BP Moves Back Into Gulf of Mexico With Full Force

Even as it remains embroiled in an intense legal battle over its role in the 2010 Deepwater Horizon disaster, British oil giant BP (NYSE: BP  ) is quietly ramping up activity in the Gulf of Mexico.

The company recently announced that it has added two drilling rigs in the area, bringing its total Gulf fleet to a BP record of nine. The two deployed rigs include Seadrill's (NYSE: SDRL  ) West Auriga ultradeep-water drillship, which recently commenced developmental drilling at BP's Thunder Horse field, and a reconstructed rig that is working on BP's Mad Dog field, after Hurricane Ike damaged the original rig in 2008.

BP in the Gulf of Mexico
The company's moves signal a genuine rebound in Gulf of Mexico drilling activity, which plunged after 2010. Bloomberg reported that the number of drilling permits issued in the Gulf soared to a record 807 on Sept. 26, up 14% from the same period a year earlier, while the number of rigs operating in the region surged to 62 as of Sept. 27, the most in four years. Royal Dutch Shell (NYSE: RDS-A  ) and BP have been two of the most active drillers so far, each having secured seven permits to drill new wells this year.

BP has been exploring the deepwater Gulf of Mexico for nearly three decades and was the region's largest producer last year. Over the next decade, it plans to spend roughly $4 billion annually on deepwater projects in the Gulf, focusing primarily on four large production platforms -- Thunder Horse, Atlantis, Na Kika, and Mad Dog – as well as Mars, Ursa, and Great White, three major nonoperated production hubs in which it holds an interest.

Thunder Horse, Mad Dog, Na Kika, and Atlantis, which are located in water depths ranging from 4,500 to 7,000 feet, are truly massive projects. Thunder Horse, for instance, can process up to 250,000 barrels of oil and 200 million cubic feet of natural gas per day and is BP's largest producing deepwater field. As operator, BP maintains a 75% stake in the project, with co-owner ExxonMobil (NYSE: XOM  ) accounting for the balance.

Similarly, the Atlantis field, which is being developed through a semisubmersible production quarters facility, boasts a production capacity of roughly 200,000 barrels of oil and 180 million cubic feet of gas per day. With a 56% interest, BP operates the field, with co-owner BHP Billiton (NYSE: BHP  ) owning the remaining 44% interest.

Combined, these four fields represent total production capacity of 660,000 barrels of oil and 990 cubic feet of natural gas per day, with production capacity net to BP totaling 415,000 barrels of oil and 560 million cubic feet of natural gas per day. That converts to roughly 0.52 million barrels of oil equivalent a day, or approximately 16.5% of the company's total third-quarter production of 3.17 million boe/d.

BP's future: opportunities and risks
As BP's record number of rigs operating in the Gulf of Mexico highlight, the company has ambitious plans for its upstream segment. Over the next decade, it plans to allocate roughly 75%-80% of its capital budget toward more than 40 upstream projects in four key operating regions: Angola, Azerbaijan, the North Sea, and the U.S. Gulf of Mexico.

By 2020, these four regions are expected to account for roughly half of the company's operating income. If BP can avoid project delays and keep costs within check, its pipeline of major upstream projects, of which 15 are expected to start up by the end of next year, should help the company significantly boost its operating cash flow over the next few years.

However, the outcome of the ongoing Gulf spill trial, now in its second phase, remains a major risk to the company's future. If BP is charged with gross negligence for its role in the event, not only would its spill tab rise by tens of billions of dollars, but it could also lead to sharply higher fees for punitive damages in the future. That would almost certainly put BP between a rock and a hard place, placing added stress on its cash reserves and likely forcing the company to sell more assets.

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