Tip of the iceberg

Author James Keates

BP employees across the world found out this week that their pay is being frozen this year. Add to that voluntary redundancies being offered to BP staff in Trinidad and Tobago and hundreds of job losses in the UK North Sea and Azerbaijan, and you have a company taking sub-$50/bl oil prices pretty seriously.

BP employees across the world found out this week that their pay is being frozen this year. Add to that voluntary redundancies being offered to BP staff in Trinidad and Tobago and hundreds of job losses in the UK North Sea and Azerbaijan, and you have a company taking sub-$50/bl oil prices pretty seriously.

While not great news for those affected, it's music to the ears of BP shareholders. With the full cost of the Macondo disaster still uncertain and BP’s heavy investment in Russia looking more risky by the day, investors will take any cash-saving measures they can if it means protecting their cherished dividends.

But the truth is, capping wages and laying off staff only scratches the surface.

Some rough calculations using BP’s “operating environment rules of thumb” explain why. For every $1/bl decline in Brent crude over the course of a year, BP’s pre-tax operating profit takes a $275mn hit, according to the guide. So, if Brent were to average $50/bl this year, that would translate into a $13.5bn shortfall compared with last year.

Obviously, these rules of thumb are approximate and actual results will be governed by many other factors besides the price of oil. Nevertheless, it gives a flavour of the challenge ahead.

To be fair, BP has never pretended that pay freezes and job cuts are the answer to falling oil prices. The firm has a number of other tools at its disposal, including cutting capital expenditure, selling more of its assets and even abandoning its share buyback plans. And in the short term, its balance sheet is more than strong enough to accommodate more debt without risking its credit rating.

Expect some or all of the above when BP reports its full-year results next week. Freezing salaries is just the tip of the iceberg.

For more information please contact OilBlog@argusmedia.com

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