With production exceeding its forecasts and wind in its sails, BP plc will hold a steady course through 2010 before launching a slew of new projects in 2011, CEO Tony Hayward said Tuesday.

The London-based producer reported that its natural gas and oil production exceeded 4 million boe/d, which was 3% higher year/year — and ahead of earlier forecasts that put output growing 1-2% a year. BP benefited from the absence of a significant hurricane season in the Gulf of Mexico (GOM) in 2009, which lifted production above expectations. But output is not expected to be ahead of guidance this year, Hayward told financial analysts during a conference call.

Last year seven major projects were started up worldwide, and most of the projects now on the table aren’t set to launch before 2011, the CEO explained.

Following “a very strong year in 2009, we expect reported production in 2010 to be slightly lower,” in line with the company’s guidance, he said. “Growth is expected to resume in 2011, and the longer-term guidance is unchanged. Costs are expected to come down and capital efficiency to go up.”

“Our strategy hasn’t changed,” Hayward said. But this may be a good year to take a pause. BP’s management team is forecasting that “in the major economies of the U.S. and Europe, we expect recovery from the recession to be slow and gradual,” Hayward said. “The oil markets look well supported by OPEC, but we expect gas markets to remain volatile. Demand for petrochemicals products is recovering only slowly, and there is significant refining overcapacity, particularly in the Atlantic Basin. As a consequence, refining margins are likely to remain depressed for the foreseeable future.”

2010 “is not a year of big start-ups in the upstream,” exploration chief Andy Inglis told investors. However, eight major projects are set to launch in 2011, including three in the deepwater GOM. Another 12 projects are in development stages, with five of those long-term prospects in the GOM.

There will be a “pause in major projects in 2010,” which Inglis said had been planned. “But the future looks very strong,” especially with the list of prospects that are “being progressed at the moment.”

“Our industry-leading track record of exploration success continued including the Tiber discovery, a giant field in the Gulf of Mexico, which along with further appraisal success on Mad Dog South helps to underpin the potential for continued growth in the deepwater Gulf of Mexico,” said Hayward. The Tiber well, in the Lower Tertiary Trend, could be larger than BP’s 2006 Kaskida discovery, which contains an estimated 3 billion boe in place (see Daily GPI, Sept. 3, 2009; April 23, 2008).

But BP is not concentrating solely on its gas and oil prospects. In its Alternative Energy business BP now is focused on four key areas: biofuels; wind power in the United States; lower-cost solar manufacturing, and two major carbon capture and sequestration projects, including one in California (see Daily GPI, Nov. 19, 2009; Sept. 25, 2009; July 2, 2009).

Another area where BP has been able to top expectations is in its efficiency gains. BP has been cutting expenses and manpower at every level, and it has paid off, Hayward explained.

“Our forward agenda has been focused around corporate efficiency,” he told analysts. The company has “exceeded our original objective, having reduced the total BP nonretail headcount, since December 2007 by around 7,500, and permanent contractors by more than 1,500. In addition, we have reduced senior executive roles from 650 to fewer than 500.

“In parallel, across the business we have continued our focus on deepening expertise. Over the last two years, almost 22,000 people have left BP and over 14,000 have joined, accelerating the process of change within the company. We will continue to drive greater efficiencies into the business to ensure that we really do make every dollar count.”

BP faced a “mixed market environment” in the final three months of 2009, CFO Byron Grote said. “Our liquid realizations increased by 8% compared with the third quarter, rising to $68/bbl, over 30% higher than 4Q2008. Our 4Q2009 gas realizations increased to $3.68/Mcf, over 30% higher than the previous quarter but almost 30% lower than a year ago. Taking both oil and gas together, our total average hydrocarbon realization was up 12% compared with 4Q2008.”

BP’s underlying replacement cost profit was $4.4 billion in the last quarter, up 70% from 4Q2008. The higher result benefited from production growth, operational performance and reductions in cash costs, said the CFO. Operating cash flow in 4Q2009 was $7.3 billion, up nearly 30% year/year. In the exploration and production unit, BP reported a pre-tax underlying replacement cost profit of $7.1 billion for 4Q2009, up $2.8 billion compared with a year earlier, which reflected “both higher oil prices and a stronger operational performance.”

“Building on the significant reductions we achieved in 2009, cash costs are expected to fall further as the benefits of our actions continue to feed into the bottom line,” said Grote. “In the current environment, we expect to face adverse year-on-year foreign exchange and energy cost effects, which would be an offset to our underlying progress in 2010.”

There are no plans to add significantly to BP’s portfolio this year, Hayward said. Most of BP’s output gains will come from organic growth, and capital spending is set at around $20 billion. The company also plans to sell another $2-3 billion of its assets, which is similar to the amount recouped from divestitures in 2009.

“2009 has been one of the best years for BP and its shareholders since the merger with Amoco,” Hayward said. “But we are not resting on our laurels. In an environment that remains challenging and volatile, particularly in the downstream, there’s a lot more to do.”

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