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BP drops reserves replacement ratio as strategic performance target

Highlights

Historic move comes amid strategic pivot to cleaner energy

BP has failed to replace its reserves since 2019

Producer targeting 'value over volume' in green transition

London — BP has dropped its oil and natural gas reserves replacement ratio as one of the company's key performance metrics, it said March 22, underscoring the company's ambitious plans to become an integrated energy player by targeting renewable and low-carbon energy investments.

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A measure of whether a producer has been able to replace its production with new, proved reserves during any one year, reserves replacement ratios and related "reserves life" have been a touchstone of operating performance measures for oil majors since the birth of the global oil industry.

"We have removed proved reserves replacement ratio from our [key performance indicators], as it no longer serves as a useful measure of our strategic performance," the company said in its 2020 annual report.

The move comes nine months after BP unveiled a radical change of strategy in a pivot to cleaner energy, which includes plans for a 40% cut in hydrocarbon production over the next decade.

BP reported a rare negative RRR for 2020 after its reserves shrank by a factor higher than actual production, reflecting the impact of ongoing asset sales.

Including acquisitions and divestments, BP said its total reserves-replacement ratio in 2020 was minus 5% after total reserves slipped 7% to 17.98 billion barrels of oil equivalent.

Excluding portfolio changes, its organic reserves-replacement ratio was 78% for the year, up from 67% in 2019 but down from 100% in 2018.

Value over volume

While BP has failed to replace its production with new reserves for the last two years, like many of its European oil major peers, the company has said it is focused on "value over volume" when it comes to new reserve additions.

Speaking in early 2020, BP's former CEO Bob Dudley defended the company's record on adding new reserves but acknowledged that more capital spending would likely go on lower-carbon investments in the future.

"It's never a smooth line with reserve replacement ratios," Dudley said at the time. "They kind of move up and down. I don't look at 67% as a big drop because we have been measuring about 100% over the last five years. The reserves are still healthy. Our reserve production ratio is still just around 14 years."

Dudley acknowledged that while reserves replacement had become a less key strategic target for the company in recent years, BP still plans to book new oil and reserves and explore for oil and gas.

Last August, BP said expects its oil and gas production to shrink by at least 1 million b/d of oil equivalent, or 40%, over the next decade and also pledged to no longer explore in countries where it does not already have upstream activities.

The target will radically reshape BP's upstream business where the company had been rebuilding production with a focus on gas after a wave of asset sales to help pay for the 2010 Gulf of Mexico oil spill.

Bonuses canceled

BP's reserves replacement ratio relative to its peers had been a performance measure for pay and shares plans for executives directors for decades but the metric was dropped in 2017. It remained, however, as a KPI for the company's strategic business performance.

In addition to metrics including financial performance, such as ROACE and shareholder returns, BP's new strategic performance indicators now cover "sustainable operations" such as greenhouse gas emission reductions, methane intensity, upstream plant reliability, and unit production costs.

BP, which last year announced plans to slash a seventh of its global workforce as the pandemic tanked oil prices and hit its cashflow, confirmed that none of its 30,000 staff eligible for bonuses will receive them for 2020. BP also said "large numbers" of its employees received no pay adjustment in 2020 or had their increase deferred for six months. It said, however, that most employees will receive an "above-market" pay increase in 2021.