BP plc expects to see its upstream production climb on average by 5% every year to 2021 as seven projects come online this year and nine ramp up between 2018 and 2021, the supermajor said Tuesday.
In a five-year strategy update, Group CEO Bob Dudley said organic capital spending is set at $15-17 billion a year through 2021. Upstream free cash flow (FCF) by 2021 is forecast to reach $13-14 billion, with downstream FCF of $9-10 billion.
BP's cash balance point meanwhile is projected to fall to around $35-40/bbl in 2021, Dudley said. The presentation comes two weeks after4Q2016 results were delivered and it increased capital guidance for 2017 to $16-17 billion, a $1 billion increase from 3Q2016 guidance, as it eyes potential "opportunities" within the rebalanced portfolio.
"In six years we have fundamentally reshaped and built a very different BP," Dudley said, noting that in the last six years BP has divested close to $75 billion of its portfolio. "We are now stronger and more focused -- fully competitive and fit for a fast-changing future."
BP has "proven financial discipline, clear plans in action and...a distinctive portfolio which gives us a strong platform for growth, now and into the future. Striking a balance between short and long-term value, our recent acquisitions and agreements have strengthened this even further."
Management "can see growth ahead right across the Group," Dudley said. "While always maintaining our discipline on costs and capital, BP is now getting back to growth -- today, over the medium term and over the very long term."
Over the next five years, both the upstream and downstream arms are expected to deliver material growth.
"In the upstream, growth is expected to come from a continuing series of major higher-margin project start-ups, while the downstream expects to deliver strong marketing-led growth, both underpinned by BP's continued focus on safe and reliable operations, increasing efficiency, simplification and modernization."
Production ramp ups from new upstream projects should deliver a "material improvement" in operating cash flow through the second half of 2017.
"Last year we delivered our targeted $7 billion reduction in cash costs a year early, and capital spending was $8.6 billion lower than its peak in 2013 -- without damaging our growth pipeline," CFO Brian Gilvary said. "We will continue that tight focus on costs and capital discipline and seek further improvements throughout the Group.
"We expect this combination of continued cost discipline with the growing cash flow from our core businesses -- and the recent portfolio additions -- will steadily drive down the cash balance point of the business. Over the next five years we expect this to fall to around $35-40/bbl for the Group overall."
Volume and margin growth throughout the businesses are expected to increase returns over the next five years.
"Assuming a stable price environment and portfolio, BP now expects return on average capital employed for the group to recover steadily over the next few years and to be over 10% by 2021."
The upstream segment has launched production from 24 major projects in the last five years, including six in 2016. The seven projects expected online during 2017 would be "one of the largest years for commissioning new projects in BP’s history," Dudley said. The projects "are on average ahead of schedule and below budget." Nine projects coming onstream from 2018 to 2021 already are under construction.
In December BP sanctioned a “leaner” $9 billion Mad Dog Phase 2 project for the Gulf of Mexico. An expansion at the Thunder Horse platform also is underway.
Projects online in 2016 and 2017 "are on track to deliver 500,000 boe/d of new production capacity by the end of this year."
New upstream projects remain on track to deliver 800,000 boe/d of production by 2020. On average, the new projects also are expected to have operating cash margins 35% higher than the average of BP's upstream portfolio in 2015. More than 200,000 boe/d is expected by the end of the decade from the recent additions to the portfolio, primarily from an Abu Dhabi onshore concession.
"This strong pipeline means that BP is now confident that upstream production will grow from 2016 by an average of 5% a year out to 2021," Dudley said. BP Group production, including its share of production from Russia's OAO Rosneft, is expected to be around 4 million boe/d by 2021.
Meanwhile, the downstream segment since 2014 has delivered $3 billion of "sustainable reductions" in cash costs, halving the refining margin needed to deliver a pre-tax return of 15%. Within the refining and petrochemicals businesses, the downstream arm plans to improve its performance by focusing on additional efficiencies to improve its competitiveness and "resilience" to the price and margin environment. Underlying earnings from the manufacturing businesses by 2021 should be $2.5 billion higher than in 2014.
Beyond the next five years, the strategy also is evolving to ensure BP is able to "meet the energy demands of a changing world," Dudley said.
The alternative energy business, which comprises U.S. wind and Brazilian biofuels, already is the largest operated renewables business among peer oil and gas companies, according to BP. In the wind segment, BP is upgrading some of its existing turbines, while in the biofuels arena, it plans to debottleneck manufacturing sites to increase output.
"BP is also exploring new business models and technologies, which may potentially develop into options for material businesses in the future, with investment into venturing in areas such as low-carbon, digital and mobility to incubate and grow options for the future," Dudley said.
Following the presentation in London, executives were planning to update investors in various cities around the world, including Houston, Dallas and New York City.