BP plc’s primary focus for global natural gas markets today is centered on “flow assurance,” to move enough supply to European countries that remain dependent on Russia, top executives said Tuesday.
CEO Bernard Looney was joined by CFO Murray Auchincloss to discuss first quarter performance. The London-based major for several years has been the No. 1 natural gas marketer in North America. It also is a top oil and gas trader around the world.
The focus today is “making sure that molecules get from the producing locations to the consumers,” Auchincloss said. “We think that’s exceptionally important right now, given where the world is. So they’re very focused on flow assurance and making sure that energy flows generally, and our trading organization is set up to make profits when volatility occurs…
“The first quarter was probably the highest quarter of volatility we’ve seen,” he said. “So it’s more about volatility. It doesn’t matter if prices are high or low, it’s about volatility.”
Asked if BP was set up through the year to manage its gas flows, Auchincloss said “we have a lot of options to bring gas forward to help Europe.” BP during the first quarter boosted its global gas production from a year ago to 4.9 Bcf/d from 4.6 Bcf/d.
Opening Natural Gas Spigot
BP has long worked to open more avenues for gas transport into Europe, Looney noted.
In 2018, the BP-operated Shah Deniz 2 gas development in Azerbaijan was launched. Shah Deniz 1, which began producing in 2006, supplies Azerbaijan, Georgia and Turkey. Gas is transported onshore from the Caspian via a 53-mile pipeline to the Sangachal terminal near Baku.
The projects also were the starting point for the Southern Gas Corridor, a series of pipelines that deliver gas directly to European markets.
BP also is operator of a floating liquefied natural gas (FLNG) project offshore Mauritania and Senegal. The first phase is underway with partners Kosmos Energy Ltd. and Mauritania’s state-owned Société Mauritanienne Des Hydrocarbures et de Patrimoine Minier.
Gas reserves were confirmed in late 2019 at the Orca-1 exploration well in the BirAllah offshore area.
The discoveries tie into plans for BP’s Greater Tortue Ahmeyin FLNG development, which would establish the Tortue gas field as a world-class resource.
The first phase of the Tortue project “is ongoing,” Auchincloss told investors. “We’re looking at the second phase that would help in places like Shah Deniz. We’re looking at expanding the compression on the pipeline and bringing additional gas resource to Europe across the portfolio in the UK.”
How Much Did Russian Exit Cost?
BP, which has worked in Russia for more than 30 years, was the first major oil and gas producer to announce it would end new investments in the country following the invasion of Ukraine. It is offloading its 19.75% stake in Russia’s Rosneft. In addition, Looney, and former CEO Bob Dudley resigned from Rosneft’s board.
Since many countries are shunning Russian energy supplies, Looney estimated that “there’s probably about 1 million b/d…off the market today of Russian crude. That number, we think, will probably increase this month when the existing sanctions come into effect for real.
“And that number could double…Obviously, if there are further sanctions, we shall see as we step back…I think stocks are relatively low on gas and oil at the moment.” They are “filling a bit in Europe, but on gas, it’s relatively low overall on spare capacity and oil.”
The uncertainty in the energy markets also continues, the CEO said. He pointed to the “zero Covid policy” in China, which has led to demand destruction as people are forced to stay home. “What’s happening with inflation and the “knock-on impacts on global economic growth” is a big question too. “What’s going to happen in Libya? What’s going to happen with U.S. shale? There are a lot of uncertainties, I think. Where does that leave us? I think probably in a world where volatility will continue to be the order of the day.”
The management team expects a “continued volatile outlook for energy prices,” Looney said. “We probably expect prices to remain strong in the near to medium term. In terms of updating our assumptions, we do that on an annual basis…in the middle of the year” review “how the current environment has shifted our medium/longer term outlook…”
BP expects “an ongoing elevated risk of oil price volatility.” The short-term outlook for gas prices is “to remain heavily dependent on Russian pipeline flows to Europe.”
