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BP’s Dudley Targets Riskiest Drilling After $32 Billion Blowout

BP needs to stabilize its key U.S. business
Tony Hayward, chief executive officer of BP Plc, left, Carl-Henric Svanberg, chairman of BP Plc, center, and Robert Dudley, incoming chief executive officer of BP Plc. Photographer Rupert Hartley/Bloomberg

July 29 (Bloomberg) -- Robert Dudley, the man charged with rebuilding the reputation of BP Plc after the disastrous oil spill in the Gulf of Mexico, will slim the company to its core strength: the high-risk, high-return search for oil and gas in demanding environments.

That suggests Dudley, who becomes the first American chief executive officer of the British oil giant on Oct. 1, will follow the same strategy that led to the Gulf spill and turned outgoing CEO Tony Hayward into a pariah, Bloomberg Businessweek reports in its Aug. 2 issue.

“The key to this industry is replacing earnings, and BP thinks they know how to do that in deep water,” said J. Robinson West, chairman of consultant PFC Energy in Washington.

Indications that BP will stick with deepwater drilling are in the assets it’s put up for sale to raise cash to reassure financial markets of its viability and to pay bills for the spill that could reach $30 billion. What’s on the block are mostly old onshore or shallow-water fields such as Alaska’s Prudhoe Bay, where output is declining. The sales will heighten BP’s dependence on deepwater fields, which already account for about 18 percent of its output.

Dudley surprised investors with plans to sell up to $30 billion in production assets -- triple the level company executives said in May they would divest -- after reporting a record $17.2 billion loss for the second quarter on July 27. BP’s oil-and-gas production will fall from 3.8 million barrels per day to about 3.5 million.

Apache Pays Premium

BP got a premium when Apache Corp. agreed to pay $7 billion for fields in Canada, Texas and Egypt on July 20. This first sale of assets constituted about 2 percent of production. Hayward said that deal effectively valued BP’s total exploration-and-production business at $350 billion --almost three times the company’s depressed $119 billion market capitalization.

Stripped of its plain-vanilla oil fields, BP will be closer to what Wall Street analysts have long wanted it to be: An aggressive exploration company dependent on big finds in deep water, such as off the coast of West Africa, Louisiana and Texas.

BP needs to stabilize its key U.S. business as the Gulf accounts for 11 percent of its production and the oil it extracts there is among its most profitable.

Mississippi Childhood

Dudley, 54, won respect for the coolness he displayed under fire in Russia as head of BP’s joint venture, TNK-BP. BP’s Russian partners called for Dudley’s dismissal in 2008 in a dispute over strategy at Russia’s third-biggest oil company. He eventually left the country, citing “sustained harassment” amid court battles and labor and tax inspections.

He got the nod to lead the entire company at least in part to placate U.S. politicians and dissuade them from barring BP from drilling in American waters. BP is the biggest operator in the Gulf’s deepest waters, and its future depends on being able to hold on to its position there.

“It’s not our intention to exit the U.S., nor do we believe we won’t be able to operate there,” he said on July 27.

Dudley, who grew up in nearby Hattiesburg, Mississippi, was put in charge of the Gulf cleanup effort in June. He spent half of his career at Amoco Corp. before it was acquired by BP in 1998.

So far other countries with deepwater reserves, such as Angola and Egypt, have refrained from restricting BP. Dependent as they are on oil and gas revenue, these states don’t want to reject a major source of cash.

Dudley even sees an upside for BP, which he said could wind up with “higher-quality assets and growth” from its reliance on higher-risk exploration.

“In the years to come they certainly have the potential to have higher profitability on a per-barrel basis,” said Gianna Bern, a principal at Brookshire Advisory & Research.

Still, that future depends on whether Dudley, unlike Hayward before him, fulfills a pledge to strengthen BP’s safety program. “There is no room for error here,” says Oppenheimer & Co. analyst Fadel Gheit.

To contact the reporters on this story: Stanley Reed in London at

To contact the editor responsible for this story: Peter Langan at

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