[Premium] BP Q4 Profits Up Fivefold, Pegs Zohr Stake (Update)

(Updates with details of strategy progress)

BP reported underlying replacement cost profit of $2.1bn in Q4 2017, up 425% versus $400mn in 2016. The UK major though said it will not be increasing its stake further in the supergiant Zohr gas field off Egypt, and signalled that a final investment decision on a pioneering floating LNG project had slipped.

The profit increase was partly thanks to stronger oil prices and output growth, but also very high upstream and downstream plant reliability of 95%. The oil price has averaged almost $70/barrel this year as stocks deplete and geopolitical tensions remain high, but the company expects them to moderate in the medium term, to around $55/b.

CEO Bob Dudley said on an analysts’ call that the company’s momentum was giving a lot of confidence and things were looking good into the next decade. Assuming $55/b Brent, he expects return on average capital employed to exceed 10% by the end of the five-year plan that started last year, when its return on average capital employed (Roace) was 5.8% – about twice that of 2016. “There is a lot of uncertainty but we have a strong and flexible platform,” he said. “It is not a race to renewables but the race to lower greenhouse gases will need oil and gas.”

The company is aiming for average annual production growth of 5% from 2017 to 2021; maintaining output growth from 2021-2025 means bringing on another 4bn barrels of reserves, with a 15% rate of return expected for greenfield projects and 20% from brownfield. BP has however 6bn barrels of projects in its hopper to choose from and there are 130 operated wells with high margins that are expected to be drilled by 2025.

The year was marked by seven projects coming on stream, on average under budget and on time, adding what will be 500,000 barrels of oil equivalent/day (boe/d) at plateau; another 300,000 boe/d are planned to start up this year. The company now produces 3.6mn boe/d, of which Russia provides 1.1mn boe/d.

BP declines extra 5% Zohr equity

The focus is on gas and “advantaged oil” where the costs are low or the margins are high. That might be thought to include the Zohr gas field, but BP decided after much discussion that the 5% option that operator Eni was offering was not worth it, bearing in mind BP’s own set of projects and the need to contribute towards Eni’s past costs on Zohr. “I am sure Eni will find someone else to take it up,” said upstream boss Bernard Looney.

Zohr began producing gas in December 2017. BP completed its acquisition of a 10% stake in Zohr a year ago, while Rosneft bought a 30% stake later in 2017.  Each had an option to buy 5% more equity, which BP is now declining.

On the other hand, there are growth possibilities for gas in the US, both in Texan acreage south of Haynesville, where the access costs are “minuscule”, and in Alaska. BP has already tripled its acreage south of Haynesville over the past few years, and seen a rate of return of some 40%. Alaska is possibly home to an LNG export terminal which would be fed by North Slope gas, where BP has equity, although the economics have never worked so far to the majors’ satisfaction.

Tortue FID target slips

There is also Angola, where BP said the new president had made some “very positive signals, and we will look at that.” Elsewhere in Africa BP is working on pre-front-end engineering and design for Tortue floating liquefaction (FLNG) venture on which it hopes to take a final investment decision (FID) in the next 12 months or so, with LNG start-up by late 2021. The FID target date is later than the 2018 target outlined six months ago by BP’s partner Kosmos, but BP is sticking with 2021 for first gas. Tortue is based on gas reserves offshore Senegal and Mauritania first discovered by Kosmos; the FLNG venture will be operated by BP.

BP said it is going to extract more value from its gas by integrating solar plants with some of its projects in Africa and India it. It bought a minority stake in Lightsource in December, which can generate electricity much more cheaply than using gas, allowing more gas to be sold. BP said it was also getting more interested in offshore wind.

While the company seems set to make a lot of money from its expected $35-$40/b break-even cost by 2021 versus a projected oil price of $55/b and its own $46/b today, it has not said how it will spend the money. Its debt gearing is at the upper end of its 20%-30% range, so that could go down further; and dividends could rise, but the company said it would maintain its discipline, keeping below its capital expenditure ceiling of $17bn. Last year it spent $13.8bn and this year it will be about $16bn. However, Dudley said, “This is a good world for us to be in, but it is too early to say…. the board does think about it.”

BP believes that 96% is achievable and is looking next at the four elements of reservoir, export system, wells and reservoir to find ways of improving their operational efficiency. It doubled its supercomputing power last year and used it to avert a two-week shut in on a project and also to add another 200,000 barrels to its reserves at Atlantis in the Gulf of Mexico. And at Khazzan, it is using one central processing plant, rather than one at each wellhead, which cuts methane emissions.

Operating cash flow for the full year, excluding Gulf of Mexico oil spill payments (principally for Macondo in 2010), was $24.1bn, compared with $17.6bn in 2016. Gulf of Mexico oil spill payments in 2017 were $5.2bn, compared with $6.9bn in 2016. BP cannot say what the final bill will be but is down to the last 600 claims, down from

Downstream earnings were very strong with underlying replacement cost profit of $7bn, 24% higher than 2016. Operational reliability was high, with refining availability and upstream BP-operated plant reliability both 95%.

Seven major projects onstream

Seven new major projects came on stream (including the Khazzan project in Oman, pictured above) boosting oil and gas production. Upstream production, excluding BP’s share of Rosneft production, was 12% higher than 2016, the highest since 2010. Including Rosneft, production was 3.6mn barrels of oil equivalent/day, 10% higher than 2016. Oil and gas realisations were 25% higher. 

Exploration delivered the most successful year for BP since 2004, with around 1bn boe resources discovered. Non-operating items in the fourth quarter, which are excluded from underlying profit, included a $900mn charge for US tax changes and a $1.7bn post-tax charge relating to a further provision for claims associated with the oil spill

CEO Bob Dudley commented: "2017 was one of the strongest years in BP’s recent history. We delivered operationally and financially, with very strong earnings in the Downstream, Upstream production up 12%, and our finances rebalanced. And we did all this while maintaining safe and reliable operations. We enter the second year of our five-year plan with real momentum, increasingly confident that we can continue to deliver growth across our business, improving cash flows and returns for shareholders out to 2021 and beyond. At the same time, we are embracing the energy transition, seeking new opportunities in a changing, lower-carbon world."