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Interview: Bernard Looney, chief executive, upstream, BP

24th October 2018

Bernard Looney, chief executive, upstream, BP

At the Barclays Power and Energy Conference, held in September in New York, Bernard Looney, chief executive, upstream, BP, spoke about the company’s five-year strategy, the investment in the Lower 48 and its digital transformation

Bernard Looney is responsible for the upstream segment at BP that consists of exploration, development and production. He joined BP in 1991 as a drilling engineer, working in the North Sea, Vietnam and the Gulf of Mexico. In 2005 he became senior vice president for BP Alaska before becoming head of the group chief executive’s office in 2007.

In 2009 he became the managing director of BP’s North Sea business in the UK and Norway. At the same time, Bernard became a member of the Oil & Gas UK Board. He became executive vice president, developments, in October 2010, and in February 2013 became chief operating officer, production, serving in the role until April 2016.

Five-year plan
He started by explaining how a busy first half of the year for BP got even busier going into the second half, with the announcement of the acquisition of BHP’s Permian, Eagle Ford and Haynesville assets at the end of July, before moving on to BP’s strategy to create value in a changing world. “At BP we are delivering on the five-year strategy that we laid out at the beginning of 2017,” he says. “It is a strategy designed to shape our portfolio to create a business that is resilient and fit for a changing world. That change of course involves addressing the dual challenge of meeting society’s demand for more energy, while at the same time working to reduce carbon emissions to help meet the world’s climate goals.”

BP are six quarters into this five-year plan and are making good progress that is translating into improved underlying profit and cash flow. The underlying cash flow of $12.4 billion in the first half of this year more than covered the organic capital expenditure and the full dividend. “Given this progress, along with the operational momentum we see across the whole business, our continuing focus on maintaining a rigorous financial framework, and our confidence in the outlook for organic free cash flow, we announced a 2.5 per cent increase to the quarterly dividend - our first dividend increase in four years,” he says. “This demonstrates our commitment to growing distributions to shareholders over the longerterm. We are doing all of this while maintaining discipline in our organic capital expenditure, sticking to a range of $15-17 billion per annum over the medium-term, while also maintaining debt gearing within a range of 20-30 per cent.”

Upstream focus
He then turned to BP’s strategic priorities. In upstream the business is focused on growing both gas and advantaged oil – focusing on only those resources that are low cost or high margin - to be resilient to any price environment. He explains that resilience also depends on quality execution – being the best at what they do where they work – and that starts with doing it safely and in an environmentally responsible way. “And as we are now seeing, this approach delivers returns led growth – investing with discipline to grow value through increased cash flow and returns,” he adds. “We have a strong set of major projects coming onstream out to 2021, driving growth in the near-term, and creating deep optionality into the next decade. We are building our portfolio in a way that we believe is distinctive to BP, optimising the value of our assets in both incumbent and growth areas, and exiting assets where we can create value by divesting to others.”

BP have recently made distinctive portfolio choices in the Norwegian North Sea, Gulf of Mexico, Argentina and most recently, through the transaction involving its Clair UK North Sea oil field. “We are continuing to look for opportunities to high-grade our portfolio further through inorganic investments in new assets that are value-accretive,” he continues. “The recent BHP transaction was a major example of this strategy in action, creating increased optionality across our existing US onshore operations, as well as growing value in a basin where we previously did not have access. 

“We recently reported our best quarterly, underlying pre-tax earnings for the upstream since the third quarter of 2014. This result was certainly helped by the oil price environment, but much more importantly, it was underpinned by around ten per cent growth in underlying production compared to the same period last year, and a relentless focus on capital and cost discipline. This is something that is structurally different from previous industry cycles and illustrates the way we are building resilience into the business.”

Continued growth
In the upstream, the focus on quality execution is delivering record operating performance, with operated plant reliability at 96 per cent in the second quarter of 2018.

In 2017, BP started up seven major projects. It continued that momentum into 2018, with the start-up of three major projects so far - Atoll Phase One in Egypt, Taas Expansion in Russia, and Shah Deniz Phase 2 in Azerbaijan. These projects were delivered on time or ahead of schedule, and on or under budget. There are three more projects to bring on in the second half of the year.

“We have also made five final investment decisions this year on projects in Oman, India, Angola and two in the UK North Sea, further de-risking the 900 thousand barrels per day of incremental production from major projects that we expect to add by 2021,” he adds. “And we recently announced that we are deepening our operated position in Clair in the UK North Sea, increasing our equity from around 29 to 45 per cent. Clair is estimated to have had more than seven billion barrels of oil initially in place, and future development opportunities are set to create significant value, including the Clair Ridge project that we will start up this year. Across the upstream, we are moving ahead with our major programme of modernisation and transformation.”

As an example of this transformation, Looney highlights Apex, a tool that essentially provides a digital twin of real world facilities and thus enables BP to optimise production by modelling physical constraints and adjusting flows accordingly. “In the second quarter of this year we added Apex to over 1,000 wells in Alaska and we now have 22 operated assets globally using the tool,” he says. “Last year, Apex contributed to the 0.6 per cent growth we achieved in our base production. It is just one way in which the benefits of our modernisation and transformation agenda are feeding straight into the bottom line, materially improving performance.”

