Coupled with operational delays in Alaska and the North Sea, the exploration and production side of BP’s business was a “disappointment” in 2006, BP’s Tony Hayward confessed in BP's 2006 fourth-quarter conference call, indicating that market tightness in the oilfield services sector contributed to the second delay at Atlantis. Hayward, BP’s former head of exploration and production, will replace John Browne, BP’s chief executive officer, when Browne retires this summer. Hayward’s current title is Group Chief Executive Designate.

“All of these occurred in an environment where the supply chain is stretched to the breaking point,” Hayward said of oilfield services, noting that continuing upward pressure on operating costs also is putting company earnings under pressure, “especially as oil and gas prices are no longer rising at the same pace seen over the past three years.”

BP faced a 14% increase in operating costs during 2006, a level the company expects in 2007. However, over the past three years, BP said it experienced more than a 35% increase in costs, some of which were offset by long-term rig and supplier contracts, technology and demand management. “We continue to see very strong inflationary pressures in all parts of our supply chain,” Hayward said.

The Atlantis project, covering Green Canyon blocks 699, 700, 742 and 744, is expected to cost around $2 billion. Twenty wells are planned, including 16 producers and four water injection wells. BP operates Atlantis with a 56% interest. Australia’s BHP Billiton owns the remaining 44%. BP, just a week prior to announcing the first Atlantis delay last year, postponed first oil from Thunder Horse, due to “metallurgical failure” in components of the field’s sub-sea system, in particular a leaky manifold evidently caused by a bad weld. BP decided to retrieve and rebuild all of Thunder Horse’s sea-bed production equipment.

A manifold is a massive sub-sea structure designed to send oil and gas from individual wells up toward the production platform. Because of a similarity in manifold design, and the fact Atlantis was in an earlier stage of development than Thunder Horse, BP decided to also retrieve and make precautionary modifications to Atlantis’ manifolds, resulting in that project’s first delay, according to a spokesman for BP.

However, another spokesman for the company said a need to further study ocean currents in the vicinity of the Atlantis development led to BP’s decision to postpone field startup the first time. These so-called “loop currents” are prevalent in many deepwater areas of the Gulf of Mexico and can cause serious damage to sub-sea equipment and installations.

The Atlantis production facility was designed to process 200,000 barrels of oil and 180 million cubic feet of gas per day, compared to Thunder Horse’s 250,000 barrels of oil and 200 million cubic feet of gas per day. In 2002, Atlantis reserves were increased to 575 million barrels of oil equivalent from an initial estimate of around 300 million barrels. The Thunder Horse field holds recoverable reserves of around 1 billion barrels of oil equivalent.

BP currently produces in excess of 350,000 barrels of oil equivalent per day from nearly two dozen fields in the Gulf of Mexico, including company operated facilities at Na Kika, Pompano, Marlin, Horn Mountain, Mad Dog, and Holstein.

BP began deepwater Gulf of Mexico operations in the mid-1980s. In addition to production deferrals at Atlantis and Thunder Horse, BP’s overall output in 2007 will be down an additional 130,000 barrels per day due to property divestitures made in 2006, the company added. Moreover, because BP recently adopted a more conservative economic threshold for projects based $60/barrel of oil, up from a previous $40/barrel, production will be down another 100,000 barrels a day in 2007 and an additional 300,000 barrels a day by 2009. Worldwide, BP produced an average 3.926 million barrels per day of oil equivalent in 2006, down from 4.014 million barrels per day in 2005. Based on $60/barrel of oil, the company anticipates producing more than 4 million barrels per day by 2009 and more than 4.3 million barrels per day by 2012.

Meanwhile, BHP is feeling cost pressures in the U.S. Gulf. BHP Billiton said in its latest quarterly E&P report that three of five projects were experiencing cost pressure, though all of the projects remained on schedule. BHP reported a 50% increase, to $1.5 billion, in the cost of the Atlantis South project in deepwater Gulf of Mexico. First oil from 11 wells was targeted for the second half of this year, with peak production expected to reach 200,000 barrels of oil per day and 180 million cubic feet of natural gas per day. The costs and schedule for the project remain under review. BHP holds a 44% stake in the Atlantis South project. Neptune, another of BHP’s Gulf of Mexico fields, also has cost increases, the company said. However, the first two of seven BHP development wells have been completed in the field, which is expected to produce first oil by the end of this year. Production will peak at 50,000 b/d of oil and 50 MMcf/d of gas, the company said. BHP has 35% stake in Neptune.

BHP's Shenzi field in the Gulf of Mexico also is on target, with first oil expected in mid-2009, the company said, adding that fabrication of the Shenzi topsides and hull are progressing according to plan. BHP holds a 44% stake in the $4.4 billion Shenzi development, which is expected to produce 100,000 b/d of oil and 50 MMcf/d of gas at peak production.

The company’s Stybarrow field in Australian waters also has experienced cost pressure, according to the report, but remains on schedule for first production in the first quarter of 2008. Two injection wells and three development wells have been completed, and the FPSO has undergone sea trials. BHP owns 50% of Stybarrow, which is expected to produce 80,000 b/d at peak. The company’s two other major fields remain on budget and on schedule. All of the major contracts for the $200-million Angel field on the North West Shelf have been awarded. Topsides and jacket fabrication are progressing, and first oil is expected at the end of 2008. Peak production from Angel is expected to reach 800 MMcf/d. BHP has 16.67% stake in the field.