BP (NYSE:BP) is one of the world's largest oil and gas companies in terms of production capacity and revenue. BP explores for oil and natural gas in approximately 30 countries and posses proved reserves of 18.1 billion barrels of oil equivalent. Through its 16 refineries, BP processes 4 million barrels of crude oil per day. It markets these products in 80 countries and through its network of 22,400 gas stations.
In 2010, one of BP's deepwater rigs in the Gulf of Mexico exploded, killing 11 workers and spilling millions of gallons into the Gulf of Mexico. The explosion and spill not only resulted in severe financial fines, but also hurt the company's reputation. Under CEO Robert Dudley, BP is undergoing a strategic change to pay for economic losses attributable to the explosion and improve its reputation.
In the aftermath of the Horizon disaster in the US Gulf of Mexico, BP's 2010 earnings reflect both the extent of the disaster on BP's financial strength as well as the implementation of a new global strategy. In 2010, BP reported a loss before interest and taxation of $3.7 billion, compared to a profit of $26.4 billion in 2009. While the earnings in every segment rose compared to 2009 performance, BP recorded a loss of $40.8 billion before interest and taxation in response to the US Gulf oil spill. Profit from exploration and production rose to $30.89 billion from $24.80 billion in 2009 partially due to higher crude oil prices. Due to improved margins over the year, refining and marketing reported earnings of $5.55 billion, compared to $743 in 2009.
For 2011, the spill in the Gulf and potential regulations has the potential of impacting BP's financial performance. In addition, BP inked a multibillion deal with Rosneft in early 2011.
meow Exploration and production (2010 sales of $66.26 Billion): Through its Exploration and Production segment, BP engages in the search for undeveloped oil and gas reservoirs, the development of reservoirs, and the production and transportation of oil and natural gas from developed wells. BP’s upstream activities include the exploration and extraction of crude oil and natural gas from wells in eight different countries.
In 2010, BP reported sales from operations of $66.26 billion, compared to $57.6 billion in 2009. Realizations on crude oil increased substantially year-over-year, rising from $59.86 per barrel in 2009 to $77.54 per barrel in 2010. Realizations on NGLs also increased. Average realization for NGL was $42.78 per barrel in 2010, compared to $29.60 per barrel in 2009. Overall production dropped slightly in 2010. BP reported production of 3.82 million barrels per day in 2010 compared to production of 3.99 million barrels per day in 2009.
Refining and Marketing (2010 sales of $266 million): BP’s Refining and Marketing operations include the processing of crude oil into refined petroleum products and the sale of those products to wholesalers and retailers located in over 100 countries around the world.
In 2010, global oil demand increased by 2.8 million barrels per day. In response to higher demand, petro-product prices rose internationally. BP's annual global indicator refining margins were $4.44 per barrel, compared to $4.00 per barrel in 2009.In addition, total refinery throughputs 2.43 million barrels per day in 2010, compared to 2.29 million barrels per day in 2009. Replacement cost profit before interest and tax for 2010 was $5.55 billion, compared with $743 million for 2009.
BP's $16 billion share swap and joint-venture deal with Rosneft has the potential of producing substantial long term gains for the company and its Russian partner. However, BP has to bear much of the short-term costs. Since BP is exchanging 5% of its shares with 9.5% of Rosneft's better rated stock, the stock swap is likely to prove dilutive for BP's earnings per share. In addition, BP has to pay for the early costs of developing oil and gas reserves in Russia Kara Sea; costs which are estimated at $2 billion. However, the blocks BP-Rosneft plan on exploring have the potential of containing as much oil and gas as three times Rosneft and BP's 2010 combined reserve base. As a result, BP has inked a deal with substantial growth opportunities in a sector made up by state-owned companies. Because the deal is long-term, both political and financial risk remain largely unknown. BP has a 37% stake in the venture, which gives it less control over the ventures direction. In addition, the price and demand of oil have the potential of changing substantially in the long-term. These factors are likely to play an important role in how profitable the venture becomes for BP.
As of February 2011, the deal with Rosneft is on hold due to a British court order won AAR, the Russian shareholders who own half of the TNK-BP project. AAR has charged that the deal with Rosneft violates its exclusive agreement with them. While there are several proposed resolutions, including the sale of AAR's stake to BP or Rosneft, the legal troubles BP has faced with the TNK-BP project illustrate the potential dangers surrounding large-international oil ventures. Because the TNK-BP project involves a high degree of complexity in regards to ownernship control and international regulations, legal problems have plagued the project for a long time and have the potential of impacting the project's operations as well as the operations of the Rosneft deal. Russian energy czar Igor Sechin urged both BP and AAR to come to an agreement and not let their legal battles hinder BP's deal with Rosneft. To support his warnings, Sechin has threatened legal action against BP and its partners if they sabotaged the $16 billion deal.
