How do you lead a multibillion-dollar, global oil firm through the most enduring and debilitating downturn to date?
BP’s chief executive Bob Dudley sums it up in one word.
“Calm,” he said.
“Just remain calm. Don’t overreact and talk things through.”
It’s a strategy he’s deployed throughout his leadership duties at BP, which include a turbulent few years in Russia, followed by wrestling BP back from the brink in the wake of the Gulf of Mexico tragedy and, subsequently, the sector’s most devastating downturn.
The BP veteran, who sat down with Energy ahead of his Offshore Europe appearance and as part of Energy’s redesign, insisted the lessons from the Gulf better equipped his firm to cope with the oil price slide.
He said: “We reacted pretty fast, because we have been through so much we were really objective to the downturn. We had to sell $60billion worth of assets and break all of these emotional bonds, like ‘I was part of the engineering of that, or my father worked in that refinery’, after the Gulf of Mexico. And we had to just sit down and do it together. Once you do that, and that is really tough, then when the price dropped again it was a lot easier.
“We had done this before so it was just about rolling up our sleeves and figuring out what to do. I think BP is in good shape. People have stayed loyal in some very difficult times.”
But survival has meant shaking up more than just the cost structure.
“In big oil companies the allocation of capital has historically become the point of competition – upstream, downstream, refinery, marketing – so people competed for capital. We could not have gone through the last three years unless we had cut that out,” Mr Dudley said.
“We’re all in this together – the upstream and downstream management teams – so we cut out that historical upstream and downstream competition.”
The oil major reported a cash break-even at $47 a barrel for the first half of the year.
SWING PRODUCER
But despite his company’s best efforts to adapt to the new reality, there’s an emerging force whose power was never wielded in any previous recovery – US shale.
“It does appear that North American shale is a swing producer now,” the oil veteran said.
“OPEC can be a swing producer, but so can that. OPEC remains important. They will moderate things and it’s in nobody’s interest to go back to $100 a barrel.
“But how fast the shale producers can respond is quite remarkable. Few people thought it could happen. If the price of oil stays in the $50 to $55 range we are not going to see the ‘shales’ necessarily shoot up in terms of production.
“The real sweet spot in the US seems to be the Permian basin.
“If we see oil go up to $60 and $70 we will see the dampening factor of the opening of the shales. If the price of oil goes down to $30 again you’ll see a lot more incredibly stressed companies in US shale.
“That’s the thing about the US. There is not a single point of regulation on oil production like there can be in the Middle East and OPEC. It really truly only responds to price signals. Not by one or two players. It’s thousands of players.”
He added: “If the oil goes down really low below $40 for a sustained period of time that’s not good for the world, because you have so many countries’ economies that are fragile right now and that would lead to a lot of unpredictable things.”
GEOPOLITICAL VOLATILITY
The unpredictable environment in which firms must conduct their business is unlike anything Mr Dudley has ever seen.
“The geopolitical volatility has become quite extraordinary right now,” he said.
“Probably the most since I joined the industry in 1979, which was a very volatile year. Some people have compared last year to 1979.
“What it means for a company like BP is that we have to do it on our own. We can’t depend on government support or advocacy, so we have to navigate these waters ourselves. We have so many places where we work in the world, so it’s sort of a natural diversification of the portfolio. Something can go wrong somewhere, but it’s not going to destabilise BP. We are a long term company and have to have that mind-set.
“But it is extraordinary what is happening in the world right now, on many fronts, from Asia to the Middle East to Europe to the UK and the US. I think the old parameters of how we make decisions are very different today.
“Right now it’s about continuing to navigate through great geopolitical change and work with a great team of people to rebase the cost structure so we can continue to be around in 50 years.”
A lever he can control is the oil price he plans his business around. At the start of the year, the firm pinned its colours to the mast at $55 a barrel. Monthly oil price averages for 2017 range from $46.17 in June to $54.35 in February.
“We plan the year on the $55, but we’re having to make adjustments now, so we’re trimming capital here and there around the portfolio,” he said.
“I still think we will need to wait and see whether the market tightens in the third and fourth quarter.”
