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

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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.

Jes­sica Res­nick-Ault / Reuters

Thun­der Horse plat­form, one of the four in the Gulf of Mex­ico on which BP has staked its fu­ture in US oil pro­duc­tion.

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