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BP to cut capex, sell assets for $20bn payout

BP will slash its capital spending budget, sell $10 billion in assets and drop its dividend to pay for a $20 billion spill response fund.



US President Barack Obama announced the creation of the account Wednesday after meeting with top BP officials, including BP chairman Carl-Henrik Svanberg and chief executive Tony Hayward.

BP said it will pay $3 billion in third quarter this year and $2 billion in fourth quarter into the fund followed by a payment of $1.25 billion per quarter until it reaches $20 billion.

In the interim, BP must post US assets worth $20 billion as bond.

The total is not a cap on liabilities and BP said Wednesday that the response has cost $1.75 billion to date.

The fund will be administered by Kenneth Feinberg, the same person that managed a fund to help victims of the 11 September terrorist attacks.

The fund can be used for natural resource damages, state and local response costs and individual compensation but cannot be used for fines or penalties, BP officials said Wednesday.

In addition, BP will set aside $100 million to pay offshore oil workers who are unemployed due to the six-month moratorium on drilling in the deep-water Gulf of Mexico.

To increase its liquidity, BP announced Wednesday it will “implement a significant reduction” in capital spending.

BP finance boss Byron Grote said during an investor briefing he expects spending this year to drop about 10% from $20 billion to $18 billion, with most of the cuts coming in upstream projects.

The capex cuts will likely continue into next year, Grote said, but though the UK supermajor will revisit those plans as its spill liabilities become more clear.

"It will lead to a slow down in our capital spending," he said.

As well, the UK supermajor will accelerate its planned divestments to $10 billion over the next twelve months.

Like the spending cuts, the divestments will target "noncore" upstream assets, Grote said but BP plans to continue with plans to buy offshore assets from US independent Devon Energy in Brazil, Azerbaijan and the Gulf of Mexico.

BP also said it will cancel its previously announced dividend for the first quarter and will not pay a dividend through the remainder of the year and will evaluate possible payments for next year after the fourth quarter.



Burning

UK supermajor BP said today that oil and gas is flowing through a second containment system attached to the Deepwater Horizon rig’s failed blow out preventer in the US Gulf of Mexico.

“This second system supplements the lower marine riser package cap containment system, which remains in operation,” said BP.

The new system is connected directly to the BOP and carries oil and gas through a manifold and hoses to the Q4000 vessel on the surface.

The Q4000 uses a specialised clean-burning system to flare oil and gas captured by this second system.

Oil and gas collected from the BOP reached the Q4000 at approximately 1:00 am local time on Wednesday, said the company in a statement

“Operations continue to stabilise and optimise the performance of the second containment system,” said the company.



Chiefs

The heads of supermajors Shell, ExxonMobil, ConocPhillips and Chevron all condemned the well design and decision-making at Macondo, universally telling a Congressional hearing that their companies would never have drilled the well in the same manner.

ExxonMobil boss Rex Tillerson told the House Energy and Commerce Committee specifically that his company would have run a tieback liner, used different cement formula and tested more thoroughly for cement integrity.

Tillerson said those choices were “risk management decisions but had those recommended processes been followed, “this may not have happened.”

Tillerson also said he was mystified as to why BP ignored repeated problems with the wellbore, instead making decisions that "almost any" ExxonMobil drilling supervisor "would have made differently."

Chevron boss John Watson cautioned that he did not know all the specifics of the operations but said that BP did not follow the standards that Chevron would employ.

Chevron would have designed the well differently, especially with regards to the casing and mechanical barriers.

He also specified that Chevron would not have run a full string of casing for the well from the surface and instead would have used a tie-back liner under those circumstances.

Shell president Marvin Odum told Congress Macondo "was not a well we would have drilled" based on the well design and there were "concerns" with the way BP operated the well.

ConocoPhillips head James Mulva echoed Odum’s words, saying that based on the information available, “we wouldn’t have drilled the well that way.”

All four men also testified that, given the history of the well, they would not have approved plans to remove drilling mud from the riser and displace it with water, a move that appears to have occurred just before the well blew out.

McKay, who represented BP at the hearing, said the well design “was not an unusual design” for the Gulf of Mexico and it had approval from the US Minerals Management Service.

But when asked about BP’s reasoning behind its decisions, McKay repeatedly said that he would have to wait until the investigation was complete before commenting.



Failures

Representatives Henry Waxman and Bart Stupak sent a letter to BP outlining a laundry list of perceived failures in the well design and operations that they expect BP boss Tony Hayward to address when he testifies before Congress on Thursday.