$30 BREAKEVEN
“But I think we have to plan the next five years on $50 to $55, which means we have to maintain our discipline. If we do that we know we can get our breakeven in the $30s by 2021. It’s just going to require a lot of discipline.”
He added: “Say it stays at $50 forever, the cost structure of the industry will get down. The cost structure around the world will come down and make money.
“The cyclicality of it won’t be as extreme as it was in the past because you have a new swing producer there. There will be a dampening effect.
“The only reason you would have spikes would be because of political turmoil, but then it’s still not going to be a prolonged downturn or upturn.
“Everyone worries about the $2trillion of investment that the industry has either deferred or cancelled, so there are some who are going to believe in big shortages like ’20 or ’21.
“That’s one school of thought. We are in a different school of thought. We’re going to plan for a lower price.”
The BP chief is also planning for an energy transition.
“There is a transition to lower carbon,” he said.
“That is the reality for the rest of the century. But another reality is there will be two billion more people on this planet by 2035 and all forms of energy are going to be needed for that kind of growth.
“There are still 1.4billion people on the planet who don’t have access to electricity today.
“The essential reduction in carbon emissions is going to happen and I think we will see quite a struggle globally between coal and natural gas.
“Natural gas is a much cleaner burning fuel, but the industry has to be really clear on capturing methane and making sure there are no undetected leaks because it’s also a greenhouse gas.”
Mr Dudley said: “BP in 10 years will be part of the transition. The pace will be determined by government policy and putting a price on carbon because that really changes behaviour around the world. You can legislate it to a degree, but people around the world, not just the producer, but the people who use energy, have to feel like there’s a price on the choices they make.
“We will see more electric vehicles in the next 10 years. We will still see a lot of liquid based transport fuels.
“BP will probably move its portfolios from today which is about 50% gas to 60% gas. We will still have oil.
“We have one of the largest big oil renewables companies around, so we will invest more in renewables where and when it is economic. We have two viable businesses now – bio fuels and wind.
“You’ll see us making more and more investments in those areas.”
NORTH SEA
BP is also spending its capital in the North Sea.
While speculation mounts that BP has plans to shift some of its North Sea portfolio, Mr Dudley insists the firm will still be in the North Sea until its final day.
Total planned investment tops out at $10billion.
“We will stay with it all way through,” he said.
“We are seeing massive consolidation in the North Sea even beyond what the oil price dictates. I think that will continue. It is a mature basin, but it is considered our heartland and our crown jewel in our portfolio.”
But the hard work of adjusting to a new oil price is not done, according to the BP boss.
“The reality took a while to set in, in Aberdeen, but now it’s readjusting.
“But I don’t think it’s over. I think we have to keep running fast.”
The North Sea should bank on its continued position of having to be one of the first international basins to address challenges.
“I have confidence in the North Sea, otherwise I wouldn’t be spending the $10billion we are,” he said.
“The North Sea is the cradle of the difficult, harsh deepwater environment globally. The skills from that have gone around the world. There is still a lot of skills in the North Sea that are industry leading. The UK should not be shy about exporting its capability. The unbelievable technology coming from this region is not over. Without a doubt it’s a mature basin. The decom work that people will learn here can be applied all over the world.”
Government policy will have a vital role to play in the basin’s ability to flex its producing muscles, according Dudley, who called for “quicker and faster exploration rounds”.
“I think given that we are going to have more oil than we can use, the faster the UK can continue to encourage good terms on exploration and get people exploring and optimising what we have is really important.”
He added: “I’m really optimistic now that we have big projects like Quad 204 coming on and Clair next year, but it’s still a difficult industry.”
READJUSTMENT
The cost squeeze, US shale producers, the geopolitical turmoil, and the energy transition are now just part of the day job, according to Mr Dudley.
“The $100 oil price was an aberration and we all got comfortable as an industry with the cost structures,” he said.
“Even tax legislation around the world was built like that was going to be the future. And so this has been a painful readjust-
ment.
“We used to make money at $40 a barrel. We used to make money at $25 a barrel.
“We sanctioned massive projects in the Gulf of Mexico at $16 a barrel back then.
“The whole industry is going to have to continue to readjust for the new reality.”
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