London-based BP plc reached a operational “turning point” in October and has begun to invest for the long term, CEO Bob Dudley told investors last week.
Operating cash flow generated by BP in 2011 totaled $22 billion — 60% above 2010 — and expected net cash flow in 2014, “in a $100/bbl oil price environment,” is forecast to be about double that of last year, Dudley said during a webcast to discuss the company’s latest performance and strategy for this year.
“2012 will be a year of increasing investment and milestones as we build on the foundations laid last year,” he said. “As we move through 2013 and 2014 we expect financial momentum will build as we complete payments into the Gulf of Mexico [GOM] trust fund, restore high-value production and bring new projects on stream.” The big “turning point,” he said, came in October when BP’s output numbers began to rise: oil and gas production increased by more than 5%, or 170,000 boe/d, sequentially from 3Q2011 to 4Q2011. For the year production averaged 3.45 million boe, ahead of the company’s forecast of 3.4 million boe.
Five drilling rigs now are operating in the GOM and three more are scheduled to be moved there this year. An appraisal well was spudded last November on the promising Kaskida field in Keathley Canyon, and the company plans to drill four deepwater wells there (see NGI, Oct. 31, 2011). “The Gulf of Mexico remains a very important part of our future,” and is considered one of the backbones of BP’s future growth, said the CEO.
To underscore the GOM’s importance, BP and its partners plan to launch the second phase of Mad Dog, a “major new gas field” in the deepwater. BP, with 60.5% working interest, operates the project with partners Chevron Corp. (15.6%) and BHP Billiton (23.9%). A new spar platform is to be installed on the southern extension of the field that would be capable of producing 120,000-140,000 boe/d. “We have just sanctioned with our partners…one of the largest new free-standing developments in the Gulf of Mexico.” The spar is scheduled to begin operations by the end of this year.
Although the GOM is its top priority, executives disclosed that BP now has 450,000 net acres in the Eagle Ford Shale in South Texas last year. The purchase came about through “high-grading the portfolio,” said Executive Vice President Andy Hopwood, who is in charge of strategy and integration.
“We’ve got about 6 Tcf of resources spread over about 450,000 acres,” said Hopwood. “We don’t divulge specific deals, but we have a working relationship with Lewis Energy [Group], and they operate it…It is going very, very well.” BP in early 2010 joined Lewis in the Eagle Ford by acquiring a half-stake in about 80,000 net acres (see NGI, March 8, 2010).
Globally, BP is “going to a situation where we have 20 ‘real’ exploration tests a year,” said Hopwood. “Last year we managed six and this year we’re heading for 12…we’re only operating five, so there’s some uncertainty in that. But we have a portfolio that will sustain 15-25 projects a year.”
The oil major also is preparing “vigorously” for the initial trial related to the Macondo well blowout, Dudley said. In recent weeks there have been rumors circulating in Houston’s legal circles that BP is prepared to settle out of court with the U.S. Department of Justice (DOJ) ahead of the first trial later this month in New Orleans. A trial could result in huge U.S. penalties for Clean Water Act violations, among other things.
BP is ready to settle more than 600 civil lawsuits, as well as DOJ litigation, said Dudley. The “bias has always been toward settlement, but only at a fair and reasonable price.” The multi-district litigation is to be tried in three phases, each one addressing a different part of the incident and the consequences, and the “whole process is likely to last into 2013,” said the CEO. The first trial is scheduled to begin Feb. 27 in New Orleans before U.S. District Judge Carl Barbier (see NGI, Feb. 6).
“From the onset, we have said we do not believe BP was grossly negligent…We are confident in our case and we look forward to presenting the evidence…We expect considerable media attention, but we would prefer that this case not be tried in the media. The appropriate place is in federal court in New Orleans.”
During the webcast, Dudley rejected a suggestion by an analyst who questioned whether the company’s best interests might be best served by fighting a lengthy legal battle to reduce the final penalties. Since the oil spill BP has traded well below its peers. On the New York Stock Exchange early Friday BP’s share price was about $46.77/share, while ExxonMobil Corp. was trading at $84.88 and Royal Dutch Shell plc stood at $72.88.
“Our share price has taken a huge discount because of the uncertainty” related to the Macondo settlement, said Dudley. “If there is a…reasonable and fair way to put this behind us…and the value of the company goes up, that’s actually in the best interests of the shareholders.”
BP’s estimate for the total costs of the worst-ever oil spill in U.S. waters now is $43 billion, about $1.8 billion higher than originally estimated because of increased costs for Gulf Coast shoreline cleanup, now essentially complete, and an additional $500 million charge for legal expenses. The company’s total litigation costs now are estimated at more than $2 billion. The company set aside $20 billion to pay for damages from the spill, from which it has paid close to $7.8 billion. If it were to be found grossly negligent by a federal court, it could face fines of up to $20 billion under the Clean Water Act.
To date, BP has been paid more than $5 billion by its partners in the blown-out well, Anadarko Petroleum Corp. and Mitsui Ltd., which means the company will be able to complete its payments into the $20 billion compensation fund by the end of this year, Dudley said.
Because of stronger-than-expected results in 2011, BP increased its quarterly dividend by 14% to 8 cents/share from 7 cents. The company’s pre-Macondo spill quarterly payout had been 14 cents/share.
Rreplacement cost net profits in 4Q2011 jumped 65% to $7.61 billion ($2.41/share) from $5.57 billion ($1.47) in the year-ago period in part because of an estimated $4 billion contribution from Macondo partner Anadarko. Replacement costs exclude the gains or losses from the changes in the value of fuel inventories and is comparable to net income under U.S. accounting rules. Excluding one-time charges, replacement cost profits jumped 14% to $4.99 billion in 4Q2011 from $4.36 billion. Profits for the year rose to $21.66 billion from $20.52 billion in 2010.
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