BP Plc’s drilling delay in the Gulf of Mexico means production will keep declining at its most profitable fields as the company spends $2.4 million a day to keep rigs in the region idle.
While executives say BP is making progress toward resuming drilling in the Gulf, the company hasn’t submitted an application for a permit to start a new well since President Barack Obama’s moratorium was lifted on Oct. 12, according to two people with knowledge of the matter. They declined to be identified because it’s not public information.
BP’s output in the Gulf may drop as much as 30 percent a year without the wells needed to boost production at existing fields, according to Macquarie Capital Ltd. For Chief Executive Officer Bob Dudley, restoring BP’s position in the region, where the company is the largest producer, is central to reviving shares that are trading at the lowest in 11 months.
“It’s critical for Dudley to get production back up in the Gulf,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. “Those barrels are worth double or triple the value of oil from anywhere else in the world. It’s the crown jewel of the company.”
BP fell as much as 5.8 percent to 379.7 pence in London, the lowest since September. The stock traded down 1.5 percent at 397.1 pence as of 2 p.m. local time. Rival Royal Dutch Shell Plc was unchanged. BP shares are down 40 percent since the oil spill in the Gulf that followed an April 2010 explosion.
Gulf Profits
BP earns a profit of about $30 a barrel in the Gulf of Mexico when oil prices are at $100, Gheit estimates. In West Africa or the U.K. North Sea, the second-most profitable regions, the company makes $15 to $20 a barrel in profit, he said. Robert Wine, a BP spokesman, declined to disclose profitability in different regions.
Dudley said July 26 that BP is eager to “get back to work” in the Gulf, working closely with regulators, and that the pace of BP’s return depends on getting approvals for new wells. He pointed out that the U.S. Bureau of Ocean Management, Regulation and Enforcement says BP won’t be held to a higher standard than its peers in its applications.
Waiting for permits also means paying owners to keep drilling rigs idle. Transocean Inc., owner of the Deepwater Horizon rig that exploded and sank last year, is getting paid about $1.4 million a day by BP, making it the biggest beneficiary of keeping vessels on standby, company filings show.
Suing Transocean
BP filed a suit against Transocean in April, claiming the company is responsible for part of the $41 billion bill for the Macondo well blowout. Dudley reiterated last month that Transocean should contribute.
Since the moratorium was lifted, Chevron Corp. has received three deepwater well approvals. BHP Billiton Ltd. has had four deepwater wells approved, while Shell has gained permission for five. Getting a permit to drill in deep water is taking between three days and four months, according to data on the bureau’s website.
While BP hasn’t applied to drill any of its own wells, it is a partner in several fields that have been granted permits. That includes the Europa field, operated by Shell, that received a permit for drilling last week.
In the year before the April 20 Macondo accident, BP received more new deepwater well approvals than any other company, according to information from the bureau. BP’s output in the region has dropped to 250,000 barrels a day from about 390,000 barrels a day before the spill.
Output ‘Uncertainty’
“Production could go down 20 percent a year without new wells,” said Jason Gammel, an analyst at Macquarie Capital Ltd. in London. “The declines could be as high as 30 percent. It’s a key uncertainty for BP.”
BP has five rigs under contract in the Gulf of Mexico, none of which are drilling. Transocean owns GSF Development Driller II and Development Driller III, leased at $580,000 a day and $403,000 a day, according to a company filing from the rig owners. BP is also leasing the Discoverer Enterprise, which is still in port after helping in the spill cleanup and is under contract to BP at $435,000 a day. It will be handed back to Transocean in August 2012.
BP has signed up the Ensco DS-3 for $480,000 day, according to the fleet report. Ensco didn’t return calls for comment. BP is leasing Seadrill Ltd. (SDRL)’s West Sirius rig at $474,000 day, Seadrill spokeswoman Hilde Waaler said.
Slow Permits
“It’s taking longer than we thought to bring the Gulf back to full capacity,” said Kim Andre Uggedal, an analyst at Terra Markets AS in Oslo. “Drillers are talking about the end of 2012 or the middle of 2013 before permits are approved as quickly as they were before the spill.”
Transocean spokesman Guy Cantwell declined to comment on rig fees. BP reported last week that it took a $300 million charge for idle rigs in the Gulf and other costs in the second quarter. BP spokesman Wine declined to comment on how much of the charge was related to the rigs.
Transocean published an 854-page report on the Macondo blowout on June 22 that largely blames BP for the accident. The company hasn’t admitted to any mistakes in the incident that killed 11 workers and spewed almost 5 million barrels of crude into the Gulf.
Falling Production
BP’s problems in the Gulf have contributed to a global slump in output, which sank 11 percent in the second quarter after the company sold off $25 billion of assets in mostly producing fields. It also had longer turnarounds and maintenance periods as it implements higher safety standards and said production is likely to average 3.4 million barrels of oil equivalent a day this year, the lowest since 2001.
In contrast to BP’s rigs on standby, Chevron Corp. has nine rigs in the Gulf, all drilling. Apache Corp. has five rigs that are all active, and Shell has five Gulf rigs drilling, according to information from ODS Petrodata and the companies. The rig utilization rate in the Gulf is now 54 percent, similar to a year ago, compared with 78 percent worldwide.
Melissa Schwartz, a spokeswoman for Bureau of Ocean Management, reiterated that BP isn’t being judged by different standards than other operators and said the agency welcomed BP’s plans, announced July 15, to implement a higher standard of drilling rules. BP has so far only gained permission to modify an existing well, she said.
BP said that it will now only use blowout preventers on the Gulf floor with at least two so-called blind shear rams, which seal wellbores by cutting through the drill pipe. Transocean’s blowout preventer for the Deepwater Horizon had one blind shear ram that failed to cut off oil and gas from the well. BP will also set up a real-time drilling operations center in Houston.
“Getting the Gulf of Mexico back on stream is a four-star priority for BP,” said Peter Hutton, an analyst at RBC Capital Markets in London. “There’s an awful lot to do and they’re not in a position to be as convincing as investors would like them to be. It’s likely to be the end of the year before we see any progress.”
