BP Is Back in the Gulf of Mexico Drilling Game With Auction Success

Source: Thinkstock

Source: Thinkstock

Analysts deem the Environment Protection Agency settlement an important milestone in BP’s (NYSE:BP) nearly four-year long mission to recover from the 2010 Deepwater Horizon oil spill. That disaster prompted a five-month drilling moratorium and bolstered safety requirements, which together led to an exodus of rigs and drilling equipment. In fact, production collapsed after the 2010 oil spill. But large oil companies have begun drilling again, and now even BP can bid on new contracts. Last week, BP and the EPA reached an agreement to lift a 2012 ban that was implemented following the spill and prevented the company from drilling in the Gulf of Mexico, where it was once one of the most aggressive oil producers. The company has since wasted no time in getting involved in bidding.

In an auction held Wednesday in New Orleans, just days after the ban was lifted, the oil producer was the highest bidder on twenty-four exploration blocks in the Gulf of Mexico worth nearly $42 million, according to records from the Department of the Interior. “BP is very pleased at the prospect of adding to our leading leasehold position in this key U.S. offshore region,” BP’s Houston-based spokesman Brett Clanton told The New York Times. Being able to drill in the gulf is a positive for BP because, before the spill, the company had invested heavily in oil and gas fields in the region, as well as the advanced computers and technology required to discover oil deep below the ocean floor.

“They have been in the penalty box,” Oppenheimer & Company analyst Fadel Gheit told the Times. “They have been working hard to lift the sanctions, and they immediately turned that into something positive,” he added, referring to the Wednesday auction.

In the years since an undersea well exploded fifty miles off the Louisiana coast, killing eleven workers and spewing millions of barrels of crude oil into the ocean, other companies have surpassed BP’s gulf output. The company has been drilling on its old leases and even made a significant discovery, but its production has plunged to 190,000 barrels a day — less than half what it was producing before the spill — thanks to the drilling ban and the fact approximately $43 billion in oil fields were sold to pay damages.

Meanwhile, BP has missed three rounds of lease sales, the company has sold numerous assets in the gulf, and Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) surpassed the company as the largest producer in the deepwater gulf last year. But now BP is no longer a spectator in the rush to jump back into Gulf drilling that has begun to gain momentum. The company has committed to spend $4 billion annually on its Gulf of Mexico operations for at least the next ten years.

The Interior Department periodically holds lease sales, and Wednesday’s auction saw approximately fifty companies bid for 326 blocks encompassing 1.7 million acres off the coasts of Mississippi, Alabama, and Louisiana. BP came behind Freeport-McMoRan’s (NYSE:FCX) oil and gas exploration and production firm, as well as Chevron (NYSE:CVX), Murphy Exploration & Production Company (NYSE:MUR), and Shell, in terms of overall bid values.

“With this agreement [with the EPA], it’s realistic to expect that the Gulf of Mexico can be a key asset for BP’s operations not only for this decade but potentially for decades to come,” Morningstar senior oil equity analyst Stephen Simko told the Times. The importance of the gulf to the energy industry was made clear by comments made by Edward Jones analyst Brian Youngberg. “Investors should not sleep on the Gulf of Mexico,” he told Bloomberg Businessweek in a recent interview. “Onshore shale is obviously the main driver in the growth in U.S. production, but going forward, the Gulf of Mexico should start contributing to that.”

Ten large discoveries have renewed oil explorers’ enthusiasm for the region, and billions of dollars are being diverted into new wells in deep water off the coasts of Texas and Louisiana. The resurrection of offshore drilling in the gulf has much to do with technological innovation that has enabled oil companies to find oil in deeper waters. New seismic equipment allows oil exploration companies to find oil through opaque layers of rock, while engineering advancements have allowed drills to descend through 10,000 feet of water to the seabed and dig five miles into the earth’s crust. The Interior Department has calculated that the Gulf has 48 billion barrels of oil yet to be found.

Of course, BP’s rehabilitation is far from complete; over the next five years, an independent auditor approved by the EPA will monitor the company to ensure the safety of its operations and that is remains in compliance with the agreement. Plus, BP is still facing civil fines from the 2010 spill.

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