Global natural gas markets are expected to remain oversupplied to 2021, putting the hurt on U.S. exporters, the financial chief of BP plc said Tuesday.

CFO Brian Gilvary, who helmed a conference call to discuss quarterly results, said gas markets look bearish for domestic liquefied natural gas (LNG) in the near term.

A lot of excess domestic gas “under any normal rational market globally will be getting exported,” Gilvary said. “The difficulty is, from my conversations last week, gas is currently moving into Europe around about $4.50 right now. And so therefore, there is no way even at $2.20 that we have in the United States the economics going to work for that…

“You have this massive battleground called Europe, and...the UK is 105% full on LNG storage right now. Europe is 100% full on LNG, and we have the whole question mark of what will happen vis-a-vis Russia in terms of gas into Europe.”

Southern Europe, then, “suddenly becomes a major sink for setting the global price…” which means not all of the planned export projects are likely to move forward.

 “There is still no question,” Gilvary said, “that United States gas is the lowest cost of production in the world. It's going to be hard for you to find a market anytime soon in the next two years probably…

“You’re probably looking at the back end of 2021 before you start seeing this massive supply overhang clear out and then we will have LNG projects coming onstream in Australia, the Middle East and around the globe, which is simply going to exacerbate the situation.”

Natural gas “feels pretty bearish right now,” Gilvary said, “and therefore, you will see some gas exports,” but he was unsure exports would be “anywhere near the capacity” that has been built to date.

Global Phenomenon

BP is “not so much” exposed to Henry Hub gas prices, which accounts for about one-third of its global exposure, Gilvary told analysts.

“It’s the impact it’s having on Europe and the Far East,” he said of gas prices. “In terms of pricing, we’re seeing some of the big producers of gas reduce oil-related curves in terms of where they are now selling...

“So it's not just Henry Hub, but it's actually a global phenomenon right now given the absolute amount of gas around.”

Henry Hub fell to $2.20/MMBtu in the third quarter, “driven by rapid growth in natural gas production and by storage levels returning to their historical range,” the CFO told analysts. Asian and European spot prices were weighed down by “continuing rapid growth in LNG exports, averaging $4.70 and $3.30/MMBtu respectively.”

Through the next couple of years it’s likely that global gas markets will remain in surplus, he said.

“The combination of slower economic growth, slower Asian LNG demand growth and new LNG projects starting up is expected to result in some LNG export capacity being curtailed or underutilized,” said Gilvary.

Meanwhile, the London-based supermajor is seeing lots of positives in the Lower 48 following its move last year to pay $10.5 billion to acquire nearly all of BHP’s massive onshore portfolio. The deal gave BP entry into the Permian Basin in West Texas, doubled its Haynesville Shale position and added better-than-expected acreage in the Eagle Ford Shale.

“Now that we've got these high quality assets in the portfolio, we'll be looking to optimize our portfolio in terms of acquiring positions, divesting positions, high-grading the portfolio,” Gilvary said. “We've talked about checkerboarding before in terms of overlap of properties and assets with other companies and the opposite ability to swap and move around the positions...the focus will be very much on the new oil-rich options that we have going forward.”

“Every way we've looked at this acquisition it looks better than we first thought of the synergies,” Gilvary said of the BHP deal.

High On Eagle Ford

In the Permian, BP plans to boost its rig count to five in 2020, while in the Eagle Ford, eight rigs are expected to be running versus five this year. One rig may be dropped in the gassy Haynesville, where BP long has worked, “given where you can see the gas prices,” Gilvary said.

Costs overall are running 10% lower than when BHP was overseeing the package of Lower 48 assets, particularly in the Eagle Ford.

Eagle Ford production “backs into” West Texas Intermediate oil pricing, making the basin “by far the most attractive of everything we can see in that Lower 48 right now,” Gilvary said.

The Permian is the next big go-to, with activity accelerating likely “into the middle of next year as takeaway capacity comes on stream.”

