David Knott
International Editor
What do you say about a year in which your operating profit is down 20%, net profit is down 40%, and you have a major restructuring charge in which your books show you have a loss of 350 million in charges and asset write-downs?
David Simon, chief executive of British Petroleum Co. plc, asked that rhetorical question at the announcement of the company's results for 1992. He answered that figures for fourth quarter 1992 showed improvement over the same quarter of 1991 and were encouraging.
The quarter to quarter figures mask the turbulence of a year in which thousands of BP employees lost their jobs and the company went through the final throes of a major restructuring that began in 1989. Simon took BP's top job after his predecessor Robert Horton was sacked following a boardroom row (OGJ, July 6, 1992, p. 35).
A midyear watershed cost BP 888 million ($1.261 billion) in restructuring charges.
Those came largely from reducing the work force by 14,500 during 1992. Another 9,000 BP jobs worldwide will disappear by 1995. About 5,000 of those will be in the oil and chemicals divisions. The rest will come from divestment of the nutrition division and other noncore businesses.
BP's aim is to reduce worldwide payroll to about 50,000, excluding retail outlets and nutrition division.
TURNAROUND
Although further cuts will occur, BP management was relieved that the 1992 results showed the drastic surgery of the past 3 years is beginning to take effect.
During 1992, BP lost 352 million ($500 million) on a replacement cost basis, compared with a profit of 1.035 billion ($1.47 billion) for 1991.
Net cash flow figures revealed a sudden change at midyear. The first half showed a 649 million ($922 million) loss, but second half cash flow was a 42 million ($60 million) profit.
Fourth quarter 1992 figures were relatively healthy. A fourth quarter replacement cost profit of 193 million ($274 million) was well up on the 1991 figure of 72 million ($102 million).
"We have continued to restructure the business," Simon said. "We have regrettably had to downsize the staff, and we have had to put some very tough margin and cost targets to all the teams through all the businesses.
"The measure of the turnaround of the second half year is one, I think, that our businesses can be extremely pleased with and is a step in the right direction."
BUSINESS CYCLES
Simon said BP's problems were seeded during the downturn of 1987. The British government sold its 32% share and BP expanded, taking over Standard Oil in the U.S. and Britoil plc in the U.K.
"As a big company, we had taken the line that it was right to spend through the recession," Simon said. "There was the need to ride through business cycles."
At the same time the oil industry was reassessed by the financial community. Stock markets took the view that BP had taken on too much debt.
"The stock price was cut to around 1.90 ($2.75)/share. At that price it was rating us at very little more than our asset value, with virtually no premium for the 5 billion bbl of reserves we held. The market was telling us it wanted a different kind of performance from that which we were giving."
Horton instigated Project 1990, a major program to cut out the fat of BP. A survey in July 1989 among BP's 150 top managers showed the company had become bogged down by its bureaucracy. The company structure was thought to impede operational flexibility and collaboration among BP's many businesses.
"What I'm trying to do," Horton said in 1990, "is simplify, refocus, and make it clear we don't need to have hierarchies. We don't need to have baronial head office departments. This is a fundamentally different way of looking at the way you run the center of the corporation."
PROJECT 1990
Project 1990 set out to simplify the role of BP's corporate center, devolve financial authority and responsibility down a flattened corporate hierarchy, and eliminate committees and layers of control and planning. This would force individuals to take responsibility and initiative.
When restructuring began, BP thought, like the rest of industry, the world's economies would soon emerge from recession. BP spent about $8 billion in 1991, anticipating 23% economic growth in 1992.
However, persistence of the recession forced BP to rethink its capital plans, as Simon explained to a group of London analysts. One of his first tasks was to speed the moves Horton began.
"We had to reduce spending and put the group on a sustainable base, assuming that margins were not going to improve," Simon said.
His No. 1 priority was to improve profitability of the asset base.
Simon led the BP board to focus on the medium term, while taking a hard look at group strategy. The board decided that BP must concentrate on being an international, integrated hydrocarbon company with an emphasis on technology.
UPSTREAM BIAS
At mid-1992 BP's assets were split about 50% upstream and 50% downstream. Upstream will be increased to about 60%, but BP will continue in all hydrocarbons market sectors.
"Integration brings benefits in terms of reduced earnings volatility," Simon explained.
In geographical terms, BP has 50% of its asset base in Europe and 35% in the U.S., mainly Alaska. The other 15% includes projects in the Middle East, Africa, Australia, and Southeast Asia.
The European component will be reduced in favor of Southeast Asian investment, Simon said, while the U.S. contribution will stay about the same.
"The underpinning is technology,' he said. "We are to spend about $500 million on R&D and engineering in 1993 and have moved researchers and engineers together, placing them within the businesses to ensure rapid, effective application of technology."
