BP Can’t Stop Falling For Low Cost Mideast Output

Low cost Mideast fields are of growing importance for BP. The expiry of Abu Dhabi’s Adma sees output dip, but growth in Oman & Kuwait means long-term the trend is up.

BP net oil and gas output for Jan-Sep 2017 is up 10% year-on-year (excluding the firm’s 19.75% stake in Russian state giant Rosneft). CEO Bob Dudley highlighted the role of the Middle East in this growth output at this week’sAdipec conference in Abu Dhabi. BP is now pushing Total hard as the second largest IOC in the Gulf in terms of liquids output; both are closing the gap on perennial No.1 ExxonMobil (see chart).

BP bagged 10% of Abu Dhabi’s 1.6mn b/d onshore Adco concession in late 2016 ( MEES, 23 December 2016 ), raising the firm’s output by a net 160,000 b/d and boosting the firm’s Gulf liquids output by 80% to just above 360,000 b/d for 2017.

BP is having a busy year, planning to bring seven “major” projects online in 2017 – six of which have now started up. As six of these are gas, Adco is likely to provide the biggest annual increase to BP’s liquids production.

The Middle East is set to provide 25% of BP’s liquids output this year, up from 16.3% in 2016. Other than Iraq, BP’s regional assets are all in seemingly-stable GCC states – although the ongoing rift between Qatar and its neighbors highlights that political risk can never be discounted. The region’s low per-barrel development cost is also attractive, although the corollary of this is low returns.

BP’s Mideast portfolio is set to be shaken up next year as Abu Dhabi’s key offshore concession, formerly known as Adma, expires in March ( MEES, 17 November ). Other than Adnoc, BP is the largest stakeholder at the 680,000 b/d project with 14.67%. It’s a frontrunner to secure a renewed stake, but on a reduced scale. BP’s 100,000 b/d net Adma production is therefore likely to shrink below 70,000 b/d beyond March, though regional output will still remain at near-record highs.

But while BP’s Middle Eastern liquids output is set to slip next year, its regional gas portfolio is about to take off. First gas at Oman’s Khazzan – one of BP’s seven key 2017 projects – was achieved in September: train one is 500mn cfd ( MEES, 29 September ). BP Mideast head Michael Townshend says that with the addition of the second train output “will ramp up before the end of the year to 1bn cfd.” BP’s 60% stake will net it around 600mn cfd.

Khazzan is BP’s only producing gas asset in the Middle East. And 600mn cfd is more than its entire North Africa output of 513mn cfd in 2016. However, output gains in both Egypt and Algeria this year will likely see North African gas output stay ahead of the Gulf in 2018.

OMAN EXPANSION

BP officials have been effusive in their praise of the Khazzan tight gas project. Upstream chief Bernard Looney told Adipec that it’s an “incredible reservoir,” a “great example of what BP can do…taking technical learning from the Lower 48…to come up with what is a great success story.”

Second phase expansion will boost output to 1.5bn cfd. Although yet to be officially sanctioned, Mr Townshend says that drilling on the Block 61 Ghazeer extension has already begun.

When asked whether he thought a further expansion is likely, Mr Townshend replied “I do. I don’t know how much yet.” Again referencing US unconventional gas development he said that BP is cracking “the code of getting tight gas, and we’re finding better sweet spots in both Khazzan and Ghazeer.”

KIRKUK CAUTION

The Iraqi government’s retaking of disputed territory in Kirkuk province last month put BP’s Iraq operations in the spotlight again. Baghdad now holds the Kirkuk field’s Avana and Baba domes with a combined 160,000 b/d capacity, and has asked BP to help develop the field ( MEES, 3 November ). BP signed a deal to study the field in November 2013 with a view to further development, but the 2014 advance of IS put this on ice.

Mr Townshend says he has met Iraqi Oil Minister Jabbar al-Luaibi who asked BP to return, “but we haven’t really got any further than that.”

BP’s focus remains firmly on the 1.5mn b/d Rumaila field in Basra province, which netted it 96,000 b/d in 2016. BP’s contract stipulates Rumaila’s output hitting its 2.1mn b/d plateau by end-2019, but this target is out of reach. As to whether the target will be deferred or downgraded, “it’s something we will look at,” says Mr Townshend.

With BP set to keep its Rumaila budget relatively flat in 2018 “at a couple of billion dollars a year,” any gains at the field in 2018 will be incremental. BP is focusing on “finding different ways of working to do more for less.”

As for whether BP would consider taking over at the 220,000 b/d Majnoon field being relinquished by Shell ( MEES, 22 September ), “if the terms stay as they are, I doubt we would be interested” BP’s regional chief says. Moreover, taking on Majnoon would risk distracting from the sizeable task of managing Rumaila’s 17% (250,000 b/d) annual rate of natural decline.

BP Gulf Liquids Production Set To Soar In 2017 (000’ B/D Net)

^MEES PROJECTION.*EXCLUDES SHELL 15% STAKE IN ADNOC GAS PROCESSING.

SOURCE: COMPANY REPORTS, MEES CALCULATIONS.

WESTERN KUWAIT PROPOSITION

Mr Townshend says Kuwait is considering offering an enhanced technical service agreement (ETSA) for an IOC to help develop its West Kuwait fields. West Kuwait output is around 530,000 b/d from the Minagish, Umm Gudair, Dharif and Abduliya fields. BP expects a competitive bidding process to be launched in the next 6-12 months. BP has an advantage in that it previously held talks with Kuwait over developing the fields 10 years ago before parliamentary opposition to ETSAs stalled the process (MEES, 12 May 2008).

Parliament appears to have been mollified over ETSAs and three were awarded last year – one to BP and two to Total. BP’s ETSA is to maintain output of 1.7mn b/d at the Burgan field. Mr Looney says the work “is going well and the relationship is one of real respect.”

But two countries set to remain outside BP’s portfolio are Iran and Qatar. Iran’s complicated post-sanctions regulatory landscape is a major deterrent, while Mr Townshend says “we have a long and checkered relationship with Qatar. We don’t have any material in Qatar at all and there’s nothing under discussion.”