Operators have been exploring the Gulf of Mexico's Lower Tertiary play since the mid-1990s. Despite only 47% of the play's reserves currently sanctioned or onstream, it continues to hold region-leading yet-to-find volumes.
Although exploration has resulted in large discoveries, development comes with significant challenges.
Advances in seismic technology sparked a new wave of discoveries, with total reserves in the Lower Tertiary totalling 5.7 billion barrels of oil equivalent (boe). While the majors hold 59% of discovered reserves, we have seen new players enter recently, as the play is still emerging.
We expect output from the Lower Tertiary to triple over the next 10 years to 492,000 boe/d as the backlog of projects awaiting final investment decision are sanctioned and come onstream.
Development is still in the early stages, with the first fields online yielding inconsistent results. Production growth in the Lower Tertiary strongly depends on improving recovery, reducing costs and the trajectory of oil prices. Under a scenario of sustained low oil prices, many operators would redesign, postpone or simply not sanction developments, putting 61% of our production forecast at risk by 2025.
Our base case scenario for capital expenditure over the next decade-and-a-half suggests a sharp uptick in spend in the near term, with the compound annual growth rate (CAGR) growing at 34% to a peak of US$8.5 billion by 2020. If weak oil prices persist and projects remain unsanctioned, we anticipate US$48 billion to be at risk from 2015 to 2030.
Taking into account long project lead times, high drilling costs and relatively low recovery factors, we estimate rates of return of 10 to 20% and breakeven Brent oil prices of US$60-80/bbl for all projects that have yet to be sanctioned.
Should corporate co-development or improvements in extraction and completion technologies hasten recovery and improve production, project economics look brighter. In our high case scenario, production volumes could reach 760,000 boe/d by 2027.
It's clear that a broad array of possibilities remains for this play, ranging from a sharp decline in greenfield production to increased recovery driven by advanced completion techniques. While development remains at risk from both operational and economic challenges, the Lower Tertiary remains a hotspot for exploration and potential growth in the region over the next decade.
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