PROFITS FOCUS
BP's main target medium term is higher profits. This is intended to come through a 10% reduction in fixed costs, improved margins on all businesses, including upstream, and cuts in capital spending.
Steve Ahearne, managing director and chief financial officer, set out the targets in August 1992, and they have not changed since:
- $2 billion/year profits under conservative market assumptions: $18/bbl for Brent blend oil, $3/bbl refining margins, and ethylene margins $270/metric ton.
- $5 billion/year capital spending for 1993 and 1994.
- $1.5-2 billion in asset sales for 1993.
- Debt reduction of $1 billion/year beginning this year.
"We consider we now have a sustainable position upstream at $18/bbl in 1992 dollars," Simon said. "Portfolio focus is intended to continue, and the process will enhance the performance of the remaining assets. We have a good track record and have achieved the target $1.5 billion divestments in 1992."
Capital spending is to be made more efficient through applied technology. Spending will be allotted 60% upstream and 40% downstream.
"Upstream, we assume $3 billion spending to be sustaining," said Simon. "In fact, the production profile is aimed to be at least maintained at 1.5 million b/d and is likely to grow toward the end of the 1990s.
"Downstream, there are options to expand capacity in Southeast Asia and in Eastern Europe." Downstream capital spending this year and next will be split $1.4 billion on refining and marketing and $500 million on chemicals.
BP Exploration is through with its major divestment program. BP Oil, which covers refining and marketing functions, still has some assets to weed out. Major targets will be the "strategically peripheral" parts of BP Chemicals and a managed exit from BP Nutrition.
EXPLORATION CHANGES
By the end of the 1980s BP Exploration was hampered by aging facilities and falling production in its major oil fields, Prudhoe Bay in Alaska and Forties in the North Sea. The Britoil acquisition added mature assets to its portfolio, while safety and environmental spending on older North Sea installations became onerous in the post-Piper Alpha era.
When John Browne became managing director and chief executive of BP Exploration in April 1989, he weighed the situation. He concluded BP was not finding enough hydrocarbons and it was undertaking developments in areas that at the time were high cost.
Finding and development costs peaked at $11/bbl of oil equivalent (BOE) in 1989. Browne set out to improve use of capital, increase recovery from existing fields, and target exploration to find high volume, low cost reservoirs. His aim was to reduce finding and development costs to $45/BOE.
"Over the last 3 years we have sold more than $4 billion worth of assets, including almost all the items identified as noncore in the 1989 strategy review," Browne said.
Moves included the sale of North Sea assets in 1989 to Oryx U.K. Energy Co. for $1.3 billion, the sale in 1991 of U.S. onshore exploration, production, gas transmission, and marketing assets of Tex/Con Inc. in two deals totaling $640 million, and withdrawal from operations in Canada.
The exploration division is through with major divestments. Asset sales last year were less than $500 million and this year will be about the same: "a normal trading level for a business of this size."
EXPLORATION SPENDING
Group plans to reduce capital spending to $5 billion/year from 1993 onward would leave BP Exploration with about $3 billion to spend.
Browne said, "The improvements we have achieved in productivity since 1989 mean that a total of $3 billion gives us ample scope for exploration and development work in the North Sea, the U.S., and internationally."
Two thirds of the total will be devoted to sustaining key producing areas, including field development and a steady program of satellite developments.
The remaining one third will be spent on emerging profit centers-the gas business and exploration.
Production is likely to remain at current levels for 1993: 1.3 million b/d of oil and 1.1 bcfd of gas. In 1992 BP booked 600 million BOE, more than replacing production. Browne intends this to continue in the years ahead.
Declining production in older fields will be offset by new production, in particular from Bruce field in the U.K., Draugen in Norway, Pagerungan in Indonesia, and Point McIntyre in Alaska.
BP has 55 projects awaiting development around the world. Browne said unit development costs average $3.40/bbl and are still falling. In 1992 the North Sea and Alaska provided 90% of BP Exploration's profit. Browne said they should provide the same net cash flow in real terms in 2000 as they do now.
CORE AREAS
In the North Sea a stream of development projects aims to replace declining production from mature fields.
BP hopes to maintain North Sea production at 500,000 b/d to the end of the century.
Miller field went on stream last year at 120,000 b/d gross, Bruce field will provide almost 10% of U.K. gas needs starting at yearend 1993, and East Brae will go on stream at the end of this year with production rising to 100,000 b/d gross.
Browne cited U.K.'s Forth field as an example of how profitability of a project can be transformed. Once thought uncommercial, Forth is now said to have development costs among the lowest in the North Sea. It is due on stream this year, with peak production of 62,000 b/d expected in 1997.
"In 1990, the Forth development had a negative value," Browne said. "Now, the value is estimated at just under $400 million. This was achieved by spending more time studying development options, utilizing a single integrated project team, including contractors, and by application of technology. Horizontal drilling has reduced well requirements from 16 to eight."
