ETAP facility in the North Sea; Source: BP

BP sees sharp drop in profit due to flat gas prices but uplifts renewables pipeline

Business & Finance

UK-headquartered oil and gas giant BP has achieved production growth, a reduction in net debt, and a “robust” operating cash flow, based on its results for the third quarter of 2023, where the firm outlined its progress in investing not only in oil and gas to keep the energy flowing at this point in time but also in the future energy system. Two new offshore wind projects have elevated the oil major’s renewable energy portfolio to a new level. However, the company’s profit was cut by more than half from the figures recorded during the same quarter last year on the back of the natural gas market’s weaker performance.

ETAP facility in the North Sea; Source: BP

BP, just like the rest of the players in the energy industry, is increasingly showing a change in stripes, but it continues to embrace more oil and gas with open arms to meet the rising demand and ensure energy security. The quarterly results from other European and U.S. energy giants also show the trend of boosting the energy arsenal with more oil and gas while chasing the low-carbon shift and tucking strong quarterly operating and financial performance under their belts, albeit to varying degrees.

While 2022 was one for the books year in terms of sky-high profits, a downturn in energy prices has led to a steep decline. This is illustrated by the 3Q 2023 results from four oil majors – TotalEnergies, Eni, ExxonMobil, and Chevron – showing profits that are nowhere near the bonanza observed last year. While all four are feeling the impact of the fall in oil and gas prices, ExxonMobil has once again fared better than other players.

Moreover, TotalEnergies recorded a net income of $6.7 billion while Eni’s adjusted profit before tax was €3.3 billion in 3Q 2023, marked by a weaker scenario with the Brent price down by 14% and the benchmark gas price down by more than 80%. On the other hand, ExxonMobil and Chevron announced earnings of $9.1 billion and $6.5 billion, respectively.

BP’s luck during 3Q 2023 was not better than the one the rest of the global oil majors had, as its underlying replacement cost profit for the quarter was $3.3 billion, compared with $2.6 billion for the previous quarter and $8.15 billion in 3Q 2022. Compared to 2Q 2023, the result reflects higher realized refining margins, a lower level of refining turnaround activity, a very strong oil trading result, and higher oil and gas production, partly offset by a weak gas marketing and trading result.

The UK player’s reported profit attributable to its shareholders for 3Q 2023 was $4.9 billion, compared with $1.8 billion for the second quarter of 2023 and a loss of $2.16 billion for 3Q 2022. The reported result for the third quarter is adjusted for inventory holding gains of $1.2 billion (net of tax) and a net favorable impact of adjusting items of $0.4 billion (net of tax) to derive the underlying replacement cost profit. Adjusting items include impairments of $1.2 billion and favorable fair value accounting effects of $1.5 billion.

The firm’s underlying replacement cost profit for the first nine months of 2023 was $10.8 billion, compared with $22.8 billion for the same period in 2022. This reduction in underlying replacement cost profit for the nine months reflects lower oil and gas realizations, the impact of portfolio changes in oil production and operations, a lower refining and oil trading performance, and a weak gas marketing and trading result in the third quarter.

According to BP, the adjusting items in the third quarter and the past nine months had a net favorable pre-tax impact of $0.5 billion and $3.8 billion respectively, compared with an adverse pre-tax impact of $8.3 billion and $39.4 billion in the same periods of 2022. This entails a favorable impact of pre-tax fair value accounting effects relative to management’s internal measure of performance of $1.5 billion and $6.8 billion respectively, compared with an adverse pre-tax impact of $10.1 billion and $16.7 billion in the same periods of 2022, primarily due to a decline in the forward price of LNG during the 2023 periods, but an increase in the 2022 comparative periods.

Furthermore, the effective tax rate (ETR) on RC profit or loss for the third quarter and nine months was 33% and 32% respectively, compared with 96% and -242% for the same periods in 2022. Excluding adjusting items, the underlying ETR for the third quarter and nine months was 33% and 39% respectively, compared with 37% and 33% for the same periods a year ago. The lower underlying ETR for the third quarter reflects adjustments in respect to prior periods while the higher underlying ETR for the nine months reflects changes in the geographical mix of profits and the increased impact of the UK Energy Profits Levy.

The company’s net debt was reduced by $1.3 billion to $22.3 billion at the end of the third quarter of 2023, compared to $23.66 billion in 2Q 2023 and $22 billion in 3Q 2022. The oil major’s operating cash flow in 3Q 2023 was $8.7 billion and includes a working capital release – after adjusting for inventory holding losses, fair value accounting effects, and other adjusting items – of $2 billion. This is compared to the firm’s operating cash flow of $ 6.3 billion in 2Q 2023 and $8.3 billion in 3Q 2022. The operating cash flow for the past nine months was $22.7 billion, compared with $27.4 billion for the same period in 2022.

