“Times are tough right now – but we will come up with the answers. We’ve done it before many times over… and we will do so again,” stated Lamar McKay, Chief Executive – Upstream, BP plc. while speaking at CERAWeek 2016. Excerpts from his presentation
I’ve got three issues I’d like to talk about – I expect there are probably similar issues on every Upstream leader’s desk right now.
First, of course, is the response to the very difficult current environment: how do we get ourselves really competitive at lower prices? Second is the question of growth: where is the growth going to come from to meet the rising demand for energy – much of which will be from hydrocarbons? Third – how do we harness technology and new ways of working to help us compete today and grow tomorrow? I’d like to say a little more about each of those things, starting with the current environment.
RESPONDING TO THE CURRENT ENVIRONMENT
Looking at oil price forward curves, people often talk about a V or a W or an L…but actually we might need another word for the current price fall. It’s definitely not a V or a W and it’s not looking much like a typical U just yet – although it still looks to us as if supply and demand may start coming back into balance towards the back end of this year, based on projections and assumptions.
It is certainly proving to be both a deep and prolonged downturn. It’s among the worst in my 35 years in the industry. We still have a lot of adapting to do.
In BP, as in other businesses, we are pursuing strict operating cost and capital discipline and looking to simplify the organization and processes every way we can. That is paying off – as just one example, our capex was over four billion dollars down year on year in 2015. And controllable cash costs were down almost three and a half billion dollars. That is a very tough adjustment – it is meaning significant staff reductions, as it is for many companies. We understand the human impact this has.
But to maintain a competitive business, we need to take this action. And it’s not just inside the company that we need to be in action – it’s all along the supply chain. One way is on contracts – where we need to renegotiate to bring costs down – but we are trying to do that in an appropriate way, a way that offers longer term stability. The so-called “blend and extend” approach. Another way is cooperation on efficiency. Easier, simpler, faster should be our goals.
Working with our suppliers – and in some cases other operators – we’ve identified many areas where we can do things differently, saving millions of dollars from better scaffolding management to the sharing of vessels and helicopter services. And a third way is cooperation on standardization.
As an industry, we’re playing catch-up with the aviation and auto industries on this issue. There is huge scope for standardizing equipment across our industry by harmonizing our procurement specifications. By using things that have already been built, by not choosing the first, the biggest, the shiniest. This will take us a step forward towards the standardization of entire projects that will potentially save billions of dollars. Together those are three powerful forces. Our industry is seeing real change here.
In the Gulf of Mexico back in 2012 we costed our Mad Dog Phase 2 project at $20 billion. We’re now costing it at less than $10 billion on the basis of new project phasing, simpler design and by using repeat solutions instead of bespoke ones. And we expect it to deliver better returns now at $60/bbl than we originally expected at $100/bbl.
WHERE IS GROWTH GOING TO COME FROM?
Let me turn to that second question now, of where the growth is going to come from. First and foremost is growth in demand. In BP, we expect demand for primary energy to grow by about a third over the next 20 years in the most likely case, with 60 per cent of that growth being met by hydrocarbons. For oil and gas, that’s an incremental 35 million barrels of oil equivalent per day in 2035 compared to 2015 – as much as the entirety of North America oil and gas production today. Or five times all of the L48’s current oil production.
Oil demand is set to grow steadily at just under 1 per cent per year, with gas growing twice as fast – and that growth is evenly split between conventional gas and shale. That level of demand means there are many options for supply growth – more options than we have capex for. Conventional, unconventionals, deepwater and EOR. It’s an environment that is going to see only the most competitive projects getting sanctioned, however. But that is a healthy situation. It drives innovation and cost efficiency.
