Rising costs, property sales and lower volumes from production-sharing contracts contributed to a disappointing quarter for BP plc on Tuesday. Going forward, the London-based major said 2007 oil and natural gas output will range between 3.8-3.9 MMboe/d, nearly flat compared with its 2006 annual production of 3.93 MMboe.

BP’s oil and gas output averaged 3.84 MMboe/d in 4Q2006, down 5% from a year ago. BP blamed problems in its holdings in Russia, which last year accounted for about 25% of its production. The company also cited interruptions in Alaska following problems with the Prudhoe Bay crude pipeline, and delays in starting up two deepwater Gulf of Mexico (GOM) platforms.

“Although the last 12 months have been a difficult period for BP, there were many things that went right, and many things which we are continuing to do, which underpin our confidence in the future,” said incoming CEO Tony Hayward, who will take over when John Browne retires this summer.

Among BP’s successes last year were 10 new discoveries from 17 wells, which included Kaskida in the deepwater GOM, said Hayward. BP also won more than 100 blocks in two GOM lease sales last year. However, BP expects to be producing 4 MMboe/d by 2009, which is 2% lower than the 4% annual growth rate it predicted last year.

Divestments in 2006 are expected to reduce 2007 production by around 130,000 boe/d. Also, two of BP’s GOM projects will cause production delays to 2009. Thunder Horse is now due to ramp up by the end of 2008, three years later than initially planned (see Daily GPI, Sept. 19, 2006). Thunder Horse will have production capacity of 200 MMcf/d of gas and 250,000 b/d of oil.

Atlantis, another GOM platform, has been delayed to the end of 2007. Last year, BP announced Atlantis would begin operations around mid-2007. BP pushed back the start-up after it found problems in the subsea manifolds of its deepwater development Thunder Horse, a similarly designed platform. In January, 44% stakeholder BHP Billiton Ltd. estimated ultimate costs for Atlantis would be at least 50% higher; the platform had originally be expected to cost $3.5 billion (see Daily GPI, Jan. 29). Atlantis is expected to produce 180 MMcf/d of gas and 200,000 b/d.

“Whilst we expect both platforms to be up and running by the end of 2007 and 2008 respectively, their delay will impact 2007 production by around 150,000 boe/d, and 2008 production by about 100,000 boe/d,” Hayward said.

Hayward warned that rising costs will continue to be a problem through this year. He noted industry costs rose 14% in 2006.

“We are taking into account the fact that the industry’s supply chain is running at full capacity,” said Hayward. “The impact of that is being felt throughout our operations…The price of everything, from qualified staff to key items of equipment, has been rising rapidly. We are mitigating these cost pressures through new technology and demand management.”

Hayward said in 2006, the market rate for offshore rigs rose on average around 44%. Because almost half of BP’s fleet is on long-term contracts, it was able to mitigate the rise to average around 34%. “In the Gulf of Mexico, long-term contracts with options to renew have meant that we have the use of seismic vessels for most of 2007 at 2005 prices.”

Capital expenditures are expected to reach $18 billion this year, up from $16 billion in 2006. About $1 billion of the increase will be spent on increased safety and asset integrity; another $1 billion will be used to cope with industry cost inflation. BP said it would use 100% of its free cash flow to buy back shares.

Net income for 4Q2006 slipped to $2.88 billion (14.9 cents/share), from $3.69 billion (17.7 cents) in 4Q2005. Total revenue fell to $62.5 billion from $63.6 billion. BP reported a reserves-replacement ratio of 113% at year-end 2006, up from 95% at year-end 2005.

In a note to clients, Friedman, Billings, Ramsey & Co. Inc. energy analysts reduced their target price on BP after the company’s reported $365 million operating earnings came in “well below our forecast.” The analysts noted that BP management “stated that while it had previously assumed that its base production would decline at an average annual rate of 3%, it had actually been falling at a rate of 4-5% per year…”

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