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BP Writing Off Utica on 'Disappointing Appraisal Results'

BP plc is taking a $521 million impairment on its Utica Shale acreage in Ohio and will not proceed with development in the play, top management said Tuesday.

BP has an estimated 84,000 net acres in Ohio, but its decision to withdraw isn't a shock to those who have followed the major's activities in the play. Rumors have circulated for more than a year that early results were not what the company had expected.

"Following our decision to create a separate business around our U.S. Lower 48 oil and gas activities, and as a consequence of disappointing appraisal results, we have decided not to proceed with development plans in the Utica Shale," CFO Brian Gilvary said during a conference call to discuss first quarter earnings. "As a result, we have taken a $520 million exploration writeoff relating to Utica acreage in the quarter."

The writeoff was taken on appraisal wells in the Utica play in Trumbull County, OH. As to whether BP might sell the Utica portfolio, "it's premature to say what we'll do with the remaining part of that asset base. But I think we've made it very clear we don’t intend to proceed with where we are today," Gilvary said. He declined to offer any commercial information on the Utica.

In March BP said it would create a separate business for the Lower 48 operations to better compete with other operators (see Shale Daily, March 4). Total U.S. operations, including large leaseholds in the Gulf of Mexico, contribute around one-third of BP global energy reserves. Upstream chief Lamar McKay is leading implementation of the new business plan.

"It's a little premature at this point" to detail the projections for the Lower 48 business "because it was only a month ago that we announced it," Gilvary said. "But we have clearly, in terms of Lamar and the team, are in action around what the new governance model looks like, all of the various internal announcements, what that means in terms of sizing the organization…

"What I would say in terms of the first quarter, it was certainly one of the strongest quarters we've seen in over three years, as you would expect with the run-up in gas prices in the United States." More information is expected about the revamped business by midyear.

The decision to write off the Utica investments to date follows a $2 billion writedown last year by Royal Dutch Shell plc on all of the company’s U.S. unconventional assets (see Shale Daily,Aug. 2, 2013). Earlier this year Shell disclosed another $631 million charge on domestic properties (see Daily GPI,March 13).

Because of the disappointments in Utica, one analyst questioned Dudley about his confidence in other Lower 48 plays, particularly the Eagle Ford Shale, where BP has more than 450,000 net acres. Shell last year put its Eagle Ford portfolio on the market (see Shale Daily,Oct. 1, 2013). However, BP's confidence in the South Texas play is high, said Dudley.

"The Eagle Ford is producing just under 40,000 boe/d, of which 34% is liquids, so we like our Eagle Ford position," the CEO said. "We like the relationship we have with our partner there, Lewis Energy. They do a lot of the surface operations and we do the subsurface work. It's actually been a good model for us. We're happy with it."

BP, like ExxonMobil Corp. and other big operators, has turned its back on drilling dry gas acreage in order to build oil and liquids reserves. However, BP still has gas rigs running in the onshore, Dudley said. He was asked how BP's dry gas acreage stacks up in terms of where it might begin to take up the gas gauntlet again.

"It has to do with scale of operations in the various areas," as to where dry gas rigs are deployed, said Dudley. "Certainly, with scale like we have in San Juan, it produces high rates of production, but it's pretty dry gas. I think that obviously, the first thing we're interested in is our liquids because that's where most of the value is." But gas still is a viable target.

Gas-rich production areas "like Wamsutter, where we get a reasonable amount of liquids as well, 40% liquids, we've got three rigs running there...We don't have that many [dry gas] rigs running in North America," but "we've got two running in the Haynesville, which is only about 20% liquids."

As the Lower 48 business is restructured, BP first will consider the costs, "and then let the business itself look through the Wamsutter, the San Juan, the Anadarko, Woodford, etc." to determine the true value to the company.

To reduce upstream costs globally, "we are continuing to simplify," he said. "We're seeing lower lifting costs across all the regions…We are reducing our seismic activity, which will be part of our cost reduction as well. We've finished a lot of seismic. For our total cash costs for the upstream, we expect to be down about 1% from last year through this year due to efficiency and a lot of the reorganization that we've been talking about."

BP now is moving into the "heartland of acreage picked up in the last few years," as well as continuing its exploration obligations with partners, Dudley said. BP often has had discussions with various companies about "joining us, farming down, farming in or carries...in so far as to where we have 100% positions..." It's only in the positions that BP has outright where it might take on partners.

The decision to cease work in the Utica would not affect its marketing or trading business, Gilvary said. BP's North American gas trading arm long has been the biggest.

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