Credit: Simon Johnston/Geograph

BP admits low oil prices are the new normal

The oil and gas giant is working on assumption crude will level off at $60 per barrel.

by Jack Torrance
Last Updated: 27 Oct 2015

Any hope that the dramatic slump in crude oil prices was a temporary blip seem to have been dashed today as energy giant BP set out its plans for the future. The FTSE 100 company, which has suffered alongside its competitors as the price has dropped, said it plans to balance its finances on the assumption that oil will be around $60 per barrel by 2017.

Oil prices haven't been that high since July, but $60 is still well down on the $100 mark that Brent Crude remained above in the three and a half years preceding summer 2014. BP's move follows a similar admission by French oil giant Total, whose CFO told the FT last month that the company was planning 'to face low oil prices for a long period of time.'

The price of Brent Crude has taken a hammering. Credit: Bloomberg.

The slump has forced oil companies to take radical actions to safeguard their profits. Shell slashed 6,500 jobs in July and the Aberdeen-based oil services provider Wood Group said in August that it had cut 5,000 jobs since December. Today, BP said it had cut capital expenditure to $4.3bn in the last quarter, down by by 18.9% on the same period last year.

'Last year, we acted decisively to reset BP for a sustained period of lower oil prices and the results are coming through well,' said chief executive Bob Dudley. The cuts weren't remotely enough to offset falling prices though.

BP's underlying profits slumped by 40% to $1.8bn on a replacement cost basis (the industry's preferred measure, which takes into account the current price of oil). To be fair,  the results were better than expected - analysts were anticipating around $1.2bn – and its shares were up around 1% to 388.4p this morning as a result.

It helps that BP is in oil refinery, distribution and marketing, as well as exploration and extraction, as 'downstream' operations normally become more profitable when prices tank. Replacement cost profits in that division of its business were actually up by 108% to $2.5bn.

But the company, which is still dragging the millstone of the Deepwater Horizon spill, can't rely on that side of the business alone if it wants to keep investors happy. Today it also set out plans to slash costs even further. By 2017 it wants to see capex fall as low as $17bn (compared to $20bn this year) and 'controllable cash costs' to be slashed by a further $6bn when compared with 2014. It also expects to sell off around $3bn-$5bn worth of assets next year.

All of this might help BP become leaner and more capable of functioning in a low-priced market. But if conditions change and the price of crude shoots up again, then it might end up missing out on the chance to cash in.

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