BP plc’s cost-cutting measures, implemented two years ago, are beginning to pay big dividends, the oil major said last week. Costs are projected to fall by $4 billion this year from 2008, which is $1 billion more than the producer forecast in June.

“Don’t think the third quarter of 2009 is as far as we can go in improving BP operations,” CFO Byron Grote told analysts during a conference call to discuss quarterly earnings performance.

Nearly half, or $2 billion, of the cost savings to date has come from a restructuring plan that was implemented by incoming CEO Tony Hayward two years ago (see NGI, Oct. 15, 2007).

“As far as what is currently happening, it is really a case of great operational performance across the whole portfolio,” Grote said. “This is the type of operation that we were aiming to achieve and what we saw in the third quarter was the delivery of that.”

The results “demonstrate real operational momentum across the company,” said Hayward. “They show that even in the tough conditions that prevail in many of our markets, we can continue to deliver on our promise to invest in future growth while meeting our commitments to shareholders today.”

Costs to produce natural gas and oil dropped 18% in 3Q2009 from a year ago, resulting in positive cash flow numbers earlier than expected, which in turn resulted in lower net debt, which fell $800 million sequentially from 2Q2009.

BP’s clean replacement cost of supplies, which strips out gains or losses from inventories and nonoperating items, dropped by almost half (47%) from the year-ago period to $4.67 billion.

“As far as cash costs go, between 50% and 60% of the benefits are a consequence of our own actions,” Grote noted. “The rest is a combination of two factors: foreign exchange benefits, which come from a stronger dollar and lower fuel costs. But really, across the entire group, cost efficiency measures are bearing fruit.”

BP’s gas and oil production worldwide also improved in 3Q2009, up 7% versus 3Q2008 to 3.92 million boe/d. The gains mostly were attributed to the ramp-up of the massive Thunder Horse platform in the deepwater Gulf of Mexico, which has capacity to produce 200 MMcf/d of gas and 250,000 b/d of oil.

“We are currently benefiting from the continued ramp-up of production in Thunder Horse, which continues to perform beyond expectations,” Grote said. “The big change versus the 2008 time frame is obviously to leave the third quarter without the operational disruptions we had last year as a consequence of hurricanes. At least so far in the fourth quarter we continue to benefit from that.”

The London-based producer is “seeing a great response from the shale gas areas that we acquired in our deal with Chesapeake [Energy Corp.] a year ago,” Grote told analysts. Subsidiary BP America Inc. last year acquired a quarter interest in Chesapeake’s Fayetteville Shale assets for $1.9 billion, and it paid $1.75 billion to acquire all of Chesapeake’s Arkoma Basin assets in the Woodford Shale (see NGI, Sept. 8, 2008; July 21, 2008).

“We’re driving our own onshore activity to ensure that it is responsive to the environment we’re in,” Grote said. “Just to underscore that in spite of the fact that in the third quarter we had Henry Hub gas prices of below $4/Mcf, the North American gas unit, which is responsible for the onshore operations there, was both profitable and cash generative…So they have taken up the challenge here quite substantially.”

BP reported quarterly profit of $5.32 billion (28 cents/share), compared with $8.05 billion (43 cents) a year earlier. Revenue fell 36% to $66.22 billion.

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