Murphy’s Execution Skill Can Render Subsalt Play a Key Triumph

Q: What were the highlights for Murphy Oil in 2021?

A: As an industry, we experienced a couple of rough years as a result of the COVID-19 pandemic and the oil price crisis, but 2021 was a good year for Murphy. The industry in general picked up again and the recovery in oil prices helped to make this happen. Murphy has focused on a three-pillar strategy: Delever, Execute, Explore, and 2021 was successful in this regard. We maintained our execution capabilities in our three production areas - the US Gulf of Mexico, North America onshore and offshore Canada - and produced 158 MBOE/d for 2021. This generated revenues of US$2.6 billion.

The company has also advanced offshore projects in the US GOM, at our Khaleesi/Mormont and Samurai fields. The King's Quay Floating Production System (FPS) is now on location too. First oil has been targeted by 2Q22. This makes us proud because we like to see a company our size punch a little above its weight by tackling a supermajor-level project.

As part of our plan to delever, we paid down 17 percent of our total debt. This puts us on a good path toward our target to reduce debt by US$1.4 billion by the end of 2024. We expect to reach this target much earlier at current oil prices. 

In 2021 Murphy participated in two exploration wells, resulting in a discovery in Brunei and a sub-commercial one in the US GOM. We also added some good wells to our future drilling plans with interesting potential, such as in Brazil. These projects have unfortunately faced some delays because of COVID-19 but we expect exploration to return to our normal pace in 2022.

Sustainability is another highlight. We achieved excellent safety metrics and a record-low emission intensity. The company continues to protect its host communities. This helps us maintain our target to reduce the company’s emission intensity between 15 and 20 percent by 2030 compared to 2019. We managed to do all this with a low Lease Operating Expense (LOE).

Q: How does the current environment compare with the company’s expectations following the 2016 licensing rounds?

A: At the time of the licensing rounds, there was a great deal of buzz in the sector. One could argue it made companies too competitive. After our success capturing Block 5, we participated in the second shallow-water round but were outbid. By the time of the second deepwater and third shallow-water rounds, we were unwilling to expose the significant upfront cash that ended up being offered. Competition is good and beneficial for Mexico but the bidding rounds pushed the limits by compressing so many rounds into such short time frames. Here, the regulators undoubtedly did a great job. We were pleased to win the Salina Basin’s Block 5 — the most coveted block in the licensing round — with our partners, Petronas and Wintershall Dea. It has been an interesting journey. Murphy continues to be excited about and committed to Mexico. Despite the changes in the political landscape, we believe in the country and the potential of our Block. 

One of the challenges we faced as an industry was to prove that the potential of the rounds is legitimate and endures. It is easy to dismiss the rounds by saying there is no production, but this was not going to happen within five years to begin with. Unfortunately, people were sold on the idea that this would happen and that gasoline prices would fall as a result. It is difficult to fulfill expectations that were never viable. Most companies that won in the rounds are fulfilling their obligations. Murphy drilled its Cholula-1 commitment well for the initial exploration period very early in the process, for example. This stands as proof of our excitement about the Mexican market. 

Q: How is Murphy Oil demonstrating its commitment to continue operating in Mexico?

A: We signed our contract for Block 5 from Round 1.4 in March 2017. The four years for the initial exploration period started when our Exploration Plan was approved in late May 2018. Other companies that got contracts in the same round applied for COVID-19-related extensions, but we did not. For this reason, our first contract renewal is coming up in May 2022. We have met our obligations and exceeded requirements regarding the minimum work program. This entitles us to apply for the first additional exploration period, in which we need to commit to drilling another exploration well. We are working with regulator CNH in advance to show this commitment. We are prepared to drill this well, now named Tulum but previously named Linares, in 2H22. 

Q: How have Murphy Oil’s expectations for Block 5 and its de-risked resources of 800 million to 2 billion BOE evolved over time?

