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BP is Back in Business in the Gulf of Mexico in a Big Way

By Bob Ciura – Mar 19, 2014 at 10:56AM

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Significant discoveries in recent months and a settlement with the U.S. Environmental Protection Agency will pave the way for BP to dominate in the Gulf once again.

Just a few years ago, if someone told you that oil and gas giant BP (BP -0.01%) would be back in businesses in the Gulf of Mexico by early 2014, you'd probably think they were crazy. However, that's exactly what has happened. In the years since the 2010 oil spill, BP has gotten back to business in the Gulf in a big way. And, a recent agreement with the U.S. government paves the way for further growth from Gulf production.

Several high-profile energy companies, including BP, are lining up to stake their claims in the Gulf of Mexico. There's good reason for this since the Gulf remains one of the biggest oil-producing regions in North America. If you can stomach BP's high level of geopolitical risk right now, there's a clear investment case intact thanks largely to the Gulf of Mexico.

Several Gulf discoveries will help fuel BP's future
BP's production momentum accelerated as 2013 drew to a close, and it's hoping to further that momentum in the year ahead. On an underlying basis after excluding divestments, BP grew production by 3.7% in the fourth quarter, and management cites new major projects in the Gulf as a primary contributor. Going forward, BP's significant discoveries in the Gulf of Mexico will boost its upstream production for many years to come.

BP and joint venture partner Royal Dutch Shell (RDS.B) recently started production from the second platform on its Mars development in the deepwater Gulf of Mexico. Royal Dutch Shell holds a 71.5% interest in the Mars B program, with BP operating the remaining 28.5% of the project.

The potential of the discovery is very promising. Shell believes its infrastructure upgrades can extend the life of the Mars project to 2050 or beyond. In terms of production, the goal is for the Mars platform to reach a peak of 100,000 barrels of oil equivalents per day in 2016.

Another major discovery BP recently made in the Gulf pertains to the Gila well that it owns and operates along with ConocoPhillips (COP 0.29%). BP holds an 80% interest in the discovery well, and it considers the most recent find to be significant, although it hasn't yet disclosed exact totals. This represents the third such discovery at the Paleogene trend in the Gulf.

In all, BP operates 10 drilling rigs in the deepwater Gulf of Mexico, and plans to increase future activity and investment there. This goal is made even more possible by a recent agreement between BP and the Environmental Protection Agency.

BP and the EPA settle
BP has reached an agreement with the U.S. EPA that effectively resolves BP's suspension from new Gulf of Mexico contracts. As part of the agreement, BP is once again able to enter into new contracts and bid for new deepwater leases in the Gulf of Mexico.

It probably goes without saying that the Gulf of Mexico is vital for major energy producers. According to the U.S. Energy Information Administration, U.S. oil production is now at levels unseen since 1988. Going forward, the trend is set to continue. A lot of this is due to the Gulf of Mexico.

The Gulf is one of the most important regions for energy production in the United States. According to the EIA, offshore oil production in the Gulf of Mexico accounts for nearly a quarter of all U.S. crude oil production. There are four regions that have reached the one-million barrels per day production mark in the U.S., and the Gulf is the only deepwater location to hold that distinction.

BP places its bets on the Gulf
Despite the fact that the 2010 oil spill in the Gulf of Mexico nearly brought BP to the brink of extinction, it's back in a big way. BP has several projects in the Gulf along with partners Royal Dutch Shell and ConocoPhillips that will help boost production going forward. Plus, the recent settlement with the EPA means BP can now bid and secure new leases and drilling opportunities in the Gulf of Mexico. As a result, BP has done the seemingly impossible in the four years since the Gulf oil spill and has restored itself to being one of the biggest producers of Gulf of Mexico oil.

BP needs the Gulf activity to allow its dividend to compete with these

Bob Ciura owns shares of BP p.l.c. (ADR). The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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