BP wins in natural gas trading and expects limited supply during winter

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Global natural gas markets are expected to remain tight throughout the winter, with oil prices also continuing to climb, BP plc executives predicted Tuesday.

CEO Bernard Looney was joined on a conference call by CFO Murray Auchincloss to discuss the London-based integrated energy major’s third quarter results and near-term outlook.

“It was a good quarter for production, a good quarter for achievements… a good quarter for gas trading as well,” Auchincloss told investors. BP, the largest reigning natural gas trader in North America, continues to see its profits “boosted” by 2-3% per year due to its trading unit.

Henry Hub averaged $ 4.30, up from $ 2.90 in the second quarter, as capital discipline continued to limit growth in US gas production and Hurricane Ida resulted in reductions production, ”said the CFO.

International gas prices, which rose in the quarter by around 5% sequentially, reflect the tight liquefied natural gas (LNG) market, Auchincloss said. The pressure comes from “the strong growth in Asian demand, LNG supply blackouts, the depletion of European gas storage and the uncertainty of Russian gas pipeline imports.

“We expect gas markets to remain tight during the peak winter demand period. “

The surge in oil prices also reflects the “strong rebound in demand” as pandemic measures relax.

“As we look towards the end of the year, we expect oil prices to be supported by the continued decline in inventories, with the potential for additional demand due to the switch from gas to oil,” Auchincloss said.

No Kvetching by shareholders

As ExxonMobil and Royal Dutch Shell plc come under pressure from investors to reorganize their portfolios, Looney said there was little rebellion among BP shareholders. He attributed the credit to the company’s start in alternative energy, where it has a plethora of partnerships and projects underway to reduce emissions.

“We are investing in the transition with discipline, step by step,” said Looney. “Shareholders love what we do more and more, so we are encouraged.
Last year BP rebranded itself from major in oil and gas to become an integrated energy company, “because we believe deeply in the premise of … not only helping the global transition, but most importantly creating value from this transition “.

The reason is twofold, Looney said.

“No. 1, we need cash flow to invest in the transition, and our existing operations generate huge cash flow… Including working capital, we had close to $ 8 billion in cash flow. ‘operation during this quarter.
Meanwhile, some pure renewable energy companies are “struggling to finance their growth. This is not a problem that an integrated energy company will have, and it is not a problem that we have.

The second reason relates to BP’s capabilities, Looney said.

“What other company can take natural gas, build a power plant, capture the carbon, take it offshore, store it underground? What other company can take and build offshore wind turbines, build a hydrogen plant on its back, take that electricity and put it into Britain’s biggest charging grid? ”

At the same time, BP entered into an agreement with Germany’s Daimler AG to explore the potential of a hydrogen-powered trucking infrastructure in the UK, and signed an agreement in Aberdeen, Scotland, to study hydrogen for public transport. .

“And at the same time, we have a business that can help customers hedge and plan and have predictable and reliable sources of energy,” Looney said. “So as the energy transition clearly becomes more complex, I think in people’s minds I think the role of a company like BP is becoming more and more clear by the day. “

How much oil and gas does BP produce?

During the quarter, BP met its six-year program target for delivering large projects, averaging about 15% under budget. This year alone, BP put 900,000 boe / d online.

Six major projects have been launched so far this year, including two in the third quarter: Matapal, off Trinidad and Tobago, and Thunder Horse South Expansion Phase 2 in the Gulf of Mexico (GOM).

Upstream production increased 4% sequentially. Natural gas production increased year over year to 4.52 Bcf / d from 4.34 Bcf / d. Liquids production increased from 92 million b / d to 109 million b / d. Total hydrocarbon production amounted to 889 million boe / d, compared to 841 million boe / d in 3Q2020.

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BP achieved an average realized natural gas price of $ 5.26 / MMcf in 3Q2021, up from $ 2.99 in the prior year period. For its liquids production, realized prices were on average $ 66.39 / bbl, compared to $ 37.77 in 3Q2020.

The BPX Energy unit, which includes the Lower 48 business, saw its production decline overall year over year. There were an average of six platforms working ashore, with two platforms each operating in the Permian Basin shales, Haynesville and Eagle Ford. Only one platform was in place at 3Q2020.

Production in the Lower 48 declined year over year in 3Q2021 to 322,000 boe / d from 365,000 boe / d. Natural gas production declined to 1.12 Bcf / d from 1.28 Bcf / d, while liquids production fell to 130,000 b / d from 144,000 b / d.

BPX realized gas prices averaged $ 3.53 / Mcf over the most recent period, compared to $ 1.28 in 3Q2020. Liquids prices averaged $ 52.25 / bbl versus $ 25.74.

While production was down, the Lower 48 business is “at the heart” of the portfolio, Auchincloss said, “of reducing emissions, reducing flaring, reducing methane and profitability.” The reduced production in the United States followed a “lack of investment” in the Lower 48, as BP reduced its overall spending.

In the Permian, the goal for the future is to “build the infrastructure to make sure there is no flaring or methane in the atmosphere,” he said. “As we embark on the next stage of Permian drilling, we believe this is extremely important not only for the environment but also for profitability.”

Mismatch in LNG contracts

Under International Financial Reporting Standards (IFRS), similar to US GAAP, i.e. generally accepted accounting standards, third quarter losses amounted to $ 2.5 billion, compared to a loss of $ 450 million a year ago.

After adjusting the fair value of accounting effects of $ 6.1 billion, mainly increases in natural gas forward prices, underlying BP replacement cost profit in 3Q2021 was $ 3.3 billion ( $ 16.48 / share), compared to $ 86 million (42 cents) in 3Q2020.

“Under IFRS, reported profits include the mark-to-market valuation of the hedges used to manage the risks of LNG contracts, but not the physical LNG contracts themselves,” noted Auchincloss.

“This lag at the end of the third quarter is expected to resolve if prices drop and as cargoes are delivered. The underlying result removes this mismatch, in line with the way BP manages its LNG portfolio. “

Even in the “context of rising commodity prices, we remain focused on capital discipline and our third and fourth capital spending priorities remain unchanged,” the CFO said. “We continue to expect to spend around $ 13 billion in 2021.”

Considering the “cumulative level and outlook for cash surplus”, the board “remains committed to using 60% of the 2021 cash surpluses for share buybacks and plans to allocate the remaining 40% for continue to strengthen the balance sheet “.

In the last three months of 2021, BP’s upstream production is expected to increase sequentially. The increase in production reflects “the major ramp-ups of projects, mainly in the gas regions, the resumption of seasonal maintenance activity and the continued impacts of Hurricane Ida on our non-operated production in the GOM… In this framework, we expect production of both oil production and operations, and gas and low-carbon to be higher.


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