Houston-based Talos Energy Inc., a major Gulf of Mexico explorer (GOM), expects to get “several favorable provisions” of the Inflation Reduction Act (IRA) from Democrats, which would benefit upstream activities and low-carbon businesses. businesses underway, CEO Timothy S. Duncan said.
The independent released its 2Q2022 results earlier this month, followed by a conference call led by Duncan. The quarterly results predated the IRA’s passage through Congress and President Biden’s signature. However, Duncan was optimistic on the call about the benefits for Talos, both for upstream activity and for the wide range of carbon capture and sequestration (CCS) proposals proposed for the Gulf Coast.
“We have always believed that maintaining offshore leasing in the Gulf of Mexico is good energy policy that provides energy security, energy production and energy jobs in one of the oil producing basins. carbon in the world,” Duncan said.
Among the benefits of the legislation would be the reinstatement of deepwater leases awarded to Talos as the highest bidder in last November’s federal GOM 257 lease sale, he noted. Talos had been one of the most active bidders at the auction and was the highest bidder on 10 blocks totaling more than 57,000 gross acres.
The U.S. District Court for the District of Columbia rejected the findings, citing an outdated analysis of the emissions by the Trump administration.
“The acreage we were the highest bidder on in the 257 lease sale identified drilling opportunities that will be exploitable in our longer-term drilling schedule,” Duncan said. “In addition, consistent leasing is an important part of our responsible energy development strategy.”
“Milestone for Offshore Energy Security”
For the CCS business, the outlook for expanding the Internal Revenue Service’s 45Q tax credit for carbon capture is also positive, Duncan said.
“We believe we have built one of the most attractive portfolios available for permanent carbon sequestration near multiple industrial hubs, where these credits will enable decarbonization to become a priority.
“There is no doubt that the legislation is an important step for offshore energy security and the development of CCS along the United States Gulf Coast.”
On the conference call to discuss 2Q2022 results, Duncan said offshore plans are progressing. “The management team’s intention is to use a constructive commodity environment to accelerate higher impact drilling opportunities in our portfolio, beginning in the second half of 2022 and continuing through 2023.”
Talos takes possession of the Seadrill Sevan Louisiana deepwater drilling rig to begin an “open water drilling campaign, which will run through 2022 and into 2023.”
The drill contract was extended to allow Talos to complete “six consecutive operations in which we expect to target at least four prospects totaling 65 to 100 million boe of raw resource potential…” Individual well rates could be 5,000 to 15,000 boe/d gross.
Along with partners BP plc and Chevron Corp., Talos will participate in the Puma West deepwater appraisal well in the coming months. Without naming names, Duncan said Talos is “actively working to finalize a five-block exploration unit in the Green Canyon and Walker Ridge areas with another major operator in the Gulf of Mexico that will lead to an exploration well. high-impact in 2023 targeting both sub-salt Miocene, Wilcox targets nearly a 30,000 acre unit.
Zama, “not easy” but important
On the Zama project in GOM waters offshore Mexico, Talos is working with its Block 7 partners Wintershall Dea and Harbor Energy, as well as state-owned Petróleos Mexicanos (Pemex) to finalize the field development plan (PDF).
The FDP must be submitted to the Mexican National Hydrocarbons Commission (CNH) by March. Once approved, Talos expects to move to a final investment decision (FID) later in 2023.
“At the same time,” Duncan said, “we’re also discussing forming an Integrated Project Team, or IPT, which is common in international projects.” The IPT would “provide a variety of project roles for all partners and enhanced governance rights for all parties.
“In our opinion, this will greatly benefit the Zama project in the future. Although the project has experienced significant delays during unification discussions, we are encouraged that the project is progressing towards submission of the final field development plan.
“FTP approval is the last major hurdle before FID can be taken on this project by all partners.”
Duncan reminded investors on the call why Zama was a priority. Contingent resources, according to an independent engineering report, are over 700 million boe gross.
“As such, progress here still represents significant value for Talos for shareholders as we continue to evolve towards FID. Once the project is approved, we expect to be able to reserve proven reserves which, in this case, would represent several years reserve replacement,” Duncan told analysts. “And we would have more certainty about final development timelines, financing, and ultimately first oil.
“Every milestone we are able to achieve in the coming months is significant as we move closer to realizing significant value from this important discovery.” However, Duncan was quick to point out the issues that followed Talos’ stake in the Mexican offshore field and delayed an FID.
“Navigating Zama hasn’t been easy, to say the least,” he said. “But I want to reiterate that we are doing everything we can to maximize the value of this discovery for our shareholders.”
Meanwhile, the Talos Low Carbon Solutions team completed “a significant transaction in May,” integrating Chevron Corp. as a joint venture partner alongside Carbonvert Inc. for the Bayou Bend CCS project.
Bayou Bend, Duncan said, could be the “first and only” major offshore carbon dioxide (CO2) sequestration project. With Chevron to cover “hardware capital costs”, all expenses would be paid prior to project approval.
The capital “is being put to good use as we finalize drilling plans for our stratigraphic well test in the fourth quarter,” Duncan said. The well would collect rock property data, which in turn would provide “critical information” for a Class VI injection disposal well license to permanently sequester CO2.
As for Chevron as a partner, “not only do they provide critical sequestration experience in an undisputed project track record, we believe it’s also another solid endorsement of the solid platform we’re building as the one of the leaders of CCS in the United States,” Duncan said.
The CCS portfolio operated by Talos today includes nearly one billion metric tons of CO2 storage capacity across four project areas in Louisiana and Texas, Duncan said.
The company is “working aggressively to secure long-term anchor customers…”
Overall GOM production in the second quarter averaged 65,400 boe/d. By core area, the majority of Talos production came from the 98% mined Green Canyon blocks in the GOM, where production was 23,200 boe/d. Production from the Mississippi Canyon, operated at 58%, was 26,600 boe/d, while the Outer Continental Shelf and Gulf Coast (operated at 50%) averaged 15,600 boe/d.
Talos reversed prior year losses to $195 million ($2.33/share) in 2Q2022 earnings from a loss of $126 million (minus $1.54). Revenue increased year-over-year to $519 million from nearly $304 million. Cash flow increased to $354 million from $199 million in 2Q2021.