BP "Getting Back to Growth"

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By MarEx 2017-02-28 19:25:42

BP has released details of its medium-term plans for the next five years with group chief executive Bob Dudley forecasting long-term growth.

Over the past six years BP has delivered around $75 billion of divestments to improve safety, reliability and underlying performance, he says.

“In six years, we have fundamentally reshaped and built a very different BP,” says Dudley. “We can see growth ahead right across the group. While always maintaining our discipline on costs and capital, BP is now getting back to growth – today, over the medium term and over the very long term.”

Over the next five years BP expects both of its major operating segments, upstream and downstream, to deliver material growth in operating cash flows.

Upstream Projects

Upstream growth is expected to come from a continuing series of major higher-margin project start-ups which are expected to deliver a material improvement in BP’s operating cash flow through the second half of 2017. 

Over the past five years BP’s Upstream segment has begun production from 24 major projects, including six in 2016.  Seven projects are expected online during 2017 - making it one of the largest years for commissioning new projects in BP’s history. These projects are on average ahead of schedule and below budget. A further nine projects that are expected to start up through 2018-2021 are already under construction.

The projects coming on line in 2016 and 2017 are on track to deliver 500,000 barrels of oil equivalent a day (boe/d) new production capacity by the end of this year. 

The new Upstream projects remain on track to deliver 800,000 boe/d of new production by 2020. On average, the new projects are also expected to have operating cash margins 35 percent higher than the average of BP’s Upstream portfolio in 2015.

In addition to the projects under construction, BP has a portfolio of potential final investment decisions including the first phase of the discovered gas in Mauritania and Senegal, a potential extension of the Atlantis field, India gas projects and the third train of the Khazzan project in Oman.

Rosneft Investment

Dudley emphasized the importance of Russia to the group’s plans. Russia remains one of the largest and lowest-cost hydrocarbon resource bases in the world and their resources play an important role in long-term global energy supply.

As we stand today, in the Upstream we still have a deep resource base. Excluding Russia, we produced 2.2 million barrels per day in 2016. In all, including our 19.75 percent equity interest in Rosneft, we are a 3.3 million barrel per day company, with 17.8 billion barrels of oil equivalent reserves. This translates to 14.7 years of reserve life which is very competitive with our peer group”, he said.

 “Through our 19.75 percent shareholding and our two board seats, we are supporting and influencing the strategic direction of the company, and benefitting from a diversified portfolio of existing and potential projects within Rosneft. The company continues to produce strong growth and resilient performance both operationally and financially. Rosneft has also accessed international opportunities expanding its participation in countries such as India, Egypt, and Germany.

“We have also built on this strategic relationship in signing separate standalone joint venture agreements, including in the Taas JV in the Russian Far East, the Yermak exploration JV in Western Siberia and the Volga-Urals exploration agreement. As well, we are working closely to continuously improve the performance across our respective assets and companies.

“So, building on 27 years of successful experience in Russia, our partnership with Rosneft adds still more balance and long-term optionality to our portfolio. It is an important part of our portfolio today and we expect it to remain so for the long-term,” said Dudley.

A Shift to Gas

The group is making a shift towards gas through new acreage in Oman underpinning a third gas train; accessing 10 percent of Zohr in Egypt; deepening in Tangguh, and Culzean in the North Sea; and through a deal with Kosmos in Mauritania and Senegal, which gives BP a leadership position in a huge low cost gas resource.

BP also plans more advantaged oil through, for example a heads of agreement to extend ACG license in Azerbaijan and the extension of the ADCO concession in Abu Dhabi.

The group has also accessed new exploration acreage in Canada, Mexico and China

Production Estimates

More than 200,000 boe/d of production is expected by the end of the decade from the recent additions to BP’s portfolio.

This strong pipeline means that BP is now confident that Upstream production will grow from 2016 by an average of five percent a year out to 2021. BP Group production, including BP’s share of production from Rosneft, is expected to be around 4 million boe/d by 2021.

With capital investment kept steady and increasingly efficient operations and modernization driving costs lower, BP now estimates that this growth will enable the Upstream segment to generate $13-14 billion of pre-tax free cash flow by 2021, at oil prices around $55 a barrel.

Financials

BP intends to maintain its existing financial frame throughout the five years to 2021, with organic capital expenditure kept within a range of $15-17 billion a year and the target band for gearing remaining at 20-30 percent.

Brian Gilvary, BP chief financial officer, said: “Last year we delivered our targeted $7 billion reduction in cash costs a year early, and capital spending was $8.6 billion lower than its peak in 2013 – without damaging our growth pipeline. We will continue that tight focus on costs and capital discipline and seek further improvements throughout the group.

“We expect this combination of continued cost discipline with the growing cash flow from our core businesses - and the recent portfolio additions - will steadily drive down the cash balance point of the business. Over the next five years we expect this to fall to around $35-40 a barrel for the group overall.”

New Business Models

Beyond the next five years, BP’s strategy also aims to ensure that the company continues to meet the energy demands of a changing world.

BP’s Alternative Energy business – comprising U.S. wind and Brazilian biofuels – is already the largest operated renewables business among oil and gas peer companies, and BP is further optimizing and improving efficiency to deliver incremental growth. In Wind BP is upgrading some of its existing turbines and, in biofuels, has debottlenecked manufacturing sites to increase production.

BP is also exploring new business models and technologies which may potentially develop into options for material businesses in the future, with investment into venturing in areas such as low-carbon, digital and mobility to incubate and grow options for the future.