BP reports 121% reserves replacement ratio in 2008

Uchenna Izundu
OGJ International Editor

LONDON, Mar. 10 -- BP PLC achieved a reserves replacement ratio of 121% in 2008, excluding acquisitions and divestments, with yearend reserves of 18.2 billion bbl and a resource base of 43.4 billion bbl. This was driven by an increase of 1.7 billion bbl of new oil and gas to its reserves base.

Its short-term oil and gas production growth previously had been forecast at 3%, but, due to the economic downturn and low crude prices, it was revised to 1-2%/year to 2012 from existing projects.

The company is confident it can maintain an average annual production growth rate of 1-2% to 2020 without any further discoveries. Its forecast for hydrocarbons production in 2012 is 150,000-300,000 boe/d lower than last year's targets in the strategy update.

Analysts, however, are concerned about BP's long-term production outlook, which they think is weaker than its competitors.

Chief executive Tony Hayward conceded during a strategy presentation that 2009 would be a "tough year," but added that BP had the strong financial and operational momentum to address it.

"We are delivering upstream growth and making good progress turning around our downstream business. The future has not been cancelled. Our view is that the right current balance is both to continue paying the dividend and to maintain investment to grow the firm—and to use the capacity of our balance sheet while the industry cost structure adjusts."

Hayward said that cost discipline was a major issue, and that costs had remained flat in 2008 as oil prices soared. BP expects to save $2 billion in costs this year from deflation and job reductions. As the global recession tightens its grip and the financial crisis continues, operators have re-evaluated their projects and asked contractors to submit new bids because the demand for raw commodities and materials has dropped.

The company expects to spend $20-21 billion this year, which is broadly in line with 2008 expenditures, because it expects to see an improvement in the economic situation. However, BP will cut spending in refining and marketing by $700 million and in alternative energy by $400 million.

Investment in exploration and production will be maintained at $15-16 billion this year. Exploration success in 2008 included Tin Zaouatene-1 in Algeria, which flowed 9.5 MMscfd on a 32/64-in. choke, the Kinnoull oil discovery in the UK, and the HP-HT Satis discovery in the Nile Delta.

Technology such as gas injection and waterflood technologies, advanced seismic imaging, and subsea well intervention will be critical in increasing production and reserves. In drilling performance, it reduced its E&P days per 10,000 ft by 15% in 2008 compared with the year before.

Iain Conn, BP's chief executive of refining and marketing, said the company has simplified its business and would cut senior management by 15% by yearend.

In 2009, BP will focus on modernizing its Whiting refinery in Indiana, to increase the processing of Canadian extra-heavy crude. The upgrade is expected to cost $3.8 billion and to be completed in 2011. Whiting will process 340,000 b/d of extra-heavy crude, allowing it to capture heavy flows from Canada to the gulf. Whiting's gasoline production will be increased by 1.7 million gpd.

The project will include construction of a coker; installation of a crude distillation unit, a gas oil hydrotreater, and sulfur recovery facilities; upgrade of water treating facilities; and other environmental improvements.

Hayward said the downstream business had boosted its underlying profitability by $2 billion in 2008, although this strong progress had been masked by the biggest decline in US refining margins in more than 20 years relative to the rest of the world.

"However, our US refining system, including Texas City, has now reestablished full operation, and we believe there is a good chance that our refining business will return to profitability in 2009 after a $700 million loss last year. We also see further benefits from simplification, cost-efficiency and more competitive fuels value chains," Hayward added.

However, BP will no longer continue with exploration on Sakhalin-4 off the far eastern coast of Russia after finding dry holes, a company spokesman told OGJ. "The license came up for renewal last November and we said 'no.'" The company had formed a joint venture with Rosneft in 2003, Elvary Neftegaz, to explore the West Schmidt block. Sakhalin-5 contains three blocks, of which BP holds two: Kaigansky and Vasukansky. "We have made two discoveries there and are evaluating opportunities," he said.

The initial public offering of up to 20% of TNK-BP could happen in late 2010 or 2011, Hayward said, but this would depend on normality returning to financial markets. BP and its joint Russian shareholder, AAR, agreed to launch an initial public offering as one of the conditions of its truce following public arguments over TNK-BP's direction and staff.

Contact Uchenna Izundu at uchennai@pennwell.com.

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