The precipitous decline in oil prices since mid-2014 called for an immediate reaction by international oil companies to survive the impact on their operations and finances. We often read about a reduction in investments as the first reaction to the price collapse.
But this is not all as a company’s efforts can extend to all aspects of its operations, divestment and investment, staffing, technology and restructuring to suit the new price level, which are rightly described as “lower for longer”. An example is in order, where in a revealing presentation to shareholders, BP takes us through its “Strategy Update 2017” to stress the changes that were made to survive the oil price environment.
While BP remains “optimistic about the market continuing to rebalance in 2017 but the road to a more balanced position still has uncertainties” and therefore requires discipline on costs and a strong operating performance. The strategy emerges from BP’s outlook for a 30 per cent growth in global energy demand to 2035 and the dominant oil and gas positions in that outlook even though renewable energy is gaining ground.
Recognising the long road to recovery, BP cut its capital expenditure in 2016 by 35 per cent compared to 2013 and decided to limit its annual capital spend to $15 billion to $17 billion to 2021 with more than 10 per cent returns by then. It also reduced “controllable cash costs” by $7 billion compared with 2014, even though many major projects were brought on stream. An additional $2 billion was saved by a 36 per cent reduction in staff compared to the peak in 2013. In addition to efficiency gains, this helped reduce unit production costs by 36 per cent and BP says that the “trend will continue with a further reduction in 2017 resulting in a total unit production cost reduction of over 40 per cent”. The new projects to 2021 “carry a development cost which is around 20 per cent lower on average than the existing portfolio.”
All this was done by consideration to safe, reliable and efficient operations with a view to build a portfolio “that’s distinctive but also fit for the future” and to deliver competitive returns by investing in projects having “value over volume” to drive growth. BP reshaped its portfolio by “$75 billion of divestments since 2010” in response to the Deepwater Horizon accident but has become advantageous now.
Yet, BP still produced 3.3 million barrels a day (mbd) in 2016 and expects to add more than 1 mbd of oil equivalent production by 2021 from 2016, which is “over and above the natural decline we manage each year”. This includes additions from UAE’s ADCO and Zohr in Egypt. It still boasts 17.8 billion barrels of oil equivalent reserves and 14.7 years of reserve life.
The downstream side of the business is also receiving the attention it deserves as BP joins “equity sources of production to markets in ways that create additional value” by concentrating on the “advantaged manufacturing assets, growth in our marketing businesses, and simplification and efficiency actions”.
The downstream has delivered $3 billion in underlying performance improvement since 2014. In 2016, the refining business, fuel marketing and lubricants “generated more than half of downstream pre-tax earnings”. And BP expects to “deliver between $9 (billion) to $10 billion of pre-tax free cash flow in 2021, that is more than 50 per cent higher than 2016”.
BP considers the demand growth for its fuels, lubricants and petrochemicals to be strong and the break even cost of petrochemicals has been reduced by 27 per cent to support earnings growth.
As in the upstream, efficiency and simplification have delivered cost savings through streamlining operations and elimination of unnecessary activities.
The demand for cleaner energy has driven BP to consider alternative energy and it has been active in renewables for 12 years now. It is active significantly in Brazilian biofuels and US wind energy.
It also shifted more towards gas such that “by the middle of the next decade we expect around 60 per cent of our production to be gas, compared with around 50 per cent today” by development of new acreage and facilities in Oman, Egypt, the North Sea, Mauritania and Senegal.
There is a lot to be learnt from this document by national oil companies in our region, especially on how BP views the development of new technologies to produce more efficiently and on how high cost projects are leveraged against low cost ones.
BP concludes that “based on our current planning assumptions we would expect our cash balance point to reduce to around $35-$40 per barrel over the next five years.”
I wonder if oil producers can equally survive such possibility. I also wonder how BP mentioned all its activities around the world, but not a single word about its leading role in Iraq’s Rumaila field where production is around 1.5 mbd.