Kate Thomson, BP’s Interim Chief Financial Officer, commented: “BP delivered robust operating cash flow in the quarter as we continue to execute against our unchanged financial frame. Net debt reduced by $1.3 billion to $22.3 billion; we are investing with discipline; and we are delivering on our commitment to shareholder distributions, announcing a further $1.5 billion share buyback program.”

The company’s capital expenditure in the third quarter of 2023 was a loss of $3.6 billion and $11.5 billion for the past nine months including $1.1 billion for the acquisition of TravelCenters of America, compared to a loss of $3.2 billion and $9 billion in the same periods of 2022. However, BP expects capital expenditure – including inorganic capital expenditure – of $16 billion in 2023.

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During 3Q 2023, BP completed $2 billion of share buybacks. This included $225 million as part of the $675 million program announced on February 7, 2023, to offset the expected full-year dilution from the vesting of awards under employee share schemes in 2023. The company completed the $675 million buyback program on September 1, 2023. The $1.5 billion share buyback program announced with the second quarter results was completed on October 27, 2023.

The UK-headquartered energy giant remains committed to using 60% of 2023 surplus cash flow for share buybacks, subject to maintaining a strong investment grade credit rating, thus, the firm intends to execute a further $1.5 billion share buyback prior to reporting fourth-quarter results. Based on BP’s current forecasts, at around $60 per barrel Brent and subject to the board’s discretion each quarter, the company expects to be able to deliver share buybacks of around $4 billion per annum, at the lower end of its $14-18 billion capital expenditure range, and have the capacity for an annual increase in the dividend per ordinary share of around 4%.

Murray Auchincloss, BP’s Interim Chief Executive Officer, remarked: “This has been a solid quarter supported by strong underlying operational performance demonstrating our continued focus on delivery. Momentum continues to build across our businesses, with recent start-ups including Tangguh Expansion, bpx energy’s ‘Bingo’ central processing facility and Archaea Energy’s first modular biogas plant in Indiana. As we laid out at our investor update in Denver, we remain committed to executing our strategy, expect to grow earnings through this decade, and on track to deliver strong returns for our shareholders.”

Oil & gas go hand in hand with low-carbon and renewable energy

According to BP, the production for 3Q 2023 was 946 mboe/d, 3.6% lower than the same period in 2022 while the underlying production was 2.6% lower, mainly due to base decline and increased planned maintenance offset by major project delivery. On the other hand, the reported production for the past nine months was 940 mboe/d, 1.8% lower than the same period in 2022 with underlying production being 2.2% lower.

September brought regulatory approval for the Murlach oil and gas development in the North Sea, a two-well redevelopment of the Marnock-Skua field back to the Eastern Trough Area Project (ETAP) hub. Later that same month, BP announced that its joint venture with Shell had been awarded three deepwater exploration blocks off Trinidad’s east coast.

The oil major continues to work towards its aim of building an LNG portfolio of 30 million tonnes per year by 2030. To this end, the company signed in July 2023 a long-term agreement with OMV to supply up to 1 mtpa of LNG for ten years from 2026, building on the agreement from May 2023 about 2 bcm per year of regasification capacity for 20 years at the Gate terminal in Rotterdam. The firm also announced its third long-term LNG offtake contract from Woodfibre’s British Columbia LNG facility with firm offtake totaling 1.95 mtpa and any additional production on a flexible offtake basis.

The UK giant, on behalf of the Tangguh production-sharing contract partners, announced in October 2023 that the first cargo of liquefied natural gas produced by the new third liquefaction train at the Tangguh LNG facility, in Papua Barat, Indonesia, was loaded and sailed. The start-up of Tangguh Train 3 will add 3.8 mtpa of gross LNG production capacity to the existing 7.6 mtpa facility, bringing the total plant capacity to 11.4 mtpa gross.

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BP is also actively pursuing its decarbonization targets by chasing more low-carbon energy. In line with this, the company strengthened its renewables pipeline to 43.9 GW from the rights awarded to develop two offshore wind projects, with a total potential generating capacity of 4 GW, in the German tender round. As a result, the firm’s renewables pipeline increased by 6.7 GW during the past nine months thanks to these two North Sea offshore wind projects in Germany and increases to Lightsource bp’s (LSbp’s) pipeline, including over 13 GW of early-stage opportunities.