Hayward has been called before the House Energy and Commerce subcommittee on Oversight and Investigations.

The 13-page letter specifically addresses five key BP decisions during the well construction; lowering a complete string of casing rather than using a tie-back liner, using six centralisers while lowering the casing instead of 21, failing to run a cement bond log, failing to fully circulate the mud before cementing and failing to use a casing hanger lockdown sleeve.

“In spite of the well's difficulties, BP appears to have made multiple decisions for economic reasons that increased the danger of a catastrophic well failure,” the letter states.

“In several instances, these decisions appear to violate industry guidelines and were made despite warnings from BP's own personnel and its contractors. In effect, it appears that BP repeatedly chose risky procedures in order to reduce costs and save time and made minimal efforts to contain the added risk.”

After the hearing, Republican leaders in the US House held a press conference to criticise the Obama administration response to the spill, including the six-month ban on deep-water drilling in the US Gulf.

Republicans at the rally also said they would fight efforts to use the Macondo spill as a catalyst to pass a cap-and-trade climate bill.

“The American people don’t want this administration to exploit the crisis in the Gulf to advance their disastrous energy policies,” Represenative Mike Pence said.

“We won’t cap that well with cap and trade.”



Fire

Oil collection at the Macondo well was shut down temporarily after a small fire was reported on the top of the derrick of the Transocean drillship Discoverer Enterprise at about 930 local time Tuesday morning.

The fire was cause by lightning and was quickly put out, federal responders said.

BP restarted oil flow about 1:40 pm local time and over the day collected 10,440 barrels of oil and 25.1 million cubic feet of natural gas.

The collection pause meant more oil was entering the Gulf as government team again upped its flow estimate for the blown out Macondo well.

The Flow Rate Technical Group declared Tuesday the well is spewing 35,000 to 60,000 barrels per day, the highest range of flow rates yet.

For live underwater video of the spill click here.

The new estimate is more accurate than previous guesses and draws on new scientific data, the government said.

“This estimate brings together several scientific methodologies and the latest information from the sea floor, and represents a significant step forward in our effort to put a number on the oil that is escaping from BP’s well,” US energy secretary Steven Chu said in a release.

“As we continue to collect additional data and refine these estimates, it is important to realize that the numbers can change. In particular, the upper number is less certain – which is exactly why we have been planning for the worst case scenario at every stage and why we are continuing to focus on responding to the upper end of the estimate, plus additional contingencies.”

Among the things that lead to the increased certainty of the estimate was pressure data from inside the containment cap on the well and flow rates through the cap.

It is also easier to estimate the flow from a single source, the team said.



Firepower

BP outlined Monday plans to bring in more firepower to process and store oil flowing from the well.

For a video explanation of the plans by BP exec Kent Wells go here.

The UK supermajor has tapped a floating production storage and offloading vessel from Brazil to boost collection capacity at Macondo and though BP has not named the vessel, Upstream has been tipped it would be the Seillean, operated by Frontier Drilling.

It is believed to be the only dynamically positioned FPSO in Brazil, where it has worked continuously for Petrobras since 1998.

Designed for well testing and early production, it is billed as capable of connecting quickly to subsea wells.

The UK supermajor is familiar with the unit as Sheillean was originally built for BP as Swops and delivered in 1989 by Harland and Wolff.

Swops, which stood for single well oil production ship, was designed for the Cyrus field on Block 16/28 in the UK sector of the North Sea.

It produced at Cyrus and the Donan fields and was sold by BP in 1993 to Reading & Bates.

Frontier Drilling bought the unit in 2002.

According to Frontier Drilling, Seillean can store 310,000 barrels of crude and process up to 25,000 barrels of oil per day.

It can also hold station in a maximum water depth of 6500 feet, well beyond the 5000 feet of water where the Macondo well is located.

Frontier’s chief operating officer Steven Meheen declined to comment on whether the Seillean is on its way to the US Gulf.

However, he confirmed to UpstreamOnline that the vessel is “hot-stacked” with a crew on board in Vitoria, Brazil, suggesting that it is ready to depart if called upon.

BP said it would take about a month for the FPSO to arrive in the Gulf.

Once there the Seillean “will provide redundancy in the event of failure of the Toisa Pisces or the Helix Producer,” according to the latest proposal BP sent to the US government.



Tankers

BP also announced it is bringing in another pair of tankers from Europe to lighter and shuttle oil to the coast from the floating production unit Helix Producer 1.

The Evi Knutsen, currently operated by Norwegian player Knutsen OAS, the Juanita, currently operated by Ugland Marine Services, both left European waters on 11 June, BP said in its latest response plan.

