BP’s ‘Giant’ Discovery Gives the Gulf of Mexico New Life

I am trying to climb out from under an avalanche of correspondence, and I also hope to have the “Niches” article done by Monday morning. Until then, the latest from Money Morning on BP’s new oil discovery. As I previously explained topical Money Morning content will be featured here from time to time. As always, normal caveats apply: I am not an investment advisor. I don’t endorse any specific stocks mentioned in the following story nor the ad at the end of the story; these stories are meant to spur discussion.

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BP’s ‘Giant’ Discovery Gives the Gulf of Mexico New Life

By Jason Simpkins

Managing Editor – Money Morning

BP PLC (NYSE ADR: BP) yesterday (Wednesday) announced a “giant” oil discovery in the Gulf of Mexico that may contain more than 3 billion barrels of oil. The find is evidence of the Gulf’s resurrection as a major oil producer, as well as the great lengths – or depths – to which major oil companies must go to find vibrant wells.

The well, known as the Tiber Prospect, is one of the deepest wells ever drilled with a total depth of about 35,055 feet, or 6½ miles. An appraisal will be required to determine the size and potential commercial value of discovery, but preliminary estimates suggest the field is bigger than Kaskida, a 2006 discovery that boasted 3 billion barrels of oil equivalent (boe).

“Tiber represents BP’s second material discovery in the emerging Lower Tertiary play in the Gulf of Mexico, following our earlier Kaskida discovery,” said Andy Inglis, BP’s head of exploration and production. “These material discoveries together with our industry leading acreage position support the continuing growth of our deepwater Gulf of Mexico business into the second half of the next decade.”

BP is already the largest producer of oil and gas in the Gulf of Mexico, generating about 400,000 boe/day. But once they start producing, the Tiber and Kaskida wells could boost the company’s output in the region to 650,000 boe/day.

BP did not say when the Tiber well would begin producing oil, but analysts don’t expect the field to start pumping until at least 2014. That seems optimistic, however, as BP’s last large-scale development in the Gulf – the Thunder Horse field – took nearly twice as long. That well was discovered in 1999 but didn’t start producing until just last year.

Of course, the Thunder Horse platform offers a compelling case study for the revival of oil exploration and development in the Gulf of Mexico – once referred to as the “Dead Sea” by oil majors who believed the region was tapped out.

Thunder Horse is ramping up its production to 300,000 barrels per day (bpd), which makes it the No. 2 U.S. producer behind Alaska’s Prudhoe Bay, BusinessWeek reported.

In fact, Thunder Horse and projects like it have added about 1.2 million bpd to total U.S. output. U.S. crude oil production is expected to rise this year for the first time in nearly two decades. In the first seven months, the country has averaged 5.26 million bpd, the highest for the January-to-July period in four years, according to the American Petroleum Institute, an industry group.

The deep waters of the Gulf of Mexico are now “one of the few bright spots in global oil production” Bob MacKnight, an analyst at PFC Energy told BusinessWeek.

The Gulf now accounts for about 25% of domestic oil production and 15% of natural gas output through about 3,800 offshore production platforms, according to the U.S. Minerals Management Service.

Of course, that production has come at a high cost. Exploration wells cost up to $200 million to bring onstream, and actual offshore platforms are even more expensive. Thunder Horse cost more than $1 billion to build and another $250 million more to repair after Hurricane Dennis knocked the massive structure on its side.

Still, operating in U.S. waters in the Gulf of Mexico is easier and less costly taking on projects in countries such as Venezuela, Africa, Iraq, and Russia where political skirmishes and civil unrest often lead to costly setbacks.

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Money Morning Editor’s Note

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Another Helicopter Down in Scotland

It has been a very bad year so far for helicopters ferrying passengers to and from offshore oil platforms. Today comes word of another tragedy involving BP workers:

Sixteen people feared dead in North Sea helicopter crash

Sixteen people were feared to have been killed today when a helicopter crashed into the sea off north-east Scotland.

Police said eight bodies had been recovered from the North Sea while the remaining eight people who had been onboard were unaccounted for.

The aircraft was returning from an oil platform just before 2pm when it went down 35 miles off the Aberdeenshire coast, according to the coastguard. Police said the aircraft was believed to have been flying back to Aberdeen from BP’s Miller platform in the North Sea.

The picture in the video below (which discusses the crash) shows the helicopter platform in Aberdeen which was just next to my office and ferried workers back and forth to the platforms. (My house was 3 miles beyond those hills in the background).

The victims would have been at the end of an extended offshore rotation, looking forward to getting back home to friends and family. Last month off the coast of Canada another crash killed 17 workers. The month before, another one that went down in the North Sea had a happier ending with everyone surviving.

I previously documented the training all offshore workers in the North Sea have to go through in Surviving Survival Training.

The Alaskan Gas Pipeline Controversy

For months now – off and on – I have been trying to wrap my head around the controversy over the proposed gas pipeline for Alaska. As a shareholder and former employee of ConocoPhillips – one of the involved parties – I have a vested interest. However, that’s also one of the reasons I haven’t written about this before, as I wanted to better understand the issue before writing about it.

