What BP’s giant oil strike means

By Stanley Reed

updated 4:23 p.m. ET Sept. 3, 2009

It may be one of the biggest oil finds of the year, if not the decade. In recent weeks, executives at BP's exploration centers in Houston and London have been closely tracking the progress of a very deep well that BP contractors were drilling into the seabed of the western Gulf of Mexico. In late August the exploratory well, known as Tiber, was completed. On Sept. 2, BP announced that it had made "a giant oil discovery." BP's chief of exploration, Michael Daly, terms the Tiber find "very significant" and says it is even "better" than the Kaskida field, another huge BP property in the Gulf of Mexico, with an estimated 4 billion to 6 billion barrels of oil in place.

BP has struggled recently, the result of highly publicized battles with its Russian partners and a series of accidents in the U.S. at its Texas refinery and on Alaska's North Slope. Now it is getting a huge shot in the arm from its gulf finds, which are just coming onstream with highly profitable oil. Tiber provides further confirmation of BP's vanguard status among companies probing the ancient geological zones far below the seabed of the gulf in water a mile deep.

The London company's two-decade commitment to the gulf has helped resurrect a region that was being dismissed as "the Dead Sea" in the 1990s, after companies hit a series of dry holes. "With respect to the Gulf of Mexico, BP has done very, very well," says Richard Gordon, president of Gordon Energy Solutions, an Overland Park (Kan.) oil and gas consultancy.

Tiber and Kaskida will take years to develop, and BP runs the risk of cost overruns, another crash in the price of oil, and unforeseen, expensive challenges in extracting all that crude. But BP's star gulf property, a massive oil and gas field about 140 miles southeast of New Orleans called Thunder Horse, is already raking in cash for the company (ExxonMobil owns 25 percent of Thunder Horse). Visitors to the BP production platform for Thunder Horse must first board a helicopter at an airstrip at Houma in the Louisiana bayou. Dodging thunderstorms, the chopper flies over a seascape that reveals the history of the gulf oil industry, as the platforms evolve from shack-like structures in shallow water to massive, deepwater drill ships farther out to sea. Finally, a monstrous gray platform floating on four red legs comes into view. The size of a sports stadium, the Thunder Horse platform is tethered to the ocean bottom by huge chains in 6,000 feet of water and is one of the biggest in the world.

For Andy Inglis, BP's exploration and production chief and Daly's boss, Thunder Horse is the jewel in BP's crown, worth all the snafus and delays the company had to overcome before it could succeed at the cutting edge of ultra-deepsea drilling. The company and its suppliers had to devise dozens of new components and materials for the platform, such as valves and coatings to withstand the searing temperatures and intense pressures on wells that must go through four miles of seabed. In 2005 a hurricane left the platform listing to one side, and in 2007 a mass of equipment connecting up the wellheads on the sea floor had to be brought back to the surface to fix faulty welds.

Video   Oil Inventories Crude oil inventories are down 400K barrels, reports CNBC's Sharon Epperson. CNBC

‘Prepared to work on the frontier’
Thunder Horse is ramping up to its 300,000-barrels-per-day target — making it the No. 2 producer in the U.S. after Alaska's Prudhoe Bay. Thunder Horse's oil is among the most profitable in BP's portfolio. Fadel Gheit, an analyst at Oppenheimer in New York, figures that at a price of $60 per barrel, BP will earn pretax profits in the mid-$20s per barrel from Thunder Horse, perhaps four times what it earns in high-tax Russia.

Two other huge deepwater Gulf of Mexico fields, BP's Atlantis and Mad Dog, have also come onstream in recent years. BP is now the lead producer in the gulf, and projects such as Thunder Horse have added about 1.2 million barrels per day to total U.S. output, arresting a long decline in American production and decreasing dependence on imported energy. The deepwater gulf is "one of the few bright spots in global oil production," says Bob MacKnight, an analyst at consultants PFC Energy in Washington. BP now reckons an additional 22 billion to 40 billion barrels of reserves are to be found there.

Finds like Thunder Horse, Tiber, and Kaskida fit BP's high-risk, high-return strategy to a T. "We don't do simple things," Inglis says. "We are prepared to work at the frontier and manage the risks." BP wants to do big projects of a billion barrels or more because that's the only way to replace the huge volumes that it produces, and large scale translates into high returns. Unlike ExxonMobil and Royal Dutch Shell, which have substantial refining and marketing operations, BP is largely an exploration and production company. BP wants to be a first mover and get the choice deals ahead of everyone else. And BP stands out as a high roller among the majors. Witness TNK-BP, the company's turbulent though lucrative joint venture with a group of Russian oligarchs who forced the ouster of the venture's expatriate CEO last year. Then there's BP's lonely decision a few weeks ago to become the first big oil company to return to Iraq while ExxonMobil and Royal Dutch Shell balked at the Iraqis' tough terms.

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