BP’s North Sea Gas Project Will Help Its UK Business

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British oil supermajor BP Plc (NYSE:BP) recently announced the successful start-up of the Devenick project, an offshore natural gas field in the central North Sea. The project is expected to provide a substantial increase to the domestic natural gas supply in the UK. We believe that it will also enable BP to increase its natural gas revenues, both through an improved mix of natural gas revenues from sources outside of the US as well as an increase in its overall natural gas production. [1]

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According to estimates, the Devenick gas field contains 430 billion standard cubic feet of natural gas, which is expected to last until 2025. BP has credited advances in subsea gas extraction technology for making the development of the field economically feasible.

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The operation will reach peak production in 2013, at which point it is expected to increase UK’s natural gas production by up to 3%. [2] The field has been tied back to the Marathon Oil Corporation operated East Brae platform, located 34 km to the south, to facilitate domestic gas supply to the country.

BP is the primary operator of the Devenick asset, with an 88.7% stake in the project. German oil & gas major RWE Dea’s UK subsidiary owns the remaining interest. The partners together have invested around $1.04 billion in the project. The venture is in line with BP’s plans to invest over $10 billion over the next five years to develop projects in the North Sea.

The UK is the second largest producer of natural gas in the European Union (EU) and was historically a net exporter of the commodity. Over the past decade however, production has declined while consumption has remained relatively stable, and it is now a net importer of natural gas. [3] As a result, natural gas prices in the country are much higher than those prevailing in the US.

In 2011, spot prices in the UK and US (based on the Heren NBP index and Henry Hub prices) averaged around $9 and $4 per million BTU respectively. Similarly, in the same year, BP realized an average price of around $4.70 per 1,000 cubic feet of natural gas sold worldwide, compared to $3.34 per 1000 cubic feet of natural gas sold by the company in the US.

The project, which will increase BP’s natural gas production in the UK by around 100 million cubic feet per day, thus presents an opportunity for the company to earn a larger proportion of its NG revenues from the UK, where the commodity’s prices are relatively higher than in the US.

In 2011, BP’s global subsidiaries produced an average of around 6,400 million cubic feet of natural gas per day. Of this, only around 5.5% of production came from the UK. The Devenick project is expected to increase annual natural gas production in the country by 3%. On the other hand, a combined total of 4,036 million cubic feet per day, or around 63% of the company’s natural gas production, was generated in the US and Trinidad. Natural gas revenues from Trinidad primarily come from exports to the US.

We currently have a Trefis price estimate of $50 for BP, which is around 20% above the market price.

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  1. BP Confirms Start-Up of Devenick Gas Project in Central North Sea, BP Press Release, October 2012 []
  2. BP starts North Sea gas field expected to add 3 pct to UK output, Reuters, October 2012 []
  3. United Kingdom natural gas and oil production continues decade-long decline, EIA, September 2011 []