I saw that the headline story in yesterday’s Drumbeat at The Oil Drum was a story from Newsweek dealing with the controversy, and that prompted me to go ahead and write something:

Pipe Dreams

I am going to post some excerpts from the story in an attempt to summarize the key issues:

Beginning this week, the Alaska State Legislature will debate how to usher in a natural-gas boom. Two pipeline proposals are on the table. One hails from a Canadian pipeline builder and is endorsed by Alaska Gov. Sarah Palin, a Republican who has drawn surprising comparisons with Venezuelan President Hugo Chávez for her tough stance against Big Oil. The other proposal comes from BP and ConocoPhillips, two oil behemoths that hold leases on much of the state’s natural gas.

But only one giant pipeline is needed, and Palin has set the stage so that only the Canadian proposal will be considered. State lawmakers must decide whether or not to give a $500 million state subsidy to TransCanada Corp. to lay a $26 billion, 1,700-mile-long pipeline from the Alaskan Arctic to Alberta, Canada, where other lines would transport the natural gas to American markets.

At the same time, BP and ConocoPhillips recently announced that they are embarking on their own $30 billion project to pump Alaska’s gas reserves through a 2,000-mile-long pipeline. They say they don’t need the state’s $500 million and will proceed regardless if the state throws its support behind TransCanada.

The TransCanada proposal is born out of an attempt by Palin to force the hand of the big oil companies—BP, ConocoPhillips and ExxonMobil Corp.—to execute their gas leases, from which the state hopes to raise tens of billions in tax revenue. Uncertainties over natural-gas prices and state taxes have long left the companies skittish about committing to a project.

Alaska owns the natural gas; BP and Conoco, along with Exxon, hold most of the leases to develop it. The companies have long talked of tapping the reserves, but have consistently deemed the pipeline too financially risky without the state first agreeing to favorable terms on gas production taxes. Unlike Palin’s predecessor, Gov. Frank Murkowski, who wanted to give the companies generous tax breaks, she has refused to budge.

As I understand it – and everything I have read seems to confirm this – the real sticking point seems to be that Governor Palin refuses to make a long-term commitment on the tax rates for the project. For a $30 billion project, it is pretty important to understand the economics of the project pretty far in advance. What I don’t know are specific details of what is being proposed – nor whether the tax rates being asked for are in some way unreasonable. But I do think it should be reasonable to at least agree in advance not to change the rules during the game. That is, after all, what Hugo Chavez has become famous for. And Palin’s threats to tear up existing contracts with XOM do provide a cause for concern.

TransCanada would route the gas pipeline through Canada, while the COP/BP pipeline would be an all-Alaska pipeline. The risk for TransCanada, of course, is that they don’t own any gas. I think you have to presume that if they build the line, COP and BP are going to put their gas in. But they will only do so under favorable terms. The risk for COP and BP is that gas prices come back down and their $30 billion investment suddenly doesn’t look so good. That’s why they need certainty on the tax rates.

A lot of money is at stake. Per this article, there are 30 trillion cubic feet of natural gas reserves that the pipeline would tap into. There is also a blog devoted specifically to discussing this issue. I recently read through a number of articles there in order to gain a better understanding of the issues involved. That blog is called The Alaska Gas Pipeline, and the author generally opposes the approach Palin has taken.

Finally, Happy Anniversary to my wife (and me) today. For the first time in 19 years, I almost forgot. When I changed jobs I lost the security blanket of having the date on my Outlook calendar. Of course it doesn’t help that I am spending it alone in the Netherlands.

Oil Stocks for 2008

CNN is recommending oil stocks for 2008:

Oil stocks: Best picks for 2008

They cover the integrated oil companies, the independents, the refiners, natural gas, and oil services. Here is what they said about the majors:

Experts generally expect nearly all oil stock sectors to do well in 2008 – although not as well as in 2007.

If you think the price of crude is going to go down, investors like Mark Gilman, an oil and gas analyst with the Benchmark Company, say go with the big boys.

With their diversification, high dividends and low stock prices compared to revenue, big oil companies that produce, refine and market oil and natural gas like Exxon Mobil (XOM, Fortune 500), BP (BP), ConocoPhillips (COP, Fortune 500), Chevron (CVX, Fortune 500) and Royal Dutch Shell (RDSA) make good defensive plays.

I especially liked this next bit:

In the integrated space, Gheit likes BP, simply because he thinks the company’s fortunes must change. Over the last few years, the British company has suffered a major pipeline spill in Alaska, a tipped-over rig in the Gulf of Mexico, a natural gas trading scandal, and a lethal refinery explosion.

“They’ve been in the penalty box for the last five years,” said Gheit. “Everything that could go wrong went wrong.”

As a result, BP’s stock has suffered, at least relative to other “Big Oil” companies. It gained 15 percent in the last 12 months and 84 percent over the last five years, compared with Conoco’s 26 percent gain over the last 12 months and 248 percent gain since 2002. It could be catch-up time for BP.

Disclaimer: I own COP stock (and have since 2002), and Gheit owns BP stock. Gheit has also been wrong on the direction of oil prices for the past 5 years.