BP Output Rises, CEO Sees Costs Falling $1B More Than Expected

Compared to the same period last year, BP's reported daily production jumped 4 percent to more than 4 million barrels of oil equivalent in the three months to end-June. Also, the $2 billion reduction in cash costs targeted for 2009 as a whole has already been exceeded and a further $1 billion saving is expected over the remainder of the year, the company said today.

Announcing second quarter replacement cost profits of $3,140 million -- up over 30 percent on the first quarter -- chief executive Tony Hayward said BP was delivering good performance in a very tough environment.

"We are in turbulent times, volatile and uncertain. But we continue to steer a steady course through choppy waters. Two years ago we set out to restore our ability to compete more effectively with our rivals in the sector.

"The momentum we established in that process remains very powerful. Despite the current climate, we are making good progress in growing our upstream, turning around our downstream and driving cost-efficiency across the group."

Hayward said progress was underpinned by a simplified organisation, deepening expertise at the operational level and unrelenting focus on operational safety and integrity. Cash costs had been reduced by more than $2 billion in the first half of the year, versus the same period last year.

"We have already surpassed the target we set ourselves at the beginning of this year for cash costs but we are by no means complacent. We will continue to push efficiencies into the group and make sure every dollar counts. Based on this strong progress, we can expect cash costs for the full year to be down by more than $3 billion compared with 2008."

Highlights for the quarter were:

  • Replacement cost profit of $3,140 million, up 32 percent from $2,387 million in the first quarter but down 53 percent on the same period last year
  • Reported daily oil and gas production of 4.005 million barrels of oil equivalent, 4 percent higher than the second quarter of 2008
  • Capital spending for the quarter of $4.8 billion and $9.4 billion for the half year
  • Net cash from operations of $6.8 billion versus $6.7 billion a year ago
  • Net debt of $27.1 billion and gearing at 22 percent
  • An effective tax rate of 35 percent, unchanged from last year.

BP's dividend for the quarter was 14 cents a share, the same as for the corresponding period in 2008. In sterling terms this represents a rise of 21 percent year-on-year, a reflection of the stronger dollar.

Hayward said the latest economic data suggested the global economy could stabilize this summer but that any recovery, whenever it comes, would likely be sluggish: "The overall picture is of energy demand now stabilizing following significant falls in the first half of the year. We see little evidence of any growth in demand and expect the recovery to be long and drawn out."

He said expected organic capital investment for 2009 of under $20 billion remained in line with previous predictions. Disposal proceeds for the first six months totalled $1 billion and were envisaged at $2-3 billion for the year as a whole.

He added that year on year production growth was expected to continue in the second half, though normal seasonal maintenance turnarounds would impact the third quarter.

In remarks scheduled for financial analysts later today, Hayward said the strategy of the past two years remains firmly on track. "In the Upstream we said we would deliver profitable growth, and we are doing so. Costs are coming down, capital efficiency is rising and we expect output to grow again this year.

"Our view remains that the right current balance is to continue to pay the dividend and maintain investment to grow the company. We will continue to use the capacity of our balance sheet while the industry cost structure adjusts."

BP's second quarter replacement cost profit was $3,140 million, compared with $6,746 million a year ago, a decrease of 53%. For the half year, replacement cost profit was $5,527 million compared with $12,977 million a year ago, down 57%.

  • Non-operating items and fair value accounting effects for the second quarter had a net $202 million favorable impact compared to a net $1,775 million unfavorable impact in the second quarter of 2008. For the half year, the respective amounts were $8 million favorable and $1,779 million unfavorable.
  • Finance costs and net finance income or expense relating to pensions and other post-retirement benefits were $321 million for the second quarter, compared to $221 million for the same period last year. For the half year, the respective amounts were $689 million and $467 million. The net increase in cost was primarily due to a reduction in the expected return on pension plan assets.
  • The effective tax rate on replacement cost profit for the second quarter and half year was 35% and 36% respectively, the same as a year ago.
  • • Net cash provided by operating activities for the quarter and half year was $6.8 billion and $12.3 billion compared with $6.7 billion and $17.6 billion respectively a year ago.
  • Net debt at the end of the quarter was $27.1 billion. The ratio of net debt to net debt plus equity was 22% compared with 20% a year agoTotal capital expenditure for the second quarter and half year was $4.8 billion and $9.4 billion respectively. Capital expenditure, excluding acquisitions and asset exchanges, is expected to be less than $20 billion for the year. Disposal proceeds were $0.7 billion for the quarter and $1.0 billion for the half year.
  • The quarterly dividend, to be paid in September, is 14 cents per share ($0.84 per ADS), the same as a year ago. In sterling terms, the quarterly dividend is 8.503 pence per share, compared with 7.039 pence per share a year ago, an increase of 21%.

