Will New Oil Reserve Discovery Impact Crude Oil Prices?

Total S.A. (NYSE:TOT) announced on Jan. 31 that it discovered a significant oil reserve in the Gulf of Mexico in cooperation with the Chevron Corporation (NYSE:CVX).

The new reserve is Total’s largest discovery in the area. Kevin McLachlan, senior vice president of exploration at Total, said, “Ballymore is the largest discovery by Total in the prolific Gulf of Mexico and bolsters our new exploration strategy put in place since 2015”.

The Ballymore’s location is in the Mississippi Canyon area of the U.S. Gulf of Mexico and just a few miles from Chevron’s existing Blind Faith platform. The water depth at that location is approximately 6,500 feet with a total well depth of nearly 30,000 feet. The companies are currently drilling additional sidetrack wells to assess the oil reservoir more accurately, but initial estimates indicate almost 700 feet of net oil depth.

While Total took an active role in the exploration effort, the French company’s TOTAL E&P USA Inc. subsidiary holds a minority ownership position in the joint venture and Chevron’s subsidiary Chevron U.S.A. Inc. serves as the operator of the project and holds a 60% majority stake.

Oil production in the U.S. Gulf of Mexico currently accounts for approximately 1.7 million barrels per day – 17% of total U.S. oil production. Before the discovery of new reserves, the Gulf oil production was expected to add 100,000 barrels per day by 2019.

Merely adding new sources of oil supply could put downward pressure on oil prices, but the location of this discovery could have a double effect on oil prices going forward. Deep sea drilling is complex, demanding and costly. However, the break-even price for production in this site could be well below $50 per barrel.

While that cost might seem high, it is competitive with lower end of break-even costs for shale oil exploration. The cost of oil extraction for some shale oil sites might average close to $40 over the long term. However, most industry experts estimate extraction cost for fracking of horizontal oil wells to be closer to $60 per barrel and some wells are as much as 50% higher than that.

Chevron’s share price was 12.5% higher over the past 12 months and Total’s share price rose 14% over the same period. The price of oil rose 22% in the past year.

Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.