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The Sunday Times: BP goes for the unconventional

Inside the City

December 9, 2007
Grant Ringshaw

WHEN is a strategic u-turn not a u-turn? When it’s an evolution of strategy. That was the message BP tried to spin last week after reporting a Canadian oil-sands deal worth up to $10 billion (£4.9 billion) with Husky Energy.

Under Lord Browne, BP was critical of oil-sands schemes, mainly due to high production costs. Eight years ago, it sold assets in the region and focused on Russia and other tricky projects including deep-water fields.

Though BP was never totally against oil sands, what is curious is why it took so long to return. Production is difficult and makes sense only when oil prices are high – like now. But the potential is huge. Overall, output could reach 4m barrels a day by the end of the next decade, roughly the same as Iran’s current production.

Shell, the biggest global player, is raking it in with margins per barrel of the dirty bitumen double the average for crude oil.

Part of the explanation lies in BP and Shell’s apparently different bets on oil prices. A couple of years ago, Browne indicated BP used $40 a barrel in the medium term as the yardstick to make investment decisions. By that measure, oil sands are unattractive. Shell has bet on prices staying higher for longer, gambling on long-life upstream projects.

Now, BP looks guilty of being excessively cautious. Yet, it is not quite that simple.

BP executives admit privately that the measure has been $60 oil for some time.

The Husky deal sends a signal that Tony Hayward, the newish BP chief executive, will look for unconventional sources to replenish reserves – as many alternative prospects are closed off by the rise of national oil companies.

The deal also addresses BP’s need to sharpen up refining. Under the agreement, BP gets 50% of Husky’s Sunrise project and sells its partner half of its Toledo refinery. The pair will together invest $5.5 billion to upgrade Toledo to handle oil sands crude and Sunrise. Integrating oil-sands production with refining is a big advantage.

An expected improvement in BP’s troubled refining and marketing operations is key to the group’s growth story. Though deep-water projects off Angola and the Gulf of Mexico will finally come on stream and boost production, there are upstream worries.

The next big issue is for Hayward to quickly deliver a meaningful joint venture with Russia’s Gazprom after TNK-BP gave up control of the giant Kovykta gas field.

Forget the semantics about evolution. Hayward is showing a much-needed and smart pragmatism.

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