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BP Searching for More Unconventional Gas

BP plc's land grab in the Arkoma Basin's Woodford Shale last month is the first of several North American natural gas prospects likely to be pursued, the London-based major's exploration chief said last week.

Already the leading gas producer in the San Juan Basin, BP has been reviewing more conventional and unconventional gas assets across North America for some time, BP's Andy Inglis said during a conference call to discuss 2Q2008 earnings.

"If you open up the aperture slightly from conventionals to nonconventionals and consider the gas position in the United States, it is reasonable to assume that by 2020 nonconventional gas will be around 50% of the U.S. position," Inglis said of BP. "We already have a strong position in CBM [coalbed methane] in the San Juan, and we've been working over the last year or so on how we can go to equivalent positions in the emerging shale type plays. We have established a position in the Haynesville [shale of Louisiana], and looking across the tier one shale plays, Woodford was an important position to give us scale."

BP America Inc. in July agreed to pay $1.75 billion in cash to acquire all of Chesapeake Energy Corp.'s interests in 90,000 net acres of leasehold and natural gas properties in the Woodford Shale (see NGI, July 21). The properties, which are in Atoka, Coal, Hughes and Pittsburg counties, OK, currently produce around 50 MMcfe/d.

"We have up to 2 Tcf in Woodford, and the Haynesville play has yet to be appraised, but it may be double that size," Inglis said. "We will build to reality now. We have three strong positions in conventional and nonconventional plays, and these will allow us to have confidence to grow our U.S. gas business, which is an important signal going forward."

BP's North American operations extend from Canada down through the Rocky Mountain states, then swing southeasterly through Kansas, Oklahoma, Texas and Louisiana. BP already has announced plans to spend $2.2 billion over the next 15 years to double gas production in Wyoming, and in the next 10-plus years it has set a $2.4 billion budget to sustain its gas production in Colorado.

With operations already ongoing in Oklahoma, "the Chesapeake deal in Arkoma is a bolt-on," said Inglis. "It's analogous to existing North American shale plays, and we already have a huge amount of synergy there. It will prove to be a great acquisition..." BP is picking up three rigs initially from Chesapeake and then will build to seven rigs in the near term, he said. "I actually believe integration of the assets is relatively easy."

A technology edge will hold the key to growing the company's shale production, said Inglis.

"Clearly, it's all about fracing," said Inglis of gas shale. "We believe we have the depth of technology, the depth of how we integrate, and we'll be taking all of that to Haynesville as well. Haynesville is as yet unappraised, but it has double the potential of Woodford." BP has an estimated 4 Tcf of reserves of leasehold in the Haynesville play based on other producers' initial reports, he said.

Major mergers and acquisitions are off the table for now, said CEO Tony Hayward. However, more bolt-on deals in North America would complement other operations.

"We look for opportunities for resource capture where we have a stable fiscal regime and a good margin and the ability to add distinctive value with technology," Inglis told analysts. "Without talking about specific targets, I expect we will add value and additions" onshore and in the Gulf of Mexico (GOM).

The oil major has no intention of taking its eyes off its huge GOM operations.

"In the Gulf of Mexico, we are clearly focusing on getting our current fields under development," he said. Thunder Horse, the long-delayed deepwater facility, will ramp up by the end of this year. Designed to process 250,000 b/d of oil and 200 MMcf/d of gas, the first well has begun producing, and a second phase, Thunder Horse North, will ramp up in 2009.

"We're looking at future [offshore] hubs now," Inglis said. The deepwater Kodiak discovery, located in Mississippi Canyon Block 771 southeast of the Louisiana coast, was announced in April. The prospect, near BP's Tubular Bells (T Bells) discovery, which was made in 2003, requires further appraisal to determine the size and commerciality.

"Kodiak is important to us," said Inglis. "Clearly we have materiality, and we see a hub emerging on either the Kodiak or T Bells. We're focusing hard on that..." Another deepwater area to watch is BP's Mad Dog prospect. Located beneath 4,500 feet of water about 190 miles south of New Orleans, Mad Dog is the second of four gigantic fields discovered by BP in the late 1990s; it is considered one of the largest discoveries to date in the GOM.

The Mad Dog production facility, permanently moored to the seabed, began producing in 2005. The platform has the capacity to produce up to 100,000 b/d and 60 MMcf/d. As many as 150 drilling and production personnel operate the truss spar, which is designed to produce and drill at least 12 wells simultaneously in Mad Dog's Green Canyon block.

"We expect to see further development of Mad Dog..." Inglis said. "And there may be some concept to accelerate that."

Hayward, who is overseeing a restructuring within the company to make it more efficient and competitive (see NGI, Feb. 11; Oct. 15, 2007), told investors that the "recovery already is evident" in the company's upstream operations. However, BP is "operating in challenging times," he admitted.

Russian shareholders are challenging BP for control of TNK-BP, the oil major's joint venture, and the TNK-BP CEO recently left. BP also has lingering challenges within its U.S. refinery operations, including safety concerns about its largest U.S. refinery in Texas City, TX.

"We have the wind in our sails in the upstream. Refinery is more like a gale," Hayward said. "The margin environment, especially in North America, is challenging...But we are making steady progress."

BP posted a better-than-expected 28% rise in net profit with $9.47 billion in 2Q2008, up from $7.38 billion for the same period a year ago. Revenues jumped 49% to $110.98 billion as the price for oil rose by around 35% in the quarter. Upstream profits climbed 52% from a year ago to $10.8 billion; downstream profits reached $539 billion, down from $2.7 billion in 2Q2007.

Replacement cost profit rose 5.5% to $6.85 billion from $6.49 billion a year earlier. Replacement costs, closely watched by energy analysts as the best measure of performance, exclude changes in the value of crude inventories, measuring the amount it would cost to replace assets at current prices.

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