BP Talks Strategy for 2010 and Beyond

Led by CEO Tony Hayward, senior management at U.K.-based oil supermajor BP yesterday took some time out to discuss with analysts and investors the group's upstream and downstream operational and financial strategy for the coming year and beyond. In essence, BP intends to focus on extracting further efficiencies from its existing portfolio slate, with cost reductions across the board forming the backbone of the company's efforts to align itself with its very modest expectations for global economic growth going forwards. By 2012–13, BP hopes that these efforts will have served to boost underlying pre-tax profitability by over US$3 billion. From a production standpoint, and assuming oil prices remain at a minimum of US$60/b, BP anticipates growing crude oil and natural gas output by an average of 1–2% annually out to 2015, with additional upside potential out to 2020. Hayward noted that although the company had made significant progress in the last few years, in terms of capturing cost reductions and other efficiencies, BP still had work to do to fully realise the potential of its asset and resource base. "The challenge and the opportunity for us is that while our portfolio ranks amongst the best in the industry, our financial performance has yet fully to reflect this. There is now a real opportunity to make this portfolio work harder for us and we intend to do just that," he said.

Upstream, BP intends to focus its efforts on three key areas in which it characterises itself as having a "deep expertise", namely deepwater production, unconventional gas, and giant fields. Across these three areas, the company is bullish on using its advanced technological knowhow to its competitive advantage. BP characterised itself as the world's leading deepwater player, with over 650,000 boe/d of net production last year, out of its total output of 4 million boe/d. Key deepwater regions include the U.S. Gulf of Mexico (GOM), where the company continues to make and bring online sizeable finds. In the GOM alone, BP anticipates reaching a final investment decision (FID) on six developments this year, including Tubular Bells, Mars B, and Atlantis Phase 2. In 2010, BP intends to bring onstream the Great White development, with the operated Galapagos and Na Kika Phase 3 projects starting up in 2011. In terms of gas, the company has pointed towards its significant unconventional acreage onshore the United States, where it has exposure to a number of important plays including the Fayetteville, Woodford, and Haynesville Shales, as well as the Eagle Ford Shale. Sensing massive untapped potential in unconventional gas, BP believes it can use its expertise and deep reservoir knowledge to its advantage even here. The company is continuing to boost exposure to this resource at the asset level, rather than buying companies outright. As for giant fields, BP sees itself as possessing a very strong track record in developing these resources, pointing towards its experience with Alaska's Prudhoe Bay—the largest oilfield in the United States—as well as ACG, Samotlor in Russia via its TNK-BP venture, and Thunder Horse in the deepwater GOM.

The company is currently in the process of establishing a Centralised Developments Organisation that will serve to manage all major projects in its portfolio—a restructuring that BP feels should allow it to bring these projects online in a timely and consistent way. This in turn is expected to improve overall capital efficiency, which should then feed through positively to the company's bottom line. Over the next five years, BP intends to start up 42 new major projects that will, in all, boost production by 1 million boe/d by 2015—a figure that the company assures "more than" offsets anticipated production declines elsewhere.

Downstream, BP paid tribute to its very strong portfolio of refineries, from their size to their complexity, but noted that additional work had to be done to take advantage of new opportunities and boost margins. The company is, for example, currently working on upgrading its Whiting refinery in Indiana to enable it to process heavier grades of crude oil expected from Canada, providing additional flexibility in the refined product mix. As in upstream, management will continue to focus on reducing costs in the downstream business segment, hoping to improve underlying profitability here by over US$2 billion by 2013 at the latest. Hayward wants to see this segment performing profitably, even against a backdrop of depressed economic growth. Last, but perhaps not least, Hayward noted that BP would continue to invest in renewables, from biofuels, to wind and solar, as well as carbon capture and sequestration (CCS). In this regard, pragmatism appears to have prevailed over past pretensions to a future "Beyond Petroleum".

Outlook and Implications

There is little doubt that BP's project pipeline for the next five years is nothing short of impressive, and if the company manages to pull off its planned US$3-billion in savings by 2013, it will be well placed to boost its bottom-line growth. Competitively, the company is already on the warpath, with aggregate oil and gas production surpassing even that of mighty ExxonMobil, despite a much lower market valuation. While this market capitalisation gap should close, that pace will depend on whether BP can reduce its costs and boost operational efficiencies as outlined.

In terms of crude oil price expectations, although Hayward noted that US$60/b would be the minimum level the company needed to bring this portfolio online, he placed overall medium-term price expectations within the US$60–90/b band. He did, however, concede that thanks to the experience of the last few years, it was not beyond the realms of possibility that prices might again breach the US$100/b level, though he warned that demand appeared to be highly elastic beyond this point, especially in the United States.