Charts Designed by Junior Associates
Edited by Vani Rao
Moved aimed at unlocking value to its position in the Lower 48 onshore resources
British oil company BP Plc. (NYSE:BP) plans to hive off its onshore US oil and gas assets, including its extensive shale resources, into a new business unit, according to Reuters. While BP would own the new division, it would be managed by a different team. The move is expected to unlock value of BP’s resource position in the US Lower 48 onshore area.
The new business will consist of an extensive unconventional or shale resource of around 7.6 billion barrels of oil equivalent, including BP’s stakes in the prolific Eagle Ford shale in Texas. It would, however, exclude BP’s substantial portfolio off the US coast.
According to Reuters, the new division would be headquartered at a new location in Houston. Being close to the onshore blocks, the new division would enable BP to make faster decisions with relation to supply and demand cycles. It would also enable the company to leverage the shorter cycle times from gaining access to drill through to production. BP would start to disclose separate financials for the new business from 2015.
The strategic decision taken by BP to hive off its unconventional gas resource follows the trend being seen among a number of large oil companies, including Royal Dutch Shell (NYSE:RDS.A) and BG Group plc. These companies have taken a huge hit on their bottom line after making huge investments in the US. These investments have exposed these companies to depressed gas prices, thereby pulling down their profits. BP’s larger rival Shell said in January that it could look to dispose of parts of its US shale business to improve its capital efficiency.
BP’s one-year price movement is shown below.
Unconventional Gas Market Scenario
The market for unconventional gas resources is expected to witness steady growth over the next few years due to the increasing demand for natural gas across the globe. Moreover, many governments across the globe are investing a huge amount of funds in R&D activities to help develop enhanced technology in order to increase production of gas from coal beds, shale blocks, and tight sands.
The US is considered to be one of the mature markets for unconventional gas production due to the availability of vast resources. Moreover, there is a huge demand for unconventional gas in this country mainly due to the increasing natural gas consumption by major manufacturing industries located in this region.
In this regard, BP hiving off its US operation is seen to be a strategic move among industry watchers since it will allow the company to focus on unconventional gas production as opposed to traditional gas production such as the Salamat well in Egypt, where BP discovered gas in September 2013. In addition, in August 2013, BP announced a new gas condensate discovery off the eastern coast of India in the Cauvery basin with Reliance Industries Ltd.