Come October 13, the Midwest Alliance for Clean Hydrogen (MachH2), of which BP is a member, announced it was selected by the U.S. Department of Energy’s Office of Clean Energy Demonstrations to develop a regional clean hydrogen hub. Under the proposals, it would include blue hydrogen production at or near the oil major’s Whiting refinery and a potential hydrogen mobility corridor across Indiana and neighboring states. BP’s hydrogen pipeline at the end of the third quarter was 2.9 mtpa, an increase of 1.1 mtpa compared with the start of the year.

When it comes to offshore wind, BP and Equinor continue to work on options for their U.S. offshore wind projects to mitigate the effect of inflationary pressures and permitting delays. As a filing with the New York Public Services Commission (PSC) requesting to renegotiate the power purchase agreements associated with three wind farms off the coast of New York – Empire Wind 1 and 2, Beacon Wind 1 – was rejected on October 12, 2023, the companies are assessing the impact of the decision on these projects and future development plans. BP has recognized a pre-tax impairment charge of $540 million in the third quarter related to these assets.

BP’s macro energy outlook

Based on BP’s current forecasts for the fourth quarter of 2023, oil prices are expected to be supported by OPEC+ production restrictions and the continued demand rebound while European gas and Asian LNG prices will be driven by weather, demand recovery in Europe and China, and ongoing geopolitical tensions. The oil major believes that weather is also a risk factor in the U.S., but higher than normal storage levels and higher production should help to dampen volatility.

Looking ahead, the UK player expects reported upstream production for 4Q 2023 to be broadly flat compared to third-quarter 2023. BP anticipates that both reported and underlying upstream production will be higher in 2023 compared to 2022. Within this, the firm expects underlying production from oil production and operations to be higher and production from gas and low-carbon energy to be slightly lower. BP also continues to expect four major project start-ups during 2023.

Having realized $17.5 billion of divestment and other proceeds since the second quarter of 2020, the oil major continues to eye divestment and other proceeds of $2-3 billion in 2023 and expects to reach $25 billion of divestment and other proceeds between the second half of 2020 and 2025. The firm also continues to anticipate Gulf of Mexico oil spill payments for the year to be around $1.3 billion pre-tax including the $1.2 billion pre-tax payment made during the second quarter. BP has increased its 2030 adjusted EBITDA aims for resilient hydrocarbons and group by $2 billion to a range of $41-44 billion and $53-58 billion, respectively.

BP hands out $24.5 billion to shareholders

After BP posted its 3Q profits of $3.3 billion, a new Global Witness analysis found that the UK giant paid dividends of £6.5 billion ($7.9 billion) and repurchased shares worth £13.6 billion ($16.6 billion), giving shareholders a total of £20.1 billion ($24.5 billion) since January 2022, when energy and costs of living crises started hitting the UK.

The NGO claims that the firm’s shareholder pay-outs since the start of 2022 could pay the average heating bills for 10.6 million households – over a third of the total. In 2023 alone, BP paid shareholders £8.2 billion ($10.2 billion).

Jonathan Noronha-Gant, Global Witness, Senior Campaigner, stated: “BP is still riding the wave of the energy crisis, shoveling cash to its shareholders while the UK’s poverty rates spiral. The government is allowing BP to make off with the heist of the century – worse still, this government are subsidizing big oil firms with billions of taxpayers’ money. We need a proper people-first windfall tax now.”

However, it is important to note that these are BP’s global profits which Britain has no tax jurisdiction over, as the firm already paid its share related to the UK’s Energy Profits Levy (windfall tax) in 3Q 2023. Many industry experts continue to point out that the United Kingdom has the highest tax rate and these tax changes on oil and gas production are threatening to drive out investors and drive up imports, leaving consumers increasingly exposed to global shortages. 

As the UK oil and gas industry is still facing considerable challenges to safeguard the jobs of its 200,000-strong skilled workforce, ensure homegrown energy security, and power the transition to net zero and beyond with domestic oil and gas rather than imports, more action is needed to get to grips with these challenges.

Bearing this in mind, the UK made a move recently towards awarding the first set of licenses for 115 applications received in the 33rd offshore oil and gas licensing round with the offering of 27 licenses in areas that have the potential to go into production more quickly than others, aiming to strengthen Britain’s energy security. More blocks are also on the North Sea oil and gas horizon, subject to additional environmental checks.

Among those who have hailed this announcement as a step in the right direction to bolster homegrown energy security and jobs while the sector continues its expansion in wind, hydrogen, and carbon capture and storage (CCS) is Offshore Energies UK (OEUK).

The UK trade body believes that new oil and gas licenses reduce the rate of declining supplies, rather than increase it above current levels, as the data from the NSTA shows the country only replaced 3% of production with new reserves in 2022, meaning that it only invested in 1 new barrel for every 33 existing barrels produced.