BP's most recent discovery is a 250 million bbl plus discovery west of the Shetland Islands, which BP said may open the frontier area to development (OGJ, Mar. 15, p. 31).
Off Norway, BP operates Ula and Gyda fields, which produce 85,000 b/d gross, and has a 14% interest in Draugen field, operated by AS Norske Shell, which will go on stream next year. BP also bid for acreage in the 14th Norwegian licensing round, which closed Mar. 1.
In Alaska, Browne reported, Prudhoe Bay production in 1992 was 10% higher than predicted in 1989, due to successful gas handling projects, well stimulation, and low cost drilling.
Endicott and Kuparuk fields are performing better than expected, while Kuparuk is likely to remain on plateau at about 300,000 b/d until the next century. Port McIntyre field is under development with anticipated initial production of 25,000 b/d by next year.
GROWTH AREAS
BP has added potential profit centers to North Sea and Alaska core areas, Browne said. They include the Gulf of Mexico and Colombia, where developments are in progress; Azerbaijan, where terms are being negotiated; and Viet Nam, Indonesia, and Nigeria, where exploration is under way or imminent.
BP's current production in the Gulf of Mexico is 30,000 BOE/day net. The Viosca Knoll Block 989 development, with reserves of 90 million bbl, is due on stream in 1995. Work on the Mars field project, where Browne said development cost could be less than $4/bbl, will start this year. "Mars is not a project in isolation," Browne said. "The area could be a major profit center for us in future years."
In Colombia, BP's Cusiana and Cupiagua fields hold at least 2 billion bbl of reserves. Government approval to declare Cusiana commercial is expected this summer. Production will then be built to match the 150,000 b/d capacity of available export pipelines.
BP holds the large Piedemonte area north of Cusiana outright and is collecting seismic data and drilling a well.
Access has been established in Azerbaijan by the BP alliance with Den norske stats oljeselskap AS. BP-Statoil has a 20% interest in a field development program in the Caspian Sea, which holds reserves estimated at 1.8 billion bbl of oil.
BP-Statoil also has exclusive negotiating rights on the Chirag discovery immediately northwest of Azeri, which has estimated reserves of at least 1 billion bbl, and the "highly prospective" Shak Deniz acreage southwest of Azeri.
"This entire offshore province has high potential and large volumes developable at low cost," Browne said. "We have a strong starting position."
SECURE BASE
Browne set capital outlays in the North Sea and Alaska for 1993 and beyond at $1 billion. Most of the remaining $3 billion/year in exploration group capital will go toward new profit centers such as Colombia-and the Gulf of Mexico.
"Much of the capital expenditure from 1993 onwards is uncommitted," Browne said. "Should oil prices fall and remain at, say $16/bbl, we have the flexibility to respond by adjusting spending."
Beyond potential profit centers already targeted, BP is studying prospects in Venezuela and Northwest China and has service projects in Siberia and Kuwait. "Activity in these areas is currently focused on building relationships," Browne said.
Underlying the plans is a secure production base, he said. After divestments of 180,000 BOE/day in 1989-92, production will remain steady at about 1.5 million BOE/day through to 1995 and then begin to increase.
"Two years ago we said 80% of the production was already secured from existing areas, mainly North Sea and Alaska," Browne said. "Now, with additional reserves identified in the Gulf of Mexico and Colombia, the proportion that is secure has risen to over 90%."
REFINING, MARKETING
BP's refining and marketing division turned in an unsatisfactory performance last year after 4 good years, said Russell Seal, managing director and chief executive of BP Oil.
"The 1992 problem was refining, especially in the U.S.
"Recession, overinvestment and, in the U.S., the Clean Air Act swept way the structural improvement forecast by many in the industry for refining margins."
Seal said BP Oil's profits declined more than some competitors' because BP's assets are mainly in Europe and the U.S. east of the Rockies. Both areas were particularly hard hit in 1992.
In refining, BP's cash costs were 20-25cts/bbl below the average for European and U.S refineries. Marketing was boosted by brand marketing over the last 3 years to increase volumes 6%/outlet.
"A mixture of rebranding, rationalization, and investment in the retail network led to a 5% increase in BP's core branded gasoline sales at a time when most markets are flat," Seal said.
Retail unit costs and site through-puts also were improved. Costs were down 20% and volume productivity improved 28% since 1990, said Seal, while the number of outlets worldwide was reduced to 16,000 from 20,000.
R&M TARGETS
BP Oil's target is to reduce costs by $300 million this year and $100 million in 1994. From 1994 onward, the target is to "eat inflation" so money of the day costs stay the same.
