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Cost Overrun Dogs BP Skarv Project

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British energy major BP Plc (BP - Free Report) has incurred a huge cost overrun on its Skarv project off Norway, which got deferred mainly due to supply hindrances to obtain some vital equipment and services. The company is now trying hard to start operations in the field by the end of 2012.

The overrun cost is estimated at over NOK 10 billion ($1.7 billion) on the original budget of NOK 34 billion. The project is under pressure due to the elevated expenses associated with production setback, fixing of vessel charters, engineering services and an extended yard stay for the floater.

The repetitive weather-related problems such as high waves have prohibited the set up of risers and thus postponed the commissioning of the field’s floating production, storage and offloading (FPSO) vessel by over a year to December 2012. The field’s FPSO would be the largest in operation in the Norwegian region.

Earlier, the project was delayed due to complex and prolonged repair work that had to be performed on the turret, assembled at South Korea’s Samsung Heavy Industries and supplied by the Dutch contractor SBM Offshore.

Initially, BP had given the contract to Bluewater, but later cancelled it as Samsung did not possess the capacity to honor the order. SBM was finally contracted for engineering of the turret. SBM has also been criticized over its supply of offshore production unit for Talisman Energy’s disturbed Yme project off Norway.

However, BP management has defended SBM and said that the Skarv development is now moving as scheduled and will start producing in December, as the last of the field’s 13 risers was installed in the turret this summer.

The Skarv field is estimated to hold oil and condensate reserves of around 104 million barrels and gas reserves of about 42.1 billion cubic meters of gas. Initially, BP targets a daily yield rate of 80,000 barrels from the field.

BP, the operator, has a working interest of 23.8% in the Skarv development. Its partners, Statoil ASA , E.ON Ruhrgas and PGNiG hold 36.2%, 28.1% and 11.9%, respectively.

BP holds a Zacks #3 Rank (short-term Neutral rating). Longer term, we maintain our Underperform recommendation on the stock.

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