BP exits Alaska and sets its sights on going high-tech
‘We are steadily reshaping BP,’ CEO Bob Dudley said in a statement announcing the sale of its Alaska business for $5.6bn
London — BP has closed one chapter in its US business, exiting Alaska decades after transforming the state into an oil powerhouse. Now it’s time for a new phase in the company’s American story.
The old BP, which discovered billions of barrels of oil on the country’s farthest frontier and laid a 1,200km pipeline across the frozen tundra, is fading. The new BP comes with a new focus on the fast and competitive shale business, and going high-tech to squeeze all the barrels it can out of existing fields.
This future is designed to fulfil two mandates from investors: generate lots of cash, and steer clear of high-carbon oil reserves.
“We are steadily reshaping BP,” CEO Bob Dudley said in the statement announcing the sale of its Alaska business for $5.6bn. “Today we have other opportunities, both in the US and around the world, that are more closely aligned with our long-term strategy and more competitive for our investment.”
Some of those opportunities are obvious. For example, BP has put its supercomputers to work analysing seismic data on existing fields in the deep waters of the Gulf of Mexico, a cheap and low-risk way to find extra resources.
At its Thunder Horse project, the work helped it discover about 1 billion extra barrels of oil, and it approved a major expansion of the field in May which will add 50,000 barrels of oil equivalent to daily production starting in 2021. That’s an estimated one-third of what BP loses in output by selling its Alaska assets, according to an analysis by RBC Capital Markets.
Other offshore projects in the US will use BP’s existing platforms to “tie back” new oil and gas fields from more remote parts of the Gulf. The company plans to expand the Atlantis facility and could possibly tie new fields to its Na Kika platform. That’s a stark difference from the type of work BP did before the 2014 oil price crash, where it spurned incremental discoveries in favor of developing large fields known as “elephants.”
BP’s new onshore business is more challenging. While the entire world of energy has been upended by surging production out of America’s shale rock, the geology is nothing like the iconic Prudhoe Bay field in Alaska, which still forms the bulk of the company’s output there after its discovery in the 1960s. Shale wells deplete rapidly, meaning the business is more about drilling lots of wells as efficiently as possible, rather than finding the right spot and watching the cash flow for decades.
Even so, BP has bet big on shale, spending $10.5bn to buy a suite of onshore assets from BHP Group. It started operating the fields and pipelines earlier in 2019 and plans to double its drilling capacity in the Permian Basin in West Texas in the coming years, according to CFO Brian Gilvary.
US shale “has been a prolific growth story”, Gilvary said in an interview on Bloomberg TV earlier in August.
BP’s sale of its Alaska business was done partly to chase that growth. The British oil major took on debt to cover the BHP purchase, and said it would sell $10 billion of assets by the end of next year to reduce leverage. Offloading the mature, declining Alaska business is the most significant announcement related to that target so far.
While BP’s moves in the US are highly symbolic, given its 60-year history in Alaska, it also reflects something bigger than the US. Shareholders aren’t just demanding low-cost barrels, but low-carbon ones too, as they anticipate governments imposing harsher rules on the energy business to mitigate the risks of climate change.
BP faced a shareholder resolution in May that asked it to outline how each individual investment decision aligns with the goals of the Paris climate accord. It was passed nearly unanimously and also supported by management.
BP’s shale assets will produce far more natural gas — a fuel emits less carbon dioxide than oil when burnt — than its Alaska operations. The onshore business is also close to the liquefied natural gas export facilities on the Gulf coast, which BP employs in its growing trading business.
In July, before the Alaska deal, BP acknowledged some of its existing discoveries could be too costly or too high-carbon to develop. The company would either have to sell those assets, or leave the hydrocarbons in the ground, said Dominic Emery, its head of strategy.