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Reality check BP’s CEO Lord John Browne tells Anchorage audience gas pipeline not profitable; says it costs more to produce oil as Prudhoe declines Kristen Nelson PNA Editor-in-Chief
Lord John Browne, BP’s chief executive officer, told an Anchorage audience June 28 that he learned about the reality of the oil industry on his first job with BP — in Alaska.
That grounding in reality was important, he said, “because business has to be about reality or it fails.”
“I put that heavy stress on reality,” Browne said, “because I think there have been times when the aspiration has got too far ahead of what can be achieved.”
The reality right now, he said, is that oil production on the North Slope is too expensive and costs have to be cut — and that taxes and royalties would take so much out of the returns from a gas project that companies don’t have the incentive to invest.
Browne told an audience from the Resource Development Council, the Alaska Support Industry Alliance and the Anchorage Chamber of Commerce that today’s reality is different from the reality 33 years ago when he came to Alaska: Then the goal was to transport North Slope oil.
Today, he said, the goal is to reduce costs to fit declining reserves and facilities that are expensive to operate because they were built for much greater throughput.
The reality of operating on the North Slope is that it costs 20 percent more per barrel of oil than BP’s worldwide average, he said, with pipeline and shipping costs four times the worldwide average.
Because of that, BP is doing “some very difficult things here in Alaska,” he said:
• “Discontinuing frontier exploration and focusing instead on exploration in and around existing fields, looking for smaller accumulations near existing infrastructure.
• “Reducing our staff in Anchorage by 20 percent and our contractor staff by 75 percent.
• “Reducing, everywhere we can, general and administrative expenses.”
BP is also looking for opportunities to share costs with partners, contractors and Alyeska Pipeline Service Co. Reality of maturity Browne said BP will invest “well over half a billion dollars in Alaska” this year on tankers, viscous oil and satellite field development and in-fill drilling at existing fields. The company aims to sustain that level of investment over the next five years, he said.
“That investment can only be justified because we believe Alaska can, and will, be competitive against the other projects in our portfolio.
“We are confident that it is possible to respond to the reality of maturity,” he said.
In addition to looking for help from suppliers and contractors on costs, Browne said BP is looking to the state for “enduring fiscal stability and a regulatory structure that strikes the right balance between risk and reward — one that allows for investment and development while protecting the environment.” Possibility of natural gas development The future, Browne said, is about the possibility of developing North Slope natural gas, “which cannot be a reality unless it’s linked to a healthy oil business over the life of the development” because much of North Slope oil infrastructure is needed to produce gas.
Alaska gas has to compete head-on with other sources of energy, Browne said: “And at the moment it is not competitive.”
Asked about the state’s preference for a southern route, Browne said: “I think taking it in the southern direction is probably the right thing to do anyway.” This isn’t the time for detailed solutions, he said, but is the time for everyone to understand that if governments wish to develop the gas, they need to provide appropriate provisions and “the most sensible project has to take place — going south is the most sensible project.”
BP has the Alaska North Slope gas project tagged at $60 billion, he said: $20 billion in capital costs, $20 billion in operating costs and $20 billion in financing costs.
The goal is to cut 10 percent, $2 billion, off the capital cost through technology, Browne said, including: high-speed welding, higher-strength steel and more efficient carbon dioxide removal.
In a range of reasonable gas price assumptions, that 10 percent reduction would make the project viable on a pre-tax basis, he said.
“But that’s not enough.” Alaska gas still would not be commercially viable because of fiscal issues — a public policy issue that BP cannot resolve, he said.
The issue is about where the economic rent — the cash from a project — goes, Browne said. The cash flow from an Alaska North Slope gas project, to the private sector investor and the variety of governments, he said, “is such that actually, after you pay all the interest and you get the cost of capital back, there’s nothing else left for the companies.”
Which means “there really is no incentive for the private sector to invest.” Duty to shareholders The reality of any business, Browne said, is to make things better for its shareholders.
“We have a mandate, I believe, obvious to everyone in business, to those who give us their money. And this mandate cannot be broken. We don’t have discretion about it.
“And that mandate, I think… says go to the world, examine yourselves as to what you really think you can achieve in reality and invest only to make things better for me.
“That is what we have to do,” Browne said.
“We cannot invest if it doesn’t make things better. Because I think it’s outside our powers — outside the mandate we’ve been given.” Possible policy changes Governments have made policy decisions which changed the way the economic rent is shared, Browne said, and in the case of Alaska gas: “There is a case for saying that the public interest lies in setting taxes in such a way that all projects with intrinsic economic merit can proceed.”
It’s a public policy call, he said, and the economic benefit for all — Alaska, the United States, provincial and federal governments in Canada, those employed on the project, contractors and service companies and the owners of the resource — have to be “higher than if a project never goes ahead.”
Successful precedents in the United States include production credits for new technologies for coalbed methane and enhanced oil recovery incentives to extract more from old fields and in Canada progressive royalty and supporting financing measures that have supported new East Coast energy development, the tar sands industry in Alberta and Mackenzie Valley gas.
BP is not asking for a subsidy, Browne said. And it isn’t asking for risk reduction.
“We are ready to accept the normal risks if the project makes sense and can compete effectively on a global basis.”
It is, he said, a debate about public policy, about the distribution of economic rent and the effect that distribution has on commercial projects.
Alaska a cornerstone Browne said in his prepared remarks that “Alaska will remain very important to us in BP: A cornerstone and an enduring cornerstone of our worldwide business.”
When asked at the press conference if BP’s business in Alaska is for sale, Browne said:
“There is no basis for anyone to believe that our business in Alaska is for sale.
“And I think I made it very clear in my talk this morning that such ideas are totally inappropriate and have no basis in fact or rationale or reason. And I think it’s time we went back to reality.
“BP’s here to stay. We intend to make our business a good business and we’re making some very tough decisions, very tough decisions, to do that. I believe these decisions are in line with reality… and we have to, I think, make sure that everybody in Alaska recognizes that at least our perception of things is that reality is different from people would wish it to be.
“The fact is, this is a declining oil province.
“The fact is, it’s too expensive.
“The fact is, these things must be reflected in our business plan.
“I believe we’re very clear: We are very determined and we will get this right.”
BP takes on reality in its business every day, Browne said: “And in Alaska, there should be no exception.”
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