BP bets on Texas for its comeback
British energy firm looks to expand nearly a decade after Gulf disaster
At the beginning of this century, the British energy company BP achieved its own American dream, becoming the largest oil and gas producer in the United States after spending a combined $75 billion to buy the oil companies Amoco and ARCO in audacious back-to-back deals.
The future looked bright — but it didn’t last. A series of disasters that began with the 2005 Texas City refinery explosion that killed 15 and culminated in 2010 with the Deepwater Horizon disaster forced BP to sell assets and dramatically shrink its holdings as it paid tens of billions of dollars in cleanup costs, damages and penalties to settle civil and criminal cases.
Now, nearly a decade after Deepwater Horizon, BP is ready to grow again, betting much of its comeback on Texas after completing the biggest energy deal in the world this year. Its
pending acquisition of the U.S. shale assets of the Australian mining company BHP Billiton for $10.5 billions puts BP in the Permian Basin in West Texas and the Eagle Ford shale in South Texas, and expands its presence in the Haynesville shale in East Texas, positioning itself to compete for the spot as the biggest producer in the United States.
If the acquisition pays off, it would likely mean additional growth in Houston, where BP’s U.S. subsidiary is headquartered and the company employs about 4,500 people. Bill Arnold, a professor of energy management at Rice University and former executive at the Anglo-Dutch oil major Royal Dutch Shell, said BP appears headed on an upward trajectory again after riding a roller coaster over the past 20 years.
“There was a real question of whether the company could even survive,” Arnold said. “But now BP is back and it’s ready for business.”
The American comeback is led by Susan Dio, who in May became the first woman to head BP’s U.S. operations. Dio, who began at BP as a chemical engineer and rose over a 35-year career to become president of BP America, will oversee and coordinate BP’s dealings from Alaska to the deep-water Gulf of Mexico.
She and her colleagues view Texas as the the clearest path for BP to resume its growth in the United States and catch up with rivals such as Exxon Mobil, which invested billions to expand in the Permian Basin, the nation’s most prolific shale play.
With the BHP acquisitions, Texas is now at the center of BP’s global ambitions and Dio a key player in BP’s shift from defense to offense. The British supermajor has more oil and gas producing assets in the United States than any other country. Its Houston campus is its largest outside of London.
“We just doubled down in the U.S.,” Dio said in an interview. “We’re now forward looking.”
Targeting Texas
The BHP deal, expected to close by the end of October, represents BP’s biggest acquisition since it bought the Atlantic Richfield Co., called ARCO, in 2000 year for $27 billion. The new acquisition includes 83,000 net acres in the oil-rich Delaware Basin portion of the Permian, 236,000 acres in the Eagle Ford and 193,000 acres in the gasheavy Haynesville in Texas and Louisiana. The assets combine to produce nearly 200,000 barrels of oil equivalent a day with the potential for much more as BP adds drilling rigs.
BP estimates its U.S. energy production, which includes a major presence in the Gulf of Mexico, will grow to 885,000 barrels of oil equivalent per day after the BHP deal closes in October. That’s competitive with the 975,000 barrels of oil equivalent a day that the top U.S. producer, Exxon Mobil, said it pumped in the United States during the second quarter.
BP’s deal with BHP is a story of both bad and oddly fortuitous timing, analysts said. BHP Billiton bought big into U.S. shale back in 2011 when oil was priced close to $100 a barrel, spending more than than $12 billion to buy Houston oil and gas company Petrohawk Energy and $5 billion for acreage from Oklahoma City’s Chesapeake Energy.
But oil prices began crashing in 2014, falling to a low of $26 a barrel in early 2016, eventually persuading BHP to pull out after taking huge financial losses. Company executives decided to stick with its more stable mining commodities such as copper, nickel and iron ore.
The Deepwater Horizon disaster, which killed 11 workers and released nearly 4 million barrels of oil into the Gulf, drove BP to sell some $75 billion of its assets. Most of those sales, however, were closed well before the collapse in oil prices that began in 2014, meaning the oil and gas holdings sold for top dollar.
That made it easier for BP to pay cleanup costs, penalties and other obligations that topped $65 billion, paving the way for BP to ride out the bust and win the bidding for BHP assets with U.S. oil prices hovering around $70 a barrel.
“BP was forced to take a hard look at its portfolio and make divestments even before oil prices fell,” said Allen Good, an energy analyst at Morningstar. “Now they’re in growth mode and adding a lot. And there’s no better place in the world to be than the Permian.”
BP won’t discuss its development plans for its new Texas holdings. But the timing again appears to be working for the company. It’s likely BP can plan its development and begin production as new pipelines come online to relieve capacity constraints that are forcing oil companies to slow production and discount prices.
While BP expects to focus on its shale holdings, it also is growing in the Gulf of Mexico again, winning 19 federal lease bids — the second most after Exxon Mobil — for $13 million last month. It has moved ahead with construction of a massive deep-water platform for its $9 billion Mad Dog Phase 2 that’s located 200 miles south of New Orleans. The first platform came online in 2005.
‘Not coming in blind’
The progress has not come easily. In addition to the damage Deepwater Horizon did to the company’s reputation — as well as the Gulf, coastal areas and marine and wildlife — paying for the disaster led BP to sell refineries in Texas City and Carson, Calif., large holdings in the Gulf of Mexico and Alaska, and 400,000 net acres in the Permian Basin. It sold its Permian assets to Houston’s Apache Corp. for about $3 billion — just before the shale oil boom took off.
The company slashed jobs, cutting its Houston 7,500-person workforce nearly in half. Some of those jobs will return with the BHP deal, but, Dio conceded, the stigma of Deepwater Horizon and the lessons learned will resonate for years.
“We made some tough decisions on assets,” Dio said. “We’ve spent the last eight years redefining ourselves, and we transformed the company. We’ve reset the culture and empowered the employees to stop work if anything is unsafe.”
Dio, who joins BP’s 13-person global executive team that makes corporate decisions, gives U.S. operations a stronger seat at the table that didn’t exist under previous BP America presidents. Dio will join CEO Robert Dudley in infusing more of an American, entrepreneurial attitude into the leadership of company. Dudley, who stepped into the Deepwater Horizon crisis after the board forced out Tony Hayward, is a Mississippi native who earned his master’s degree in business administration from Southern Methodist University in Dallas.
Dio is a self-described Southern military brat who lived in seven cities in seven states before attending and graduating from the University of Mississippi. She has worked about 25 years of her 35 years at BP along the Texas Gulf Coast as a chemical engineer and then as a manager of refining and chemical operations. She most recently worked in London for three years as the CEO of BP Shipping, which oversees BP’s fleet of more than 70 vessels carrying oil, gas, fuel and chemicals, before moving back to Houston this year.
“Texas is home,” Dio said. “I’m thrilled to be back here. I do love London, but it’s not home.”
BP just opened a new Denver office, which will oversee its shale operations. BP has honed its shale skills in plays in Colorado, Oklahoma and East Texas. Now, with the BHP acquisition, BP is ready to compete, Dio said.
“We’re not coming in blind,” she said. “We’re looking to apply what we’ve learned to a much larger set of assets.”