BP’s strategy presentation: growth, cost cuts, biofuels, M&A and more

BP’s annual strategy presentation was delivered to analysts and investors on Tuesday, with the key headlines about the planned efficiency savings and production growth released beforehand.

Much of this is along the lines indicated at BP’s fourth quarter results. There is more detail in the press release, and a lot more in the slides and the webcast.

There was also a first appearance from Carl-Henric Svanberg, BP’s chairman, who sat silent throughout, but signed off saying: “I think your guys did well.”

Overall, the theme from Tony Hayward, the CEO, is that BP has great assets, in part thanks to the deals of the past decade, such as the takeovers of Amoco and Arco and the creation of TNK-BP, but is still not managing them as well as it could.

Having lagged well behind the pack of oil majors when Hayward took over, as measured by return on capital, BP is now about average, but it would like to get closer to the leader, Exxon. That is the context for all the plans BP is announcing today.

The key points of that plan are:

- $3bn to be saved through cost-cutting and efficiency improvements over the next 2-3 years. Roughly $2bn from refining, putting the emphasis on efficient operations rather than just getting the refineries running, which has been the priority. A further $1bn from better project management, resulting from the creation of a new global development unit to manage big projects, which have a tradition of over-shooting their budgets at BP, as they do at many other companies.

- As a small part of that, BP is pulling out of its marketing business in Namibia, Malawi and some other southern African countries.

- Production growth expected to average 1-2 per cent per year during 2008-15, and hopefully for longer. (That follows 4 per cent growth during 2009, which was helped by unusually good weather conditions and is expected to be followed by a small decline this year.)

- Gas to rise as a proportion of production from about 40 per cent to about 45 per cent by 2020. In spite of some earlier reports, there will be no headlong rush into gas. (A rising emphasis on gas could be seen as a weakness, in light of the pressure on gas prices.)

- 42 new projects set to start up during 2010-15, adding 1m barrels equivalent of production of oil and gas. (which will, of course, be offset by decline in existing fields.) Of those, 11 are in the Gulf of Mexico, seven in Angola, six in the North Sea, and the others in countries including Algeria, Libya, Egypt, Russia, Indonesia, Azerbaijan and Trinidad.

- Investment continuing in alternative energy at about $1bn per year. (It was actually $1.3bn last year, in spite of expectations that it would be below $1bn.) The priorities are biofuels, onshore wind in the US, solar – mainly in China – and carbon capture. Biofuels will be the big one for investment this year. The joint venture agreement with Verenium, trying to develop second generation biofuels, has been extended for just one more month while the two companies work on reaching a longer-term agreement, which may or may not be a sign of trouble there, but overall BP insists it is still committed to biofuels.

- A firm steer from Hayward away from M&A, in the sense of buying companies. He suggested BP was likely to buy more assets, but added: “I would be surprised if we saw opportunities at the corporate level…. It is not something I am terribly focused on.” Perhaps he had those latest rumours about Tullow in mind.

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