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Anadarko shelves Shenandoah development plans

Contractors told to stop work after appraisal dry hole; sources cite project economics, lagging 20k tech

Contractors well into the design phase of a semi-submersible production facility for Anadarko Petroleum's Shenandoah field in the deep-water US Gulf of Mexico have been told to stop work on the project, delivering a hefty blow to a region desperate for work.

Multiple industry sources said the Shenandoah project has been shelved for the foreseeable future. The stop-work order came within the last two weeks, sources said.

"Shenandoah is shut down," said one source last week. "Anadarko pulled the pin," said another. "It's a dead project," said another.

The decision to not move ahead with the development at this time follows news earlier this month that the latest appraisal well, Shenandoah-6, failed to find the oil-water contact on the eastern flank of the reservoir. A sidetrack of the well also found only wet sands.

Shenandoah now likely to be scaled down

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Anadarko said in its quarterly operations update that it would halt appraisal activity at Shenandoah as it "evaluates the path forward".

The company is thought to have already sunk more than $1 billion into its extensive drilling campaign at Shenandoah.

The bad result at Shenandoah-6 forced the company to write down the value of the overall asset to the tune of $435 million, including $267 million worth of resource that had been on the books for more than a year.

Chief executive Al Walker said on Anadarko's earnings call that the writedown was "simply accounting methodology" and that the company's view of the asset had not "philosophically" changed.

"In a $50 to $60 (oil price) world, We always felt like greenfield development in the Gulf in particular was fairly challenged," Walker said.

More recently, the company told analysts that it still believes the resource could be developed "in a more favourable commodity price environment", perhaps as a "hub" that incorporates other discoveries in the "mini-basin" such as Coronado and Yucatan.

When asked about industry chatter that the project had been shelved, Anadarko spokesman John Christiansen referred back to statements made in the quarterly reports and conference call.

"I think our statements in these documents are clear," Christiansen said.

Smaller resource

At the very least, Anadarko and its partners are almost certainly looking at a much smaller producible resource than previously envisaged.

Cobalt International Energy chief executive Tim Cutt, whose company owns a 20% stake in the project, said this week that Shenandoah's gross recoverable resource now stands at between 200 million and 300 million barrels of oil equivalent.

While Anadarko has never provided an official resource estimate, Cobalt's estimate is well below what some observers speculated based on a couple of eye-popping appraisal wells that dug up more than 1000 feet of pay. Anadarko at one time floated the idea that the field could ultimately require two host facilities.

After a long evaluation of development concepts for Shenandoah, Anadarko last year finally settled on a semisub hull proposed by SBM Offshore, with Wood Group handling the topsides. The project was thought to be well into the front-end engineering and design phase.

As Upstream previously reported, Anadarko had once considered a 200,000-barrel-per-day facility at Shenandoah, but later reined it in with a 100,000-bpd project in mind.

As the resource base shrank, the plan was scaled down to a 60,000-bpd facility. Sources said that plan too has now been halted. 

Fewer opportunities

Without a major project like Shenandoah in the pipeline, contractors will likely need to position themselves for new opportunities, even as the number of future deep-water development projects in the US Gulf continues to shrink.

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Industry observers were split on the ultimate factor in Anadarko's decision to stop work on Shenandoah, over and above the recent appraisal disappointment.

Many blamed the complexity of the Lower Tertiary reservoir, where pressures can exceed 20,000 psi and producibility is a challenge.

"20k technology is lagging facilities, so they shut it down," one source said.

Other sources said the blame falls squarely on the current pricing environment and on the four- to five-year cycle time before Anadarko would see a return on its multi-billion-dollar investment in a newbuild semisub.

The realities of deep-water mega-projects makes them hard to compete in a portfolio stuffed with relatively low-cost shale and deep-water tieback opportunities, such as Anadarko's.

"It's purely a matter of what makes the most sense for deploying capital in today's market," said one source. "There's so much runway left before you start seeing any kind of return."