BP Group Chief Executive, Tony Hayward, said Thursday that the company is well positioned to face the current economic environment and to turn it into an opportunity that, going forward, will set it apart from its competition.
He added, "BP has been, and remains, an organization operating at the frontiers of the energy industry. Our technology and capability allow us to take on challenges that others cannot -- or choose not -- to confront, securing access to new resources now as in the past -- from Iran 100 years ago to the Canadian arctic Thursday.
"But operating at the frontiers is not without risks as we have tragically experienced again this month. Yesterday, I attended the very moving memorial service in Aberdeen for the victims of the helicopter crash.
"That tragedy is a sharp reminder that even Thursday, we cannot take safety for granted and our thoughts and prayers are with the families and friends of those who died.
"Over the last decade, BP has assembled an excellent portfolio of assets -- our job is to realize their full potential in the face of Thursday's uncertain environment. It is not by chance that BP has thrived for so long.
"The ingenuity of our people has led to our success -- and that gives me great confidence with which to face the future.
"A year ago, I addressed you for the first time as the CEO of BP. At the time, we faced a real competitive challenge and we needed to up our game.
"We set out a plan to deliver safe and reliable operations, to restore revenues and to reduce the complexity and cost structure of BP. We've done exactly that.
"At a corporate level, we began to reduce the complexity and cost base of our overheads. By the end of 2008, we had reduced our organization by around 3000 people, and are on track to exceed our original target of 5000 by the middle of 2009. We have also eliminated nearly 20% of the senior positions.
"2008 was a record year for BP. Replacement cost profit reached $25.6bn -- up 39% on 2007. Net cash from operating activities was $38bn, up over 50% on the previous year. Dividends paid per share rose by 30%, to 55 c/share, versus 2007.
"With our operations restored, we benefited from record high oil prices that more than compensated for the fall in the global average refining margin to $6.50 per barrel, down from almost $10 per barrel in 2007.
"Based on the past year's results, I am glad to say that BP has restored its competitive performance -- and that is no mean achievement when you think about the year that has just passed.
He added, "Over the last two years, our focus has been on realizing the full potential of our asset base. Our number one priority of safe and reliable operations has been vital to the underpinning of our restored competitive performance.
"The number of major incidents involving process safety has continued to decrease and our personal accident and injury track record continues to improve. The tragic helicopter accident in the North Sea is a graphic reminder of the inherent risks in this business -- a persistent focus on safe and reliable operations will remain our first priority.
"In E&P, we successfully grew production in line with guidance, the only one of the majors to do so. Underlying production, excluding the effects of high oil prices on our entitlements under production-sharing contracts, was up 5%.
"We started up nine major projects and made good progress on controlling costs. We achieved more than 100% reported reserve replacement for the 15th consecutive year and also delivered resource replacement of more than 200% -- a performance that puts us among the very best.
"In R&M, despite a tough environment, we made good progress in closing half of the competitive performance gap. We rebuilt full economic capability at both the Texas City and Whiting refineries, the Fuels Value Chains were fully established and we made significant progress in simplifying our marketing footprint. Our International Businesses delivered a very strong performance despite the world economic slowdown.
"Overall, we have made good progress and the operational momentum is feeding through to the bottom line.
"Set against our main competitors, we have strong financial momentum. An underlying increase in net income of 39% is well ahead of all of our competitors -- and the operational cash flow even more so. Our goal now is to maintain this momentum as we face the challenge of the current economic climate and lower oil prices.
"Of course it is not only about Thursday's results. It is also about the foundations for future growth and 2008 was, in that respect, a year with real strategic momentum.
"With 13 new field discoveries -- the most significant of which are shown on this map -- exploration had one of its most successful years in the past decade. This included discoveries in the Gulf of Mexico, Angola, Algeria, Egypt and the North Sea -- we also completed the Libya deal -- which serves to highlight the strength and breadth of our exploration portfolio.
"We achieved significant new access -- to both undeveloped resources and new exploration acreage, particularly in North America.
"We were the successful bidder on three exploration licenses totaling 6,000 square kilometers in the arctic Canadian Offshore Continental Shelf. This is a particularly exciting prospect for the future, potentially containing some 20% of the world's yet to find hydrocarbons.
"In the middle of last year we extended our footprint in North America Gas through two deals with Chesapeake. Strategically, this gives us a material position in three top-tier shale basins and creates a balanced portfolio of conventional gas, tight gas, coalbed methane and now shale gas, in the world's biggest natural gas market.
Hayward said, "We have a world class resource base and our improving track record for executing projects gives us real confidence for the future. Last year we said we expected to grow production to 2012, and that we could maintain it out to 2020 from existing projects. The picture is quietly and steadily improving.
"We now expect to grow production between 1 and 2% out to 2013 based on existing projects and have the potential to continue the growth out to 2020.
"Linking now to our downstream business, we concluded the oil sands deal with Husky. A key aspect of the deal was to create an integrated position, with high-quality upstream resources linked to an upgraded U.S. refinery, allowing BP to capture the full value chain.
"We have just begun the upgrade of the Whiting refinery. Re-positioning Whiting towards heavy crude oil means it can take full advantage of Canadian differentials and the light-heavy spread - and will shift the yield of the refinery to higher value products.
"And finally, in Biofuels, we started production from our joint venture in Brazil. This is the largest single investment in Brazilian biofuels by an international oil company. Despite the economic downturn, we believe that a disciplined approach to Alternative Energy continues to offer good opportunities.
"So, not only have we closed our competitive performance gap, we are very well positioned for the future.
"Of course, we are facing the immediate challenge of the current economic climate and lower oil prices. In line with the increase in oil price -- illustrated by the green line on this chart - we have seen a steady increase in costs. Since 2004, when the oil price was at a comparable level to Thursday, our cost base has increased by about 50%.
"At BP, we started our drive to counter cost inflation some 18 months ago and managed to halt that inflationary trend in 2008 despite the continued rise in oil prices for most of the year."
The challenge for the industry now is to bring this cost base down -- and to do this fast, to align with the new market conditions.
The company has been working with its suppliers to improve efficiency by finding better ways to execute activity -- with one important caveat- safe and reliable operations come first whatever cost efficiency measures it undertakes.
And it continues to advance the safety and reliability of its operations through implementing its Operating Management System -- something that is fundamental to creating a culture of continuous improvement within BP.
The company aims in 2009 is to begin to roll back the inflationary trend by driving deflation into its business. Over the last few months, it has already seen sharp drops in the price of steel and petrochemicals. Its approach will be a proactive one. Based on the actions it took in 2008, and the deflation it can already see entering its supply chain, the company expects its costs to fall by around $2bn in 2009.
So, in this volatile environment, the company has kept a steady focus on what it said it would do.
He said, "Our goal is clear; to continue to invest for long term growth while retaining our focus on safe and reliable operations, paying the dividend and driving deflation into our cost base.
"At BP we have a mantra -- "every dollar counts, every seat counts" and we intend to follow it through. We have strong momentum on cost and operations - production is expected to continue to grow and refining availability is expected to be materially higher in 2009 than in 2008 - these underlying business improvements are expected to add to our cash flows in 2009.
"We have a strong balance sheet and based on our current plans, we expect cash inflows and outflows in 2009 to balance at an oil price of around $60 per barrel. That break-even point should continue to fall as we realize the benefits of our operational momentum and our action on costs.
Copyright (c) 2009 Dow Jones & Company, Inc.
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