Murphy Oil in Mexico: efficient execution

Mexico

Gabriel Gomez, Murphy Oil Corporation’s Mexico country manager, talks to The Energy Year about the key challenges for Mexico’s E&P bid rounds, the company’s plans following the Cholula-1 deepwater well and the convenience of the scenario model for exploration plans. Murphy Oil Corporation is an independent multinational E&P company.

This interview is featured in The Energy Year Mexico 2023

What main challenges have Mexico’s E&P bid rounds faced?
The majority of contracts awarded during the bid rounds were for exploration. Therefore, lead times are very long and getting that message across has been one of the biggest challenges. After the energy reform passed, expectations were high as to when these plays would come into production. Not only are lead times long, but industry cycles can also delay everything, not to mention the unprecedented crisis triggered by the pandemic. The slump in oil prices in 2020 pushed back a lot of the projects that had been in the pipeline.
In Round 1.4 we were awarded, together with our partners Petronas and Wintershall Dea, Block 5 in the Salina Basin. This block has multiple identified opportunities with a total resource potential ranging from a mean of 800 million to up to 2 billion barrels of oil. Offshore deepwater contracts like these had an initial four-year exploration period to complete certain commitments. Some companies also opted for an extension that was granted by the regulator CNH [National Hydrocarbons Commission] due to Covid-19. We didn’t, as we had already met and even exceeded our commitments.
Today, we see a very interesting momentum where contract awardees – for both deep and shallow water – have to demonstrate they are meeting their obligations. We drilled the Cholula-1EXP exploration well in February-March 2019, which resulted in a very successful operation and a discovery. We had developed an appraisal plan following these results, which was postponed due to Covid-19, low oil prices and resulting budget revisions. We continue to assess Cholula’s potential at this time.

Tell us about the success of the Cholula-1 well and your plans for subsalt plays.
We are very pleased to have drilled a discovery in our first deepwater well, with Cholula-1 also being the first deepwater well drilled by a private operator in the basin. From an operational perspective, it was a very successful project, executed safely and efficiently. We were awarded Block 5 with one commitment well and we met that with the drilling of Cholula-1. We’ve also done additional activities such as licensing a 3D WAZ seismic survey over the block and reprocessing it over a large part of the block, as well as evaluation and appraisal work and studies around the Cholula area.
In our reprocessing over the western half of the block, we are looking at a subsalt play which is still in the Miocene. The targets are similar to those of Polok, which are in the same region, but they are subsalt, which means you need reprocessing to be able to see the prospects. That was one of the projects that we kicked off early on. With those results, we’ve been maturing some of the opportunities. As a consortium, we’re very excited about the subsalt potential in this block and we’ve actually shifted our focus to exploration in that play.
Now, the prospect that has risen to the top of our portfolio, and that we’re wanting to drill, is Tulum. This is a subsalt prospect in an ideal location that we’re getting ready to drill. We have been looking forward to drilling this well for the last couple of years, and now we have secured a contract extension for an additional three years, thereby enabling us to drill Tulum. This shows that the Mexican government is doing its part supporting E&P players. We also continue to advance other permits and approvals in preparation for the drilling of the Tulum well.

What requirements are involved in the extension period for Block 5?
The contract stipulates the requirements for this first additional exploration period: firstly, you need to have met your obligations for the initial period, which we have; and secondly, you need to commit to drilling an additional exploration well. The contract actually allows you to drill an additional well during the initial period, and seek to use it to count towards the additional commitment required for the extension. We have decided to have the Tulum well drilled in the extension period.
Even though it is broadly described in the contract, the reality is that there are no guidelines that explain in detail the process to apply and secure approval for these extensions, but we have a good working relationship with the CNH and started the process and engagement well in advance of the initial period expiring. For us, it’s important to drill the well very early on in the extension period. Subject to the results of Tulum, we might want to do some additional technical work and another reprocessing as there are some follow-up opportunities that we would like to consider for additional exploration drilling.
All in all, three years is, in fact, not that much time. This is why we are looking to drill the Tulum well in the second half of this year. There is still a lot of preparation work that needs to start in advance and for that reason we have been working on all the steps required – work programme, permitting, procurement, etc. Although we have already secured the contract extension and drilling permit, we are still working with the government on obtaining other required permits.
Also, alongside requesting the extension, you also have to amend your exploration plan to cover the additional period. So, we’ve been doing a lot of work on that front for the last six months. Both the extension of the exploration period and the amendment to the exploration plan were approved by the CNH, which reflects their commitment to realise the potential of this block.

