BP Will Create Create New Entity Just For Onshore Oil And Gas In U.S.

BP Will Create Create New Entity Just For Onshore Oil And Gas In U.S.

New company will have its own management team tailored to demands of drilling in lower 48 states.
by John Pendleton  |   Friday, March 07, 2014
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In 2013 several of the major oil companies spent lavishly on offshore prospects and are now feeling the pain of exploration efforts that didn't pay off. Royal Dutch Shell, for example, spent more than five billion dollars in a bid for Arctic oil that was mired in litigation and so far has produced little in the way of results. Under new leadership Shell is now scaling back drastically on exploration and is selling assets. British Petroleum is another company that is making major changes in hopes of improving its situation.

Recent press accounts suggest that BP is undertaking major structural changes to reflect a new approach to how it operates. The company is going to create a new, separate entity to encompass its onshore oil and gas operations in most of the United States. The new company will cover all of BP's land-based assets in the lower 48 states as a distinct financial entity.

The shift is being made in recognition of the differences between onshore drilling in the U.S. and elsewhere in the world and the schism between offshore drilling and fracing in shale formations on land

When negotiating for oil and gas leases almost anywhere on the planet, energy companies usually have a single point of contact which is generally an agency of a national government. In America, negotiating onshore leases generally involves multiple private-party landowners on a piecemeal basis, so the process is vastly more complicated. Unlike government agencies, which are committed to cutting a lease deal for the highest possible price, some private landowners see a lease as "found money" while others aren't in the least bit interested in seeing a drilling rig go up on their land.

In offshore plays, exploration focuses on finding a single vast reservoir of oil and/or gas and then using a small number of very expensive platforms to recover assets over a period that may be as long as 30 years.

Onshore, the costs of drilling are much less, but the resources are widely distributed, and shale fracing operations start to get depleted relatively soon. The key to success is to find the highest-value assets and saturate them with multiple wells before moving on.

BP seems to have grasped, perhaps a little late in the day, that offshore engineers and geologists with their methodical, deliberate, approach to exploration and extraction are a completely ill-suited to onshore fracing. Onshore operational need require shorter decision-making cycles and a nimbler approach with very tight financial controls.

The new company will still be part of BP, but it will have its own headquarters in Houston, Texas, a separate management team and as of 2015, will report its financial results independently. There is some speculation that if the new entity struggles financially, it may be sold off.

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