BP Makes Fresh Investments in the North Sea

Satarupa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The biggest problem that oil and natural gas companies face is depleting reserves. With daily production, the overall proven reserves decrease and this leads to a situation where these companies have to find and develop new reserves to sustain production.

And this task is quite challenging. Improvement in technology has made it possible to extract oil and natural gas from reserves which were previously out of reach, or economically unfeasible. BP’s (NYSE: BP) decision to invest further $500 million to develop its interest in the Clair field is the result of one such improvement.

What does the field promise?

The Clair field was discovered back in 1977, but production started as late as 2005 and has already produced 90 million barrels of oil. Since 2005, BP and its partners in the Clair project -- Shell, ConocoPhillips, and Chevron -- have already invested a whopping $10 billion for the first phase facilities, expected to be running till 2028.

The influx of another 500 million is to drill five new wells, which being successful, will lead to the drilling of an additional 7 wells. This investment is part of their planned 4.5 billion pound investment in the second phase. After the completion of the second phase, the area is expected to produce 120,000 barrels of oil per day.

The bigger picture

With the decrease of production in the North Sea, the west of Shetland area is expected to play a vital role in the region's oil production. It’s one of the least drilled areas and is also expected to hold 8 billion barrels of oil. There are reasons for the area to be unexplored -- the huge cost on the environment if anything goes wrong -- which we have already seen in BP’s Gulf of Mexico spill. The conditions are really challenging to locate oil and build an offshore facility. But new technology has provided a glimpse of hope for these companies.

Advancements in seismic technology have made it possible for oil and natural gas companies to locate crude under the deepwaters, leading to a flock of investment in the area. In December, Statoil (NYSE: STO) announced that it will invest $7 billion to develop the Mariner field off Shetland in the largest offshore development in the U.K. in more than a decade.

The field is estimated to produce on an average around 55,000 barrels of oil per day with a field life of 30 years. Statoil reported an 8% increase in volume for the fourth quarter of 2012, with a 7% increase in adjusted earnings.

Statoil is not the only other company investing in Shetland offshore area. Talisman Energy (NYSE: TLM) has also decided to invest $2.4 billion in the area. The company completed asset sales amounting to $2.5 billion, that had an effect on its production which remained flat at 426,000 barrels of oil equivalent per day. Talisman reported an income of $376 million for the fourth quarter of 2012, compared to a loss of $117 million for the same period last year.

Foolish bottom line

BP has been selling off its depleted assets in the North Sea to acquire unexplored reserves. Given the loss incurred by BP in the Gulf of Mexico oil spill incident, moves like this are required in plenty to solidify its financial position and increase field life.

The cost of the spill is still increasing a lot more than what was initially expected. With a share buyback plan announced, BP is trying its very best to maintain the value of its shares. And we expect a lot more to be in store. Let’s not take our eyes off the stock.


Satarupa Bose has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus