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BP assesses future projects with an eye toward $20 oil Company shifts to higher decision-making price; industry analyst agrees Larry Persily Petroleum News Government Affairs Editor
BP has shifted its balancing point in deciding future oil exploration and production projects from $16 a barrel to $20 a barrel, saying it appears the market is in for a long-term run of higher prices.
“The question … is what price to use for resource allocation to reflect the right balance,” John Browne, chief executive officer of London-based BP told industry analysts Feb 10.
“It is my view that it is quite reasonable to use $20 a barrel,” Browne said in announcing BP’s fourth-quarter 2003 financial results. But, he cautioned, the company is “always testing projects at $16 a barrel on the downside.”
Judging future investments against oil at $20 a barrel seems reasonable to Fadel Gheit, oil and gas industry analyst for Oppenheimer & Co. in New York City. Most large producers have shifted to using $18 to $20 oil-price forecasts for their long-range planning, he said. It depends on each project’s risk, location and fiscal contract terms.
“No one really believes that in the next two years oil prices will be $16,” Gheit said.
BP is the only major North Slope producer that discloses its budget-planning price for oil. ExxonMobil and ConocoPhillips do not, nor do Anadarko Petroleum Corp. and the other independents operating in Alaska.
Browne told analysts BP based its decision on history. “We do detailed financial planning over a five-year period, and if you look over any 60-month period you see that the average Brent oil price has never gone below $16 a barrel,” the CEO said. Browne says history backs up $20 forecast Looking back at the past five years and ahead to the next 20 years, world oil prices have averaged in the $20-plus range and are expected to remain in that range, he said in an interview in London’s Sunday Times in January.
Alaska North Slope oil has averaged just under $30 a barrel over the first eight months of Fiscal Year 2004, according to the Alaska Department of Revenue, holding around $32 the first two weeks of February. North Slope oil usually prices about $2 above Brent crude.
Although Browne said BP has moved up its long-term expectation to $20, he added a note of caution in his Feb. 10 remarks to industry analysts: “Oil prices are impossible to predict, either on a short- or long-term basis.
“There are many uncertainties. One is the stability of demand (worldwide), which has been volatile and has grown by less than 1 percent a year on average since 1997.”
Separate from its oil-price benchmark for new exploration and production projects, Browne said BP also is using $20 a barrel in its cash-flow planning to balance spending with income. “First, we believe it is necessary to retain a sufficient cushion of debt capacity to see us through a period of $16 oil.
“Second, as a base case, we now see cash flows balancing at around $20 over the next couple of years.”
He further explained that over time, as production rises and capital expenditures decrease, the company’s cash flow will balance out at below $20 a barrel, producing more profit if prices stay high. Analyst says majors need higher returns The majors have different needs than independent producers, Gheit said. The larger companies need a higher rate of return on their successful projects to cover the increased risks of big-ticket and large-scale exploration, he said. Because of their cash needs for finding and development costs, and longer lead time to bring new production online, they project prices 10 to 15 years out. Smaller companies that buy up mature production fields from the majors often look out only as far as needed to pump the oil they bought, Gheit said. “They are going to milk the cow until it runs dry.
“They are buying instant production,” and know the costs of getting the oil out of the ground, allowing them to accept a lower rate of return to reflect their smaller risk, he explained.
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