How convenient is an incremental scenario approach to exploration plans when considering the shifting nature of exploration?
A couple of years ago, the CNH amended the regulatory guidelines for plans, allowing operators to include different scenarios. In exploration, things change very rapidly, which means that one requires flexibility. The way to enable that flexibility under the regulatory framework is through different scenarios.
For example, in the recent amendment to the exploration plan we included a base and an incremental scenario, which defines both a minimum and maximum set of proposed activities, and a range for everything in between. This means that our exploration plan contemplates scenarios that go from only drilling the Tulum well – which is our commitment for the extension period we have entered into, to the inclusion of other activities at our discretion, such as seismic work, reprocessing and various other geological and geophysical studies which form part of the diverse incremental scenarios. We included up to two additional exploration wells as options in this incremental scenario, as an absolute maximum for this three-year period. It would be difficult for us to do everything, but if things go as planned and Tulum is an outstanding success, we just want to have the ability to do that in that period as well.
This scenario model fits well with the changing nature of our industry. If you decide to do an additional activity, you don’t want to go and amend the original plan, as this would be costly in terms of time. This scenario-based model allows both operators and regulators to have a certain degree of flexibility.
This regulatory model also stipulates the need to provide the corresponding investment for all related activities. When a plan gets approved, we are required to provide the estimated investment for the range of possible scenarios going from the minimum committed activities like the drilling of the well, to the incremental or maximum scenario, which encompasses all these optional activities we could do in the next few years, including drilling more wells, reprocessing and additional studies. In the case of our amended exploration plan for this first additional exploration period, the estimated investment associated with the maximum incremental scenario is significant.

What drilling timing and associated investment is Murphy looking at?
We recently signed contracts with Valaris for drilling activities with the Valaris DPS-5 rig, first in the Gulf of Mexico and then in offshore Mexico. In addition, the drilling permit from the CNH for the Tulum well was approved on June 9 and notified on June 21. We have up to 180 days after that to commence drilling. For Tulum, the rig is expected to arrive on location during the second half of 2022 and the estimated drilling duration is 60 days.
In addition to the estimated Tulum well cost, there are some other additional investments required for the block. We were paying around USD 5 million per year in licence fees and taxes. With the increase to the licence fee established five years into the contract, the number has gone up to nearly USD 9 million per year.
For a block like ours that covers 2,572 square kilometres, one has to really understand the potential and work involved in this scope. If not, it can become a real economic burden. It’s in our own best interest to speed up the exploration process. That’s why we want to drill this well very early on in the current period, so that we can actually realise some added potential during those additional three years.

What have been the keys to success for the company’s operational capabilities and efficiencies?
We are very proud of Murphy’s execution capabilities; they are a strategic pillar and we believe that they differentiate us. We are an independent oil and natural gas exploration and production company with long-term deepwater expertise, and we’ve demonstrated this various times. For instance, we made the first Malaysian deepwater discovery and started production in only five years. Further, we recently achieved first oil at our major Gulf of Mexico project via the King’s Quay FPS [floating production system]. Our development team has outstanding capabilities to execute these types of projects.
We aim to apply this same philosophy in Mexico, progressing towards production as soon as we can. Of course, you have to work within the contract and regulatory framework, respecting times and stipulations. From successful exploration, one has to carry out an appraisal programme, and if that goes well, then one has to aim for a declaration of commerciality and its corresponding development plan. The timing, steps and approvals to go through these stages are all established under the contract.
Exploration is crucial as a pillar of Murphy’s strategy. It serves as a basis to grow the company. So with our Mexico project, we’re focused on advancing the asset towards appraisal, development and eventually production over the next several years.
At the same time, we are adamant in maintaining low operating expenses, even when oil prices are high. This goes back to our execution abilities, wherein efficiency is key. Technology makes sure that happens and we are now one of the most efficient drillers.

What do Murphy’s partners bring to Block 5?
In Block 5, Murphy holds a 40% operated interest while Wintershall Dea and Petronas have 30% each. Our partners recognise our execution capabilities and we have worked hand-in-hand very well. Apart from being competent operators themselves, they value our ability to execute efficiently, saving costs and delivering projects quickly. For example, Petronas knows us as we worked with them in Malaysia for a long time. We have demonstrated the ability to deliver as operators in their country. We also work very well with Wintershall Dea and have partnered with them in Brazil. It’s a valuable relationship with both our partners because they also understand the surrounding area very well with interests in various neighbouring blocks. Even though Murphy is only present in Block 5, we have very good execution capabilities and together with our partners, a good understanding of the whole region. It’s a recipe for a successful partnership.

Tell us about your near-term objectives for Block 5.
One of our key goals this year was securing the contract extension. That has been approved, which gives us a horizon of action for the near future. We are now preparing for the different operations, and recently obtained the required drilling permit. We are working on the operational readiness and additional approvals that are required for the drilling activities we have planned for Block 5. For example, we’re setting up our shore base at the port; we have also been advancing in awarding contracts for the rig, in addition to some of the other well services.
Likewise, we need to be ready to execute the operation for when the rig shows up in Mexico – this means not only preparing for it but also making sure that the operation is conducted safely and efficiently, and that we minimise any potential downtime. Lastly, we are all working in harmony so that we manage to have a successful well, from a technical and commercial point of view.

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