BP plc has ratcheted down oil and natural gas production plans through 2012 but it still plans to keep spending near 2008 levels to prepare for a certain upturn, CEO Tony Hayward said Tuesday.

Worldwide oil and natural gas output is set to rise by 1.5% this year, and BP should lift its output to 4.1 million boe/d by 2012, Hayward said during a strategy conference in London. A year ago BP was targeting production to reach 4.3 million boe/d (see Daily GPI, Feb. 28, 2008). However, the CEO said last year’s forecasts were based on projections that have since been tossed aside because of the global economic downturn.

“We began our drive in 2007 to counter the cost inflation that had developed alongside rising oil prices,” Hayward said. “Our mantra is that every dollar counts and every seat counts and we are applying it with determination…As a result, we managed to halt the inflationary trend and to hold costs flat in 2008, despite the continued rise in oil prices for most of the year. Our aim this year is to begin rolling back the inflationary trend and drive deflation into the business.”

BP, said Hayward, probably was more able to quickly adapt to the contracted business environment because it was already in the midst of revamping its entire operations, downsizing where it needed to downsize and pull back where it wasn’t making money. By the end of 2008 it had 3,000 fewer employees, and 20% of its upper management was gone.

“Our aim remains to strike the right balance for our shareholders between investing for the future, providing current returns via the dividend, and ensuring an appropriate and prudent level of gearing,” Hayward said.

Fourteen major projects worldwide still are scheduled to come on stream over the next four years, including three in the Gulf of Mexico. Several other new discoveries also will be developed, but timing will be slower than earlier forecast.

“A revised view of our investment pattern and the pace at which major projects will run” led to BP slowing down its development pace, exploration and production (E&P) chief Andy Inglis said during the meeting.

Capital spending in 2009 is expected to be $20-21 billion, which, on paper, is down slightly from the $22.66 billion spent in 2008. However, Inglis noted that operating costs this year are expected to drop by at least $2 billion as cost inflation reverses. Between $15 billion and $16 billion is slated for E&P.

BP’s spending plans are based on future forecasts, said Hayward.

“The last few years have been a poor time to put capital on the balance sheet, but the next few may be a lot better,” Hayward said.

Between now and 2013 BP’s oil and gas output is forecast to grow by 1-2% a year, and the company potentially could continue at that pace to 2020 based on its current reserves. BP replaced 121% of its reserves in 2008 by adding 1.7 billion boe of new oil and gas resources.

“Our upstream business overall is delivering good growth, making BP the only supermajor to boost its production in 2008,” said Hayward. “Combined with our reserves replacement of 121%, that’s a great record to be able to cite in this, our centenary year, because it suggests that BP has not lost its traditional skill with the drillbit…And that’s one of the many reasons why I believe we can face the future with pride, confidence and a renewed sense of purpose.”

BP also is able to still access debt markets, and the cost of borrowing this year should be equal to or lower than the 2008 cost, Hayward told analysts. The company has $5-6 billion of bonds to refinance in 2009, compared with $7.5 billion of bonds issued in 2008. There is still “strong investor demand” for highly rated corporate debt, he said.

“We made good progress in 2008, and we delivered as we said we would,” Hayward said. “We intend to continue that trend in 2009. We have very strong momentum, and costs will fall through 2009 and beyond. As I’ve said a number of times, the future has not been canceled. It’s been delayed by a year or two. The challenge is to strike the right balance for shareholders, for returns today, for dividends, and to be prudent where it is appropriate.”

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