BP plans $9B project in Gulf
British oil firm makes one of industry’s biggest drilling moves since 2010 spill
BP plans to make a $9 billion investment to drill in the deep waters of the Gulf of Mexico, one of the energy industry’s biggest moves yet back into the frontiers of exploration and another sign that the tentative oil market recovery is gaining traction after long downturn.
The British oil company, which has 4,500 employees in Houston, plans to dispatch a new oil production platform to a deep-water field about 190 miles south of New Orleans, where it could start pumping oil from more than a dozen wells in five years.
The project is BP’s first major investment in the Gulf since oil prices collapsed in 2014 and marks another milestone for a company that a few years ago sold tens of billions of dollars in assets to help pay fines and cleanup costs of the 2010 Deepwater Horizon disaster.
The planned investment plan also capitalizes on a rapidly changing oil market following OPEC’s
decision earlier this week to cut production by 1.2 million barrels a day to support crude prices. Oil has surged since the cartel’s meeting in Vienna, climbing 13 percent since Tuesday to settle at $51.06 a barrel in New York on Thursday.
BP officials said their decision to move ahead with the deepwater project was unrelated to OPEC’s production cut since it won’t start pumping until 2021. But the agreement by the Organization of the Petroleum Exporting Countries still marks a turning point that could lift both U.S. drillers in West Texas and, if the rally lasts long enough, provide cover for large companies to make longer-term investments in deep ocean waters.
Mad Dog’s second phase
BP’s new project, announced Thursday, is the second phase in the development of the Mad Dog field, a region discovered in 1998 that could hold, by BP’s estimates, 4 billion barrels of oil. It plans to increase production there by 140,000 barrels of oil a day, more oil than 70 of the most productive wells in the Permian Basin in West Texas could produce today.
BP plans to increase worldwide oil and gas production by 800,000 barrels a day by the end of the decade in a burst of new drilling and production efforts in the Gulf of Mexico and the North Sea, as well as Egypt, Algeria, Oman, Australia and several other countries.
“It helps lay some of the groundwork for the company’s future growth potential,” said Brian Youngberg, an analyst at Edward Jones.
In 2013, BP decided to scrap its plans for a $20 billion truss spar — a massive steel oil-production facility that stands upright in the ocean — in the Mad Dog field. At the time, crude prices had risen above $100 a barrel, and a fiercely competitive drilling boom inflated prices for equipment and labor on large projects. The oil bust began the next year.
So BP put the project on hold and began redesigning it. The truss spar was gone, and the company plans to assemble a less expensive, more standard oil-production platform. The effort to lower costs also involved negotiating better prices with equipment suppliers, willing to deal after suffering themselves during the two-year downturn.
“There had to be a better way,” said Starlee Sykes, vice president of global projects offshore in Houston. “We went through every component of design to reduce all the complexity and made it simpler.”
The project is now expected to be profitable at $40-a-barrel oil.
“Big deep-water projects can still be economic in a low price environment in the U.S. if they are designed in a smart and cost-effective way,” BP CEO Bob Dudley said in a written statement.
The green light for BP’s new project comes as the industry’s investments in deepwater projects have dropped nearly 40 percent since late 2014, when the oil bust began in earnest, according to energy research firm Wood Mackenzie. This year, the number of approved offshore projects fell to a four-decade low, and deepwater output will likely continue to slide globally as producers focus on less costly onshore development, according to consultancy Rystad Energy.
$60 oil possible
Analysts believe, though, that OPEC’s first oil production cut in eight years could ensure oil prices firm above $50 a barrel for a while, or even rise toward $60 a barrel. If that happens, it could give big oil companies like BP a starting point to consider larger projects, in deep waters or elsewhere, that have been deferred for two years.
Earlier this year, Chevron Corp. approved a $36.8 billion investment into the giant Tengiz oil field in Kazakhstan, and last month Shell said it would put $10 billion into Brazil’s deep-water fields over the next few years. And in Mexico City next week, executives of several big oil companies will gather in a data room to bid on deep-water oil fields the Mexican government is selling in one of its first auctions in seven decades.