CAPEX Cuts Change Murphy's Mexico Plans but Commitment Remains

Q: How has Murphy consolidated the data and insights garnered from the Cholula-1 well ahead of appraisal?

A: Murphy was very happy with our first well, Cholula-1EXP, on Block 5 in the Salina Basin. It was one of the first wells in the basin and in Mexico’s deepwaters, and was therefore an important well both for Murphy and the rest of the industry.

The company has taken the last year to integrate results from the well to develop a plan moving forward. We view Cholula-1EXP as a successful well but do not feel it is quite yet ready to be commercialized and move toward development. It first needs appraisal but this is a very common practice in any basin. We were able to confirm a number of pre-drill assumptions we had through the well and learned a great deal about what the geophysical data had indicated. The well confirms Murphy’s belief that we have a very high-quality block that is well-positioned for the future.

With that in mind, we put together a two- to three-well exploration and appraisal campaign that we were planning to begin in late 2020 prior to the oil price decline. This included an appraisal well to the Cholula discovery and up to two more exploration wells on the block, starting in 2020 and into 2021. Unfortunately, given the prices in the market and our subsequent need to reduce our CAPEX, we decided to defer the program. These additional operations were discretionary and Murphy had met its commitment for the block with the Cholula-1EXP well. We are also still within the first exploration period. We certainly wanted to drill the wells now, but due to the circumstances, we have delayed drilling.

We are very excited about our findings in Cholula-1EXP and what it means for future exploration on the block. At the moment, Murphy is still determining what 2021 will look like in terms of capital budget, but we are very encouraged by the results some of our peers have announced near our block as it confirms the high prospectivity of Block 5 and gives us more enthusiasm to get back and drill again. It is most likely that drilling will commence in 4Q21, subject to Murphy’s other global activities. We will try to capture synergies with rigs and support operations with our developments on the US Gulf of Mexico and work behind that. Considering this, it is very early to give a definitive answer on the exact drilling dates. We are in discussions with drilling companies about potential projects but nothing has been settled as of yet.

Q: Does Murphy have intentions for the broader Block 5 picture, including the additional prospects cited in the Exploration Plan?

A: Our team has done a great job evaluating the block and the technical potential it has. We have over 30 leads and prospects identified on the block and multiple types of plays. Cholula-1EXP was an Upper Miocene play, but we also have Lower Miocene plays, Oligocene age plays and Cretaceous plays too.

Our intent is to fully evaluate the block. It is a large block – the equivalent to over 100 US Gulf of Mexico Outer Continental Shelf blocks. It has a lot of acreage to work with. Murphy would like to test as many of those plays as we possibly can over the coming years. With respect to the wells and the plan, we have subsalt features similar to what we have in the north US Gulf of Mexico that we are looking to test. This next phase is about expanding beyond what we found with Cholula-1EXP and begin to look at other opportunities to test.

Q: Has the company been able to glean a greater understanding of Block 5’s prospective resources?

A: We feel that the block as a whole has significant potential. Individual prospect sizes range from modest to quite large. In a frontier area, operators need a threshold of size to be able to move forward and that is where we are with Cholula. We are at a stage where we have discovered hydrocarbons and we are looking to push that over the line to get to a project we can carry forward.

Q: How does Mexico compare against other global opportunities in Murphy’s portfolio?

A: Mexico fits well into Murphy’s global portfolio. Following the downturn in 2015 and 2016, Murphy took a step back in our global exploration and decided upon the regions where we wanted to focus on going forward. Mexico was clearly one of those areas.

Fundamentally, we are looking to be able to explore in basins we feel are proven, but have significant materiality remaining in the basin and Mexico met that criteria. Mexico has a proven onshore and shallow water province and it is relatively unexplored in the deepwater area. This fits our DNA as a company. We are a deepwater explorer and operator and we feel that we explore efficiently and cost-effectively here. Our three focus areas are in the US Gulf of Mexico, offshore Mexico and Brazil, in addition to other exploration activity in Vietnam and Australia.

Murphy looks at its business from a near-term, mid-term and long-term perspective. We therefore try to build assets that fit within each of these areas. While the US Gulf of Mexico is a very mature province with lots of infrastructure, we are working on modestly-sized projects that offer quick routes to first production. This fulfils our zero to three-year time frame for near-term developments. In contrast, Brazil is a much more frontier area where developments will take longer but will likely deliver more materiality. This fits our long-term, or five-plus year time frame. Mexico fits right in the middle. We view it as offering sound material opportunities that can be developed and commercialized within a three- to five-year time frame.

Q: Will price pressure propel operators to find ways to work together in the future development of their Mexican blocks?

A: Yes, this is quite likely. We are all in the same boat and we are all trying to work within this environment of low oil prices. Nobody knows how long this will last. Working together and looking for synergies among operations, including cluster developments, are all considerations companies are having. Murphy has had early conversations about this possibility with other operators in our area.

The current situation reminds me of the Independence Hub development in the eastern US Gulf of Mexico, which began some 15 years ago. Operators and service companies got together to create this facility to which a number of fields from varying operators were tied back to. This was done to help the economics for everybody. Rather than competing, the companies entered into a type of joint venture that reduced costs for all concerned. This is certainly the type of behavior that could occur in Mexico’s offshore if the low-price environment continues.

Q: What have been Murphy’s experiences with the industry’s authorities over the past 12 months and how is the company demonstrating its commitment to Mexico?

A: Murphy is moving forward with its commitments in Mexico. We have not seen any issues with progressing our plans for the country. We feel as though we have had the support that we need and enjoy good communications with the regulatory agencies. Murphy was one of the first companies to drill post-Reform and were one of the first companies to have our EP amended and approved. We were on track to become one of the first companies to appraise their discoveries, prior to the arrival of COVID-19.

Challenges remain and there are issues that need to be overcome, but in a broad sense, Mexico is functioning just as well as any other regions in which we work. Murphy remains committed to Mexico and wants to be one of the most active players in the country. The fact that we have chosen to delay our program has nothing to do with our interest in Mexico. It has everything to do with the fact that we are trying to manage our business through a difficult period. If conditions improve faster, we will be ready to go right back to work. We are continuing with the permitting process, to finalize our well planning and we will be ready when the time comes. And that time will be as soon as possible.

We want to get back to drilling because we believe there is a lot of oil to be found on our block and that the oil will benefit not only Murphy and its partners but Mexico and the Mexican people. We want to begin drilling so we can deliver in the three- to five-year time frame. This is what we are trying to achieve. We are working diligently to get back and start the drilling program as soon as we possibly can. Our competitive ability is to operate and bring on production safely, efficiently and cost-effectively and we believe we can achieve that in Mexico. We are active in the farm-in market and are considering options constantly.

Murphy Oil Corporation is an independent oil and natural gas exploration and production company. Its assets are located in North America onshore, Gulf of Mexico and offshore Canada, with exploration prospects in the Gulf of Mexico, offshore Mexico, Brazil, Vietnam and Australia.