Most of Bob Dudley’s seven years in charge of BP have been an exercise in crisis management. First came the deadly 2010 explosion on the Deepwater Horizon oil rig in the Gulf of Mexico — as devastating to the company’s finances as it was to its reputation.
Then, as clean-up and compensation costs soared, further pain was inflicted by the deepest downturn in oil prices for a generation.
It is only in the past year that BP has begun to look like a normal company again, helped by a partial recovery in crude prices and growing confidence that, after $62bn of fines and settlements, the bulk of Deepwater Horizon liabilities are past.
“This year has felt like a turning point,” says Mr Dudley, chief executive. “We’re never going to feel complacent. But it feels like we are now dealing with the same problems that everyone else has.”
Recovery has been aided by a surge in production from seven oil and gas projects brought on stream this year — one of the highest start-up rates in BP’s history. The latest, the Zohr gasfield off the coast of Egypt, 10 per cent owned by BP, began producing this week.
Acquisition of the Zohr stake as well as resources bought in Abu Dhabi, Senegal and Mauritania over the past year are part of Mr Dudley’s efforts to rebuild BP after more than $60bn of assets were sold to settle its Gulf of Mexico legal obligations.
Production, at about 3.6m barrels a day of oil and oil equivalent, remains below the 4m peak before the Deepwater Horizon disaster. But the rush of project start-ups from Oman to Trinidad has increased output by 14 per cent this year, with growth forecast, by BP, to continue at 5 per cent a year until 2021 as further developments are completed.
Yet, Mr Dudley, who was appointed to replace Tony Hayward as chief executive days after the ruptured Macondo well was capped in July 2010, is not declaring victory. The 62-year-old American joined the company as part of its $50bn merger with Amoco in 1998, a deal which, for a time, made BP the second-biggest non-state-owned oil producer by market capitalisation after ExxonMobil.
That era of rapid growth under John Browne and, later, Mr Hayward, was brought to a juddering halt by the Macondo blowout, and BP has since fallen behind Chevron, Royal Dutch Shell and Total in market value.
“I remember going into presentations before Macondo and hearing Tony Hayward comparing BP with Exxon,” says Iain Reid, analyst at Macquarie. “That seems like a long time ago.”
Today, the most telling comparison is with Shell, the other UK-listed oil major, which gambled on a $50bn acquisition of BG Group during the oil downturn in 2015 when BP was still wrangling with lawyers in Louisiana courtrooms.
“Shell has moved ahead and is moving further ahead,” says Mr Reid, estimating that Shell can generate annual free cash flow of $40bn in the medium term, compared with $26bn from BP, at oil prices of $60 a barrel. “BP has decisions to make about where it goes from here.”
Rebuilding BP would be hard enough in the best of circumstances but Mr Dudley is doing it as Big Oil’s business model faces disruption on several fronts. US shale oil and gas is increasing competition for traditional producers, while renewable energy and electric vehicles pose long-term threats to demand.
BP was the first of the oil majors to make a serious commitment to clean energy in the 2000s when, under Lord Browne, it adopted the slogan “Beyond Petroleum” and poured $8bn into low-carbon technologies. The strategy turned out to be premature and most of the investment has been written off, although BP still has a biofuels business in Brazil and wind assets in the US.
Mr Dudley, who was an assistant to Lord Browne during the first push into green technology, is now weighing how deeply to recommit as the renewables revolution takes off. A $200m deal last week to buy a 43 per cent stake in Lightsource, Europe’s largest solar power developer, was BP’s largest in the sector since the Browne era and follows similar investments by Shell and Total. BP will invest up to $400m a year in “alternative energy”, Mr Dudley says, but that remains a fraction of its $15bn-$17bn annual capital expenditure. “We’re placing bets, but not big bets,” he says.
Instead of large acquisitions, BP plans to take a venture capital approach to clean energy by funding start-ups and forging partnerships of the kind agreed with Lightsource, according to Lamar McKay, BP’s deputy chief executive and head of long-term strategy. These investments can be scaled up, he says, once it becomes clearer which technologies are going to succeed and how much money can be made from them. “Some things will work out, others won’t, but we see substantial businesses in these areas over time,” he adds.
Until then, BP’s main response to the changing energy landscape is a gradual shift from oil to gas. Of the 16 new BP projects due on stream between this year and 2021, 12 involve gas rather than oil — Zohr being the latest. This reflects both the long-term threat to petroleum demand from EVs and the opportunity for gas to play a bigger role in power generation as a lower-carbon alternative to coal.
Gas accounts for about half of BP’s production and Mr Dudley says its share is heading for 60 per cent. Yet, while acknowledging that oil demand is destined to slow and eventually decline because of EVs, he insists the switch will take decades because of the difficulty of replacing oil in trucks, ships, aircraft and chemicals. “There will be a need for oil well into the second half of the century,” he says. “There are going to be 2bn more people in the world by 2035 . . . Every kind of energy is going to be needed.”
With so much uncertainty over the pace of transition to cleaner fuels, BP is trying to make its oil and gas portfolio resilient enough for any market conditions. All the majors have cut costs sharply since oil prices crashed in 2014 but Mr Dudley says BP acted faster than most.
“Knowing that we were still walking a financial tightrope coming out of the Gulf [of Mexico disaster], we couldn’t wait to see if the price went back up,” he says. “The whole organisation reacted fast.”
Unit production costs have fallen 40 per cent since 2013, bringing the company’s break-even point — the oil price needed to cover dividends and capital investment — down to just under $50 a barrel, excluding residual Deepwater Horizon costs. That leaves plenty of headroom to make money at current prices of more than $60 a barrel.
