British oil supermajor
) recently announced the successful start-up of the Devenick
project, an offshore natural gas field in the central North Sea.
The project is expected to provide a substantial increase to the
domestic natural gas supply in the UK. We believe that it will also
enable BP to increase its natural gas revenues, both through an
improved mix of natural gas revenues from sources outside of the US
as well as an increase in its overall natural gas production.
See our full analysis for BP
According to estimates, the Devenick gas field contains 430
billion standard cubic feet of natural gas, which is expected to
last until 2025. BP has credited advances in subsea gas extraction
technology for making the development of the field economically
The operation will reach peak production in 2013, at which point
it is expected to increase UK's natural gas production by up to
3%. The field has been tied back to the Marathon Oil
Corporation operated East Brae platform, located 34 km to the
south, to facilitate domestic gas supply to the country.
BP is the primary operator of the Devenick asset, with an 88.7%
stake in the project. German oil & gas major RWE Dea's UK
subsidiary owns the remaining interest. The partners together have
invested around $1.04 billion in the project. The venture is in
line with BP's plans to invest over $10 billion over the next five
years to develop projects in the North Sea.
The UK is the second largest producer of natural gas in the
European Union (
) and was historically a net exporter of the commodity. Over the
past decade however, production has declined while consumption has
remained relatively stable, and it is now a net importer of natural
gas. As a result, natural gas prices in the country are much
higher than those prevailing in the US.
In 2011, spot prices in the UK and US (based on the Heren NBP
index and Henry Hub prices) averaged around $9 and $4 per million
BTU respectively. Similarly, in the same year, BP realized an
average price of around $4.70 per 1,000 cubic feet of natural gas
sold worldwide, compared to $3.34 per 1000 cubic feet of natural
gas sold by the company in the US.
The project, which will increase BP's natural gas production in
the UK by around 100 million cubic feet per day, thus presents an
opportunity for the company to earn a larger proportion of its NG
revenues from the UK, where the commodity's prices are relatively
higher than in the US.
In 2011, BP's global subsidiaries produced an average of around
6,400 million cubic feet of natural gas per day. Of this, only
around 5.5% of production came from the UK. The Devenick project is
expected to increase annual natural gas production in the country
by 3%. On the other hand, a combined total of 4,036 million
cubic feet per day, or around 63% of the company's natural gas
production, was generated in the US and Trinidad. Natural gas
revenues from Trinidad primarily come from exports to the US.
We currently have a Trefis price estimate of $50 for
, which is around 20% above the market price.
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