BP at the crossroads: Dudley sets future path

The energy giant is still in the hunt for the world's trickiest oil despite recording its first loss in decades

The oil giant BP announced its first annual loss for nearly two decades yesterday, dragged down by a whopping $41bn (£25bn) charge to pay for the Gulf of Mexico disaster last summer which unleashed the worst offshore oil spill in history.

Despite fourth-quarter profits of $4.4bn, the company recorded an annual loss of $4.6bn, compared with profits of $14bn in 2009. But BP was keen to stress its confidence in its financial future, reporting underlying earnings of $20.5bn and reinstating the dividend at 7 cents per share, about half its level before it was axed to help meet the slick clean-up costs. The company also announced plans to sell two US refineries, at Texas City and Carson, to concentrate on more competitive assets at Whiting, Toledo and Cherry Point.

But of greater significance than either the black hole in the company's finances or the decision to halve its North American refinery capacity, or even the reinstatement of the dividend, was the vision of the future set out by the newly installed chief executive, Bob Dudley.

BP faced nothing short of an existential crisis in the aftermath of the Deepwater Horizon explosion last April, which left 11 people dead, vast swaths of US coastal waters polluted, and the company's reputation in ruins. BP stock dropped to well below half its pre-spill value. Mr Dudley's predecessor, Tony Hayward, was forced out of his job after a series of PR gaffes left him as public enemy number one in America. And there were questions about whether BP had a future in the Gulf of Mexico at all, let alone other environmentally sensitive regions such as Alaska or the Canadian tar sands.

When Mr Dudley took over in October, the priority was to improve the company's safety procedures. And there is every suggestion that Mark Bly, the man appointed to lead the charge, is making progress. The company has suspended operations at several rigs around the world in recent months in response to newly stringent safety rules.

But there were also longer-term questions about the future of the company. Mr Dudley laid out unequivocal answers yesterday. BP will stick to its core strength: exploring and drilling for oil. The company is to double its exploration investment in the coming years, focusing on either giant or technically challenging fields and selling out of areas which no longer fit the more focused portfolio profile. Of crucial importance will be partnership arrangements with national oil companies. Notwithstanding the row that has blown up with BP's Russian joint venture TNK-BP (see panel, below), the $10bn share-swap deal with Rosneft to explore the Arctic's Kara Sea is the first of many.

Mr Dudley was clear yesterday that the company would not be cowed by the Deepwater Horizon tragedy, but must put it to use. "After the Gulf of Mexico we had the choice of stepping back, of losing confidence in our ability to operate with these technologies and in these conditions," he said. "But we don't think that is the right thing: it would be irresponsible of us not to take the lessons and change the company to the core, and then take that around the world and help change the global industry."

He was also unforgiving in his analysis of what options are available to international oil majors in a world where just 9 per cent of reserves are outside the grip of national companies, compared with 90 per cent 30 years ago. "The role of an international oil company like BP is the technology and know-how at the more difficult ends of the spectrum, working with the national oil companies," Mr Dudley said. "If it cannot do that, it probably doesn't have a future."

Hence Mr Dudley's plans for BP. The company remains committed to its renewables portfolio, and to refinery assets it is keen to expand in fast-growing Asian economies such as China and India. But the upstream division is the core of the smaller, more flexible BP that will emerge from the $30bn divestment programme set in train to raise money to pay for the Gulf of Mexico spill. The company made final investment decisions on 15 projects last year, including several in the North Sea, Angola and Azerbaijan.

Such a rate of activity is not going to stop. Out of a total capital expenditure of $20bn planned for 2011, some three-quarters of it will be spent in the upstream business. And the group has an ambitious programme for 32 new projects by 2016, contributing 1 million barrels per day to production levels and entering new provinces such as Libya, the South China Sea and the Arctic.

Unsurprisingly, Mr Dudley gave no ground on the issue of blame for the Gulf of Mexico spill yesterday. Although BP has put aside a "satisfactory" $41bn pot to cover all potential costs, Mr Dudley stressed again that BP was not grossly negligent, and also that it expects to recover at least "a portion" of the costs from its partners in the Deepwater Horizon rig. It is not yet clear how successful it will be, and Mr Dudley admitted that although the company has sent out $6bn in bills so far, none has yet been paid. "They are not responding, but we will continue to bill," he said.

The sale of the Texas City refinery – which has already raised inquiries from potential buyers and BP hopes will be completed in 2012 – will draw a final line under the 2005 fire which claimed 15 lives and wreaked untold reputational damage on the company's ill-starred US business. But Mr Dudley made clear that the decision to cut back refinery capacity was purely commercial, getting rid of inflexible or non-core assets to leave the company's portfolio "although smaller... competitively advantaged". The move in no way constitutes a pulling back from the US market, he said. "We have no intention to spin off the US operations. We are utterly committed to doing business in the US: it is a good business, with good prospects."

Investors responded positively to the slew of news from BP yesterday, sending the shares up by 1.27 per cent to 491p despite the losses overshadowing the reinstated dividend. BP stock is still some way from the 640p-plus before the Gulf of Mexico tragedy, but the company has now set out how it plans to get back there.

The Russian problem: Court pauses Rosneft deal in AAR row

BP's Russian partners have successfully stalled the British oil major's plans for a $10bn (£6.2bn) tie-up with Kremlin-owned rival Rosneft.

The High Court in London yesterday granted an injunction filed by Alfa-Access-Renova (AAR), the consortium that shares TNK-BP 50/50 with BP, claiming that the Rosneft deal violates the joint venture's shareholder agreement. AAR's four billionaire members claim that the agreement stipulates that any activities in Russia must be through TNK-BP, or the company must at least have the opportunity to participate.

Bob Dudley, BP's chief executive, downplayed the spat yesterday, repeatedly saying he expects a "business solution". He also said, before the injunction was granted, that it would make little difference because the Rosneft negotiations were already on hold pending arbitration between BP and AAR.

When the court decision was reached, later in the day, BP made a formal announcement of plans for arbitration proceedings, with a view to settling the issues raised by 25 February.

Mr Dudley claimed that the details of the Rosneft deal were not shared with TNK-BP earlier because of the market-sensitive nature of the deal, which includes a $5bn share swap and plans to explore the Arctic South Kara Sea.

Since the issue blew up last week, BP has shared all the relevant papers with its Russian partner, and is keen for a resolution, he said.

Mr Dudley made a side-swipe at AAR over the consortium's decision at the start of the week to vote down TNK-BP's proposed $1.8bn special dividend at the shareholder meeting later this month. "I note that two weeks ago, it was AAR that proposed the special dividend, not us," he said. "If they don't want to do the dividend, we're fine with that."

But Mr Dudley also gave a hint of a possible compromise, not ruling out either a financial settlement or a deal giving TNK-BP a slice of the controversial deal. "It is possible that TNK could be involved in the deal with Rosneft," he said. "We wouldn't be opposed to that."

Mr Dudley has long experience of AAR. As chief executive of TNK-BP he was harassed into hiding in 2008 in a row over governance at the company. Leaked documents from the WikiLeaks website yesterday suggested that Mr Dudley blamed the campaign on Russia's Deputy Prime Minister, Igor Sechin, who also happens to be the Rosneft chairman and a key architect of the latest BP tie-up.

Mr Dudley shrugged off the claims yesterday, saying he was not certain they were accurate. "BP has been operating in Russia for 20 years and the TNK-BP venture has moved along really well since 2008," he said.