A new decade dawns for BP

By Bob Dudley

In it’s most recent earnings announcement, BP confirmed that its immediate priority is to complete the process of embedding world-class safety and operational risk management at the heart of the group's approach to all its activities and throughout all its operations. It will also reconfirm its commitment to meet its obligations arising from the Gulf of Mexico oil spill and in relation to the Texas City refinery, ensuring that the lessons it has learnt from the oil spill are applied across BP and shared effectively with industry and governments worldwide.

“2011 will be a year of recovery and consolidation as we implement the changes we have identified.”
-Bob Dudley

"2010 will rightly be remembered for the tragic accident and oil spill in the Gulf of Mexico and it is clear that as a result BP is a company in transition. I am determined that we will emerge from this episode as a company that is safer, stronger, more sustainable, more trusted and also more valuable," said BP group chief executive Bob Dudley.

As such, BP's top priority will remain safety and operational risk management. This will be driven through the new Safety and Operational Risk organisation and the continued implementation of the common Operating Management System (OMS) across the group. BP has introduced a new performance management process for 2011, explicitly requiring all employees to focus on safety, compliance and risk management priorities. The company is also carrying out an extensive review of how it manages third-party contractors.

"2011 will be a year of recovery and consolidation as we implement the changes we have identified to reduce operational risk and meet our commitments arising from the spill," said Dudley. "But it will also be a year in which we have the opportunity to reset the company, adjust the shape of our business, and focus on growing value for shareholders."

In its upstream business, for instance, BP's framework for growth will be focused on delivering value rather than volume. This will be achieved by actively managing its portfolio, investing in new access and in increased exploration, and building an enduring presence in key oil and gas basins by making the right investment choices. This will be supported by deep sustainable relationships with partners, including national oil companies, said Dudley.

BP intends to significantly increase its investment in exploration and will seek new partnership opportunities where its capabilities and experience can add distinctive value. And it will continue to refocus its portfolio for growth and divest assets worth more to others than itself, thereby unlocking value for shareholders.

The group's upstream portfolio today includes an unmatched position in Russia, an industry-leading resource position in the North Sea, Angola and the US (including the Gulf of Mexico deepwater) and strong positions in North Africa, the Caspian, the Far East and Trinidad. BP will also continue to gain access to new opportunities. Over the next six years, BP plans to start a total of 32 projects, which are expected to contribute around one million barrels a day of new production by the end of 2016, generating significant cashflow and value.

In the downstream sector, BP plans to reshape its business to better reflect the changing patterns of worldwide energy demand, concentrating on growth opportunities in developing and emerging markets while rationalising and focusing its business in mature areas. As such, the company announced its intention to divest two of its US refineries - Texas City and Carson, along with its associated marketing interests - while continuing to improve its other more competitive refineries in the US. It intends to divest the assets as going concerns and, subject to regulatory and other approvals, expects to complete their sale by the end of 2012. BP has also reiterated its commitment to implement the recommendations of the BP US Refineries Independent Safety Review Panel, which followed the 2005 Texas City refinery explosion.

BP intends to focus its downstream business worldwide around integrated positions and higher performing assets and businesses that can deliver growth and attractive returns. The sale of the two US refineries will make BP the smallest refiner among its international competitors, with a portfolio focussed on fewer but larger and higher quality refineries and related marketing networks. Outside the US, BP will continue to upgrade its fuels value chain businesses and explore potential new investment opportunities in high growth markets such as Asia. It also plans to continue to grow its high-performing lubricants and petrochemicals businesses.

BP remains on track to meet its target of up to US$30 billion of divestments by the end of 2011, having concluded agreements for divestments totalling around US$22 billion by the end of 2010. The divestments agreed so far are expected to deliver disposal proceeds more than double their current book value, once completed. The divestment programme has not included any of BP's inventory of future major upstream projects, resulting in a more focused portfolio with the potential for higher growth from a smaller base.

BP's oil and gas production in 2011 is expected to be around 3.4 million barrels of oil and gas equivalent (boe) a day. In the fourth quarter of 2010, BP's production averaged 3.67 million boe a day, nine percent lower than 2009, reflecting higher turnaround activity, particularly in the North Sea and Angola, and the continued impact of the Gulf of Mexico drilling moratorium.

Meanwhile, BP's reserves replacement ratio, excluding acquisitions and divestments, for 2010 was 106 percent - the 18th consecutive year that BP has reported a ratio of over 100 percent - and its resource replacement ratio was 470 percent. These additions extended BP's inventory life from 43 to 48 years.

The ground-breaking alliance between Rosneft and BP, announced in January 2011, is a key step forward in BP's strategy to seek material positions in the world's leading hydrocarbon basins, based on relationships of mutual advantage. The alliance offers BP a world-class opportunity to work in the Russian Arctic, and the two companies have agreed to seek additional opportunities for international collaboration. TNK-BP continues to perform strongly, growing onshore production as output from greenfield projects ramps up, and developing business internationally. The venture will continue to seek long-term growth such as preparing for developments in the Yamal peninsula.

Organic capital expenditure for 2011 is expected to be around US$20 billion, an increase from US$18.2 billion in 2009. BP intends to retain financial flexibility by maintaining a significant liquidity buffer and reducing debt levels to a gearing ratio of between 10 and 20 percent. Total cash held at the end of 2010 was over US$18 billion.

"After ensuring we meet all our commitments, we are refocusing BP so that we can increase our investment in its future; investing in reducing risk, in exploration, in new projects, in emerging economies, and in new strategic partnerships," said Dudley. "In this way I believe we will create a BP that is both safer and stronger, one that rebuilds value and trust for the long term by doing the right things and doing them well."