Downstream oil capital spending peaked in 1991 with the $800 million acquisition of Petromed, Seal said. BP Oil bought 92.9% of Petromed SA, a Spanish refining and distribution company, to gain 9% of the Spanish retail market and a modern refinery at Castellon on the south coast. "The performance of these assets is good and exceeds our expectations."
BP sees Europe as having surplus unsophisticated refineries, some of which went back on stream in the last 2 years. A major problem is judging the future in the former eastern bloc.
"Demand in the east collapsed last year in the former Soviet Union," said Seal, "and some of the refineries there are in pretty poor shape. It is entirely possible that, as demand comes back in the former Soviet Union, we will see this demand passed on to European refining.
"But I think it is most likely that short term pressures mean there is still surplus capacity and some of the weaker refineries need to be cut back."
CHEMICALS SLUMP
"It has been a hard slog for the chemicals division," Simon told the annual results presentation. "Some assets need to be refocused, as there is overcapacity in Europe."
BP Chemicals lost $42 million in 1992, largely due to poor performances from the petrochemicals and polymers units.
Simon set BP Chemicals a target of 50% improvement in productivity, to place the company among the top 25% of the sector. The first hurdle, though, is to stop the chemicals division from being a cash drain on the group.
BP Chemicals is split into six business divisions: nitrites and nitrogen, bulk chemicals, petrochemicals, polymers, specialities, and advanced materials and carborundum.
Bryan Sanderson, managing director and chief executive, said his strategy is to concentrate on core strengths and sell underperforming assets such as the labor intensive advanced materials division.
Sanderson sees the chemicals industry's main problems as overcapacity and falling demand. He said across Europe three or four cracking plants need to be closed and a similar number of polymer plants mothballed, although he has no timetable in mind.
On Mar. 2 he announced that a slump in German demand would mean BP Chemicals must shed 1,400 jobs in 1993 and a further 2,700 by 1995. Many of them will be through planned divestments.
CHEMICALS PLANS
"Petrochemicals is part of the core of our activity," Sanderson said. "It is also the most volatile, and margins are currently in a worldwide slump. BP is well positioned for when margins recover, with Grangemouth one of the most cost competitive crackers in Europe.
"Polymers is both a strength and a problem area. We have leadership in gas phase technology for polyethylene and a growing licensing income. However, western Europe is in a very deep recession in the plastics business, and this dominates the returns."
Sanderson plans to expand petrochemicals and polymers in the Far East, along with interests in acetyls, acrylonitriles, carborundum, and some specialities around the world.
General chemicals, nitrogen, and some specialities will be maintained at present levels.
European petrochemicals and polymers are due for a shakedown, along with some specialities. The advanced materials group is marked for divestment. A target of $600 million recovery from sales of specialities by 1995 was set.
"The difficult area is the very heartland of the petrochemicals business, which is ethylene, and the related polymers business," Sanderson said. "That requires some supply side adjustment across the industry, and we are not big enough in the industry to set the pace, although we can set some examples. There will be a combination through the industry of divestment, shutdown, and merger and alliance."
Apart from advanced materials, BP Chemicals has not completed a divestment list. Areas that are not potentially profitable will go, although in some cases BP will consider setting up joint ventures to reduce its commitment.
"We are just putting a sieve in there and trying to force everything through, asking, 'Which businesses are going to be returning a satisfactory profit over the next year?" Sanderson said.
1993 DIVESTMENTS
BP intends to raise $1.5-2 billion from asset sales this year and continue to repay borrowings of $15.3 billion at an average $1 billion/year.
Asset sales in 1992 raised $1.9 billion, improved cash generation and reduced cash balances, and enabled about $550 million of borrowings to be repaid in the second half of the year.
BP has three asset disposal deals in hand that could go halfway toward meeting its 1993 target. BP Nutrition's consumer foods group is expected to go to U.S. foods group Sara Lee for $100-120 million, while the consumer products division is expected to sell for about $250 million.
The third deal, involving BP's 49% interest in the Olympic Dam mine, Australia, was completed Mar. 2. The BP shareholding went to Western Mining Corp., already a partner in the project, for $455 million.
BP Nutrition doubled its profits to 73 million ($105 million) for 1992, a performance that impressed Simon as a great result when there was little growth in the world market.
However nutrition now falls outside BP's sphere of business, so the division will be sold business by business. Latest target is the sale of Purina Mills, a U.S. pet food company. BP engaged the First Boston bank to advise on the sale.
If Royal Dutch/Shell Group and Exxon Corp. form the first rank of oil and gas companies, BP's strategy is designed to keep it at the front of the second rank.
"We do not necessarily have to compete with Shell or Exxon in order to be successful," Simon said. "There is plenty of room in the industry for companies of different sizes. We are positioning as a fit middleweight rather than a heavyweight. We have a good asset base that can be very competitive, provided we attend to performance."
Copyright 1993 Oil & Gas Journal. All Rights Reserved.
