Otto learns GoM lessons

WITH a spud targeting more than 90 billion cubic feet imminent and production at a nearby discovery potentially by January, Energy News has learned that it all could have been so different for Otto Energy which had originally written the region off.

Otto learns GoM lessons Cellar deck in the air for SMI 71.jpg

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Otto likes its chances with the imminent spud of South Timbalier 224 in the Gulf targeting more than 90Tcf and about 3.2 million barrels of oil, which should start producing by October 2018 if all goes well.
 
In December 2015 Otto farmed into a four-well deal with Byron Energy, started drilling in February 2016, made the SMI 71 discovery in May 2016, sanctioned development soon after and could be producing by January 2018 - a cycle time of 18-20 months.
 
Though Otto sold its 33% stake in Galoc offshore of the Philippines to Nido Petroleum in September 2014 for about $130 million, the field had a break-even of US$65-70/bbl, yet the sale price was benchmarked on $100 oil, having sold it with a July 1, 2014 pricing.
 
Cashed up and with the world its oyster, Otto rolled out the map and immediately put a line through places it didn't see it had a competitive advantage like Nigeria, South America and the Gulf of Mexico.
 
"The reason we crossed the Gulf of Mexico off very early was because in previous experienced with Woodside where we'd seen a business built in the Gulf; we knew it's very hard for foreign companies to come into the Gulf and compete with locals that have 40-years plus of operating experience, have all the 3D data, production analogues and the history," Otto CEO Matthew Allen told Energy News.
 
"So it's very hard for foreign companies to come into a place like the Gulf cold and compete.
 
"We've seen Woodside blow a bunch of money in the Gulf unsuccessfully, and initially our view was we didn't really bring anything into the Gulf."
 

Positive strategy 

Yet with the majors having exited the Gulf's shallow waters over the past decade including Chevron Corporation, Apache and BP to either commission deepwater projects or to focus on onshore shale, the competition had largely disappeared.
 
"Companies that have bought the Gulf acreage were predominantly private equity-backed and high leveraged vehicles, heavily exposed to oil prices, as were the oil shale early movers," Allen said.
 
"They had no capital to do exploration drilling in the Gulf. All of it is going into required plug and abandonment or into production workovers on existing fields; very few greenfields."
 
Otto vice president exploration and new ventures Paul Senycia told Energy News that as GoM leases have a five-year time cycle, companies who picked up blocks during the boom and did lots of work are now sitting on good prospects with no money, so they either have to drill it or lose it.
 
"We've come along with some capital after our divestment with Galoc, and when I looked at the Gulf technically I thought ‘I haven't seen anything as good as this ever in the Gulf of Mexico' having worked there in 2002-03 when everyone had money," Senycia said.
 
Now Otto is looking to do more deals with the likes of W&T which are more than 100 times its market cap.
 
"So there's a sweet spot being developed for us in the GoM," Senycia said.

Senycia was Woodside's head of evaluation during the Perth oiler's ill-fated jaunt into the Gulf, before it sold out to Otto's current GoM partner W&T Offshore in February 2014 having spent much time and money.

Woodside CEO Peter Coleman said at the time the company had been "unsuccessful over the years creating a material position" in the Gulf, describing the Perth oiler as a "distressed seller".
 
He also flagged expanding Woodside's position in the Mediterranean having unsuccessfully bid for offshore exploration in Cyprus, then promptly pulled out of the Leviathan debacle three months later in an episode that's best forgotten.
 
By that time Otto had finished the Phase 2 development at Galoc in late 2013, having taken production from 4000-4500 barrels per day to 13,000bpd and drilled two more wells in a $200 million investment overall.
 
Yet Energy News has learned that before Otto even commissioned those two wells the company had written its mantra, as it were, of wanting to diversify away from being a single-asset company - a lesson Empire Oil & Gas has just learned the hard way.
 
"We knew that any more upside at Galoc had risk associated with it, and concentrating everything on one project for a small company like us was just too much risk," Allen said.
 
New technical understanding of the field led Otto to divest, which happily coincided with oil prices collapsing in mid-2014. 
 
 
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