BP Separates Continental U.S. Business to Focus on Recovery

Gulf of Mexico Oil Spill BP

The mark the 2010 Deepwater Horizon disaster left on BP’s (NYSE:BP) financial health and public image has been an indelible one in the intervening years. The Gulf of Mexico disaster was the worst offshore spill in U.S. history. It began on April 20, 2010, when an undersea well exploded 50 miles off the Louisiana coast, killing 11 workers and spewing millions of barrels of crude oil into the ocean. Marshes, fisheries, and beaches stretching from Louisiana to Florida were polluted, harming local tourism and fishing. To cover the costs of the clean-up, legal expenses, and victim compensation, assets worth $40 billion were sold, causing the company to lose one-fifth of its pre-2010 earnings power. That dropped BP from second largest oil company by assets to the fifth. Even as recently as the fourth-quarter of last year, the lasting financial effects of the oil spill were evident; now, as a smaller company, it pumps less crude, and as a result of the recent downsizing and the problems hurting the oil industry as whole, its profit and revenue both declined in the final three months of 2013.

At this point, the British oil and gas producer is probably best known for the 2010 Deepwater Horizon disaster. But a Tuesday announcement that BP will create a new company to managed its onshore oil and natural gas assets in the 48 contiguous U.S. states shows that the company is employing drastic measures to make itself competitive once more and leave behind its troubles.

Noting that the onshore oil and gas business environment in the continental United States has “unique characteristics,” BP explained that by establishing a separate business unit the company will be better able to adapt to the “rapidly changing and hyper-competitive energy landscape in the region.” The move is expected to help BP unlock the “significant value” from its extensive position in contiguous U.S. states, read the press release dated March 2014.

“Over the last few years, we have fundamentally reshaped our North America Gas portfolio” by divesting non-core assets and focusing development efforts on so-called “unconventional plays” like the Eagle Ford Shale in South Texas, said BP Upstream Chief Executive Lamar McKay in the release. “Now it’s time to reshape the way we run the business — and we are very excited about this bold step forward,” he added. “Our overriding goal is to build a stronger, more competitive, and sustainable business that we expect will be a key component of BP’s portfolio for years to come.” In total, the US Lower 48 onshore unit’s portfolio will include the equivalent of 7.6 billion barrels of oil, spread across 5.5 million acres, as well as an interest in over 21,000 wells. B.P’s U.S. assets include holdings in the Eagle Ford and Haynesville in Texas, the Fayetteville in Arkansas, and Oklahoma’s Woodford.

While BP will continue own the new US Lower 48 onshore unit, it will operate with its own management team at a new Houston office and report financials separately beginning in 2015. According to the oil producer, the separation will make the US Lower 48 onshore business more competitive with the type of nimble companies that pioneered the U.S. shale gas boom by allow for faster innovation, easier decision-making, shorter project development timelines, and greater cost management. More specifically, by separating Alaskan operations from the rest of its U.S. assets, BP will free those discoveries from competing with discoveries in other parts of the world for financial and personnel resources. Plus, oil produced in the U.S. has accounted for a decreasing proportion of the company’s total sales since 2009, dropping from 35 percent to 33 percent last year.

“With a rapidly evolving environment, our business has become less competitive,” Chief Executive Officer Bob Dudley said Tuesday at the company’s London investor day conference. “We intend to run business in the lower-48 to compete more effectively with independents and have shorter decision times.”

BP is not alone it its desire to become more nimble; many of the world’s largest oil producers — Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) — have also struggled to profit from the U.S. natural gas boom.

Hydraulic fracking, a process that cracks rock deep underground to release oil and natural gas, made production possible in many previously untapped shale fields, sparking a land grab. During President Barack Obama’s tenure in the White House, soaring production of natural gas from horizontal drilling and hydraulic fracking has pushed supplies to record highs for many years. The boom in domestic production of both oil and natural gas has provided the United States with 84 percent of its energy requirements in 2012, the highest annual level since 1991. Plus, the shale gas revolution swiftly changed the economics of natural gas. It prompted the industry to launch more than 100 new projects in the past several years specifically aimed at taking advantage of low prices, with investments totaling billions of dollars and 50,000 new jobs created. But once supply eclipsed demand, energy companies were left with a glut of natural gas. Plunging prices, along with disappointing wells, spawned a series of write-downs of oil and gas shale assets.

For example, Shell announced January 30 alongside disappointing earnings plans to restructure its shale operations in North America after writing down billions of dollars from the value of those natural gas assets. Plus, Occidental Petroleum (NYSE:OXY), ConocoPhillips (NYSE:COP), and Marathon Oil (NYSE:MRO) have all split off units in recent years.

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