BP committed to UK North Sea operations, CEO says

BP PLC would welcome any favorable tax changes from the UK Treasury to help operations in the UK North Sea, BP's Chief Executive Tony Hayward said July 24 at a London press conference.

Uchenna Izundu
International Editor

LONDON, July 26 -- BP PLC would welcome any favorable tax changes from the UK Treasury to help operations in the UK North Sea, BP's Chief Executive Tony Hayward said July 24 at a London press conference.

BP remains committed to staying in the North Sea, he added, but because it is a mature area in decline, there is a serious "mismatch between costs and revenue." Hayward said North Sea oil and gas production has been falling by 5-10%/year over the past 6-7 years. "It is a high-cost operating environment and arguably the highest in the world," he said. "It is the government's call. The North Sea needs every bit of help that it can get."

The announcement came as he unveiled the company's second-quarter replacement cost profits of $6 billion compared with $6.1 billion for second quarter 2006.

Dismissing speculation that BP may withdraw from the North Sea, Hayward said, "We have no intention to spin off the North Sea business. It's a great business; we want to keep it."

The costly fiscal regime for North Sea operations is deterring future investment, North Sea industry operators have warned, making it difficult for current projects to be economic. Within the past 2 years, there have been two major increases in supplementary corporate tax, bringing it to 20%. UK Prime Minister Gordon Brown, in his last budget as UK chancellor, did not change the current corporation tax level of 50% and a total tax rate of 75% on production from older fields (OGJ Online, Mar. 21, 2007). The Treasury has launched a consultation on changes to fiscal regime that will close in September.

Rumors dispelled
Hayward also scorned renewed speculation that BP is in merger talks with Royal Dutch Shell PLC, which is expected to announce higher second-quarter profits later this week. "The issues we face are operational, not strategic: we need to focus on restoring our operational performance."

Hayward, admitting that BP's operational performance was unsatisfactory, stressed that the company's problem is a lack of consistency. "We have done things well in Russia, Azerbaijan, and Angola for example, but there are places where we are not so good. This is partly due to our heritage, legacy, and how we have approached operations."

Building in-house expertise is also critical: this year BP said it will recruit 1,500 engineers.

Referring to the mega takeovers of Amoco and Arco, which were overseen by Hayward's predecessor John Browne, Hayward said another reason behind BP's poor operational performance was "unfinished business from the mergers." Hayward credited Browne and his team for creating "extraordinary assets" that had built BP into a "much stronger, bigger, and better company that we could have imagined 10 years ago." But the complexity and size of the mergers had created duplication of staff across the group, and Hayward plans to turn BP into a leaner, more efficient organization.

Furthermore, the company's business units have had a high level of operational control of their projects within a stringent financial framework. But Hayward said he planned to cap that independence.

Separately, BP has spent $5 billion on asset integrity, which is up $1 billion year on year.

Hayward was upbeat about BP's investments in Russia, and he wants to expand its investments there. "We have experience in dealing with Russia. We bring technology, capability, citizenship, and taxes—of $40 billion over the last 4 years." Discussions with OAO Gazprom over a strategic alliance to develop the 2 tcf gas in place for Kovykta gas field in East Siberia are under way. Each side will contribute $1.5 billion to a new joint venture to invest in energy projects across the globe and this may grow in time, Hayward said. No decisions have been made yet on which assets they may swap under this memorandum of understanding, which was signed in June.

Carbon capture projects
Vivienne Cox, BP's chief executive of gas, power, and renewables, told OGJ the company is investigating carbon capture and storage project opportunities around the world.

BP has proposed a 500-Mw hydrogen power plant in Carson, Calif., that would separate hydrogen from coke and inject 4 million tonnes/year of CO2 for underground storage. Cox said the project was progressing well but there were technical issues that yet must be overcome.

However, BP has dropped its proposal for a 475-Mw plant in Peterhead, Scotland, that would separate hydrogen in gas, use the hydrogen for power, and transport 1.8 million tonnes/year of CO2 to Miller oil field in the North Sea. Cox explained that the government had delayed a competition offering subsidies until November, which was too late for it to make a final investment decision.

Contact Uchenna Izundu at uchennai@pennwell.com.

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