Exploration and Production

The replacement cost profit before interest and tax for the second quarter and half year was $5,046 million and $9,366 million respectively, decreases of 53% and 55% compared to the same periods in 2008. The decreases in both periods were primarily due to lower realizations and lower earnings from equity-accounted entities, primarily TNK-BP due to lower prices and the effect of lagged tax reference prices. Additionally, the results for both periods reflected higher depreciation but benefited from the impact of higher reported volumes and lower costs, with unit production costs 12% lower than in the second quarter of 2008.

In addition, the second quarter and half year benefited from net non-operating gains of $507 million and $818 million respectively, primarily related to gains on the sale of operations and fair value gains on embedded derivatives. The corresponding periods in 2008 included net non-operating losses of $1,976 million and $2,352 million respectively. In the second quarter and half year, fair value accounting effects had favourable impacts of $135 million and $293 million respectively compared with unfavourable impacts of $373 million and $632 million in the same periods of last year.

Reported production for the quarter was 4,005mboe/d, more than 4% higher than the second quarter of 2008. After adjusting for entitlement impacts in our production-sharing agreements (PSAs) and the effect of OPEC quota restrictions, the increase was also 4%. This primarily reflects the continued ramp-up of production from major projects that started up in 2008 and the first half of 2009. As previously indicated we expect production in 2009 to be higher than 2008. The actual growth rate will depend on a number of factors including the impact of oil price in PSAs and OPEC quota restrictions. We expect the quarterly phasing of underlying production during the year to reflect the normal seasonal effects associated with turnaround activity. Reported production for the half year was 4,011mboe/d, more than 3% higher than the same period of 2008. After adjusting for the effect of entitlement changes in our PSAs and the effect of OPEC quota restrictions, production was 4% higher.

During the quarter we announced that production had commenced from the Dorado (BP 75% and operator) and King South (BP 100%) projects in the Gulf of Mexico. Both projects are subsea tiebacks to the existing Marlin Platform.

On May 27, Sonangol and BP announced the Oberon oil discovery in ultra-deepwater Block 31, offshore Angola (BP 26.67% and operator). This is the eighteenth discovery made by BP in Block 31.

In Egypt, the Egyptian Natural Gas Holding Company awarded BP two blocks in the 2008 International bid round. North Tineh Offshore is in a deepwater offshore area of the Nile Delta, will be operated by BP (100%) and was ratified in June. North Damietta Offshore is an adjacent block that BP will operate with Shell and Petronas, with one third working interest each.

In Iraq’s first licensing round on June 30, BP (operator) and China National Petroleum Corporation were awarded the rights to redevelop the Rumaila oilfield.

During the quarter, we sold our wholly-owned subsidiary, BP West Java Limited (BPWJ), to PT Pertamina (Persero). Pertamina purchased BPWJ for a consideration of $278 million.

Shortly after the end of the quarter, BP, as operator on behalf of the Tangguh project partners, announced that the first cargo of liquefied natural gas (LNG) had been lifted from the Tangguh LNG project (BP 37.16% and operator) in Papua Barat, Indonesia. We also announced, together with SOCAR (the State Oil Company of the Republic of Azerbaijan), that we have signed a memorandum of understanding to jointly explore and develop the Shafag and Asiman structures in the Azerbaijan sector of the Caspian Sea. In the Gulf of Mexico we announced the drilling of a successful appraisal well in a previously untested southern segment of the Mad Dog field (BP 60.5% and operator).

Finally, in line with UK regulatory requirements, the following is a summary of the principal disclosures made in our first-quarter results announcement. In the Gulf of Mexico, production from Thunder Horse continued to ramp up as wells in Thunder Horse North came onstream. In Russia, TNK-BP announced that it had commenced commercial production from the Urna and Ust-Tegus fields in the Uvat area of the Tyumen region. Offshore Angola, Sonangol and BP announced the Leda oil discovery in ultra-deepwater Block 31 (BP 26.67% and operator).