Both can store about 750,000 barrels of oil.

The pair will hookup to the Helix Producer 1, which can handle 30,000 barrels of oil per day and 70 million cubic feet of natural gas per day.

Helix expects the Helix Producer 1 to be at Macondo for at least 60 days, the company said in a statement Monday.

Helix also has contracted the Q4000 to BP and hopes to have oil flowing from Macondo to the floating services platform “in the next few days.”

The vessel was first used to support the failed top kill operation but now BP is working to retrofit it to produce 5000 to 10,000 barrels per day from Macondo.

The Q4000 is hooked to the Macondo well through the same choke line used to pump mud and debris during the top kill.

BP hopes to reverse the flow on the those lines and send oil to the Q4000, but the vessel does not have any storage, so all of the oil and natural gas will be flared.



Redundancy

In addition to the Helix vessels, BP is bringing in Sealion Shipping’s well testing vessel Toisa Pisces, which can process up to 20,000 barrels per day.

Toisa Pisces will offload to the Loch Rannoch, a shuttle tanker with a capacity of more than 1 million barrels, which normally services the Schiehallion development, west of Shetland.

To meet government pleas for redundancy, BP is bringing in the Transocean drillship Clear Leader for additional processing and storage capacity.

Clear Leader is 10 months into a contract with US supermajor Chevron, which expires in July 2014 with a day rate is $500,000.

Chevron representative Margaret Cooper told UpstreamOnline that Chevron had struck a deal with BP for use of the vessel.

“The drillship would be on short-term assignment to BP and operated by BP during this time,” Cooper said.

Clear Leader does not have built in processing capacity, a Transocean representative told UpstreamOnline, but BP plans to add equipment to the vessel.

That process should have been completed Tuesday, Transocean’s Guy Cantwell told UpstreamOnline and will allow Clear Leader to process 10,000 to 20,000 bdp.



Faster

BP has upped its timeline to have the new production and storage systems in place after the federal government said it was being too slow to hook up the additional capacity.

Now the UK supermajor plans to have the Q4000 hooked up this week, bringing the capacity of the system to as much as 28,000 bpd, up from the current 18,000 bpd with the Discoverer Enterprise.

By the end of June, BP plans to have a permanent floating riser running from the kill line on the Macondo BOP and to the either the Helix Producer 1 or the Toisa Pisces.

This addition will increase the total capacity of the system to about 45,000 bpd.

By the middle of July, BP plans a second permanent riser connection running from the choke line on the BOP to the either the Toisa Pisces or the Helix Producer 1 - whichever vessel was not used for the first connection.

Finally, BP plans to install the new, more secure cap on the top of the lower marine riser package, which will be connected via a drill pipe to a surface vessel, either the Discoverer Enterprise or the Clear Leader.

Some of the vessels are foreign flagged and would normally be prohibited from shuttling to US ports under the Jones Act, but the Coast Guard finalised plans Tuesday to expedite waivers to the act.

“Should any waivers be needed, we are prepared to process them as quickly as possible to allow vital spill response activities being undertaken by foreign-flagged vessels to continue without delay,” Coast Guard Admiral Thad Allen said in a release.



Relief

That final system would be in place until the two relief wells reach the reservoir and kill the well.

The ultimate fix to the blowout, a pair of relief wells being drilling by the Transocean semi-submersible rigs Development Driller 2 and Development Driller 3 are progressing on schedule, Allen said.

Development Driller 3 is at about 13,978 feet below the drill floor while, Development Driller 2 is about 9022 feet below the drill floor, BP said in an update issued Monday.

The both are expected to reach total depth at about 18,000 feet sometime in mid-August.

Currently, BP is capturing more than 15,000 bpd through its containment system on the blown out well and is bumping up against the 18,000 bpd processing capacity of the Transocean drillship Discoverer Enterprise.

The oil tanker Massachusetts, with help from the tanker Ocean Cascade is lightering the Discoverer Enterprise as needed.

The tankers are offloading at the terminal in Mobile, Alabama.

So far, BP's oil spill response has cost the company $1.6 billion.

Transocean's semi-submersible Deepwater Horizon was working on the Macondo well, on Mississippi Canyon Block 252 in the Gulf of Mexico, on 20 April when an explosion rocked the unit before engulfing it in flames.

The exploration well had been drilled to 18,000 feet in 5000 feet of water and was being temporarily suspended as a future producer when the blowout occurred.

Eleven crew died in the explosion.

Additional information drawn from news wires.