BP faces ‘reset phase’ – also known as a serious problem

Bob Dudley, the chief executive of BP, laid bare the industry’s North Sea problems this morning when he told me that, anecdotally, he’s heard as much as a third of the offshore fields there are operating at a loss.

He wouldn’t say if any of BP’s was among them, but you certainly got the feeling it was something he was worried about. “There’s a serious problem in the North Sea,” he told a round table of journalists, as he reiterated calls for a tax cut in the upcoming March budget.

That there’s a problem was clear from the company’s results this morning. Profits down to $2.2bn in the three months to December 2014. That’s below the $2.8bn a year ago. And when you include a charge for writing down the value of North Sea assets and oil reserves, BP was pushed to a loss of $969m. A loss. That’s not something BP has historically been used to.

And the problem isn’t going to go away any time soon. According to Mr Dudley the industry is in what he called a “reset phase”, a “period of intense change”. He likened the fall in the price of oil from over $100 a barrel just last summer to less than $50 today to the slump in 1986 when oil fell to $9 a barrel. It was an “incredibly stressful period then,” he said.  It’s clearly stressful now, too.

BP has already announced a $1bn restructuring charge for 2015, but the company’s finance chief said he would update the market in due course if that needed to change. And it said today it would cut capital spending by 20 per cent, or about $4bn this year – meaning it will now spend $20bn rather than the $24bn it planned.

Of course, that’s still a massive amount of money, and BP is by no means on the brink; it maintained its dividend to shareholders today. But given the problems of the past, BP does have less room for manoeuver than others.

All these cuts mean jobs will go, IT systems will be streamlined and, crucially, big projects – like BP’s next deep-water exploration in the Gulf of Mexico – will be put on hold. Some would say that’s no bad thing.

This isn’t a knee-jerk reaction. Dudley and his team are factoring in low oil prices this year and for the next several years, he said. There’s no room for being in denial mode, he added. “The longer you don’t respond to the problem, the more difficulties you get into.” So BP will react quick and fast, Dudley said. It’s all about cost discipline and rebalancing for the “new reality”.

The other new reality is Russia. BP owns a near 20 per cent stake in Rosneft, the majority state-owned oil firm. It was meant to be the next big thing for BP, giving it access to the crown jewels of Russia’s Arctic. But Rosneft is suffering too, from the oil price and the sanctions imposed on Russia because of the conflict in the Ukraine.

BP’s profits from Rosneft fell to $470m in the fourth quarter, nearly half what it had been the year before. But those profits could have been wiped out altogether were it not for an accounting change Rosneft put in place that shielded BP from the slide in Russia’s rouble. As if all that isn’t enough uncertainty, the disastrous gulf of Mexico oil spill – in which 11 people lost their lives –  isn’t fully behind BP either.

The clean-up and compensation has to date cost it $43.5bn. But the district court in New Orleans is in the process of determining its fine for the spill. And that could be as much as $13.7bn. It’s a perfect storm of factors that mean the future for BP looks bleak on all fronts. Or as Dudley put it himself today, less of a perfect storm and more of a “raging gale”. One he clearly does not believe will dissipate any time soon.

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