Chevron, BP Locked Into $200 Million Oil Wells Amid Price Slump

By Joe Carroll

Feb. 10 (Bloomberg) -- Chevron Corp., BP Plc and other oil producers are locked into drilling offshore wells that cost as much as $200 million each because of rig contracts that were signed when crude was soaring above $140 a barrel.

Even as energy companies slash billions of dollars in spending to cope with the lowest prices in five years, deep-sea exploration continues unabated because canceling rig contracts would cost as much as finishing the projects, said Candida Scott, a senior director at Cambridge Energy Research Associates who tracks oil-development costs.

Demand for rigs that can fetch more than $600,000 a day to rent hasn’t diminished amid the $105-a-barrel tumble in crude from a July record, said Gregory Cauthen, chief financial officer at Transocean Ltd., the world’s largest offshore driller. Exxon Mobil Corp. and other producers use the vessels to search for crude in 50 million-year-old rock formations 6 miles (9.7 kilometers) beneath the Gulf of Mexico and the Atlantic Ocean.

“We haven’t seen any huge cancellation of rigs simply because the day rates that they locked in were so large,” Scott said in an interview from Houston. “I would have thought it is painful” to terminate a rig lease.

Chevron, which last week discovered a prospect in the Gulf of Mexico called Buckskin that may hold 500 million barrels of oil, has no plans to idle any deepwater rigs, said Kurt Glaubitz, a spokesman for the company.

Moving Forward

“We’re going to proceed with moving our vast queue of deepwater projects forward,” Glaubitz said in a telephone interview. In addition to several prospects in the deepest reaches of the Gulf of Mexico, Chevron has drilling projects under way off the coasts of Scotland, Brazil and Thailand.

BP said Feb. 3 that it will add three wells at its Thunder Horse field in the Gulf of Mexico this year, bringing the total number of wells there to seven, pumping the equivalent of more than 250,000 barrels of oil a day.

“It’s very difficult for our customers to just terminate a contract as long as we are performing,” Transocean’s Cauthen said in a Feb. 4 presentation to analysts in Vail, Colorado. “Our long-term view remains fairly bullish” for deepwater-rig demand.

Canceling a $600,000-a-day lease with 12 months remaining could potentially cost $219 million. Oil-industry profits already are under pressure as energy prices slide and costs for rigs and other equipment remain at or near peaks, said David Foley, who helps manage $2 billion at Estabrook Capital Management in New York.

Waiting for Rebound

Energy companies are betting that in the five to 10 years it takes to turn a discovery into a producing field, crude prices will rebound and their finds will turn a profit, Foley said.

The last time prices slumped, explorers’ long-term approach paid off, said Robert Sweet, who helps manage $130 million, including Exxon and Chevron shares, at Horizon Investment Services Inc. in Hammond, Indiana.

BP’s 1.5 billion-barrel Thunder Horse field in the Gulf of Mexico was discovered in 1999, when crude traded as low as $11.26 a barrel. The field began pumping crude in June 2008, when oil topped $143 for the first time. Exxon owns a 25 percent stake in Thunder Horse.

In the final three months of 2008, Shell and London-based BP posted their first losses in 10 years and six years, respectively. Irving, Texas-based Exxon had its biggest decline in quarterly net income since 2002. Chevron, based in San Ramon, California, had its smallest profit gain in more than a year.

Even so, those four companies plan to spend a combined $105 billion this year on exploration, refineries and chemical plants, enough to fund the U.S. space program for half a decade.

Record Dayrate

Ronnie Chappell, a Houston-based spokesman for BP, declined to comment on the company’s rig leases. Exxon Mobil spokesman Alan Jeffers also declined to comment.

“Shell has not planned any major changes regarding our deepwater-leasing contracts in the Gulf of Mexico,” Robin Lebovitz, a Houston-based spokeswoman for Shell, said in an e- mailed message.

Lease rates for the most-sophisticated, durable drilling vessels surged to an all-time high of $652,000 a day in July when Italy’s Eni SpA signed an agreement for Transocean’s Deepwater Pathfinder. That was followed by a deal at an identical rate with Exxon in October.

All of Transocean’s most-sophisticated rigs are booked until at least mid 2010, with some committed through November 2016. The company had a $41.1 billion backlog of orders as of Sept. 30.

‘Deep Pockets’

Anadarko Petroleum Corp., which last week announced two discoveries in 5,000-foot seas, plans to continue searching the Gulf of Mexico for prospects that contain at least 100 million barrels of crude. At current prices, such a find would be worth about $4 billion.

Anadarko, based in The Woodlands, Texas, can make a 10 percent profit on deepwater fields when oil is $30 a barrel, Chief Executive James Hackett said during a Feb. 3 conference call with investors and analysts. The company is devoting 20 percent of its capital budget to exploration this year.

“You have to have deep pockets to play in the deepwater Gulf of Mexico,” Matt Snyder, head of Gulf of Mexico upstream research at oil-industry advisory firm Wood Mackenzie Consultants Ltd., said in an interview in Houston. “We’re just not seeing companies saying they’re going to cut back their drilling programs in the deep Gulf.”

To contact the reporter on this story: Joe Carroll in Houston at jcarroll8@bloomberg.net