BP’s (NYSE: BP) highly anticipated Mad Dog Phase 2 has cleared a major hurdle, with the operator revealing it has sanctioned the $9 billion deepwater U.S. Gulf of Mexico development.

The news, delivered Dec. 1, comes after BP slashed costs for the originally $20 billion project by more than half amid a lingering downturn that left many offshore projects stalled. The project will give BP and its partners—BHP Billiton (NYSE: BHP) and Chevron (NYSE: CVX) affiliate Union Oil Co. of California—an opportunity to capitalize on the more than 4 billion barrels of oil equivalent (Bboe) resources at the Mad Dog Field, where production began from the first platform about 11 years ago.

The investment decision is one of several recent ones made in the oil and gas industry as market conditions slowly improve.

“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,” BP Group CEO Bob Dudley said in a statement. “It also demonstrates the resilience of our strategy, which is focused on building on incumbent positions in the world’s most prolific hydrocarbon basins while relentlessly focusing on value over volume.”

Plans for Mad Dog Phase 2, where oil production is set to start in late 2021, include a new floating production platform that will be moored about six miles southwest of the existing Mad Dog Platform. The new platform will have the capacity to produce, from 14 wells, up to 140,000 barrels per day (Mbbl/d) of gross crude oil, compared with the existing platform’s production capacity of up to 80 Mbbl/d of gross oil.

The Mad Dog Field is currently producing from a truss spar, which is also designed to process 1.6 million cubic meters per day (60 million cubic feet per day) of gas, with dual barrier production risers and dry trees.

The initial design, described by BP as “too complex and costly,” prompted the company and its partners to start searching for ways to lower costs in 2013. Their efforts and those of contractors involved in the project led to a 60% drop in costs, attributable to a simpler and standardized platform design.

“Today, the leaner $9 billion project, which also includes capacity for water injection, is projected to be profitable at or below current oil prices,” BP said.

Richard Morrison, president of BP’s Gulf of Mexico business, added, “The project team showed tremendous discipline and arrived at a far better and more resilient concept that we expect to generate strong returns for years to come, even in a low oil price environment.”

For the most part, companies have slowed investments in large, expensive offshore projects as challenging market conditions have persisted. But some, like BP, are starting to loosen their grip on wallets with cost-cutting measures and efficiency improvements in place.

In August, Chevron Corp. (NYSE: CVX) affiliate Tengizchevroil, a joint venture with ExxonMobil Corp. (NYSE: XOM), KazMunayGas and LukArco, said it decided to proceed with its $36.8 billion future growth and wellhead pressure management project designed to increase production at the Tengiz oil field in Kazakhstan by 260 Mbbl/d to 850 Mbbl/d. The project will involve reinjecting sour gas into the Tengiz reservoir—using the same technology used in existing Tengiz operations—for EOR.

Also earlier this year, Woodside Energy Ltd. and partner Mitsui E&P Australia agreed to spend $1.9 billion to develop the Greater Enfield reserves offshore Western Australia.

“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 are prices around $50 a barrel in the deepwater,” Mark Tabrett, an analyst at Sanford Bernstein, said in a Reuters article.

“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.”

Mad Dog Phase 2 is among the projects that BP is counting on to add 800 Mboe/d of new production by 2020. During a call in August, BP executives said other projects that could be sanctioned include Angelin and a compression project, both in Trinidad, Platina in Angola Block 18, Snadd in Norway, India gas projects and additional development of the Khazzan Field in Oman.

“The expectation remains the same, and that is twofold. [No.1], it has to hit—each has to hit the hurdle rates, which is driven by value over volume, mid-teens for greenfield and greater than 20% for brownfield and infill,” BP Upstream Chief Bernard Looney said. “And the project has got to be the best that it can be.”

BP said BHP Billiton and Chevron are expected to reach FID in the future.

Velda Addison can be reached at vaddison@hartenergy.com.

Offshore