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BP Substantially Boosts U.S. Onshore Rig Count, Mostly in Midcontinent

BP plc has increased its onshore rig count in the Lower 48 states and has increasing confidence in its U.S. prospects, CEO Bob Dudley said Tuesday.

The operator is running 10 rigs in the onshore operations, one higher than it had in the first quarter and eight more than it was working at the end of 2014 (see Daily GPIApril 28).

"We've got seven in the Midcontinent area, two rigs in East Texas and one rig in Wyoming," Dudley said during a conference call to discuss second quarter results. “We've got seven in the Midcontinent area, two rigs in East Texas and one rig in Wyoming."

The "big focus" is on the Anadarko and Arkoma basins, "where we get nearly 20% liquids..." The two rigs in East Texas are targeting natural gas in the Haynesville Shale, while the one Wyoming is prospecting for Bakken Shale liquids.

During the call, an analyst quizzed the management team about what sense it made to increase the onshore rig count given that "realizations seem extremely low at $25/bbl liquids."

"I think the big change that we're seeing...in terms of the Lower 48 is a 50% reduction in the drilling costs," said CFO Brian Gilvary. As drilling costs have fallen, the U.S. team has ramped up the number of rigs. "If you then look at the basins that we're in, that actually changes the profitability of the portfolio that we now have in the Lower 48. So it's absolutely being driven by the fact we reduced the drilling cost by 50%."

Last summer, BP tapped former SandRidge Energy Inc. COO David Lawler to helm the Lower 48 business (see Shale DailyAug. 20, 2014). David Lawler is the younger brother of Chesapeake Energy Corp. CEO Doug Lawler.

BP early last year announced plans to separate its U.S. onshore business (see Daily GPIMarch 4, 2014). Upstream chief Lamar McKay said at the time the U.S. onshore was "key to our upstream strategy because we believe the region will remain at the forefront of innovation and drive global learning in unconventional resources."

BP last year had around 7.6 billion boe of reserves on 5.5 million acres with 21,000 wells.

Dudley said the U.S. onshore executives had been "empowered...to implement their own capital and operating efficiency improvements." Since first announcing it would give the Lower 48 more focus, "there's no question we feel like we've improved the competitiveness of the business. We've done all kinds of structural things, organized it into five sort of accountability-based business units that can move very quickly in implementing capital changes and cost reductions.

"So far, the kinds of things we're doing is, we're managing the producing wells better, new artificial lift, we're reducing some of our costs to drill wells...So, we've also seen an increase from the drilling and the activity in the percentage of liquids, which is up pushing 20%, about 18% now. Our production across the Lower 48 is about 280,000 boe/d. So we're pleased with it.

"Obviously, it's challenged with the lower prices right now," but costs are coming down. BP streamlined the business units, laying off some personnel, which has made operations overall more efficient.

BP wants the U.S. unit to become a "visibly high-return onshore operator in the U.S.," said the CEO. "It's got about 1,200 employees today across five states and...I think it's a real restructuring activity we've taken on to be competitive. We knew we weren't," but so far, the onshore team is "doing a great job...Cost structures are coming down."

BP also could become acquisitive in the onshore if the right opportunity emerges.

"I think what we will continue to do is scan and screen for deepening and existing projects as a starter," Dudley said. "I think that simplifies our activities without any overhead. That's an obvious one. And I think commenting on acquisitions, I think probably the bigger point for us is thinking about value over volume, and so we're going to pursue the value, and I think we'll just see. I think the landscape is quite uncertain in the industry, and it will be for some time, and that will throw up all kinds of challenges and opportunities for companies that are well positioned for it."

Projects are being tested, with final investment decisions considered "around the $60/bbl mark," he said. "We're of course, running and looking at it at $80. We even do a little stress test down at $40, but we think that they probably don't accurately reflect the cost structure today...

"I think we're seeing a big cost re-basing of the entire oil and gas industry now. We used to make money at $60, we used to make money at $40, we used to make money at $25, but it's going to require this re-basing of costs, which I think is now firmly in the whole industry's sights..."

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