BP: British Petroleum. Big Profits

by Tony Daltorio, the Investment U Research Team

Not too long ago, seven major oil companies – commonly referred to as the Seven Sisters – controlled their market.

But that was then and this is now. Today, they’re scrambling to find new oil fields, while “smaller” companies rock the industry.

That’s why there’s been so much excitement over the recent discovery of a ‘giant’ oil field in the Gulf of Mexico by one of the Seven Sisters, British Petroleum ADR (NYSE: BP).

When international oil companies consider where to invest, they typically have to choose between technically straightforward fields in politically turbulent countries, or politically stable areas that require complex and costly production techniques.

Easily produced, accessible energy resources in secure countries just don’t exist anymore; the era of cheap oil is truly over.

But BP has a long history of pioneering new frontiers for oil. The company will go anywhere in its search, from its long-time commitment in Russia to its more recent forays into Angola, Azerbaijan and Iraq, all the time using new technology to drill where other companies wouldn’t consider.

That includes the United States, especially in the deep waters off the Gulf of Mexico, which produces about 25 percent of US domestic oil production and 15 percent of natural gas output.

Andy Inglis, BP’s head of exploration of production, put it best when he said the company’s strategy involves being “in the best basins and the biggest fields.”

BP in the Gulf of Mexico

BP has an overall strong position in the US, both in opening up Alaska, and with the assets it acquired in the Amoco and Arco takeovers. And last year, it became the biggest gas producer in the company after acquiring assets from Chesapeake Energy.

It’s also the biggest oil producer in the Gulf of Mexico, thanks to the huge – and much delayed – Thunder Horse platform coming on stream. BP now produces about 400,000 barrels of oil equivalent per day.

That project cost over $1 billion to build and another $250 million to repair after Hurricane Dennis knocked the massive structure over on its side. But it’s paying off, ramping up production to 300,000 barrels per day, which makes it the second largest US producer, just behind Alaska’s Prudhoe Bay.

And that brings us to the company’s latest discovery in the Gulf of Mexico: The Tiber field, located about 250 miles southeast of Houston.

The Tiber Field

The discovery of the Tiber field proves once again that BP is a pioneer considering that the well it drilled there has a total depth of over 35,000 feet (About 6.5 miles), easily making it one of the deepest made.

That’s like an inverted Mount Everest… only deeper!

Add to that accomplishment, the fact that BP is leading the way in the exploration of the entire Lower Tertiary (the Paleogene area of the Gulf of Mexico), a deeper region than the strata providing most of the region’s known reserves.

And it’s already struck gold once – black gold, that is – in 2006, when they discovered the Kaskida field, which experts think holds 3 billion barrels of oil.

BP thinks that Tiber holds at least that much, of which they could recover between 500 million to 1 billion barrels with today’s technology. But many believe the field holds even more than that.

Admittedly, production at these extreme depths – with very high temperatures and pressures – can be extremely difficult, as the Thunder Horse project has already proved. Because of these challenges, the Tiber field may not produce oil until 2014 at the earliest.

However, once it does, the Tiber and Kaskida fields combined could lift BP’s output from 400,000 barrels per day to about 650,000 barrels and add 5 percent to the company’s proved reserves, which totaled 18.1 billion barrels of oil equivalent a day at the end of 2008.

And BP thinks this area contains an additional 20 billion barrels of oil or more. If that’s true, it would make a substantial addition to the United States’ proved reserves of about 30 billion barrels.

The Future for BP

The afore-mentioned Inglis says that Tiber “points to the longevity of the Gulf of Mexico as an area with significant potential.”

It also points to a bright future for BP. The discovery of these fields in the deep waters of the Gulf of Mexico is a very important boost to its longer-term prospects considering how it’s adding reserves at a time when many major oil companies’ holdings continue to be depleted.

Let’s say 1 billion barrels of oil were recovered from the Tiber field. If that oil were valued at only $15 per barrel, it could be worth over $11 billion to BP, if it can just navigate the challenges of developing the field.

And while investors are waiting for BP’s pioneering efforts to bear fruit in the second half of the next decade, they can sit back and wait, collecting the juicy dividend in excess of 6% while they do.

For patient investors, BP should mean Big Profits in the future.

Good investing,

Tony Daltorio