HOUSTON — BP’s oil empire began to shrink many decades before a massive oil spill first fouled the Gulf of Mexico and then nearly toppled its industry reign four years ago Sunday.
Forty years ago, Saudi Arabia and other oil-rich states began to siphon BP’s 1 billion barrels of Middle Eastern oil — four-fifths of its reserves in 1975 — into state-owned companies like Saudi Aramco. That tightening grip on global oil is one big reason BP, even after the worst offshore oil spill in American history, is doubling down on the Gulf of Mexico.
The London oil company in 2012 sold stakes in three deep-water Gulf fields in part to collect cash for oil spill costs. But in the past year, BP has begun to regain its momentum and help push the U.S. deep-water region past its previous oil production peak, reached in 2009.
BP has rebuilt its armada of deep-water drilling rigs to nearly double its size before April 20, 2010, fired up three big expansion projects since last April and in March reached a deal with the federal government to lift a 16-month suspension from entering into new federal contracts for leases in Gulf oil fields.
“We’re fully back in,” said Richard Morrison, regional president of BP’s Gulf of Mexico business, in a recent interview with FuelFix.
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The Gulf has become one of BP’s most profitable regions in the world, and the company has produced only about a fifth of the reserves from its four giant Gulf fields. Those, along with newly discovered ultradeep-water oil patches, “will keep our geologists and rigs busy for the next several decades,” Morrison said. “That’s why we have confidence in the future.”
It’s a turnaround that relieved many who had feared the deep water of the Gulf of Mexico would succumb to political entanglements and lose its status as a major oil lode.
The government put a moratorium on some deep-water operations for several months after the accident, and the aftermath of that suspension all but stopped BP and other producers’ drilling and well completions in 2011 and 2012.
But activity has picked up. Last April, BP started a major expansion project at its Atlantis North field. Two months ago, it boosted its daily oil crop at the Na Kika field southeast of New Orleans and reaped rewards from its partnership with Royal Dutch Shell, which started up production from its Olympus platform about 130 miles south of New Orleans.
By 2020, BP expects the Gulf to deliver a larger share of operating cash than any of its other regions.
Its large projects are among several slated to come online that will boost overall Gulf production 35 percent over the next two years, according to Wood Mackenzie.
The Houston-based research firm expects the region’s daily harvest to rise from 1.4 million barrels in 2014 to 1.9 million barrels in 2016 — its highest level ever — boosted by projects including Hess Corp. and Anadarko Petroleum expansions planned this year, and by growing production from Noble Energy and Exxon Mobil’s fields.
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Spending in the region could hit $17 billion this year, 20 percent over 2013, according to Wood Mackenzie.
BP has told investors it aims to spend $40 billion over the next decade expanding its Thunder Horse, Atlantis, Mad Dog and Na Kika fields and exploring for new discoveries in the Gulf. It also wants to boost its Gulf daily production from 189,000 barrels last year to 300,000 barrels in 2018.
With high-pressure wells that flow large volumes of oil, the Gulf is an attractive investment for BP and other companies that have the scale and technological capability to tackle massive deep-water oil fields, Morrison said.
But while the Gulf’s economics are attractive, Big Oil has been running out of alternatives for nearly half a century. BP, formerly British Petroleum, and other international oil companies had controlled nearly every drop of oil in the Middle East until the early 1970s, when tension between Britain and Libya culminated in the nationalization of BP’s oil assets in that North African nation.
Saudi Arabia, Abu Dhabi, Iraq and other Arab states followed suit over the next decade, clamping down on reserves that international companies had developed after World War II. By 1983, the amount of oil that BP shipped out of the Middle East had fallen to less than 1 percent of the 1 billion barrels it had moved out of the region only eight years before.
By the end of the last decade, nationalized oil companies owned more than 85 percent of the world’s known oil reserves. And international oil giants were producing less than 25 percent of the world’s output, said Praveen Kumar, a University of Houston finance professor and executive director of the UH Global Energy Management Institute.
“That’s what’s driving these international oil companies to the Gulf of Mexico,” Kumar said. “They’ve essentially been shut out of ownership of the world’s known oil reserves. They’ve been aware since the 1990s that to grow production, they have to move into these technologically challenging locations.”
Those locations include extreme settings such as the massive Kashagan field in the Caspian Sea, near the coast of Kazakhstan, where a Big Oil consortium has struggled for years and spent $40 billion. Production there was delayed late last year after operators discovered a gas leak.
Yet the Gulf of Mexico has presented its own challenges.
Four years ago, BP’s Macondo well off the Louisiana cost blew out — killing 11 workers on the Deepwater Horizon drilling rig and spilling millions of barrels of oil into the ocean.
The disaster demonstrated how a single accident can inflict immense costs on a company and an entire region.
BP has spent billions of dollars on oil spill costs, raising the cash by selling $38 billion in assets in a program that cut half its pipelines, half its installations, 35 percent of its wells and 10 percent of its reserves.
BP CEO Bob Dudley has said the strategy will focus the company on creating value, rather than hanging on to low-margin volumes.
BP’s market value as of Friday was $151 billion — $32 billion below its level April 19, 2010.
Investors are watching for rulings from U.S. District Judge Carl Barbier of New Orleans, who is overseeing the tangle of litigation arising from the spill and eventually will set fines under the Clean Water Act that could reach $18 billion.
After the spill, federal regulators set stricter rules around deep-water drilling, including a requirement for weekly tests of blowout preventers — the stacks of valves and rams that sit at the top of a well as a final line of defense should pressure rise beyond operators’ control.
The requirement has slowed drilling operations and increased costs for many companies, said Nimmi Henderson, Wood Mackenzie’s lead analyst on the Gulf of Mexico upstream business.
“Companies are working with a new normal in the Gulf,” Henderson said, adding that some companies have equipped their rigs with secondary blowout preventers.
Still, BP continues to pour money into the region. In a federal auction last month, it spent $42 million to win 24 bids on new blocks in the Gulf of Mexico. That’s on top of its 620 lease blocks there, the largest position of any company in the Gulf.
The company’s rebound in the Gulf, however, would not be possible without first prioritizing increased safety on its deep-water rigs, Morrison said.
BP, he said, has sharpened its safety procedures and organizational structures since 2011. Over the past four years, it has cut by 75 percent the number of accidents that harm crew members or damage equipment.
“It has been a long journey working through procedures and really getting systematic in how we approach our business,” Morrison said. “If you keep your operations running safely, you’ll keep them running well.”
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