BYRON Energy has spudded its first well in the South Marsh Island block 6 (SM 6), in the Gulf of Mexico, testing a new prospect offshore Louisiana.

Jack-up drilling rig Hercules 205 spudded the Byron Energy SM 6 2 well on 15 February, with the well being drilled in water about 20 metres deep, 216 kilometres southwest of New Orleans.

The well is expected to reach a total measured depth of 2,900 metres and total vertical depth of 2,785 metres, taking about 40 days to complete.

It will test the shallow section of what Byron says is the south west corner of a major salt dome in the permit area – an area not intersected by an earlier well drilled in mid-2014.

Targeting undeveloped 3P gross reserves of 3.2 million barrels of oil and 2.5 billion cubic feet in the G 20 sand, the well is being drilled under a farm-out agreement signed with Otto Energy in December, 2015.

Under that agreement, Otto must contribute to some of Byron’s past costs and 66.6 per cent of the costs of the SM 6 2 well – estimated to be US$8 million in its entirety.

Any costs above that will be equally divided between the two companies.

In an earlier announcement, Byron chief executive Maynard Smith said he hoped that success with SM 6 2 would cement the relationship between his company and Otto – to the point where Otto would exercise another option on the same terms to buy into Byron’s South March 70/71 blocks by paying 66.67% of drilling costs at the SM 71 1 well.

“The SM 6 2 well can be drilled and, if successful, brought on production within the next year under the production handling agreement (PHA) Byron has executed with the offset operator Fieldwood,” he said.

“The PHA, which substantially reduces development costs of the SM 6 project, combined with the relatively low lease operating expenses in the shallow waters of the Gulf of Mexico, result in attractive project returns, even in the current oil price environment.”

Otto Energy managing director Matthew Allen said the company was pleased to have started operations in the field.

“In the success case, the well will be completed for production with development by way of low-cost tie-in, meaning that the project is economically robust even in the current low oil price environment,” he said.

“With production likely to commence around mid-2017, any improvement in oil price conditions will yield significant further value.”

Otto has assigned a 70% chance of success to the opportunity, it said in an announcement.