ExxonMobil Corp. (XOM) is planning to reduce development costs in the Upper Zakumoil field off Abu Dhabi. The company will build four artificial islands in this region along with its partners that could lead to a billion dollars in cost savings.
The company thinks that building islands is a cheaper option than erecting offshore production platforms. Exxon’s development cost is already one of the lowest among its peers and well below the industry average. We believe this initiative will further strengthen its position in this space.
As stated by Morten Mauritzen, president of Exxon Mobil Abu Dhabi Offshore Petroleum Co., the construction and use of the islands may allow removal of almost 100 wellhead towers in the sea and save the project more than $1 billion.
Zakum Development project, aka Zadco, is a joint venture between the state-run Abu Dhabi National Oil Co., or Adnoc (60% working interest), ExxonMobil (28%) and Japan Oil, a unit of Inpex Corp. (12%). Zadco plans a $15 billion artificial island project to boost production at this field by about 40% to 750,000 barrels per day.
Exxon continues to perform well in the upstream space, reflecting the significantly increased third quarter production volume. While increased production at reduced costs at Zakum oil field is appreciable, we believe that Exxon’s upstream momentum will increase further next year as the second field in Sakhalin-1 Project, Russia has recently come online.
However, weak demand growth and increased supply from the shale gas plays could keep natural gas prices under pressure in the near to medium term. Our Neutral recommendation for ExxonMobil shares remains unchanged at this stage, along with the Zacks #3 Rank (Hold) that Exxon retains.
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