Also on the radar is the reemerging Austin Chalk formation, part of the BHP package, which runs along the Texas coast and “looks really interesting. We're getting much lower water cuts than we anticipated in some of the wells, higher oil-rich numbers coming through, and probably most importantly the synergies...”

Overall, the new BHP assets “give us huge flexibility in terms of the ability to ramp up…” depending on the movement in oil and gas prices, as well as takeaway capacity and midstream solutions.

BP also is entering a new era, as long-time CEO Bob Dudley retires at the end of the year. Upstream chief Bernard Looney has been tapped to take the helm during a transformational period in the energy world, Gilvary told analysts.

“It’s not a reflection on Bernard versus Bob in terms of style or approach,” Gilvary said. “It's the fact that we have learned a huge amount as we're able to deal with the financial, the $67 billion financial fallout of Deepwater Horizon,” the tragic Macondo blowout in the Gulf of Mexico in 2010 that continues to impact BP today.

BP emerged in part with a “low carbon agenda,” strengthened after the United Nations global climate accord in 2015, aka the Paris Agreement, which has been “a defining moment for us,” Gilvary said. BP shareholders earlier this year overwhelmingly approved a resolution to align the business strategy with the Paris Agreement.

“Of course, society and investors and shareholders are moving at a rapid rate of knots, and therefore in some respects, Bernard coming arrives at a time when we're seeing huge change...in terms of more of what society expects,” said the CFO. Looney for the last few years has led BP’s digitization and low carbon efforts, he noted.

“I think it's an opportunity whenever there is a change at the top. It's an opportunity to slightly move the ship in a slightly different direction,” and Looney will be “leaning into that debate in the same way that Bob actually got the company back into the alternative energy space back in 2015 post the Paris accord.”

Demand Growth Concerns

In the broader macro environment, Brent crude prices averaged $62/bbl in the third quarter versus $69 in the second quarter. In addition to volatility from the attack on Saudi oil facilities, “prices were also tempered by rising trade tensions and increasing concerns over demand growth,” he said.

“Forward pricing is expected to continue to be influenced by a number of competing supply and demand factors,” including the future production strategy of the Organization of the Petroleum Exporting Countries and its allies, unplanned outages, U.S. tight oil production performance and the extent of the global economic slowdown.

BP’s global refining marker margin dropped to $14.70/bbl in the quarter, slightly lower sequentially, on weak demand growth, which led to a build-up of inventories despite high levels of refinery maintenance around the world.

The Brent-West Texas Intermediate (WTI) differential narrowed in the third quarter as new Permian Basin takeaway capacity eased logistics constraints, and the WTI-Western Canadian Select differential remained narrow on tight heavy crude markets and ongoing production cuts in Alberta.

“Looking to 2020, margins and light-heavy crude differentials are expected to be supported by increased demand for marine diesel and very low sulphur fuel oil” that would be needed to meet the new bunker fuel expectations of the International Maritime Organization. “Brent-WTI is expected to narrow further, as new pipeline capacity comes on stream out of the Permian,” Gilvary said.

BP’s reported oil and gas production for the quarter averaged 3.7 million boe/d from 3.6 million boe/d in 3Q2018. U.S. gas production increased year/year to 2.396 Bcf/d from 1.805 Bcf/d, while liquids output increased to 449 million boe/d from 424 million boe/d.

Underlying replacement cost profit, similar to U.S. net earnings, fell 41% in 3Q2019 from a year ago to $2.3 billion (66 cents/share) from $3.8 billion ($1.15). Total revenue fell to $62.29 billion from $80.80 billion.

One-time impairments in 3Q2019 totaled $2.6 billion, in part from divesting some U.S. natural gas assets at lower prices than expected. Also during the quarter BP sold its legacy Alaska portfolio for $5.6 billion to Hilcorp Energy Co., which accounted for about $1 billion of the impairment charge. U.S. upstream profits plunged year/year to $552 million from $1.025 billion.