The attack on Ukraine has led to “terrible consequences…for people in the country and in the region,” the CEO said. BP is supporting the humanitarian response through financial contributions to the relief efforts and paid leave for staff members who volunteer to support the relief effort.
“And as we know, the war is also having an impact globally on energy markets and the cost of living, creating a terrible situation for many people around the world…
“We are looking at what we can do to provide support, while also remaining fully focused on the day job, which at its core is about keeping the energy flowing where it is needed to. So to that end, we are in close contact with governments in Europe, working hard to provide the energy that customers and economies need…”
Details on progress to sell the Rosneft stake were not disclosed. However, Looney told analysts “we plan to exit all our other businesses in Russia. The board undertook a thorough process, concluding that Russia’s military action represented a fundamental change, and that BP’s involvement with Rosneft, a state-owned enterprise, simply could not continue.
“This decision impacts our people,” he said. “Before the conflict, we had around 200 employees in Russia, the majority Russian nationals. We are doing all we can to look after them, including continuing to pay their wages until at least the end of 2022 and are looking at options for redeployment.”
Looney took exception with a question from an analyst about BP being “forced” to withdraw from Russia.
“No. 1, you said we were out because of reasons ‘outside our control’ and I guess I would just say that we chose to exit Russia. We chose to exit within 96 hours of the invasion starting. So it was a choice, obviously, driven by the attack on Ukraine. But, at the end of the day, it was a choice that we made. And we made that choice because we believe…it was both the right thing to do and it was the right thing to do for our shareholders.”
BP can “perform absent Russia,” Looney said. “So you see a company and what it’s capable of…Our strategy is to become an integrated energy company and that is about investing in hydrocarbons today, while investing in the energy system of the future…I don’t see a gap in our portfolio at all. And I think I will just leave it there.”
In tandem with the events in Russia, “current events emphasize that the world faces an energy trilemma,” Looney said. “We need energy that is not only cleaner, but also reliable and affordable. And in our view, these are not mutually exclusive.”
The role of an integrated energy company, said Looney, “is to solve that trilemma. Now, how do we do that? We do that by investing in hydrocarbons today” while investing in alternative energies with low carbon footprints. Through 2025, BP is investing around 3%/year of capital into zero-carbon projects. Beyond 2025, around 40% of capital would be directed to the energy transition projects, and “that number will be 50% by 2030.”
BP has “made a strong start to 2022 in each of our strategic focus areas,” Looney said. He noted that late last year, the Thunder Horse expansion ramped up in the deepwater Gulf of Mexico. In addition, BP has agreed to combine its Angolan assets with Eni SpA to improve efficiencies. It also partnered in an oil discovery in Brazil, “where evaluation is ongoing,” he told analysts.
On the LNG front, BP last month also signed an 18-year agreement with Korea Gas Corp., which could supply around 1.6 million metric tons/year beginning in 2025.
To build its net-zero emissions portfolio, BP has increased its holdings in offshore wind, including a partnership with Japan’s Marubeni Corp. European hydrogen projects are on the table too, with a 250 MW green hydrogen project in Rotterdam and a joint venture with Scotland’s Aberdeen city council to develop a hydrogen hub.
Exiting new ventures in Russia led to huge financial consequences, estimated at more than $24 billion after tax. The losses included a $13.5 billion writedown of the Rosneft stake. BP also is no longer equity accounting for the Rosneft stake. The expected loss on future earnings from Rosneft has reduced BP’s expected earnings targets to 2025 “by around $2 billion,” Auchincloss said. The 2030 profit goals also were reduced by the same amount.
Because of the Russian exit, BP reported an overall loss in 1Q2022 of nearly $20.4 billion, versus year-ago profits of $4.67 billion.
However, underlying replacement cost profit, which is similar to U.S. net earnings, jumped year/year to $6.2 billion ($1.92/share) from $2.6 billion (78 cents) on the back of “exceptional oil and gas trading” conditions, management said.
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