With Sale of Assets, BP Bets on More Deep Wells

Despite the April 20 Deepwater Horizon disaster, BP has no plans to leave the Gulf of Mexico or stop drilling for oil in other deep ocean waters.

Just the opposite: with its runaway well apparently under control, the troubled oil giant is now staking its future more than ever on deepwater wells. Although such wells are far riskier than land-based or shallow-water ones, oil fields that are located under a mile or more of water can be extremely lucrative, and BP continues to see them as worth the risks.

Reflecting that strategy, BP announced Tuesdaythat it had agreed to sell $7 billion of oil and gas fields to the Apache Corporation. The assets being sold — in Texas, New Mexico, western Canada and Egypt — are all on land.

The move goes a long way toward raising the $20 billion that BP pledged to put in escrow by the end of 2013 to pay claims for the gulf oil spill. The company has already suspended its shareholder dividend to come up with some of the money, and it is expected to announce at least $3 billion in additional asset sales in the coming months.

BP sign
Ben Stansall | AFP | Getty Images
BP sign

Reflecting BP’s urgent need for cash, Apache said it would advance BP $5 billion of the purchase price on July 30, even though the transaction is unlikely to close for several months as regulators in various countries review it.

But the deal is not just about the money. Although BP, based in London, could have raised the funds by selling valuable deepwater assets, it decided to dispose of onshore assets instead.

Analysts say the choice shows that BP is committed to deepwater drilling, despite the prospect of increased global regulation of such wells and an effort in Congress to bar the company from receiving new drilling permits in the gulf.

“The Gulf of Mexico, West Africa, Brazil, Egypt — these offshore areas are where you have significant deposits, and this is what BP will continue to go after,” said Bruce Lanni, an energy portfolio strategist at Nollenberger Capital Partners. “BP has an opportunity to become a little leaner and meaner by selling some of its noncore assets on the periphery and emphasize the deepwater production.”

On Monday, as optimism grew that the temporary cap put on the Macondo well was holding up against the pressure of the oil below, BP announced an expansion of its offshore portfolio. The companysigned a deal with Egypt’s government to develop new hydrocarbon deposits in the Mediterranean Sea. BP’s chief executive, Tony Hayward, declared, “This agreement unlocks a new phase in realizing the huge potential of the Nile Delta basin.”

News of the Apache deal came shortly after Thad W. Allen, the retired Coast Guard admiral in charge of the response to the gulf spill, said Tuesday afternoon that the government would give BP another 24 hours to test the cap on the Macondo well. The cap, which has been fully closed since Thursday, will remain shut while BP and government officials weighed whether to kill the well permanently by pumping heavy mud into it.

In their quest for new supplies, oil companies have gone after oil and gas reserves in ever-deeper waters since the 1990s. But no company has invested as much in deepwater exploration over the last decade as BP, which has often led the way in the industry’s push into the deepest reaches of the oceans.

Deepwater production, traditionally defined as wells in more than 1,000 feet of water, now accounts for about a third of BP’s 2.5 million barrels of daily oil output — surpassing Royal Dutch Shell or Exxon Mobil .

BP is the top producer in the Gulf of Mexico, with a daily output of 400,000 barrels in 2009. The company operates the world’s biggest offshore platform, Thunder Horse, in the gulf. BP is also one of the top investors in Angola, which has turned into the fastest-growing source of oil in Africa thanks to its offshore deposits. Last year, the company made three discoveries in Angola’s ultradeepwater Block 31. In addition, BP is also looking for oil off the coasts of Libya and Egypt, and it is the largest foreign investor in Azerbaijan, where it operates two major fields in the Caspian Sea, Azeri-Chirag-Gunashli and Shah Deniz.

With most of the big onshore fields long since discovered or controlled by national governments, major oil companies view the world’s oceans as their best opportunity to find vast pools of untapped oil and gas.

But for BP, the increasing dependence on deepwater drilling poses its own risks.

Deepwater projects are challenging under the best of circumstances — much of the work must be done using remote-controlled robotic vehicles, and the intense pressures and temperatures of the ocean depths make everything more difficult.

The Deepwater Horizon accident has gravely damaged BP’s reputation. Even if the company can contain the political damage, its growth will be stunted by its need to save cash to pay for the spill. BP has already announced it would not pay a dividend this year and would reduce its capital spending program.

Will BP survive?

“BP will probably end up a more humble company,” said Brian Youngberg, an energy analyst at Edward Jones, a brokerage firm based in St. Louis. “Their future growth will be challenged. Will other companies or countries want BP as an operator? That is a very valid question.”

In the United States, where BP has a history of troubled operations in the gulf, its Alaska operations and its refineries, the government has shown increasing frustration with the company.

The House Committee on Natural Resources voted last week to bar BP from obtaining new offshore leases because of its previous safety violations. If the proposed legislation passes, it would hobble BP’s growth. Although the company could continue to operate its existing facilities and invest as a minority partner in other companies’ projects, it would not be able to drill new wells.

Crisis_In_The_Gulf_badge.jpg

“The ripple effects to their reputation are huge,” said John R. Kimberly, a professor at the University of Pennsylvania’s Wharton School. “This is not the first time that BP has run into trouble. It is now on them to show they are not irresponsible.”

Although some analysts and lawyers are concerned about a risk of bankruptcy, BP is likely to survive the crisis. The company will generate $30 billion in free cash flow this year; its operations in the United States are valued at about $100 billion. Its proven oil reserves alone are worth $150 billion, according to analysts at Société Générale.

In the short term, the company needs to raise cash to pay for cleanup costs from the spill and endow the compensation fund. At the same time, it is seeking to avoid any appearance of a fire sale.

The assets sold to Apache represent 2 percent of BP’s reserves and 2.3 percent of its production. But the sale price represents 6.4 percent of BP’s current market value of $110 billion.

BP had originally discussed selling half of its stake in Alaska’s Prudhoe Bay field to Apache, but those talks fell through over the weekend because of complications in sorting out who would run the field, which BP now operates.

BP also confirmed Tuesday that it had recently informed the governments of Pakistan and Vietnam that it intended to sell production assets in both countries. The company’s operations in both countries include onshore and offshore fields but have a marginal impact on BP’s overall production.

Last week, BP sold some pipeline operations to Magellan Midstream Partners, including its crude oil storage facilities in Cushing, Okla. The $289 million transaction has puzzled analysts because BP’s ownership of Cushing, the receiving terminal for West Texas Intermediate crude oil, has long given the company’s oil traders precious market information that they could use to their advantage. Some analysts speculated that the sale might signal that BP was considering selling its highly lucrative oil trading unit.

BP is expected to lay out more details of its strategy on July 27, when it reports second-quarter earnings.

The ongoing uncertainty continues to weigh on its share price, which plunged as the impact of the April 20 accident became apparent. After hitting their lowest level since 1996 at the end of June, shares have bounced back in the last three weeks, closing Tuesday at $35.20 in New York.

Under Tuesday’s deal, Apache will pay $3.1 billion for 10 natural gas fields in the Permian Basin in Texas and New Mexico, $3.25 billion for natural gas assets in western Canada and $650 million for BP fields and an exploration concession in western Egypt. Apache, a midsize oil exploration and production company based in Houston, is known for buying underperforming or declining assets and wringing more production out of them.