OilVoice - BP Cost-Cutting Set to Increase Annual profits

BP Cost-Cutting Set to Increase Annual profits

Thursday, March 04, 2010

UK-based oil industry giant BP has outlined its aim to increasing annual profits by $3 billion within two-to-three years. BP expects the increased profits to come mainly from efficiency savings in the company's refining and marketing units, although BP also announced that it intends to increase production by bringing 42 new upstream projects onstream by 2015.

BP claims that the increased downstream savings would come mainly from the company's five US-based refineries, and would involve lower sourcing costs for goods, better planning and improved contractor management.

In line with a border oil industry trend, BP's refining margins have fallen in recent years. At the rear end of 2009 they dropped to just $1.49 per barrel, down from $5.20 per barrel at the end of 2008. In terms of savings, BP's refining unit has already achieved around 60% of the $4.8 billion target set by the company, since 2007.

The remaining $1 billion of savings is expected to come from the firm's upstream operations. BP is reported to have made a average of $10 net profit on every barrel of oil equivalent, compared with $13 on every barrel of oil equivalent achieved by rival oil major ExxonMobil. BP hopes to narrow this gap by increasing production, especially at areas with lower costs.

In 2009 BP brought as many as seven new projects onstream, which it has said it hopes to increase to a total of 42 by 2015. This is equivalent to brining eight new projects onstream every year. As a result, the company has forecast that annual output will rise by between 1% and 2% each year until 2015.

BP's chief executive officer Tony Hayward has cited deepwater production, gas and unconventional gas, and giant oilfields such as Rumaila in Iraq, as the main growth areas for BP in the mid term. Significantly, however, Iraqi output was not included in the company's forecast production increases.

BP's strategy of significantly increasing profitability is likely to have important impacts on the company's operations. It means that the company is likely to continue to look for savings, particularly in refining. Also it allows the firm to start refocusing away from productive but low margin areas to look at assets with lower production costs.