BP plc had begun restructuring its global businesses following the Macondo well blowout in 2010, and the blowout in oil prices is going to require more belt-tightening, executives said Wednesday
"Although the current environment is challenging, BP is well-positioned to respond and manage our upstream business for the long term," said Upstream chief Lamar McKay. "We expect to see growth from our conventional and deepwater assets and an increasing contribution from gas. And we also have a quality pipeline of opportunities that we believe are capable of extending underlying growth well beyond 2020. Our focus throughout will remain firmly on safe operations, execution efficiency and greater plant reliability."
As part of its wider ongoing group-wide program to simplify across its upstream and downstream activities and corporate functions, it expects to incur $1 billion in non-operating restructuring charges over the next five quarters, including 4Q2014. Details are expected to be given with each quarter's results.
"We have already been working very hard over these past 18 months or so to right-size our organization as a result of completing more than $43 billion of divestments," noted Group CEO Bob Dudley. "We are clearly a more focused business now and, without diverting our attention from safety and reliability, our goal is to make BP even stronger and more competitive.
"The simplification work we have already done is serving us well as we face the tougher external environment. We continue to seek opportunities to eliminate duplication and stop unnecessary activity that is not fully aligned with the group's strategy."
As an integrated group, not all BP businesses are exposed equally to the oil price. About one-third of the upstream projects around the world are operated under production sharing contracts and BP also is investing in natural gas projects that are typically less sensitive to oil price movements.
While BP approves projects at crude oil prices of $80/bbl, it also tests each at $60/bbl to understand the resilience of the portfolio at a range of prices. Management plans to continue to consider lower price sets when it's appropriate, said McKay.
The oil major's flexibility as an integrated producer has allowed it to manage through previous volatile commodity cycles, but still plans to "look very closely at every dollar of capital spend," he said. He urged investors to keep in mind that price volatility is nothing new.
"We enter this period with a very strong balance sheet. Gearing is historically low at around 15% and cash balances are strong. This ensures we have the time and flexibility to make the right decisions for the group."
Between now and 2020, the start-up of a suite of new upstream projects is expected to be capable of adding more than 900,000 boe/d net of incremental production to the portfolio. BP also plans to progress "opportunities expected to continue to drive underlying growth into the next decade as it builds out its well-established conventional and deepwater oil positions and a distinctive and material portfolio of gas options."
One highlight of the investment update was about BP's natural gas strategy. Today, gas contributes to around half of the resources and production in BP's portfolio and it is expected to grow over the next decade. The gas portfolio also has the potential to double operating cash flow and improve returns over this period through volume and margin growth.
BP in 2Q2014 continued to be the top natural gas marketer in North America, according to NGI's marketer rankings. BP has eight material gas value chains that are either producing or in development, including in the Lower 48, with Alaska set to become the ninth in the mid-2020s (see Daily GPI, July 3). New hubs also are being developed in India, Oman and Azerbaijan.
Liquefied natural gas (LNG) projects in North America have not been a priority for BP, but they are "critical scale" global businesses, according to the management team. BP has aspirations to grow its LNG business to around 25 million metric tons/year over the next 15 years.
One thing is certain: capital expenditures (capex) through the medium-term will likely be trimmed. Expenditures in March had been pegged at $24-26 billion a year between 2014 and 2018, with $20-22 billion directed to upstream projects. Those numbers are under review, McKay acknowledged.
"We will look to pare back or re-phase spend where we can do so without compromising safety or the future growth of the group," he said. "In October we told you this could make a difference of $1-2 billion in 2015 across the group." At that time, BP cut its capex plans through the rest of the year to around $23 billion, down from previous guidance of $24-25 billion (see Daily GPI, Oct. 28).
"Of course, given the recent position taken by OPEC and with oil prices where they are today, we will continue to review this further and will update guidance for 2015 with our fourth quarter results in February as appropriate," said the upstream chief. "A lot depends on the pace of deflation and the benefits of balancing timing investments and opportunities to leverage the deflationary curve."
Unlike some producers that may be scrambling on haywire commodity prices, BP has been streamlining its operations for close to two years. It stepped up those efforts earlier this year as it prepared to separate the Lower 48 business (see Daily GPI, March 4).
"In the upstream we are in action to align today's cost base with our smaller footprint and reduced activity levels, as well as to drive further efficiencies into our processes," said McKay. The last four years have been a "remarkably stable period by historical standards for oil prices," he noted. Historically, it has taken up to two years for prices to undergo a recovery following periods of steep price declines. "With the exception of the period between 1985 and 1986, the recovery was triggered by one or more OPEC production cuts.
"At the same time, history also shows the strong alignment between industry costs and oil prices, with cost changes generally reacting to oil price movements with a lag of one to two years...We believe that over the past 12 to 18 months, cost inflation had caught up with $100-plus oil prices and was already showing signs of slowing, even before the recent sharp fall in oil prices. With oil prices where they are today we expect this natural self-correction mechanism to become evident in supply chain deflation.
"Obviously the current environment introduces some near-term uncertainty. Over time we see this as potentially healthy for the industry overall. It can drive greater efficiency right across the value chain and is one of the mechanisms that underpin long-range returns in our sector, albeit with some leads and lags along the way."
If oil prices were to remain below industry project forecasts of about $100 Brent, margin structures would have to be reconfigured to the changing macro conditions, the BP executive said. In any case, BP's mantra would continue to be value over volume, "which means investing in high-quality activities which play to our strengths, divesting assets which are not core to our strategy and finding alternative ways to create long-term value through portfolio realignment."
Since Macondo four years ago, BP has completed the sale of around $38 billion of its global assets. Going forward, said McKay, "we are progressing toward divesting an additional $10 billion of assets by the end of 2015."