HOUSTON/LONDON (Reuters) - BP Plc has cancelled contracts to build a costly, bespoke extension to its Mad Dog oil project in the Gulf of Mexico that has been under review since April due to cost inflation and uncertain future oil prices.
BP’s decision to rein in its ambitions on the project, in the same region as its 2010 Macondo oil spill disaster, will affect its output growth prospects and shows the increasing cost pressures on big oil projects worldwide.
Three industry sources familiar with the decision said Front End Engineering Design contracts signed in 2012 by contractors AMEC and Technip with BP, the holder of the largest number of Gulf leases, had been cancelled.
The sources would not say whether that meant the go-ahead for a smaller, less innovative, cheaper Mad Dog extension that does not require a bespoke design - flagged as a possibility by BP in July - or that the whole project is in limbo, or even whether BP might strike new deals with AMEC and Technip.
Before the April review decision, construction of Mad Dog Phase 2 had been due to start by the end of this year and its cost had been estimated at more than $10 billion.
In a July analysts briefing, Lamar McKay, head of BP’s upstream oil and gas division, said the group was considering a “slimmer, repeatable design that’s been built before, rather than a brand new design ... and that we will back off the size just a tad probably to, in effect, get 90 percent of the benefit with maybe quite a bit less of that cost”.
He said the group was in “good conversations” with contractors and partners about that.
Chief Executive Bob Dudley told the same briefing that far from delaying the new project, which had been slated to come on stream in 2018, a less ambitious design “might actually accelerate production”.
BP has sold many of its Gulf of Mexico leases to help pay the tens of billions of dollars of fines, as well as compensation and clean-up costs, after the 2010 Macondo spill that killed 11 men and wrecked marine and shore environments.
In all, BP has sold assets equivalent to about a fifth of its pre-spill earning power to pay that bill.
Its criminal conviction for Macondo meant a ban on acquiring new Gulf of Mexico leases and it has also sold several older, smaller oil and gas platforms to focus on bigger fields: Mad Dog, Thunder Horse, Atlantis and Na Kika.
Technip, AMEC and BP - the world’s No. 4 investor-controlled oil company by value - all declined to comment on the status of the contracts, the value of which were not disclosed at the time they were announced.
Technip’s contract centred on the single circular spar hull and mooring system for the new platform. AMEC’s was for the so-called “topsides”, or multiple decks that would be placed on top of the spar and house production infrastructure, drilling and monitoring systems and living quarters for workers.
BP’s Mad Dog platform, with capacity to produce up to 80,000 barrels per day of oil, has been producing since 2005 for 60.5 percent-owner and operator BP and its partners, BHP Billiton and Chevron Corp.
Two years ago an appraisal well in an undeveloped part of the Mad Dog field indicated it contained much more crude than previously thought - up to 4 billion barrels of oil equivalent.
The find prompted BP to make plans to build the second, bigger Mad Dog platform able to handle up to 130,000 bpd of oil.
One of the sources said Mad Dog 2 may now end up as a smaller spar platform like the original Mad Dog, or it could be a floating tension leg platform that generally has four smaller hulls, similar to BP’s other three platforms in the Gulf.
Mad Dog is just one of a series of oil and gas projects being reconsidered worldwide. The main factor has been cost inflation, running at between 5 and 10 percent a year and more in some of the most actively developing regions, but a more uncertain outlook for prices has also been a factor.
Cost over-runs prompted Woodside Petroleum to consider a different plan for its $45 billion Browse liquefied natural gas project in Western Australia. France’s Total said in March it was abandoning a multibillion-dollar oil sands project in Canada. Statoil has delayed its $15 billion Johan Castberg project in Norway’s Arctic.
Additional reporting by Stephen Eisenhammer in London and Michel Rose in Paris; Editing by Louise Ireland