BP plc, which has been nudging up its natural gas position in North America's shales in the past few years, sees its best opportunities in the next decade coming from new technology and a new company culture, CEO Tony Hayward said last week.
With his management team at his side, Hayward offered the London-based major's strategic view for the medium term at an investment meeting with financial analysts. Increased efficiency and reduced costs are expected to boost BP's annual underlying pre-tax profitability by more than $3 billion over the next two to three years.
"We have begun to see the economic recovery taking hold," Hayward said, mirroring comments by El Paso Corp. management last week (see related story). "In the U.S. it continues to be slow and gradual. Oil demand grew in the fourth quarter and we expect that to continue in 2010, and the oil markets look well supported by OPEC. We expect the gas markets to remain volatile."
Upstream chief Andy Inglis told analysts that U.S. gas prices have little room to move to the upside because of the new shale finds and improved technology, which will keep the markets well supplied in the medium term.
"Today we're certainly going through a period when there's plenty of supply around," Inglis said. "Two effects are going on...There were a significant number of LNG [liquefied natural gas] projects started up through 2009 and which continues into 2010...and that will have some impact on supply in the U.S.
"The other thing I'll say is, shale performance continues to surprise people in terms of the robustness of reservoir performance. There's been a significant reduction in [rig] rates, yet we haven't seen the same fall-off in supply. In the near term we see a relatively robust supply position and I think we won't see any improvement in price until we see demand returning to the economy.
"Supply is robust and it will continue to be robust. Our business in North American gas made money in the $4 Henry Hub world because of the quality of our resource base. We have a distinct set of assets and driving efficiencies into it is about a margin business. We see limited upside now simply because of the shale gas resources..."
Annual capital investments will be "gently rising" from $20 billion this year as the company brings onstream new projects and builds its output, said the CEO.
"We think economic growth will be quite modest," Hayward said. "I think there is alignment with most of the governments of the world...that energy efficiency is the way to go...On the demand side, we're more conservative...
"It's not a small task to bring on new production...It's not about the rocks and the resources, but what goes on above the ground...politics and access issues. It remains challenging. We're doing OK but it remains challenging."
Gas and oil production should rise by 1-2% a year to 2015 and Hayward is "increasingly confident" that growth would be maintained to at least 2020. The growth is to be organic with strategic acquisitions and bolt-on land purchases, like the Eagle Ford Shale purchase that the company officially announced last week (see related story).
Despite having a portfolio that "reflects the best in industry," the challenge, said Hayward, is that "the financials have yet to reflect this." Topping the list is a goal to cut costs by more than $1 billion a year.
With better project management, BP could save $700 million a year, and by improving the efficiency of its drilling operations another $500 million a year could be saved, Inglis noted.
Technological advances in unconventional gas and oil drilling, seismic surveys and subsea well intervention could add an extra 10 billion boe of reserves from BP's existing discoveries, said the E&P chief.
BP's E&P portfolio is deep enough that "I would be surprised if we found good value in corporate activity," Inglis said, when asked about whether acquisitions would be needed to drive production growth.
"We are resolutely focused on driving sustainable improvements," said Inglis. "We are making progress but there is much more to do...In our portfolio there is growth in production out to 2015 and beyond, and growth from efficiency, where we have significant opportunities to improve returns."
BP produced 4 million boe/d in 2009, an increase of 4% from 2008. In the next two years 24 major projects are set for final investment decisions, Inglis said.
BP intends to start up a total of 42 new major projects between 2010 and 2015, which is expected to contribute about 1.0 million boe to total production by 2015, more than offsetting the decline from currently producing fields.
"We're also expanding producing fields...The big fields keep getting bigger," Inglis said.
BP's medium-term growth in the upstream will focus on three areas: deepwater production, global gas including unconventional gas, and managing some of the world's giant oilfields.
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