BP has made its move. The critics have lined up already. It’s a gamble all right, but then contrary to the views espoused by some of the media, you don’t win anything worth having without risk. BP has bought itself a big slice of an oil opportunity in Brazil and the Gulf of Mexico.
The proven oil reserves it gets for its money come at a huge price.
But BP is hoping to get so much more. And the lesson to the story: it shows why oil is destined to fall back in price, down the line.
BP’s investment in the Thunder Horse oil platform in the Gulf of Mexico was simply huge. The construction of the platform cost around $5 billion. When it was complete the project was three years late.
But as the project developed, more oil was found, and now BP, along with its 25 per cent partner Exxon, is apparently processing more oil and natural gas than originally expected.
But BP gained something else from the project. It secured new-found expertise. Thunder Horse involved tapping oil more than 25,000 feet down. The expertise it gained from this project no doubt built on the specialisation it gained from its earlier ventures in the North Sea.
Now, BP is “heading south of the border, down Mexico way.” It has bought assets from the US oil company Devon Energy, and in addition to the Gulf of Mexico and Brazilian opportunities, it has also acquired assets in Azerbaijan. It is forking out $7 billion, and giving Devon a stake in its Tar Sands oil project in Canada.
The thing you need to bear in mind is that proven oil reserves from the deal are 140 million barrels. That works out at $50 a barrel. A huge price given that the current price of oil is $80 a barrel and that this time last year oil was trading for just $35 on the futures market at the New York Mercantile Exchange.
But the point is, BP is hoping to find more of the black stuff, a lot more.
Bear in mind that BP has not bought itself a slice of the massive Tupi field, which lays deep below the ocean seabed off the coast of Brazil. This was hailed as the largest oil find from the Americas in 30 years.
The Brazilian government is keeping this field to itself.
But BP’s hope must be that it will find more. Its expertise is clearly impressive, meaning BP may find it may get far more from its assets than its rivals could. Presumably it is also hoping that the Brazilian government will be so impressed with all this BP expertise on its doorstep, that it may eventually sell BP a slug of the larger oil fields.
The risks are two-fold. Risk one, the unproven oil reserves are less than BP is hoping. Risk two, that Brazil’s government goes the way of Russia and eventually finds some spurious reason for removing BP’s licensing rights.
But there are four more important issues here.
First of all it shows how business reacts when prices are high. Oil is currently expensive, so oil exploration budgets increase. The likes of BP agree massive deals. In due course global oil production will rise.
There is clearly a limit to how much oil lurks in our planet. And there will come a time when we run out. Peak oil is meant to be that moment when global oil production peaks and then goes into reverse. Some say peak oil is close. But bear in mind, ten years ago oil was priced at around $10. Back then oil exploration was miniscule.
Oil finds are not like they used to be. Even the massive oil finds are small by comparison to the finds of a few decades ago. Furthermore, when we do find oil, often it is buried deep beneath the ocean’s surface.
Meaning it is more expensive than ever before to exploit.
On the other hand, the fact that oil finds over the last few years have been so modest may be the inevitable consequence of the tiny oil exploration budgets of a few years ago. More recently, the credit crunch hasn’t helped. It is far too soon to say whether we are approaching peak oil. Let’s see what riches the current oil rush throws up first.
The second, and quite obvious point, is that today’s oil activity means cheaper oil tomorrow. That’s good for consumers. One assumes BP has factored in this effect. Bankers of course made the error of failing to take into account the effect their actions had on the market overall. They entered into mortgage securitisation in order to reduce risk, but consequently took more risk. They failed to realise that every bank was doing the same, and as a result the benefits of mortgage securitisation were almost completely nullified. One assumes BP has not been so stupid, and realises it is not alone in its endeavours to capitalise on the high price of oil by finding more of the black stuff.
The third point is a climate change argument. According to today’s Independent, the oil that BP has acquired in the Gulf of Mexico lies beneath rocks that were laid down 65 million years ago. Or to put it another way, it is tapping into reserves of carbon that when exploited create carbon dioxide that has lain dormant for 65 million years.
Cynics of man-made climate change need to ask themselves this question: How is it possible for us to continue to tap into reserves of carbon which in some cases were formed before the extinction of the dinosaurs, without causing havoc for the climate? It has been claimed that each year we burn up reserves of carbon that took one million years to form. Is that sustainable? It is not inconceivable that such wanton exploitation won’t have longer-term ramifications.
The fourth point, the fact that BP now has such impressive expertise in exploiting oil tucked away at such unfathomable depths, shows how it has benefited from specialisation.
The more we do something, the better we can get at doing it. This is the key point that cynics overlook. Specialisation, however, will also be the means by which we are ultimately able to exploit renewables, and it is the reason why one day solar power, even wind power, will be more cost effective than power generated from conventional fuels.
© Investment & Business News 2013