* Announcement of Whale well discovery delayed until auction
* "Geological insights" drove big bids for Mexican blocks
* Whale estimated to hold 700 million barrels of oil -sources
* Shell seeking to replenish oil resources to sustain output
By Ron Bousso and Marianna Parraga
The size of Shell's cash payments -
The Anglo-Dutch major knew something no one else did.
Six months earlier, its drilling rig had struck a giant oilreservoir, the Whale well, in the
Calculating that this significantly increased the chances ofthe Mexican blocks also containing treasure, Shell delayed theannouncement of the discovery until the day of the auction,after bids had been submitted.
"Post the Whale discovery we had some geological insights.It is not by accident we didn't announce it until the day of thebid," Andy Brown, Shell's head of oil and gas production, toldReuters. "The nine blocks give us significant potential."
The geological intelligence gleaned from the Whale discoveryexplains why Shell bid so aggressively for the Mexicanblocks, something that had confounded industry experts.
It could also offer insight into the rationale underpinningits bet that
Shell, or any other explorer, is not legally obliged topublicly disclose a discovery. The fact that its first majorexploration success in over 10 years came adjacent to blockscoming up for auction was a matter of good fortune, while thetiming of the announcement was canny.
Shell has not yet released any estimates for the Whale'srecoverable resources, but two industry sources close to theexploration project put the figure at up to 700 million barrelsof oil. That equates to about half of Shell's 2017 oilproduction and would make the reservoir one of the biggestdiscoveries of the past decade in the industry.
Shell declined to comment on the potential size of thereserves.
Fossil fuels like oil are formed over millions of years inspecific rock formations, which geologists and explorers try toidentify via seismic studies and drilling to predict whereresources might be found.
But, even though a similar geology might increase thechances of similar exploration success, there are no guarantees,and luck is always a big factor. So there is no certainty thatthe Mexican blocks will yield commercial volumes of oil.
NOT 'OBSESSED'
Shell acquired large amounts of specialised seismic databefore the auction, about Whale and the Mexican blocks, to tryto gain a better sense of the geological formations andpotential oil reserves under the seabed, according to a sourceat an oil services company that provides such information.
"Even for us it was surprising the way Shell bid during
Shell needs to replenish its oil and gas reserves tomaintain its production into the 2030s. Aside from the
Last year, it was able to replace only 27 percent of itsproduction, while on a three-year average, the figure was 78percent, the company disclosed in its full-year results. Thedecline in reserves means that at the end of 2017 Shell hadenough reserves to sustain its production for 8.9 years,compared with around 10.5 years in 2015.
CEO Ben Van Beurden, while insisting he was not "obsessed"with the scale of his company's reserves, said Shell wasstarting to work on restocking its resources.
"We have a deepwater programme that looks pretty good allthe way into the next decade, but if you look at the second halfof the next decade ... you will need new elements in thedevelopment funnel to sustain the cash-flow generation," he toldreporters after the annual results announcement last month.
Shell has now given itself seven years to replenish itsexploration programme in order to sustain its deepwaterproduction growth well into the 2030s, he added.
The company, like many of its peers, was forced todramatically slash spending in recent years because of weak oilprices, with its exploration budgets hit particularly hard. Nowthat prices have recovered to a near three-year high of around
Shell owns a 60 percent stake in the Whale discovery withthe remaining 40 percent held by Chevron, which ismainly shale-focused.
The reservoir is located in the Perdido area, which hasbecome a heartland of Shell's deepwater activities in the
Companies such as Shell that are eyeing
(Reporting by Ron Bousso and Marianna ParragaEditing by Pravin Char)