Deep expectations | FT Alphaville

Deep expectations

BP shares have popped higher on the news of the oil major’s  ‘giant’ find in the Gulf of Mexico on Wednesday.

BP shares - FT

As analysts have already begun to note, the use of the word ‘giant’ to describe the well is almost unprecedented. But the indication is clear: BP thinks this will be a massive production asset, despite needing further appraisal to determine the exact size and commerciality of the discovery.

A quick take from UBS, for example, stated (our emphasis):

Announces ‘giant’ oil discovery at Tiber prospect in deepwater GoM. Any announcement of a discovery by a major means its important. Using the word ‘giant’ is almost unprecendented. From memory the last time something like this was announced it was Thunder Horse which is >1bn bbls. The previous discovery in the Lower Tertiary Kaskida was >3bn bbls in place and >300-500m bbls recoverable with significant upside. So this sounds like a 500m-1bn bbls discovery and with Kaskida the opening up of a whole new geological play. Company saying technologically ‘within the envelope’ and big advantages of critical mass. GoM oil discoveries are the highest value globally so this is a big positive – probably worth at least 3% even to a company the size of BP.

Goldman Sachs,  meanwhile, said it was good news for BP, but not necessarily an industry-changing find:

We don’t have a size yet for the discovery, but we can assume c1 bn bls of recoverable reserves. This discovery will be very challenging to develop due to its complex geology (Lower tertiary) and water depth (almost 11 km) and is unlikely to be producing before 2014. We value these reserves at c$3/bl. BP owns a 62% stake (Petrobras 20%, ConocoPhillips 18%) and therefore this discovery could be worth c$1.9 bn net to them (1.1% of market cap). Good news for BP, but it is hardly transformational and does not provide a solution to their thin pipeline of new projects in the 2010-13 period.

The key issue – as always with deep-water production – will be costs.  BP’s Thunder Horse currently rates as the largest deepwater production site in the Gulf of Mexico, drilling at depths of 6,000m below sea level.  The first discovery well was struck in 1999, but the field only began producing first-oil in 2008.

Tiber, meanwhile, is incrementally deeper than Thunder Horse. As BP stated:

The Tiber well was drilled to a total depth of approximately 35,055 feet (10,685 metres) making it one of the deepest wells ever drilled by the oil and gas industry.

Here’s a nice graphic from BP that sets the depth in perspective:

BP GoM fields - BP

Related links:
BP announces giant oil discovery
– FT Alphaville
BP’s GoM discovery: How giant is ‘giant’?
– FT Energy Source