BP (NYSE: BP) $500 Million Oil Investment

Brian Hicks

Written By Brian Hicks

Posted March 29, 2013

British oil giant BP (NYSE: BP) is taking the helm of a $500 million (£330 million) drilling operation near the Shetland Islands, according to the BBC.

This coincides with the British government’s efforts to revitalize the British oil and gas industries to uplift the economy. The government also wants to boost the Atlantic’s reputation as an oil-producing region, and it hopes to make up for lost revenue from slow production in the North Sea.

The Shetland Islands are located to the north of Scotland.

BP will lead the project by drilling five appraisal wells to the west of Shetland in the oil-rich Clair field – with each well costing $100 million, as reported by The New York Times. If the five wells prove to be worth further exploration, BP will continue drilling seven more wells, which could amount up to $1 billion.

In the Clair region, BP is partnered with ConocoPhillips (NYSE: COP), Royal Dutch Shell (NYSE: RDS.B), and Chevron (NYSE: CVX).

Many experts believe Clair and other projects “could lead to the Atlantic overtaking the North Sea as the UK’s biggest oil-producing region within 20 years,” as reported by the BBC. Clair field has as much as eight billion barrels of oil.

The companies have already poured £4.5 billion ($6.8 billion) in the second phase of the project since 2005, Reuters reports.

If all goes well with the appraisal process, a third phase will begin that could last beyond 2050, according to the BBC. Oil from Clair field will be filtered via pipeline to the Shetland region.

Reuters reports that BP has a 29 percent stake in the region – more than any other partner. Many oil companies are turning to the Shetland Islands and the surrounding region because of its rich, geological formations that could yield plenty of reserves.

On the other hand, the North Sea has undergone a two-thirds decline since 2000.

North Sea Investment Boost

However, the non-profit Oil & Gas UK made a prediction of increased investment and drilling activity in the North Sea in 2014. BP does have connections to the North Sea area as well, with planned investments through Norway’s semi state-run oil company Statoil (NYSE: STO) – a project that will cost $7 billion.

BP also plans to invest $2.4 billion in the North Sea with Canada’s Talisman Energy (NYSE: TLM), according to Reuters.

BP could be the government’s hope in making the North Atlantic region an oil powerhouse while extracting more reserves from the North Sea.

This map shows the British government has a two-front strategy in using BP and other companies to get the most oil output from the North Atlantic and North Sea. 

North Sea MapSource: Beach and Island 

The Clair region, further to the North Atlantic, is already known to have a vast amount of reserves, but oil companies in the region have been eyeing the North Sea as well – all in thanks to increasing technology and more capital to spend on reaching stubborn reserves.

But let’s not forget Britain’s history of steady decline in the North Sea. Oil & Gas UK may have predicted a rise in investment and government backing, but this does not guarantee a spike in oil production in the region itself – regardless of new technology and investment. The North Sea does show promise, but it may be years before more reserves are tapped. 

From The New York Times:

“The companies and the British government hope that development off the Shetlands can help offset the rapid fall of production in the North Sea, where nearly all of Britain’s fields are located — or even lead to an increase in Britain’s output.”

The British stand a good chance of recouping lost North Sea investments through Shetland, but how much output companies can extract from the North Sea is very much an open question.

Oil Industry Tax Incentives

British leaders are prepared to help oil companies explore all areas of the seas by giving tax incentives and investment capital, according to Reuters. The oil industry makes up a large revenue base for the British government, having contributed one-fifth of taxes in 2012. The government is looking to regain the trust of the fossil fuel industry after a sharp increase of taxes in 2011.

In hopes of ingratiating themselves with the oil industry, Secretary of Energy Ed Davey and Business Minister Vince Cable travelled to Aberdeen, Scotland, considered the oil center of Europe, to assure business leaders of their commitment to foster growth in the oil sector through tax breaks and engineering investments.

The government announced a £7 million ($10.6 million) investment plan to set up a Neptune engineering center in the city of Newcastle, as reported by the BBC. The British also forecast an impending worker shortage within the industry in the next five years. In order to remedy this, there will also be programs for training military personnel approaching the end of their service contracts.

The British government is betting heavily on exploration in the North Atlantic and North Sea, but it remains to be seen if BP and its partners can live up to expectations.  


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