A: It was a coveted block from the start, so we made a competitive bid. What has changed is that we identified over 30 prospects within the Block, leading to our current BOE range estimation. Cholula was the obvious first test, based on the initial seismic data, and was the first deepwater discovery in the Basin. This well was executed seamlessly and has progressed to the appraisal stages. Cholula resides on the southeastern corner of the Block and extends the Upper Miocene play further offshore. The Block is becoming more promising because we identified a different play type with subsalt potential on the western area of the Block. We licensed more seismic data to expand on the Block’s potential. Following reprocessing of this data, we managed to de-risk and untap the potential of our subsalt play. Block 5 has some further opportunities, such as Cretaceous targets, putting it at the heart of potential production in the Salina Basin. The Tulum well has become the top-ranking prospect of the new subsalt play. It will be our first test, though we have various other opportunities lined up that would add greatly to Murphy’s resource potential compared to the Miocene play. 

Q: How will Cholula develop further?

A: We are very happy with Cholula. It yielded some of the first positive results in what is a frontier basin. PEMEX had drilled some wells in the area, but not even one in Block 5, which is a rather large piece of ocean. Very often, such a first effort does not work out, so to have this premier Block in the Salina Basin is great for Murphy. We want to do further exploration work because of it. The company had plans to appraise Cholula in late 2020 and filed an appraisal program. We had even hired a rig, but oil prices collapsed and COVID-19 started, which was a combination of truly unfortunate events that challenged the industry and made Cholula’s viability somewhat questionable at the time. We continue to do our technical work on the Block, regardless. Our interest in Cholula remains although our enthusiasm has shifted toward the subsalt potential in Tulum. Still, we might come back to Cholula soon enough, once we see the results of the Tulum well. 

Q: How does Murphy Oil assess Tulum’s potential?

A: Tulum’s subsalt potential was clear early on but a seismic data reprocessing has helped us to mature its potential. Tulum is one in a series of high-potential opportunities, and has been identified as the best prospect to drill next. It is a subsalt play but we do not need to drill through the salt because of how the canopy is laid out; instead, we can deviate the well to go underneath the salt. That makes it easier to operate in a rather new area, which is a major advantage for the company. There are some other areas with potential related to Tulum, which would be significantly de-risked if we are successful. In fact, some of these prospects are independent of Tulum, so should this opportunity fail we still have some room to move within the play. 

Q: How is the company planning to develop this prospect further?

A: The main aspect we need is CNH’s approval of the first additional exploration period. The company is well-prepared to get this approval and move forward with permitting and operations. We have contracted a rig that has significant experience operating in offshore Mexico. Additionally, we are working through the remainder of our procurement process, including setting up a shore base, ahead of drilling in the second half of 2022. We look forward to working with CNH and advancing our exploration drilling program. 

Q: To what degree has the way Murphy Oil works with regulators such as CNH evolved over the years?

A: First and foremost, independent and qualified regulators such as CNH, CRE and ASEA are essential for the functioning of the industry. Unfortunately, their position is challenged because of the proposed electricity reform. CNH was conceived as a world-class regulator. The framework it set up was exemplary and achieved great results. Nevertheless, the sector changed, so regulators needed to mature too. They have had to work with fewer personnel and had a lower capability to react to its massive demands. Murphy Oil continues to work well with CNH to extend its exploration contract. 

Q: How can the regulator improve the industry’s regulatory framework so that this relationship continues to progress?

A: The 2014 Energy Reform did an excellent job in creating regulation but perhaps had some excessive controls built in. Ideally, the regulatory framework would be simplified. Even more importantly, flexibility in the exploration stages is paramount. One geological study can upend all expectations, after all. One of the biggest areas of opportunity is therefore simplifying the now still very prescriptive guidelines for exploration plans because this also factors heavily into development plans. Circumstances outside of the operator’s control can change easily. By becoming more flexible, regulators can keep the oversight they want to have without sacrificing the possibility of operators developing projects further.

Q: What would Murphy Oil want to have achieved to call 2022 a success?

A: The first objective we have is to get our contract extension. We have met our contract requirements and are willing to take the next steps. This is the key to success this year. We would like to have a safe well too. There is no compromise on the project’s safety efforts. Ideally, the company would like to have identified a relevant potential resource volume, making Tulum a stand-alone project. After all, you want to reach past the minimum economic field size, which would also provide an anchor for a potential tie-back for Cholula. 2022 will be a success if we deliver the project and even better if Tulum has the clear potential to be a commercial success.

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 and Vietnam.