BP, Conoco both continuing cost cutting

Kristen Nelson

Petroleum News

There were some common themes as BP and ConocoPhillips reported earnings at the end of October. Third-quarter earnings were down substantially from the 2008 third-quarter, when earnings were bolstered by high oil prices. But that is true for oil and gas companies generally.

Both companies said they have reduced spending to live within their means and have been cutting costs.

BP has been restructuring and reducing costs for more than two years and Byron Grote, the company’s chief financial officer, said in an Oct. 27 analysts’ call that the company has maintained momentum in reducing costs.

BP has been “driving greater efficiency” across the company, he said, and cash costs year-to-date are down by more than $3 billion, with a full-year decrease of some $4 billion expected, “twice the level projected at the start of the year.”

Fergus MacLeod, BP’s head of investor relations, said a decrease in unit costs in the third quarter was driven by high grading of activity, more efficient execution and supply-chain benefits. With rising oil prices “we’d expect to see something of a head wind developing from the supply chain,” but high grading of activity and more efficient execution will continue.

“And so I think you would be overly pessimistic to expect us to revert to the cost structure of two and a half years ago, even if we were to see the oil price go back to where it was,” MacLeod said.

“As a firm, we’ve said that we intend to balance our sources and uses of cash at about a $60 oil price environment and to invest at a level that is necessary to be able to grow the firm,” Grote said.

Both men said there were benefits yet to be found in reducing costs.

MacLeod said some areas of BP’s upstream operations were doing very well and some “still have a ways to travel.”

In describing cost cutting Grote said BP was taking “general cost efficiency measures across the company, a thousand and one things that are being done consistent with the model ‘every dollar counts,’ which is held dear by everybody working at BP.”

ConocoPhillips — the size issue

Jim Mulva, ConocoPhillips’ chairman and CEO, said in an Oct. 28 analysts’ call that while the company of today was created over the past 10 years, the business environment has changed in the last 12 to 18 months.

Access to resources worldwide continues to be an issue, he said, and the company’s capital program is constrained.

ConocoPhillips is living within its means, he said, and while the company will continue to be an international integrated company it will be somewhat smaller with an emphasis on return rather than growth, and with projects prioritized to improve returns.

The goal of the sale of some $10 billion in assets, previously announced, is to reduce the company’s debt, Mulva said.

Like BP, ConocoPhillips talked about reducing spending to live within its means.

Mulva said the company’s capital budget will be reduced, from the $14 billion to $15 billion a year range where it has been recently to about $11 billion a year.

He said the company believes a capital budget of $11 billion is really “the sweet spot” for Conoco in terms of business.

Sig Cornelius, the company’s chief financial officer, said lower operating costs improved the company’s earnings. He said the company will continue to pursue cost reductions aggressively across the board working with service providers, with a goal of getting those costs down to where they were in 2007, a 10 percent reduction from 2008 cost levels.

He said that through the third quarter ConocoPhillips achieved its full-year cost reduction goals, and will continue to pursue additional cost-reduction opportunities.