BP Looks to Boost Refining Profits

THE WALL STREET JOURNAL

MARCH 2, 2010, 3:09 P.M. ET

By GUY CHAZAN

LONDON—BP PLC on Tuesday said it is pushing through the biggest shake-up of its oil-production business since it acquired Amoco 12 years ago, as it seeks to increase annual profits by more than $3 billion over the next two to three years.

In an update to investors Tuesday, Chief Executive Tony Hayward said that while the British oil giant’s portfolio ranks among the best in the industry, “our financial performance has yet fully to reflect this.” He said BP sees a “real opportunity to make this portfolio work harder for us, and we intend to do just that.”

The push involves another round of efficiency measures designed to improved BP’s financial performance and its sometimes patchy record of executing big oil and gas projects, as well as more standardization across the company and improvements in the way it buys goods and services from third parties.

The reforms show BP seeking to build on the big efficiency gains it has pushed through over the last two years, a period of volatile oil prices and soaring industry costs.

BP said it will target a $2 billion increase in underlying pretax profit in its refining division, which saw earnings plunge last year amid the global economic slowdown, and a $1 billion rise in profitability at its exploration and production arm, in part through the creation of a new central unit to manage all major projects.

Mr. Hayward said it is the “biggest change we’ve instigated in the upstream,” or exploration and production, since the merger with Amoco in 1998.

BP also said its annual output would rise 1% to 2% a year on average to 2015, two years further out than the forecast it gave a year ago. It said it would start 42 new major projects between 2010 and 2015 that would contribute about one million barrels a day to total production.

Mr. Hayward took over at BP in 2007 with the company scrambling to recover from mishaps, such as an explosion at the Texas City refinery in 2005 that left 15 people dead, leaks from its Alaskan oil pipeline and delays in projects such as its flagship Thunder Horse platform in the Gulf of Mexico.

BP saved $4 billion in costs last year, double the initial target, and has shed some 7,500 jobs since 2007. That helped it close the gap with rival Royal Dutch Shell PLC.

But underlying earnings, which strip out nonoperating items and disposals and acquisitions, trail those of Exxon Mobil Corp., considered the company to beat. BP’s underlying return on capital employed is also lower than most of its peers.

BP’s head of exploration and production, Andy Inglis, said projects had exceeded their budgets by 20% on average over the past five years. Some overruns occurred because of inflation, but most resulted from “inconsistency in our approach to project management,” he said. BP could save $700 million a year through better project management, he said, and $500 million a year by improving drilling efficiency—measured by the number of days a company takes to drill down 10,000 feet.

In centralizing project management, BP is seeking to emulate Exxon, widely seen as the most efficient of the oil majors. Exxon is far more centralized than BP, where the heads of business units have traditionally enjoyed broad independence.

Shell has pushed through similar changes. Last year it created a new business to manage the design of all major new projects, previously the responsibility of its various operating units. The idea was that it would save money and improve project execution by centralizing procurement and contracting.

Write to Guy Chazan at [email protected]

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