I was grateful to be invited to address the Aberdeen business community last week as part of the Scottish Council for Development and Industry’s (SCDI) Oil and Gas Industry Leader Series.
In the discussion that followed everyone was clear that we still have a lot to do to complete the necessary transformation of North Sea competitiveness.
But there was a real sense of optimism in the room as I spoke about the green shoots of confidence that are starting to show in our sector.
My speech to the SCDI focused on three main themes.
Firstly, I looked at how future trends in world energy markets might affect the North Sea.
I then focused on how BP has adjusted to lower prices and is working to double production from the North Sea by 2020.
I concluded with my thoughts on how the industry can stay competitive in a rapidly changing world.
Between now and 2035, the BP Energy Outlook – which looks at the global energy landscape – projects oil demand to grow by an average of 0.7% per annum and gas demand to grow twice as fast, at 1.6% per annum.
So, we can probably be assured of strong, ongoing demand for oil and especially gas. The more pertinent question is at what price?
There is cautious optimism in the markets about the deal struck between OPEC and 11 other producers including Russia but we still have a large overhang of stocks.
US production remains significantly below its end-2014 peak, yet, it is clear that US tight oil production has started to recover following the rise in price.
All these factors are currently essentially in balance – and it is noteworthy that oil prices have been remarkably stable since early December.
However, the BP Energy Outlook estimates that there is twice as much technically recoverable oil available as the world is expected to need between now and 2050, and it is increasingly likely that some oil reserves will never be extracted.
The result is likely to be significant pressures to dampen long-run prices and increasing competition for market share between companies and producer nations.
For a traditionally high-cost basin like the North Sea, that will mean there can be no let-up in our drive for efficiency and cost-reduction if we are to continue to attract investment and maximise economic recovery.
The expectation of resource abundance and sustained price pressures could advantage the North Sea in some ways, however.
In an environment of supply abundance, the industry will naturally be more conservative about opening up new frontiers. The relative “certainty” of operating in well-understood basins and building on incumbency becomes more attractive.
In recent years, we have been refreshing and focussing our North Sea portfolio by bringing new fields into production, by investing in the renewal of our core production hubs and by divesting some of our non-core assets to others. We are a strong supporter of the OGA and industry strategy to get the “right assets in the right hands”.
BP recently announced its new strategy, described by our CEO Bob Dudley as a “story of growth”.
The North Sea is playing a vital role in this growth story, but to be clear, active portfolio management will continue to be a key part of the way we do business here.
Underpinning our North Sea growth, we have a number of exciting developments and opportunities.
This year, along with our partners Shell and Siccar Point, we will see first oil from Quad 204, the multi-billion-dollar redevelopment of the Schiehallion field area. We also look forward to working with our soon-to-be Schiehallion partners, Chrysaor.
2017 will also see BP bringing the Arundel field into production as a satellite to Andrew.
The second phase development of the giant Clair field – Clair Ridge – will come into production in 2018, and along with our partners Shell, Chevron and ConocoPhillips, we are assessing the potential for a third phase of development of the Clair field.
Last year, we doubled our interest in Culzean, the Maersk-operated high pressure high temperature (HPHT) gas development and our $1billion renewal programme for ETAP is now largely complete.
And just to the south of ETAP, BP has recently acquired a 50% interest in the Apache-operated Seagull discovery from Repsol Sinopec. The ETAP hub is obviously a potential candidate to progress development of that hydrocarbon pool.
Also in the central North Sea, we are finalising our evaluation of two possible development options for our Vorlich discovery and are ready to commit to a fast-track project. Given the collective industry desire to stimulate new activity for the North Sea supply chain, we are hoping to secure our partners’ and the Oil & Gas Authority’s (OGA) support to move forward on this rapidly.
Looking further ahead, avoiding a return to significant production decline post-2020 is entirely dependent on the levels of new investment North Sea operators are able to attract in the next 3-5 years.
In BP’s case, any investment opportunities we develop here are competing against other very strong global options.
I believe we have a strong set of potential future investment and development opportunities – and we are looking to grow and high-grade that opportunity-set through licence rounds and acquisition.
We now need to work hard to make those opportunities as competitive as they can be.
When investment options are ranked on a global basis, they are ranked on all the criteria you would expect: – finding cost; development cost per barrel; production cost per barrel; future growth potential and of course, return on investment – or more specifically – post-tax return on investment.
Regions are also compared on their respective track records of reliability, operating efficiency and safety. And of course the competitor regions will not be standing still, so we will need to continuously improve our productivity and efficiency if we want to stay ahead.
We’ll need to nurture a culture in which everyone is striving for progressive, incremental improvements in everything they do. But I don’t believe that alone will be enough.
We will need real transformational change in some areas. We will need to modernise the way we work. For example, the data revolution has so far not transformed the oil and gas sector as it has other areas of life.
“Digital” offers many potential benefits in the areas of exploration and development, but some of the biggest opportunities are in basic production operations, such as maintenance.
As I said to the audience at the SCDI event last week, the green shoots of confidence are there. It’s now up to us, as an industry, to nurture those green shoots and talk powerfully to our confidence that we are collectively up to the task.
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