Why BP's Recovery Strategy Will Fail
BP CEO Robert Dudley tried during Tuesday's quarterly earnings call to sell folks on the company's "rapid progress" towards recovery from last year's Gulf oil disaster. But there's a reason his attempt to drum up confidence in the company's long-term strategy fell a little flat: It hinges largely on returning to the Gulf of Mexico, a region where it still isn't allowed to drill. It's not exactly the bold, new strategy that will allow BP to grow and maintain its relevancy in the industry.
BP has had some success lately. It reported profits of $5.6 billion in the second quarter, 13 percent more than the same period last year. But the profit spike was largely due to crude prices, not savvy business decisions by BP execs.
BP is pinning its hopes on challenging projects
BP expects the momentum of its recovery to build into 2012 and 2013 as nine new high-margin projects start to come online. The problem is where it hopes to achieve that production and revenue growth. North Sea, Angola and the Gulf of Mexico are among those nine high-margin projects, BP said in its SEC filing Tuesday.
In short, its big plan for growth includes the Gulf, where it still isn't allowed to drill new wells, and the North Sea, where the UK government recently instituted a new energy windfall tax that will cut into profits.
Oil production is highly dependent on returning to the Gulf of Mexico
Production for the second quarter was 3.43 million barrels of oil equivalent a day, 11 percent lower than the same period last year.
BP can't push its production numbers up unless it can return to the Gulf of Mexico. And even if BP can resume drilling in the Gulf, the company may still come up short because it's sold off a number of production projects to pay for last year's oil disaster. To date, BP has divested $25 billion in assets including interests in four mature producing deepwater oil and gas fields in the Gulf of Mexico.
Luckily, BP isn't totally reliant on the Gulf. The company was recently awarded new exploration and production rights in Australia, Indonesia, Brazil and most recently, Trinidad. Still, it takes years and often more than a decade to find and develop a fruitful oil well.
BP's strategy needs a makeover
It's not that BP's plan to get smaller and focus on exploration and production is horrible. It's just not particularly impressive -- and it leaves a big question as to how it will grow materially over the next five to 10 years.
Other Big Oil companies have tweaked their growth strategies in recent years as resources and economics have changed. Exxon (XOM) jumped into the U.S. unconventional natural gas business with its $31 billion purchase of XTO; ConocoPhillips recently decided to spinoff its refining business and Shell (RDS) has turned much of its efforts and investment into developing mega gas projects in Australia.
Photo from Flickr user hans.gerwitz, CC 2.0
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