Some of the cost improvement has come from shedding older assets as part of its disposal programme. “There had been a tendency for the majors to become too sprawling,” says Rohan Murphy, analyst at Allianz Global Investors. “You would never say Macondo was a good thing, but it forced them to slim down and focus and that was not such a bad thing.”
Bernard Looney, BP’s head of upstream exploration and production, wants to keep pushing costs lower even as the market recovers, breaking the boom-to-bust cycle which usually sees expenses rise and fall in parallel with crude prices. He believes that three-quarters of the $9bn in annual savings made since 2013 are structural rather than cyclical — reflecting more efficient ways of working. Design has been simplified and equipment standardised in new oil and gas developments, while a range of digital technologies, from machine learning to robotics, is making operations faster and more reliable.
“In the auto industry, every year they get a bit better on productivity and cost regardless of what’s happening in the market,” says Mr Looney. “We’ve not had that ethos in the oil and gas sector and that needs to change.”
Similar rhetoric can be heard across the industry but BP is backing it up with evidence. Most of its new projects this year have been completed on time and under budget. The 800,000 b/d that BP is planning to bring on stream between 2016 and 2020 is expected by the company to deliver an average cash margin 35 per cent higher than previous output. Mr Dudley says the aim is to further cut BP’s break-even point to below $40 a barrel within five years. All oil majors are making similar improvements but Lydia Rainforth, analyst at Barclays, says BP’s progress is faster than previously expected.
Similar efficiency gains are coming from the downstream business, spanning refining, chemicals and marketing, which propped up BP during the downturn with a $3bn increase in earnings between 2014 and 2016. Several underperforming refineries have been sold or closed and those that remain have become more productive. Meanwhile, fuel retailing — once an afterthought for shareholders — has emerged as an important source of growth in places such as Mexico and Indonesia and even in the mature UK market, where a partnership with Marks and Spencer food stores is increasing margins.
Tufan Erginbilgic, head of BP’s downstream business, is targeting a further $3bn of annual free cash flow by 2021. “There isn’t a single business in downstream which hasn’t improved,” he says.
An improved downstream performance and recovery in the upstream business combined to deliver $4.1bn of profits in the first nine months of this year, more than double the amount in the same period last year. Investor doubts about the durability of BP’s dividend — a mainstay for UK income investors with its 6 per cent yield — have been replaced by anticipation of improved returns.
Like most of its European peers, BP eased pressure on its balance sheet during the downturn by offering its dividend in shares rather than cash, causing dilution to existing stock. The launch of a share buyback scheme in October to offset this dilution was seen as a sign of a company on a more sustainable footing.
“BP is back in the pack with the other majors after a period when many investors saw it as too complicated because of the Macondo risks,” says Alasdair McKinnon, a fund manager at Scottish Investment Trust. “These companies are in a sweet spot at current crude prices. They have taken an axe to costs and are now maximising cash flows.”
Mr McKinnon is among those who avoided BP shares and, despite now having a more positive view of the company, he has yet to buy the stock because he is happy with his positions in other oil majors. Shares in BP have risen 46 per cent since the start of 2016, the second-biggest gain among the top five oil and gas groups, but it has been eclipsed by Shell, which has grown almost 60 per cent over the same period.
Mr Dudley must still convince investors that BP can keep pace with peers while shaking off the last of its Deepwater Horizon liabilities. A final $20bn settlement with US authorities last year removed uncertainty over the remaining bill but payments of at least $1.1bn a year will continue for 15 years. BP plans to cover these through further asset disposals but they represent an extra financial hurdle to be cleared. “We’re still on a narrower fairway than most companies,” says Mr Dudley.
As BP fights its way back to health, the veterans of the Deepwater Horizon era will gradually give way to new bosses. The announcement in October that Carl-Henric Svanberg would step down as chairman next year was part of that process — but it also signalled that Mr Dudley is likely to stay longer to avoid both top jobs being vacated at once. That gives him time — perhaps another two or three years — to prove BP has the assets it needs to maximise returns from the final stages of the oil age while charting a path towards a low-carbon future.
Dudley defends BP’s Russian connection
To some it represents a prized position in one of the world’s largest oil and gas producing nations, to others an opaque relationship fraught with political risks.
BP’s 19.75 per cent stake in Rosneft of Russia has become an important source of cash for the UK group, delivering a $515m dividend in the first nine months of this year. Measured by its share of Rosneft output, the Russian company represents 30 per cent of BP’s total production.
The holding stems from a 2012 deal under which Rosneft acquired BP’s stake in the TNK-BP Russian joint-venture. Some investors are uncomfortable with an outcome which tied BP to a Russian state-controlled company at a time of tension between Moscow and the west. Rosneft is run by Igor Sechin, a long-time associate of President Vladimir Putin.
“The Rosneft stake is the one thing I don’t like about BP,” says Rohan Murphy, analyst at Allianz Global Investors.
Critics often portray BP as a passive shareholder with little influence — a characterisation rejected by Bob Dudley, BP chief executive and a Rosneft board member.
He says the pair are working together “very smoothly” on joint exploration and development projects, giving BP access to some of the world’s most plentiful and competitive resources. These include the Taas-Yuryakh joint-venture developing one of the largest oil and gas projects in eastern Siberia.
US and EU sanctions against Russia stemming from its conflict with Ukraine have complicated the relationship, but not derailed it. Mr Dudley knows all about the pitfalls of doing business in Russia, having fled Moscow in 2008 after complaining of “sustained harassment” while running TNK-BP.
But he insists the country is worth the risks. “It is one of the lowest-cost resource nations of the world,” he says. “It’s a natural place for us to be.”
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