UPDATE 2-BP to be simpler, oilier as investment rises

Mon Dec 3, 2012 11:42am EST

* Capex to be $24-$27 billion per year 2014-2020
    * Reiterates cash flow forecast
    * To divest $2-$3 billion of assets per year


    By Andrew Callus
    LONDON, Dec 3 (Reuters) - BP is raising investment
and betting its future on oil over gas, as the slimmed-down
British group fights to recover from the U.S. oil spill and
Russian rows that have hurt its reputation and share price.
    The No.4 ranked company among western investor-owned oil and
gas groups said it would raise capital spending, excluding
acquisitions, to between $24 and $27 billion a year in the years
2014 to 2020 from an estimated $22 billion in 2012 and $19.1
billion in 2011.
    Next year and in 2014, spending will average between $24
billion and $25 billion, BP told analysts in its first strategy
update since striking a series of deals aimed at getting its
Russian and U.S. operations back on track.
    The so-called "upstream" oil and gas production arm of the
business that generates the bulk of profits will absorb more of
that spending too - 80 percent up from 70 percent at present,
further reducing the importance of its refining and marketing,
trading and other non-production activities.     
   The extra spend will be financed by higher cashflow from
operations and asset sales of between $2 billion and $3 billion
a year. The company reaffirmed a target it set at the start of
the year to increase operating cash flow by 50 percent by 2014
versus 2011. 
    Like all top investor-owned western oil firms, BP is
struggling to increase output and reserves as nations guard
their resource wealth jealously, and spending ever more to find
and develop new supplies.
    Unlike its peers though, BP has had some difficult recent
years in the United States and Russia - which contribute about
half the company's output.
    In order to pay its dues for the oil spill and refocus its
Russian strategy, BP has undergone a massive rearrangement of
assets with total completed and planned divestments of $65
billion - about half its total market value.
    BP's stock market value "discount" to its peers like Royal
Dutch/Shell and Exxon Mobil amounts to tens of
billions of dollars as a result of its U.S. and Russian issues,
analysts believe, but although the divestments were to a large
extent forced upon it, Chief Executive Bob Dudley argued that
they had also made BP simpler and easier to manage.
    "We have sold 50 percent of our upstream installations, one
third of our wells and half of our pipelines," Dudley said, "yet
we have only lost 9 percent of our production and 10 percent of
our reserves. That makes us a simpler company."    
     
  
    
    MORE OIL, LESS GAS
    Dudley also agreed the company was taking a route focused
more on oil and less on gas than some of its rivals. 
    BP is set to retreat in the rankings of Liquefied Natural
Gas (LNG) producers over the coming years, although in barrels
of oil equivalent terms, its oil and gas output levels are about
equal to each other.
    In the United States, and particularly the Gulf of Mexico,
BP became a pariah after its 2010 oil spill there. Although BP's
U.S. offshore operations are back to pre-spill levels, last
month it pleaded guilty to criminal misconduct and added a $4.5
billion penalty to the $23 billion the disaster has cost it.
    Investors expect the settlement will allow the company to
move on, but last week the U.S. government used BP's criminal
status to ban it from new federal contracts over its "lack of
business integrity." 
    Also last week, BP avoided bidding for Gulf of Mexico
leases, raising a new question mark over its plans for a
province where it is the main deepwater leaseholder, and which
accounted for much of its output growth plans in past strategy
announcements.
    In Monday's presentation, Dudley made clear the Gulf of
Mexico was still a core growth area for the company. 
    In Russia, where BP is more heavily invested than rivals, BP
has had disagreements with its 50-50 partner in TNK-BP
, privately-owned AAR. BP has also pursued new Russian
projects with the increasingly dominant state sector in the form
of deals with government-owned Rosneft.
    In October and November, it finally struck a series of deals
allowing it to exit TNK-BP, acquire a stake in Rosneft, and
begin talks about such projects. 
    Rosneft board member Mikhail Kuzovlev gave a speech at
Monday's presentation in which he hailed its $55 billion dollar
deals to buy out both BP and AAR as "one of the largest energy
transactions in history." 
    Monday's strategy update comes hard on the heels of a Nov.
23 reorganisation of BP's oil and gas production management,
reversing a change it enacted after the spill. 
    The move puts Lamar McKay, head of BP's U.S. operations, in
charge of the upstream division, freeing up Dudley from close
oversight of the day-to-day operations he took over in the wake
of the spill, which killed 11 men and spewed millions of barrels
of crude into the sea.
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