British Petroleum - Eye of the Tiber

The announcement of BP’s giant oil discovery at its Tiber Prospect has sent shockwaves through the oil industry.  The company hasn't released specifics on the size of the find, but if it turns out to be true ‘giant,’ it will contain more than 500 million barrels of recoverable oil, according to definitions by the U.S. Energy Information Administration. The last giant discovered in the deepwater Gulf of Mexico was Thunder Horse in 1999, which is also operated by BP.

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 and represents BP's second material discovery in the emerging Lower Tertiary play in the US Gulf of Mexico, following its earlier Kaskida discovery in 2006 which is currently under appraisal. Appraisal will also be required to determine the size and commerciality of the Tiber discovery however the field is reported to be bigger that the Kaskida field, has an estimated four to six billion barrels of oil. 

BP is the largest producer of oil and gas in the US Gulf of Mexico with net production of over 400,000 barrels of oil equivalent per day. BP is progressing nine US Gulf of Mexico projects, comprising Atlantis Phase 2, Tubular Bells, Kodiak, Freedom, Kaskida, Isabela, Santa Cruz, Mad Dog tiebacks and Great White. 

The company’s June quarterly results set the tone for the rest of the big oil fraternity. With oil prices down by around 50% since their record peak at about the same time last year, it didn’t take a rocket scientist to figure out that earnings figures would be drastically lower than 12 months earlier. Despite this, BP’s underlying second-quarter earnings came in slightly ahead of consensus estimates at around US$2.9 billion, 66% below the company’s earnings for the same period last year. 

Of course, oil company management cannot control oil prices, but they can be assessed on the merits of their response to the situation. And in this respect BP’s continuing focus on costs and sensible investment (key areas that are within its control) in order to bolster longer-term production, is highly commendable.  

Interestingly, BP acted earlier than most on the cost reduction front (2 years ago in fact), and has also been successful in turning around key areas of concern on the production front. As such, the company’s earnings are highly leveraged to the longer-term recovery in oil prices that we envisage over the coming years. 

Further momentum will of course be at least partly driven by the oil price, and we believe there is much to be positive about.  

So with the era of ‘easy oil’ now gone, the supply side of things is pretty clear. The only question is when will demand recover? In our view many economies globally will emerge from recession within the next 12 months, and with China for one continuing to move forward solidly, then a return to triple-digit oil prices might be a lot closer than most sceptics expect.