BP stakes its future on its US offshore strategy
Seven years after its Deepwater Horizon oil spill in the Gulf of Mexico, BP believes it can slash the costs of offshore drilling by half, particularly since it has discovered more than a billion barrels of oil, worth more than $40bn, Jessica Resnick-Ault
About 300 BP workers commute 240 kilometres by helicopter, from the Louisiana coast to a deep-sea drilling platform that can produce more oil in a day than a West Texas rig can pump in a year.
On the deck of Thunder Horse they work two-week shifts, drink seawater from a desalination plant and eat ribs and chicken ferried in by boat. On the ocean floor, robots provide remote eyes and arms as drills extract up to 265,000 barrels per day.
“There’s a whole city below us,” said Jim Pearl, the marine team leader on the platform.
This is just one of the four Gulf of Mexico platforms on which BP has staked its future in US oil production.
Seven years after its Deepwater Horizon explosion and oil spill, BP is betting tens of billions of dollars on the prospect that it can slash the costs of offshore drilling by half or more – just as shale oil producers have done onshore. The company says it can do that while it continues to pay an estimated US$61 billion in total costs and damages from the worst spill in history – and without compromising safety.
BP’s Gulf platforms are key to a global strategy calling for up to $17bn in annual investments to the end of 2021 to increase production by about 5 per cent each year, Bob Dudley, the chief executive, recently told investors.
“Our strategy is to take this investment that we spent so much money building and keep it full” to the platform’s capacity, Richard Morrison, BP’s regional president for the Gulf of Mexico, said during the first tour of a BP Gulf drilling platform since the disaster. “We’re also exploring for larger pools of oil.”
BP’s deepwater double-down is all the more striking for the contrast to its chief competitors, who have cooled on offshore investments in light of the lower costs and quicker returns of onshore shale plays. While BP has some onshore US developments, the firm is notably absent from the industry’s rush into shale oilfields of the West Texas Permian Basin.
Majors including ExxonMobil, Chevron and Royal Dutch Shell have maintained Gulf operations but focused expansions on US shale. ExxonMobil doubled its acreage in the Permian in a deal earlier this year. Freeport-McMoRan and Devon Energy have pulled out of Gulf drilling entirely in recent years. Anadarko Petroleum took a $435 million writedown in May on its Shenandoah project in the Gulf, deciding it could not profit with oil prices hovering at about $50 per barrel.
“In a $50 to $60 world, we always felt like greenfield development, in the Gulf [of Mexico] in particular, was fairly challenged,” Al Walker, Anadarko’s chief executive, told investors last month. Oil prices dropped steeply last week, settling in the low $40s per barrel.
BP says its next Gulf development – the $9bn Mad Dog phase two – would be profitable even at $40 per barrel.
In time, BP’s offshore expansion could produce a huge payoff. The company announced last month that it had discovered an additional billion barrels of oil below its four Gulf platforms – Thunder Horse, Atlantis, Na Kika and Mad Dog. The find – worth more than $40bn at today’s prices – amounts to more than three times the proven reserves at the Na Kika field, or the equivalent of three new fields in the Gulf.
“It seems like every 10 years there’s another breakthrough” that unlocks more Gulf oil, Mr Morrison said on the deck of Thunder Horse.
Over his shoulder, a drillship three miles away tapped a new well that will feed production into the massive platform.
In the wake of the 2010 BP disaster, deepwater production was curtailed by a six-month US government moratorium on drilling and a longer period of uncertainty about regulation. But output has rebounded to new record highs as projects sanctioned years ago start operations and existing hubs such as Thunder Horse expand.
BP’s big discovery is key to its slashing of estimated per-barrel costs, as are a host of drilling innovations and more favourable deals with service providers.
For eight decades, geologists have used seismic imaging to estimate oil and gas reserves beneath the undersea terrain.
BP used its own new technology for the billion-barrel discovery. Called full waveform inversion, the technique uses massive amounts of data to create a high-resolution model of reserves that were previously hidden beneath salt deposits.
It aims to tap those reserves without new platforms. At Thunder Horse and other platforms, BP is installing wellheads on the seabed and connecting them to pipelines that rise up to existing platforms, like legs of a spider. These “tiebacks” allow producers to feed oil from remote regions of fields that previously went untapped.
Other design changes helped BP hold down the investment in Mad Dog’s second phase from an initially estimated $20bn to just $9bn, the company said. Such savings are part of the equation BP uses to estimate the platform’s profitability at oil prices of $40 per barrel.
“If you’re going to be building an offshore Gulf of Mexico platform, now is the time to be doing it,” said Norm MacDonald, the portfolio manager for Invesco’s energy fund, which has increased its stake in BP, its second-largest holding.
Other funds remain leery of offshore investments because of the longer wait for a return in a volatile industry.
Shale has a “liquidity premium” because producers can make smaller investments and recoup them sooner, within two or three years, said Michael Roomberg, a portfolio analyst at Miller-Howard Investments. Tiebacks and other advances, however, could accelerate deepwater returns and help narrow the liquidity gap with shale, he said.
BP said it has bolstered safety operations globally since the spill, introducing a safety and operational risk staff with 800 positions and an internal global wells organisation to standardise drilling practices, among other measures.
In a glassed-in drilling shack on the Thunder Horse platform, operators stay connected to a new onshore command centre in Houston that BP designed to monitor data from offshore wells.
On the deck below sits a blowout preventer, a room-sized piece of equipment that would soon be fitted on the wellhead of a drilling site, two miles under water. But first it would need a safety inspection – unlike the blowout preventer that infamously failed to contain the 2010 spill, which federal regulators have said had not been inspected in years.
Thunder Horse platform, one of the four in the Gulf of Mexico on which BP has staked its future in US oil production.