BP faces declining profitability
October 5, 2006
By Jeremy Warner
London - You've heard of "peak oil", the idea that world oil production is already close to or even at its peak. Now comes the idea of "peak profits", the possibility that oil profits too may have reached their zenith.
After the spectacular returns of recent years, it may be all downhill from now on. On the face of it, the two things would seem incompatible. If production is about to go into decline, then, assuming demand continues to rise, prices would logically remain buoyant too, ensuring higher profits still.
Yet as the BP share price, which on Wednesday sank to a 52-week low, already reflects, it is more than likely that the record profits currently being chalked up in big oil won't last. This may be as good as it gets.
BP on Wednesday admitted that its oil and gas production in the third quarter was down both on the previous three-month period and on a year earlier. We knew about lost production at Prudhoe Bay in Alaska, but there has also been a comparatively benign hurricane season, so analysts had been expecting some uplift.
Delays at Thunderhorse and elsewhere means that production targets are under threat. What's more, the oil price is again in steep decline, thanks to high American inventories and an easing of Middle Eastern tensions.
Average selling prices for the year as a whole are already a good deal higher than last year, so profits will continue to gush for a while longer yet. However, assuming the oil price doesn't bounce back, profits may return to more normalised levels in 2007.
Further out, too, prospects for oil prices may not be as robustly upwards as imagined. Demand from the developing world will presumably continue to accelerate, but eventually that will be counteracted by declining demand from already industrialised countries as measures adopted to tackle climate change begin to kick in.
After a series of mishaps in the US, Lord Browne of Madingley, the BP chief executive, has made it his business to restore BP's good name and position in the world pecking order of big oil companies. He retires in a couple of years, so he's not got much time. The now quite strong possibility of working against the backdrop of declining profitability makes the task that much tougher still.
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