BP's Big Oil Find Cements Gulf's Revival

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Sept. 3, 2009

BP PLC announced a major new oil find in the Gulf of Mexico, the latest in a string of discoveries there that cements the offshore waters of the southern U.S. as one of the oil world's most promising exploration regions.

BP said its Tiber prospect, about 200 miles due south of Lake Charles, La., is a "giant." The field is estimated to contain three billion barrels of oil, although only a fraction of that may ever be extracted, spokesman Daren Beaudo said.

BP is already the biggest producer in the Gulf, pumping the oil and natural gas equivalent of 400,000 barrels there a day.

Just two decades ago, the Gulf of Mexico was called the "Dead Sea" by an industry that believed it had already offered up all its big discoveries. But now it is again front and center for petroleum explorers.

As new technologies have enabled exploration in the deepest recesses of the Gulf, nearly a dozen discoveries, including BP's Tiber, have been made beneath nearly two miles of water. Indeed, a BP spokesman said of Tiber: "We believe it's the deepest well ever drilled by the oil and gas industry."

The deep-water successes have spurred new enthusiasm that oil production in the Gulf of Mexico will rise. The U.S. Minerals Management Service, which oversees offshore oil leases, predicts 1.88 million barrels of oil a day will be produced in 2013, up from a storm-battered 1.14 million barrels a day last year.

In 2010, about 14% of crude oil production in the Lower 48 states will come from four deepwater Gulf oil fields, two of which, Atlantis and Thunder Horse, are operated by BP, the U.S. Energy Information Administration said.

The technological wizardry required to suck oil from the ancient rocks, known as the Gulf's lower tertiary, underscores how extraordinarily expensive it is to develop these prospects. To drill each well costs about $200 million, industry executives said. And a prospect often requires several wells, plus expensive pipelines and floating facilities.

Still, the Gulf of Mexico has emerged as a major area of interest for the Western oil companies that have been locked out of many of the world's largest untapped resources in the Middle East and Russia.

"If you are looking for another opportunity of that scale that is oil and that is open to [Western oil companies], the Santos Basin of Brazil is the only other one in the world," said Andrew Latham, a vice president of global exploration services for consultant Wood Mackenzie.

Other recent finds in Uganda, Kurdistan and off the coast of Ghana are estimated to be several billion barrels of oil, while the Gulf of Mexico and Brazil contain "tens of billions of barrels," he said.

Making the site even more attractive, oil companies have to pay the U.S. less in taxes, royalties, oil payments and other levies for the privilege of drilling than they would have to pay other governments.

This combination of financial and geologic advantages has drawn the attention of many of the world's largest oil companies. Even Exxon Mobil Corp., which hadn't embraced lower tertiary exploration with the same vigor as its competitors, is increasing its activity. Last year, the Texas behemoth leased 142 offshore exploration sites, compared with 12 in the two previous years.

But it has been Exxon's peers that have led the way into the Gulf's lower tertiary. Royal Dutch Shell PLC and Chevron Corp. are expected to begin producing oil from Perdido -- a floating cork-shaped platform as tall as the Eiffel Tower -- in the next few months. That is expected to be the first oil produced from a lower tertiary discovery.

"If anyone was under the impression that the Gulf of Mexico was done, they should change that impression," said Marvin Odum, Shell's head of exploration and production from Brazil to Canada.

In mid-2010, a second lower tertiary discovery -- Petroleo Brasileiro SA's Chinook and Cascade prospects -- is expected to begin producing. Rather than build a 165-mile pipeline from the discoveries to the Louisiana coast, Petrobras is building a floating production, storage and offloading facility, called an FPSO.

While FPSOs, which resemble giant oil tankers, have become commonplace elsewhere, including off Angola, it is the first one in the Gulf of Mexico.

Gustavo Amaral, a Petrobras senior vice president in charge of Gulf of Mexico operations, cautioned against premature enthusiasm about the Gulf oil discoveries. Much remains unknown about how well the oil will flow from the prospects, and it can't be determined until they begin pumping oil.

"The statistics tell us there is a lot of oil left in the Gulf of Mexico, but there are challenges. The key for the success in the ultradeep lower tertiary plays is how the wells will behave," Mr. Amarall said.

Despite the uncertainty, Tiber and other lower tertiary finds are substantial enough to excite investors. BP's American depositary shares rose 4.08% today on the news. If one-third of the estimated three billion barrels of oil can be successfully retrieved, an optimistic figure according to analysts, it could fetch $70 billion at market prices.

But that would slake the globe's thirst for crude for only two weeks, and oil markets were unimpressed by the news. A barrel of crude oil on the New York Mercantile Exchange settled at $68.05, unchanged from a day earlier.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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