BP has warned that gas markets will remain “tight” during the winter months after rocketing global gas markets fuelled higher-than-expected profits and an extra $1.25bn returns for its shareholders.
The global gas supply crisis, which threatens to increase costs for homes and businesses this winter, helped drive BP’s profits to $3.3bn (£2.4bn) for the third quarter, ahead of analysts’ forecasts of $3.1bn.
The economic rebound from the depths of the Covid-19 pandemic last year has caused global oil and gas prices to surge to record highs in recent months, and lifted BP’s profits more than 38 times higher than a year ago.
BP predicts tight gas markets this winter as rising prices boost profits – business liveRead more
The FTSE 100 oil company will use its stronger cashflows to buy back an additional $1.25bn of shares, as part of the company’s plans to keep investors on side as it prepares to plough billions of dollars into renewable energy while shrinking its fossil fuel production.
The BP chief executive, Bernard Looney, predicted that gas prices would stay high in the coming months. “All things being equal, of course that’s a big if, we would expect gas prices to return to normal probably by the summer of next year,” he told the Guardian.
Commenting on the oil market, Looney said: “Over the medium term [the oil cartel] Opec is demonstrating strong discipline and importantly the US shale business, which typically would respond strongly in a situation like this, has become very financially disciplined.
“Demand is strong but we’re not yet at pre-Covid levels.”
He said it was “not unreasonable to expect prices to remain at this level for some time to come,” adding: “If oil prices remain strong and it’s very possible that they will, then you can see the sort of financial results that we can generate today.”
Prices of wholesale gas have soared because of low storage levels after an especially cold winter in Europe last year and increased energy demand from Asia. The cost of gas for delivery in November hit an all-time high of 407p a therm in early October, though has since fallen back. In December last year it was just 45p.
Oil prices have also climbed, and inventories have fallen towards pre-pandemic levels, BP noted. It expects oil prices to be underpinned by a further decline in inventories and possibly additional demand from gas to oil switching. It said that decisions taken on production levels by the Opec+ oil cartel of big producers including Russia continued to be an important factor in oil prices and market rebalancing. Brent crude is now trading at about $85 a barrel.
Last week, Larry Fink, the chairman and chief executive of BlackRock, the world’s biggest fund manager, warned that there was a “high probability” of oil hitting $100 a barrel.
Despite benefiting from higher prices in the third quarter, shares in BP were down 3.5% on Tuesday. Michael Hewson, chief market analyst at CMC Markets, said the results overall were “underwhelming”.
BP expects both oil and gas production in the fourth quarter to be higher than in the third, as it ramps up big projects, particularly in gas regions, and recovers from seasonal maintenance and the impact of Hurricane Ida on production in the Gulf of Mexico.
For 2021 as a whole, BP expects production to be lower than 2020 because it is selling off unwanted assets worth $6bn to $7bn as part of its plan to trim the size of its fossil fuel business by 2030. At the same time, BP is investing in renewable energy, buying a pipeline of US solar farms in June, for example.
Looney, who is attending a panel at the Cop26 climate summit in Glasgow on Tuesday night, said about the event: “Everybody wants to see more ambition. We want to see more concrete, realistic actions to drive emissions down. If that means burning gas rather than coal then that’s what we should be doing. I recognise that that is not popular in all camps.”
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Nicholas Hyett, an analyst at Hargreaves Lansdown, said BP’s profits show “that oil and gas remains a lucrative business”.
“High prices have driven strong year-on-year growth in profits, and that’s being used to fund a generous $1.25bn share buyback. Coming on top of a $1.4bn buyback announced at the half year stage the group is firmly focused on shareholder returns at present. However, you can reasonably question whether that generosity is justified,” Hyett added.
The analyst warned that BP will need to deliver a strong final quarter result to make sure its debt doesn’t begin to rise again. The company is making payments relating to the Gulf of Mexico oil spill in 2010 of about $1.5bn before tax this year.