BP: Disconnecting From the Operator
There is little point in acting large and in charge if someone else is actually calling the shots.
Typically, a large oil or gas field will be owned by several partners, but only one operates it. So the behemoths of the oil and gas industry generally prefer to control and operate their main assets, rather than hand over the reins to a rival. Indeed, as competing oil-services firms and state-backed national oil companies have muscled in, management of complex energy projects has been touted as a raison d'être for the big oil companies.
But one in particular looks less like a master of its own destiny these days: BP.
The U.K. oil company derived only 30% of last year's output, after paying royalties, from assets in which it was the operator, according to data from sector consultant Rystad Energy. That is well shy of peers such as Chevron, at 74%, and Royal Dutch Shell, at 59%. It also is less than at Exxon Mobil, Total and Eni, which each got about 45% of their output from operated assets.
One big reason for this is Russia. A 20% stake in Kremlin-controlled Rosneft accounts for about one-third of BP's production. Though it claims some sway over Rosneft's operations, including BP Chief Executive Bob Dudley's seat on the Russian company's board, recent tensions around Ukraine have reawakened concerns about BP's exposure. Excluding the Rosneft stake, BP's share of production that it operates would be much closer to that of its rivals, though still below the average.
Another factor is the legacy of 2010's Macondo disaster and, in particular, BP's $38 billion in asset sales to help foot the bill. Indeed, it recently sold stakes in four small fields it operated in Alaska, a company stronghold for decades.
BP's overall production has fallen 20% since 2009, hitting 3.23 million barrels of oil equivalent a day last year. Disposals account for about two-thirds of the drop. While BP shed both operated and nonoperated positions, its Russian production has become a more significant chunk of total output.
The big oil companies can still exert behind-the-scenes influence over nonoperated projects. And BP's sale of smaller, more mature assets is in keeping with a broader industry shift of focusing on more profitable barrels, rather than growth at any price.
But BP has some catching up to do. Rystad forecasts a ramp-up in operated production, notably in the North Sea and North America, could mean that by 2020 BP's control over its output is in line with peers like Total and Eni.
The catch is that this costs money, at a time when oil and gas companies are coming under pressure from shareholders to reduce investment budgets.
BP's budget hasn't blown out in recent years like at some rivals. So it hasn't pledged cuts of its own. Yearly capital expenditures will stay between $24 billion and $26 billion to 2018. But Rystad estimates that, to hit the consultant's forecasts, BP's spending would need to rise to close to $30 billion by 2020, with substantial spending on discoveries BP has yet to sanction for development.
After years of big budgets, investors are rewarding big oil companies that can show self-control. For BP, however, a little spending may be the cost of regaining control of another kind.