BP CEO: Oil collapse could repeat 1980s with years of low prices

HOUSTON – The CEO of BP says crude prices will likely settle in at low levels because the surging U.S. oil production that sent markets into a tailspin isn’t going to ease up overnight, leaving the company with no choice but to work quickly to adjust to $48 oil.

And oil prices might stay that low for a while, he said.

We see (U.S. production) continuing to increase at least through the summer, even though rigs are falling very fast,” BP CEO Bob Dudley said during a conference call with investors and analysts, providing a gloomy outlook despite the rally in oil prices in recent days.

Crude stocks are growing around the world, he said, likely pushing off inventories to floating storage “before long here, and when you have that much storage it takes a long time to work that off.” The rate of China’s economic growth has slowed and an agreement with Iran could push oil prices lower if sanctioned crude returns to the market, he said.

Dudley drew a comparison between the current slide in oil prices and the bust of the mid-1980s, which upended the surging Texas economy, left thousands out of the job and battered the oil industry, real estate markets and banks.

At times, it reminds me a little bit of 1986 in terms of the potential for this to be an extended downturn,” Dudley said. “I think any time the price of oil drops 60 percent it’s not a correction, it’s something different.”

BP chief financial officer Brian Gilvary added BP will have to plan for a minimum of a year before oil prices rise to even $80 a barrel, “and it could be several years.” And Tufan Erginbilgic, BP’s chief executive of its downstream division, said it could take three years or more for oil markets to clear out excess supply. BP will likely defer making final investment decisions on several oil-production projects, possibly including its Mad Dog offshore project in the Gulf of Mexico and its operations in Canadian oil sands, Dudley said.

The executives’ comments came as BP announced it would slice billions out of its spending plans this year, becoming the latest oil major to yield ambitious investments to falling petroleum prices.

The British oil giant said Tuesday it would cut its annual budget to $20 billion, down about 20 percent from its original program as it slashed spending on hunting for oil and postponed refining projects. It followed oil giants Chevron and Royal Dutch Shell in signaling lesser spending as a way to cope with lower oil prices and preserve shareholder dividends.

The company reported it lost $4.4 billion in profits during the fourth as it wrote down the value of some of its oil-producing assets and spent $450 million on restructuring charges — largely severance payments for laid-off employees. The sum of its charges came in at $3.6 billion.

It saw a net loss of 32 cents a share in the October-December period, down from $1.04 billion, or 48 cents a share, in the same period in 2013. Its sales fell from $93.7 billion to $74 billion in that time, as sunken crude prices continued to take its toll on the oil major.

It’s a far different world than the one BP expected when it set out in 2011 to trim its balance sheet and pay down tens of billions in oil spill costs stemming from the 2010 Deepwater Horizon disaster. It sold off more than $40 billion in assets in recent years and is halfway to divesting another $10 billion in assets through the end of the year.

We are where we wanted to be, but the outlook to the environment now is much weaker,” Dudley told investors. The company is pursuing 60 projects to simplify its business, including combining a number of corporate functions. In the upstream segment, BP has split off its U.S. lower 48 business.

We’re now further intensifying our efforts in response to current market conditions and we will be actively looking to take advantage of the deflationary opportunity,” Dudley said. “We’re not going to put a number to what we think is achievable today.”

He said on top of the $1 billion in restructuring charges BP has said it would take this year, the company will also look to reduce its cost base in preparation for a more sustained period of lower oil prices.

We are deepening our efforts and looking at all activities across the group,” he said. “This will be an area of intense focus in 2015.”

In its U.S. lower 48 oil business, BP has cut its workforce by about 900 employees and contractors — through layoffs, transfers to other parts of the company, early retirements and buyouts — and have seen cash costs fall about 25 percent between 2012 and 2014, as it has trimmed the business to become more efficient, said Lamar McKay, BP’s upstream chief executive. 

“In past cycles we see cost reductions on both the capital side and really on the operational side if 20 percent to 30 percent in 18 to 24 months,” Mckay said. “There are a lot of contractors and obviously other operators making big changes today. It will … probably happen fastest in there U.S. where some of the capital is being trimmed back quickest.”

He said the company has 1,250 contracts coming up for renewal in 2015, “so we’ll be using those as opportunities to understand what the cost set should be on the activity associated with those contracts going forward.”

The firm’s upstream segment took a $3.17 billion net loss, down from the $2.5 billion it earned the year before. Its oil production fell 2.6 percent, but it still expects its output to rise this year.

The refining business lost $4 billion in profits as petrochemical margins weakened in Asia and it took large restructuring and impairment charges on its fuels business.

BP’s 19.7-percent stake in Russia’s state-owned oil giant Rosneft collected $390 million in profit, down from $901 million in the last three months of 2013. The Russian oil producer’s profits have worried BP investors as lower oil prices have battered the Russian ruble.

Its shareholder dividend, Dudley said, remains the company’s first priority. BP will pay a dividend of 60 cents per American Depository Share in March. 

The company provided little detail on the thousands of jobs it plans to cut over the next year, but it said in the fourth quarter 23 percent of its restructuring charges – the bulk of which come from severance payments – was taken from its oil-production business.

More than 36 percent of the payroll-related cut came from its oil-refining business and 40 percent came from its corporate divisions and other businesses.

The company had said in December it will take $1 billion in restructuring charges from the fourth quarter through the end of 2015.