In April 2010, a major fire on an oil rig in the Gulf of Mexico owned by BP and operated by Transocean has the potential of hampering the development of offshore oil production and costing both companies millions in order to fix the situation. Although the exact cause has not been determined, people at Transocean believe the blaze is from an uncontrolled burst of oil and gas from the well. The Gulf of Mexico produces 30% of the U.S. oil output and is an important source of revenue for oil majors like BP.
In July 2010, BP temporarily capped the oil spill using a pipe "cork." To control pressure, oil is released through pipes up to ships, which collect it. As of July 18, 2010, BP plans to use this method until mud and cement are used to plug the well for good. With spill capped successfully, the BP outlined its $20 billion fund set aside for to pay for damages to companies, organizations, and individuals significantly impacted by the spill. raise money for this fund, BP plans to sell up to $12 billion of assets to Apache (APA) in order to cover some of its liabilities.
In late July 2010, Tony Hayward, who has held the position of CEO since 2007, announced that he plans to step down as CEO effective October 2010. Hayward was succeeded by Bob Dudley, who previously ran the unit responsible for clean-up operations and compensation programs in the Gulf of Mexico. While Dudley has noted that cleaning up the Gulf Spill has the potential of being his first priority as CEO, the company has also suggested that its near-future strategy incorporates several divestitures deemed non-core or risky. The divestitures have the potential of raising cash to pay for BP's $20 billion Gulf-relief fund and reducing the company's risk exposure to another drilling accident. As suggested in interviews and press releases, BP's strategy includes selling assets in places such as Egypt and Vietnam that BP bought in recent years to diversify its reserve base. Assets that have the highest potential for up for sale are those that BP deemed risky or non-core. While it is still uncertain how much BP plans to sell, it appears clear a focus on core assets and operations has the potential of becoming a principle strategy of a Dudley-run BP.
In 2009 and 2010, BP inked several deals with oilsand production companies that have the potential of increasing BP's exposure to that type of production. Since March 2010, the deals struck by BP have typically followed a "combination" approach, which basically slice the management of particular asset between the two companies while allowing both to receive revenue from them. The result of these deals make it possible for both companies to retain a portfolio of assets without requiring that they have to run all of the assets. BP announced in March 2010 a $7 billion dollar deal with Devon Canada Corporation. The two companies agreed to work together on the Kirby oilsands lease south of Fort McMurray, Alta. However, Devon is designated as the project´s operator. From the deal, Devon's share of the oilsands production market as well as the size of BP's offshore production operations have the potential of expanding. BP has made similar deals involving oilsands production. In 2007, BP and Husky Energy Inc. struck a deal evenly splitting the ownership of BP´s refineries in the United States and Husky´s oilsands leases. However, each company would operate their own side of the venture. In March 2010, BP agreed to make capital contributions to Value Creation Inc., a privately held production company, in exchange for an operating stake in Value Creation's oilsand's leases.
As do other oil majors, BP controls oil resources in countries around the world. 72% of BP's oil comes from North America and Europe, but the company's exploration and production segment has a strong incentive to push forward and explore in countries that are less politically stable. By expanding around the globe, BP has the potential of increasing its production capacity and reserve life. At the end of 2008, BP had invested 67% of its capital in Organizations for Economic Cooperation and Development(OECD) countries, and its U.S. and Europe operations are the company’s largest. . While its refining operations are located almost completely in the U.S. and Europe, BP’s has exploration and production operations are located in 29 countries. Major development projects are located in the Gulf of Mexico, Azerbaijan, Algeria, Angola, and parts of Pacific Asia. Although BP’s expanding global reach is capable of increasing its production capabilities, political instability in many of these countries has the potential of damaging or destroying BP’s operations. The company believes its operations most exposed to political risk are located in Iran, Cuba, Syria, and Russia.
The Gulf of Mexico, where 21% of BP's 2008 production occured, is prone to violent hurricanes during the last few months of summer. These storms can damage drilling rigs and refineries, and injure workers. Like most oil companies in the region, BP reduces production during hurricane months. Still, some storms can do real harm. In 2008, Hurricane Ike and Gustav resulted in a significant amount of rig shut downs. The impact of both hurricanes was a reduction equivalent to approximately 24mboe per day for 2008. BP's Thunder Horse operations, completed in 2009, are also susceptible to hurricane destruction. iioooo
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