BP warned Tuesday of "exceptional" uncertainty over prices and oil demand, and said coronavirus could prompt a long-term reduction in oil consumption, but that cost reductions arising in part from technological change would protect the business.
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Unveiling first-quarter results, including a $3.7 billion write-down in the value of BP's oil inventories, new CEO Bernard Looney said he did not expect the company to curtail its oil production due to the filling up of storage capacity worldwide, but he did expect output to be crimped by production cuts implemented by the OPEC+ group of countries, highlighting Iraq, where BP operates the Rumaila field, as an example.
He added BP was in "conversation" with countries such as Angola, Azerbaijan and Russia on the issue.
BP said its own cost-cutting measures such as delaying upstream project work and curtailing lower-margin projects would reduce its production by 70,000 b/d of oil equivalent this year, with most of the reduction to occur at the company's BPX shale business in the US.
BP said it would reduce its "balance point," or the price at which it could break even, after dividend payments, to $35/b next year, down from $56/b in 2019, partly helped by technological change that has reduced the cost of deepwater wells.
"We are taking decisive actions to strengthen our finances -- reinforcing liquidity, rapidly reducing spending and costs, driving our cash balance point lower," Looney told analysts as he presented his first set of quarterly results since taking over on February 5.
The company added that its second-quarter oil and gas production would be lower than its first-quarter production, which was down 3% on the year at 2.60 million boe/d.
However, it said its forecast for second-quarter production was subject to high uncertainty. "There are significant uncertainties with regard to the implementation of OPEC+ restrictions, price impacts on entitlement volumes, divestments, market restrictions given lack of demand for oil and COVID-19 operational impacts," it said.
"There remains an exceptional level of uncertainty regarding the near-term outlook for prices and product demand. There is the risk of more sustained consequences depending on the efforts of governments and the public and private sectors to manage the health, economic and financial stability effects of the pandemic."
Reiterating his commitment to BP having net-zero carbon emissions by 2050, Looney said: "The pandemic I think only adds to the challenge for oil in the future. We're all living and working very differently -- no travel, I'm connecting with people, the company is running, and I think there's a real possibility that some of that will stick... and therefore the question has to be will consumers consume less, and I think there's a real possibility that that may happen."
He noted BP had rapidly scaled back rig numbers at its BPX shale business, from 13 to one or two, but voiced confidence in the soundness of that business, the underlying geological assets, and the opportunity it provided to modulate spending according to market conditions. "The rocks continue to be as good as -- if not better than -- what we planned for," he said.
BP reiterated plans to cut its capital expenditure to $12 billion this year and indicated scope for a further $1-2 billion cut next year, but insisted this would not harm the fundamentals of the business thanks to progress in areas such as digitization.
As an example, a deepwater well off West Africa that would have cost $150 million a few years ago could now be drilled for $50 million, with far fewer expatriate staff needed on-site and much of the oversight carried out in the UK, said Murray Auchincloss, who is BP's upstream chief financial officer and takes over as CFO on July 1.
Auchincloss said there was little chance of cost reductions coming from a struggling supply chain in the upstream, saying, "We're not presuming we're going to get any deflation. The supply chain is in a pretty difficult place inside the upstream business."
However, he said: "The sector had a shale revolution a decade ago, it's in the midst of a digital revolution right now, and it's structurally changing the cost of supply of our business."
One BP project being directly hit by the coronavirus outbreak is the Tangguh LNG project in Indonesia, while a fabrication yard in South Korea working on the Mad Dog Phase 2 project in the Gulf of Mexico has also had to suspend activities, though BP did not indicate any delay in getting to first production, due in late 2021.
Looney said he remained committed to the company's energy transition goals, which could mean BP's oil output declining as it repositions itself, and that he was not guided by oil volumes.
The company took a big financial hit in its results, with its debt gearing ballooning to 36.2%, well outside its 20-30% guidance range, and expected to increase further in Q2 and remain outside the range into 2021.
It reported an outright first-quarter loss of $4.4 billion, reflecting the cut in its inventory values.