Gila Bolstering Optimism Toward GoM & BP
BMI View: The late 2013 discovery by BP in the Gulf of Mexico acts as a boost for the supermajor as it continues its slow climb back to normality in the wake of the 2010 Macondo disaster. It also further underpins our view for rising investor interest, and thus greater production growth in the Gulf over the medium term.
At the end of 2013, supermajor BP with its partner ConocoPhillips announced a major find in its Gila prospect in the deepwater US Gulf of Mexico. It is BP's third Paleogene find in the Gulf over the past decade, following Kaskida (2006) and Tiber (2009), and was drilled to a total depth of 29,000 feet in the Keathley Canyon area. Described by the company only as a "significant oil discovery", BP indicates that further drilling will be required to determine the ultimate size of the play, and test for additional pay zones. That said, we see the discovery as highly significant, acting as both a boost to BP as it slowly continues its recovery from the 2010 Macondo disaster, as well as highlighting growing investor interest in the Gulf of Mexico (GoM).
Bolstering BP's Prospects
In many ways, BP is still trying to live down the disastrous 2010 Gulf of Mexico spill, with the incident continuing to weigh heavily on the company's prospects. Not only does it continue to face a ban imposed by the Environmental Protection Agency on bidding on any new federal contracts, but the extent of its financial liability for charges associated with the 2010 disaster remain highly uncertain. For example, while it had originally projected settlements with businesses and individuals would cost less than US$8bn, the company has recently been forced to boost its estimate to US$9.2bn as of October 2013. The company has indicated this sum could rise further after its efforts to convince a US federal judge that businesses seeking to recover damages should provide proof of their losses were rejected.
That said, while BP has a long way to go to return to its pre-Macondo state, the recent find suggests long-term potential. Indeed, with Gila capping off BP's most promising year of exploration in nearly a decade - with a success rate of 40% on its wildcat wells - we see the find as a boon for the company, suggesting a slow return of momentum. Moreover, with BP anticipating spending US$4bn annually on exploration and drilling new wells through 2020, and with only 20% of the company's resource base in the Gulf developed, we believe that over the longer term, the region is likely to be a major driver of growth.
|Promising Project Pipeline|
|BP - Sampling Of Major Upstream Projects|
We cannot discount some downside risks due to below-ground issues given the company's self-proclaimed bias toward deepwater in its upstream segment. For example, the ramp up in GoM activity following the oil spill has been somewhat slow, and recently rising cost estimates for its Mad Dog field saw the company announce in September 2013 that it was cancelling its contracts for the building of an extension to the project. However, overall we still believe the company has a quite promising pipeline project.
Gulf of Mexico Highly Prospective
Meanwhile, we also see the Gila find as highlighting strong interest in the region at large among both international oil companies (IOCs) and national oil companies (NOCs). After a decade long decline throughout the 2000s, the number of drilling rigs operating in the Gulf has rebounded considerably in recent years ( see chart), as new technology and high oil prices support more favourable project economics. With the EIA reporting a number of major developing projects set to come online over the coming years, this suggests GoM deepwater exploration will continue to grow.
|Heading Up After A Long Fall|
|US - Gulf of Mexico Rig Count|
Finally, we note that the recent passage of the Transboundary Hydrocarbon Agreement (THA) only further bolsters our optimism. The THA is a deal between the US and Mexico which will allow for the development of offshore oil and gas fields in a 4.2mn acre swathe known as the 'Western Gap' on the border of the two countries but beyond their exclusive economic zones. While its passage was long delayed by a failure to move through the US legislature, it has recently been approved by the US Congress - pushed through as part of a bipartisan budget bill. With the Bureau of Ocean Energy Management (BOEM) projecting that the transboundary area could hold as much 172mn barrels (bbl) of oil and 8.6bn cubic metres of natural gas, we believe this suggests substantial upside potential for the region.