How Libyan Developments Can Impact BP

August 24th, 2011 by Trefis Team
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BP (NYSE:BP) announced this Monday that it would be resuming its Libyan operations ‘when conditions allow’ as the rebels press closer to ending Gadhafi’s 42 year regime. BP had to halt its plans to drill in offshore in Gulf of Sirte and in onshore sites in Ghadames because of the 6 month old uprising that saw the oil output of Libya fall from 1.6 million bbl/day to approximately 100,000 bbl/day. [1] [2] While not many expect a quick resurgence of Libyan oil production, oil prices have already eased following signs that the six month unrest may come to an end soon. Apart from BP, the oil exploration and production industry is dominated by other oil majors such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Conoco Phillips (NYSE:CVX) and the Royal Dutch Shell (NYSE:RDS).

We have a $55.30 price estimate for BP which is at a handsome 45% premium over its current market price.

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Will prices be affected?

Increasing oil prices have resulted in BP and other oil majors posting growth in revenues over the past few quarters despite falling oil production. The uprising in Libya was one of the primary reasons that oil prices crossed the $100 /bbl earlier this year, prompting the OECD to release emergency stockpiles to bring the situation under control. BP saw its oil output fall 11% because of divestments and output declines in the Gulf of Mexico in Q2 2011 but continued to show higher revenues benefiting from the high prices. (See: A Banged up BP is Still Worth $55) However with the Libyan situation finally showing signs of concluding, oil prices, which have already fallen from their April highs on the growing fears of recession, are expected to show some decline. Brent crude fell by around 1.3% with the developments in Libya this week. [1]

Analysts do not expect the Libyan production to ramp up any time soon. Some estimate that output will be restored only in 2013, which means that oil prices may not recede as quickly as some estimate. [1]

Just what the doctor ordered for BP

Adjusted for divestments, BP saw its output fall by 7% in the previous quarter. Oil fields back at home in the North Sea are seeing strong decline and new taxation laws introduced the government have made drilling in the region less enticing. BP entered into an accord with the Libyan government in 2007 to drill in the Gulf of Sirte and in onshore sites in Ghadames in the country and was to proceed with the drilling when its plans were disrupted by the political unrest following which it evacuated its expatriate staff. Resumption of activity in Libya may help the company revive its sagging production to counter the effects of lower oil prices in the long term.

Click here for our full analysis of BP.

Notes:
  1. Gadhafi’s Regime Crumbles As Rebels Storm Tripoli: Don’t Expect Oil Production Back Any Time Soon, Forbes [↩] [↩] [↩]
  2. BP to resume Libya operations ‘when conditions allow’, AFP [↩]