Unconventional assets
One of the BP’s transformational investments was the transaction during the summer to acquire BHP’s assets in the Permian, Eagle Ford and Haynesville basins. “It strengthens our advantaged global oil and gas portfolio with the addition of world-class unconventional oil and gas assets, with more than four billion barrels of high quality resources,” Looney explains. “These are resources that can be developed with an IRR (internal rate of return) of 20 per cent or more at prices of $55 per barrel WTI and $2.75 Henry Hub. 

“The move also builds on the proven sector-leading operating capability we have demonstrated in our Lower 48 onshore business. The deal also high-grades our Lower 48 portfolio. It increases our onshore liquids’ exposure with new access to black oil and highquality liquids in the Permian-Delaware and Eagle Ford basins, and premium positions in the Haynesville basin. “Above all, from an investor perspective, the acquisition creates value. Post integration, the transaction is expected to be accretive on both an earnings and cash flow basis. Indeed, it contributed to us increasing our projected upstream free cashflow outlook in 2021 by an additional $1 billion. Our production CAGR (compound annual growth rate) of five per cent per annum to 2021 is also set to be further improved through this acquisition. And critically, this acquisition will be accommodated within our existing financial frame: Our planned medium-term organic capital expenditure of $15–17 billion per annum as well as our guidance for gearing and returns on capital employed all remain unchanged.” BP has also announced its intention to divest an additional $5 to $6 billion of assets, predominantly from its upstream business, bringing its net investment to around $5 billion. Proceeds from divestments are expected to fund up to $5 to 6 billion of further share buybacks over time. “As we look to the longer term, these long-lived unconventional oil and gas assets are an important addition to the suite of growth options we have, providing potential for material value creation into the next decade and beyond,” Looney explains. “Our confidence that we can create value from these new assets is underpinned by our track record in the Lower 48 so far.”

Improvements in Lower 48
Looney explains that in the so called Lower 48 region, the 48 contiguous US states, BP’s Lower 48 team has laid the groundwork for the deal over the last four years. It has radically transformed its business into a top quartile operator, driving significant improvements through leading operational processes and technologies.

Unit production costs have declined each year. This year BP is on track to reduce them to 35 per cent below 2013 levels at under $7 per barrel. Its headcount has been reduced by 54 per cent, enabled by technology such as intelligent operations, as well as by utilising a more efficient organisational model to manage overhead costs. And development costs are also down by 35 per cent. “This is partly driven by improving capital efficiency, as our drilling programmes become more repetitive, more factory or manufacturing-like and more competitive; and partly by improving well productivity, as better completion technologies are deployed,” Looney says.

Downstream
Moving on the downstream sector he highlighted BP’s two-pronged strategy. First, to deliver underlying performance improvement and growth, expanding earnings potential and improving resilience; and second, to continue to build competitively advantaged businesses across the segment. “We are making strong progress delivering this market-led growth strategy, particularly in our fuels marketing business,” he says. “We are expanding in major growth markets such as Mexico, India, Indonesia and China, and we are continuing to progress our convenience retail offering in established markets. Recently, we announced a series of investments in Freewire, StoreDot and Chargemaster, which respectively represent fast-charging technology, battery innovation and the UK’s largest electric vehicle charging network operator. These investments position us effectively for the rapidly evolving EV market - a market that we see as an opportunity for BP.”

Advancing a low carbon future
Those investments are also central to BP’s commitment to advancing the low-carbon future across its entire business, something the company laid out in detail earlier this year when it released the report on Advancing the Energy Transition. This commitment is integral to the broader strategy of BP, involving every part of the business. The approach consists of three distinct elements – which they refer to as ‘Reduce-Improve-Create’ or ‘RIC’.

The first is reducing its own emissions through operational emission reduction activities – with a goal of zero net growth in emissions between 2015 and 2025. Second, improving its products to enable customers to lower their emissions. Third, creating low-carbon businesses to complement its existing portfolio. “And last but not least, we are underpinning all of this activity with a drive to modernise the whole group, from the systems and tools we employ, to the data we collect, and the new technologies which are transforming the way we work,” he says.

He closed by emphasising that BP are a global energy company with a distinctive portfolio that is designed to be fit for the future and good for all seasons. “Like many highperforming investment portfolios, one of its main qualities is balance,” he says. “The portfolio is balanced between oil and gas, between the regions, between onshore and offshore, conventional and unconventional resources, and with a growing low carbon mix. It is packed with optionality. We are optimising it all the time, ensuring that it is resilient to a changing environment and leverages our strengths.

“Our focus on returns through value-based, disciplined investment and a rigorous focus on costs is relentless. We expect our group oil price cashflow break even level to reduce steadily to around $35-$40 per barrel by 2021, and over the same period we expect our ROACE (return on average capital employed) to improve to over ten per cent at $55/bbl.

“Together, these three elements make up a proposition that was laid out in 2017 in our five-year plan, and which is delivering results. It is consistent, it is working, and it is all in service of our aim of growing sustainable free cashflow and distributions.”

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