BP plc on Wednesday cut capital spending for 2020 by one-quarter, with the Lower 48 exploration budget sliced by half as the supermajor defends itself from the global pandemic and low oil prices.
NGI’s perennial No. 1 natural gas marketer in North America reduced capital expenditures (capex) to $12 billion from $15 billion, with Lower 48-focused BPX Energy Inc. spend cut in half to $1 billion.
CEO Bernard Looney shared insight into the confounding issues facing the global oil and gas industry and said the main objectives today are protecting employees, supporting the communities where they live and work and strengthening finances.
Operations have been shifted to make social distancing easier, with workplace access restricted. Increased testing of staff for the global operator is underway, enabling those suspected of having the virus to be isolated and evacuated. Nonessential activity and manning levels also have been reduced, including thousands of construction workers at the Tangguh expansion project in Indonesia.
BP also is offering psychological support, “recognizing this is a mental health challenge as well as a physical health threat,” Looney said. “Job security is a big worry at this time, so we have taken the decision that for the next three months, no BP employees will be laid off as a result of virus-related cost cutting. We simply do not want to add another burden during what is already an incredibly stressful time for individuals and families.”
At the same time, BP is acting to protect its financial health.
“This may be the most brutal environment for oil and gas businesses in decades, but I am confident that we will come through it,” Looney said. “We know what to do, and we have done so before. And we also entered this environment in great shape with good operating momentum and financial discipline, strong liquidity and extensive optionality in our portfolio.”
In the Upstream business, short-cycle onshore activity is taking a hit, and the reduction in Lower 48 spend should lead to a loss in estimated 2020 production of around 70,000 boe/d. BP also is deferring “certain exploration and appraisal activity and optimization of our major project spend,” the CEO said.
In the Downstream, BP expects to reduce capex by around $1 billion, including less spend on fuels marketing, refining and petrochemicals.
By the end of 2021, around $2.5 billion in cash cost savings is expected versus 2019 levels, with digitization and increased integration the key drivers in the next phase of cost efficiencies. Some of the cost savings also may have associated restructuring charges, Looney said.
At the end of March, BP had around $32 billion of cash and undrawn facilities available. First quarter results are scheduled to be reported on April 28.
“Notwithstanding the interventions outlined,” Looney said, “the challenging environment is expected to have an impact on our first quarter results, and there is uncertainty around how long current depressed commodity pricing and weakness in product demand will continue.”
There was “no significant operational impact” during the first three months from Covid-19, said the CEO. “This could change through the second quarter.”
Upstream production in 1Q2020 is expected to be sequentially lower to 2.55-2.60 million boe/d.
Downstream refining availability is expected to be 95-96%, with some reduction in utilization toward the end of the second quarter because of lower fuel demand.
“We expect Downstream first quarter results to be impacted by a significant and growing decline in demand for fuels, jet fuel and lubricants as countries implemented significant measures to address Covid-19,” Looney said. “This has been particularly evident in China and, toward quarter-end, has extended into our larger U.S. and European markets.”
BP also is reviewing “potential first quarter impairment charges,” and now expects to take a one-time charge of around $1 billion for 1Q2020.
The existing divestment program to deliver $15 billion of announced transactions by mid-2021 remains on track, said the CEO.
“The phasing of receipt of $10 billion of divestment proceeds by the end of 2020 may be revised as transactions complete, particularly while volatile market conditions persist,” including the sale of the Alaska portfolio to Hilcorp Energy Co., which still is expected to be completed this year.
Looney took time to praise BP’s workforce, as well as honor the people serving on the front lines in the thick of the pandemic that has disrupted the world.
“The world is in a fight against Covid-19, and I want to thank all the people looking after us,” Looney said. “The nurses and doctors, the first responders and the police…the people keeping food shops open and deliveries happening, and also the people we don’t see so much, like those behind the technologies that mean we can stay connected with our loved ones and with our work colleagues.
“Many, many are giving their time and risking their own well-being so that we can stay safe and sound. We rely on them, we are indebted to them, and I want to pay tribute to the sacrifices they are making on our behalf.”
Looney said he had been inspired by BP’s employees in how they have responded to the coronavirus.
“They are taking care of each other, supporting their communities and identifying new ways to safely drive down costs and strengthen our finances. I truly believe that our purpose is driving our actions during this crisis. That is why I am confident we will weather this storm and emerge better able to deliver our ambition — to make BP a net-zero company by 2050 or sooner and help the world achieve the same goal.
“I am just as confident that the world will emerge stronger as well. As hard as that may seem today, we will get through this and learn important lessons in the process,” Looney said. “We are seeing the best of people. We are coming together as a global community. We can come out of this crisis closer, more collaborative, and more caring, with all the benefits that it brings for society and the planet.”
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