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BP's 'Giant' Discovery Gives the Gulf of Mexico New Life

By , Money Morning •

BP PLC (NYSE ADR: BP) yesterday (Wednesday) announced a "giant" oil discovery in the Gulf of Mexico that may contain more than 3 billion barrels of oil. The find is evidence of the Gulf's resurrection as a major oil producer, as well as the great lengths - or depths - to which major oil companies must go to find vibrant wells.

The well, known as the Tiber Prospect, is one of the deepest wells ever drilled with a total depth of about 35,055 feet, or 6½ miles. An appraisal will be required to determine the size and potential commercial value of discovery, but preliminary estimates suggest the field is bigger than Kaskida, a 2006 discovery that boasted 3 billion barrels of oil equivalent (boe).

"Tiber represents BP's second material discovery in the emerging Lower Tertiary play in the Gulf of Mexico, following our earlier Kaskida discovery," said Andy Inglis, BP's head of exploration and production. "These material discoveries together with our industry leading acreage position support the continuing growth of our deepwater Gulf of Mexico business into the second half of the next decade."

BP is already the largest producer of oil and gas in the Gulf of Mexico, generating about 400,000 boe/day. But once they start producing, the Tiber and Kaskida wells could boost the company's output in the region to 650,000 boe/day.

BP did not say when the Tiber well would begin producing oil, but analysts don't expect the field to start pumping until at least 2014. That seems optimistic, however, as BP's last large-scale development in the Gulf - the Thunder Horse field - took nearly twice as long.  That well was discovered in 1999 but didn't start producing until just last year.

Of course, the Thunder Horse platform offers a compelling case study for the revival of oil exploration and development in the Gulf of Mexico - once referred to as the "Dead Sea" by oil majors who believed the region was tapped out.

Thunder Horse is ramping up its production to 300,000 barrels per day (bpd), which makes it the No. 2 U.S. producer behind Alaska's Prudhoe Bay, BusinessWeek reported.

In fact, Thunder Horse and projects like it have added about 1.2 million bpd to total U.S. output. U.S. crude oil production is expected to rise this year for the first time in nearly two decades. In the first seven months, the country has averaged 5.26 million bpd, the highest for the January-to-July period in four years, according to the American Petroleum Institute, an industry group.

The deep waters of the Gulf of Mexico are now "one of the few bright spots in global oil production" Bob MacKnight, an analyst at PFC Energy told BusinessWeek.

The Gulf now accounts for about 25% of domestic oil production and 15% of natural gas output through about 3,800 offshore production platforms, according to the U.S. Minerals Management Service.

Of course, that production has come at a high cost. Exploration wells cost up to $200 million to bring onstream, and actual offshore platforms are even more expensive. Thunder Horse cost more than $1 billion to build and another $250 million more to repair after Hurricane Dennis knocked the massive structure on its side.

Still, operating in U.S. waters in the Gulf of Mexico is easier and less costly taking on projects in countries such as Venezuela, Africa, Iraq, and Russia where political skirmishes and civil unrest often lead to costly setbacks.

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