BP Norway Shaving Costs by Reworking Contracts

LONDON (Dow Jones Newswires), Jun. 3, 2009

As oil producers battle falling revenues, BP Norway's chief said the company is having success in lowering its supply costs in the country by renegotiating contracts.

At the same time, BP has an ambitious target of nearly doubling its Norwegian output to 80,000 barrels of oil equivalents a day by 2012, or 2% of the company's projected global daily output of around 4 million barrels.

Country managing director Trevor Garlick said BP has shaved 5.5% off its planned 2009 investment in Norway, cutting it to $850 million from $900 million.

"That's still a record annual level, but it's less than we intended a year ago. The decline is due to a combination of the work we've done with the supply chain on prices, decisions not to accelerate certain projects and to delay some smaller projects," Garlick told Dow Jones Newswires in a recent interview.

An equilibrium between oil prices and supply costs is needed, he said. "If we do not get costs down, activities will incrementally get slowed or stopped altogether." At the same time, "we have to be realistic about what we can do, and the pace at which costs can decline. We're working this year to get at least 10% off everything. We need to do that again next year. Some sectors are coming through. We're seeing material changes for rig pricing, but not in the labor-based ones," Garlick admitted.

BP Norway gathered together nearly 50 of its suppliers at the start of 2009 and explained to them the company's cost base. "We showed them the revenue side had dropped by over 70% at the same time our costs had gone up more than 150% since 2005. We had extreme inflation in our costs, and we asked our core contractors to have a look, with us, at any way to reduce the cost of supply," Garlick said.

Oil prices plunged from highs of just under $150 a barrel in mid 2008 to around $40/bl in 2009, though they've since regained some ground to just under $70/bl.

Producers have felt the pinch as their income has ebbed, prompting wide-ranging cost cutting, not least through restructuring. BP itself was well ahead of the curve in that respect, implementing a major restructuring almost two years before rival Royal Dutch Shell (RDSA).

BP isn't alone in calling for lower supply costs in Norway. StatoilHydro ASA (STL.OS), by far Norway's biggest independent oil and gas company, has been vocal about the need for supply prices to fall if producers - and subsequently oil-services companies - are to continue to flourish.

Drive For Efficiency

The work doesn't stop at simply lowering supply costs, Garlick said. Straight rate reductions have to be followed by further efficiency savings.

"Efficiency levels in the way we work with our contractors, integrate our plans, carry out surveys and actually execute are a lot lower than we could both aspire to. There's a cost prize for getting that sorted out," he said. "It is a real cost lever, but harder and slower to attain."

And if the concerted cost-cutting efforts don't succeed? "If we don't do it, it's quite stark. There will be activity reductions or cost reductions. If incremental investments don't look good at $50/bl, in Norway or elsewhere, it's foolish to continue investing in a business that doesn't make the required return," Garlick said.

"But we've lots of opportunity, that's the message. We remain committed to Norway, to growing and investing a record amount of money," he said.

BP intends to invest between $600 million and $700 million in Norway in 2010 and has ambitious plans at its Valhall, Skarv and Ula hubs.

The Valhall redevelopment project is expected to be completed in early 2011, and Skarv is due onstream at the end of 2011. At Valhall a new field center -- now 64% complete -- is being built to improve efficiency and address subsidence problems. The project will ensure the 60,000-barrel-a-day field can produce for another 40 years, while the new Skarv field -- currently 53% complete -- will produce 100,000 b/d at peak output.

Skarv is due to start flowing in August 2011, and will have an estimated 30-year lifetime. Production drilling is on target to start in January 2010, Garlick said.

Ula will be a key hub, processing volumes from DONG A/S's nearby Olselvar oil and gas field. It will get gas from Olselvar that will be used for a water alternating gas process designed to improve oil recovery by "tens of percent" and help ensure Ula produces for another 20 years, Garlick said.

As BP boosts output in Norway, which now accounts for around a sixth of the company's overall North Sea production, it will raise its Norwegian employees by roughly 10% by the end of 2010, primarily by adding 140 people at the Skarv offshore production unit. But as it slims down staffing in other areas, Skarv's onshore support will be absorbed by existing onshore units, Garlick said.

The new projects mean BP's Norwegian output in 2012 will rise to nearly a third of its total North Sea production, itself between 7% and 8% of the company's net global output.

In the meantime, Garlick said BP is "trying to get the business fit at $50/bl" oil prices. "We think that's a good strategy for BP Norway whether it stays at around that level or takes off. BP's well published view is that we think the price will stay low for a good while. The concern is that the (recent) rebound will not continue," Garlick said.  

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