BP’s Lamar McKay on oil price curves: Is it a V or a W or an L?

The current downturn in oil prices and the industry downcycle is anything but typical, BP’s new Deputy Group Chief Executive Lamar McKay said in a speech at an industry conference on Tuesday.

“Looking at oil price forward curves, people often talk about a V or a W or an L…but actually we might need another word for the current price fall. It’s definitely not a V or a W and it’s not looking much like a typical U just yet – although it still looks to us as if supply and demand may start coming back into balance towards the back end of this year, based on projections and assumptions,” McKay sad delivering his speech at the IHS CERAWeek energy conference in Houston.

He said the downturn, one of the worst in his 35 years in the industry, was proving to be both deep and prolonged, and that the industry, despite what has been done so far, still has a lot of adapting to do.

Job cuts needed to stay competitive

BP itself has slashed over four billion dollars down year on year in 2015. Mckay, seen by Bloomberg as a successor of the current CEO Bob Dudley, also said the controllable operating cash costs were down almost three and a half billion dollars, an adjustment which lead to significant workforce reductions, „as it is for many companies.“

„We understand the human impact this has. But to maintain a competitive business, we need to take this action. And it’s not just inside the company that we need to be in action – it’s all along the supply chain,“ Lamar, until recently the head of BP’s upstream business.

Echoing what’s been said time and time again since the oil prices started going down, McKay said that other than simply slashing workforce and capex, BP is also renegotiating contracts in order to cut the costs.

Simplify, standardize

He also said the industry should strive towards simplification, standardization and efficiency:“Another way is cooperation on efficiency. Easier, simpler, faster should be our goals.“

„Working with our suppliers – and in some cases other operators – we’ve identified many areas where we can do things differently, saving millions of dollars from better scaffolding management to the sharing of vessels and helicopter services.“

On standardization he said the oil and gas industry has been playing catch-up with the aviation and auto industries.

„There is huge scope for standardizing equipment across our industry by harmonizing our procurement specifications.  By using things that have already been built, by not choosing the first, the biggest, the shiniest.“

He said that the move would take the oil and gas industry a step forward towards the standardization of entire projects that will potentially save billions of dollars.

Mad Dog

As a positive example of choosing a simple solution, Mckay picked out BP’s Mad Dog 2 development in the U.S. Gulf of Mexico.

„In the Gulf of Mexico back in 2012 we costed our Mad Dog Phase 2 project at $20 billion. We’re now costing it at less than $10 billion on the basis of new project phasing, simpler design and by using repeat solutions instead of bespoke ones.  And we expect it to deliver better returns now at $60 oil price than we originally expected at $100 a barrel.“

The UK based oil giant had planned to develop the Mad Dog 2 using a spar platform, similar to the one used for the first phase, but then submitted a revised plan, selecting a different production unit.

While McKay said the project would be profitable at $60, the oil prices are now lingering around $30 a barrel. He did not provide a timeline on the potential final investment decision on the Mad Dog 2 project, nor the expected date of the production start.

We’ll survive!

Ending his presentation, McKay expressed a belief that the the industry, as in the previous cycles, will come up with a solution for the current situation.

„We are showing again that we are an industry with a truly remarkable capacity to change and adapt.

In the early part of the last century, we figured out how to produce oil from deep below the desert.

A few decades on we developed technology to produce oil from deepwater.

He said that more recently advances were made to technologies to produce from oil sands and tight rocks.

„And now all of us are finding ways to deploy our technologies and capabilities with maximum efficiency.   So times are tough right now – but we will come up with the answers. We’ve done it before many times over…and we will do so again.“

 

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