By Jessica Resnick-Ault
LONDON (Reuters) - Oil major BP (L:BP) has approved a $9-billion (7.14 billion pound) investment in its Mad Dog project in the Gulf of Mexico, its first major new platform in the region since a 2010 explosion at its Macondo well led to the worst offshore disaster in U.S. history.
The decision shows confidence that the company can safely operate in the region and is a bet that oil produced in the deepwater offshore can compete with rival on-shore production.
The project's costs have declined from over $20 billion initially, to less than half that amount, BP said.
“This announcement shows that big deepwater projects can still be economic in a low price environment in the U.S. if they are designed in a smart and cost-effective way,” said Bob Dudley, BP's chief executive officer.
The platform is the first BP-operated project that the company has sanctioned in the Gulf of Mexico since the April 2010 spill at its Macondo well, the worst offshore oil disaster in U.S. history.
The project comes as a two-year crude price rout has curbed interest in offshore development.
"Offshore has lagged what we've seen onshore in unconventional oil," said Jim Krane, an energy fellow at Rice University in Houston, Texas.
Companies have been reluctant to invest in costly large offshore developments as oil produced from shale formations in the U.S. has become more economical and created a supply glut.
"It could be an indication that they are optimistic that prices will recover, but even if not they feel confident enough to sanction a project when prices around $50 a barrel in the deepwater," said Mark Tabrett, an analyst at Sanford Bernstein.
"Around two years ago people didn't think that was an economic level to sanction anything in deep water, so that seems like a bullish indicator for the market."
The Mad Dog Phase 2 project will start producing oil in late 2021 and have the capacity to pump up to 140,000 barrels per day (bpd) from up to 14 wells, BP said.
A leaner design of the expanded Mad Dog, which is located around 190 miles south of New Orleans, helped to more than halve the project's costs to $9 billion.
BP said its project partners BHP Billiton (LON:BLT) and Chevron (NYSE:CVX) are expected to made a final investment decision on the field soon.
The Mad Dog development will be the first new platform the company has planned to operate since its Thunderhorse platform came online in 2008.
(Additional Reporting by Karolin Schaps; Editing by Alexandra Hudson and Bernadette Baum)