BP plc in the first three months posted its biggest year/year increase in oil and natural gas production in almost four years, topping 4 million boe/d, CEO Tony Hayward said Thursday.

The rise in output was the biggest since 2Q2005 and the largest average quarterly gains since 2Q2006, he said. Most of the increase came from the start-up of the deepwater Thunder Horse field in the Gulf of Mexico, which now is producing around 300,000 boe/d (see NGI, Nov. 3, 2008; June 23, 2008).

“We now expect to grow production between 1% and 2% out to 2013 based on existing projects and have the potential to continue the growth out to 2020,” Hayward said at the company’s annual shareholder meeting in London.

BP, he said, is well positioned to turn the current economic environment into an opportunity that will set it apart from the competition.

“BP has been, and remains, an organization operating at the frontiers of the energy industry,” said Hayward. “Our technology and capability allow us to take on challenges that others cannot — or choose not — to confront, securing access to new resources now as in the past — from Iran 100 years ago to the Canadian arctic…”

However, Hayward said “operating at the frontiers is not without risks, as we have tragically experienced again this month.” He told shareholders that on Wednesday he attended a memorial service in Aberdeen, Scotland for victims of a helicopter crash earlier this month in the North Sea. The helicopter had been ferrying energy employees offshore.

Turning to the company’s operations, Hayward noted that in the past 10 years, BP has assembled “an excellent portfolio of assets. Our job is to realize their full potential in the face of Thursday’s uncertain environment. It is not by chance that BP has thrived for so long. The ingenuity of our people has led to our success, and that gives me great confidence with which to face the future.”

He reminded the audience that a year ago he addressed them for the first time as CEO. Hayward took over during a period of upheaval for BP, and he said management implemented a plan to restore revenues and reduce the “complexity and cost structure…We’ve done exactly that.”

At the corporate level, BP by the end of 2008 had reduced its organization by around 3,000 people, and it’s on track to “exceed our original target of 5,000 by the middle of 2009,” Hayward said. “We have also eliminated nearly 20% of the senior positions.”

Costs also have been reduced. Replacement cost profit in 2008 rose 39% from 2007 to $25.6 billion, said Hayward. Net cash from operating activities was $38 billion, up more than 50%. Dividends paid per share rose by 30%.

“With our operations restored, we benefited from record high oil prices that more than compensated for the fall in the global average refining margin to $6.50/bbl, down from almost $10/bbl in 2007,” said the CEO. “Based on the past year’s results, I am glad to say that BP has restored its competitive performance — and that is no mean achievement when you think about the year that has just passed.”

In its exploration and production business, Hayward noted that BP had grown production “in line with guidance, the only one of the majors to do so.”

“With 13 new field discoveries…exploration had one of its most successful years in the past decade,” he said of 2008. “This included discoveries in the Gulf of Mexico, Angola, Algeria, Egypt and the North Sea…We achieved significant new access, to both undeveloped resources and new exploration acreage, particularly in North America.

“We were the successful bidder on three exploration licenses totaling 6,000 square kilometers in the arctic Canadian Offshore Continental Shelf. This is a particularly exciting prospect for the future, potentially containing some 20% of the world’s yet to find hydrocarbons. In the middle of last year we extended our footprint in North America Gas through two deals with Chesapeake.

“Strategically, this gives us a material position in three top-tier shale basins and creates a balanced portfolio of conventional gas, tight gas, coalbed methane and now shale gas, in the world’s biggest natural gas market.”

The company plans to begin this year to roll back the inflationary trend by “driving deflation into its business,” said Hayward. Over the last few months, BP has witnessed a sharp drops in the price of steel and petrochemicals. Overall, he company expects its costs to fall by around $2 billion in 2009.

No doubt 2009 will be a challenging year, he said. “But one that we’ll meet head on and turn to our advantage.”

Chairman Peter Sutherland also withstood withering criticism of the company from shareholders during the meeting, which was webcast. He told investors BP’s priorities were to continue paying dividends and to maintain investments to expand its reserves base. Sutherland, who is retiring this year, said plans are “well advanced” to have a new chair in place by the time of the next annual general meeting in 2010.

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