BP – low oil price isn’t all bad news

BP sign

Two things are clear from BP's results this morning.

First, the oil major is preparing for a low oil price for the foreseeable future, saying that it is working towards a "financial frame" by 2017 that assumes a price of $60 a barrel.

When I interviewed Bob Dudley at the start of the year, he said that low energy prices could last for three years.

Nothing since then seems to have changed his view.

"Last year, we acted decisively to reset BP for a sustained period of lower oil prices and the results are coming through well," he said today.

"We are now in action to rebalance our financial framework in this new price environment."

Second, low oil prices are not all bad news for integrated oil companies.

Yes, life upstream (the exploration and production part of the business) might be tougher because the business is not being paid as much for every barrel of oil it produces.

But, for the downstream business (that's refined oil products such as fuel, lubricants and petrochemicals for making things like paint and plastic bottles) a low oil price can be a veritable boon.

That's because the input costs - essentially the low oil price - are down and therefore the profit margin can be boosted.

If you compare the upstream and downstream profit numbers for BP, the difference is stark.

For upstream, pre-tax underlying profit was $800m (£520m) compared with $3.9bn (£2.54bn) in the third quarter of 2014.

That's a pretty precipitate drop.

For downstream, pre-tax underlying profit hit $2.3bn (£1.5bn) compared with $1.5bn (£980m) in the third quarter of 2014.

So, for the moment, BP's downstream business is creating considerably more profit than its upstream partner.

BP also revealed that the cost of the Deepwater Horizon disaster has now reached $55bn (£35.85bn).

When the Macondo rig blew up in 2010, killing 11 people and leading to a major oil spill, many predicted it would cost BP several billion dollars in clean-up costs, fines and compensation.

Few people foresaw just how high the price would be.

Or for how many years it would weigh on the company.

VW should take note. Scandals are more expensive than you initially think.

And take a lot longer to clean up.


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