Oil and Gas

BP's Middle East chief isn't worried about low oil prices, says $50 a barrel is 'within range'

Key Points
  • British energy giant BP plans its investments on the back of a $50 to $70 a barrel range to adequately prepare for oil market swings, its Middle East chief told CNBC. 
  • Crude prices have been on a rollercoaster ride, falling to a year-low on Friday, just weeks after hitting a nearly four-year high in October ahead of U.S. sanctions on Iran.
  • Countries like Iraq may see cuts in capital spending from the public sector, putting vital reconstruction projects at risk.  
Flames rise from the burning of excess hydrocarbons at the Hammar Mushrif new Degassing Station Facilities site inside the Zubair oil and gas field.

Oil producers across North America may be looking at dialing back their investment plans amid plummeting oil prices in recent weeks, but BP's Middle East chief is unfazed.

The British oil giant has planned its investments with a wide price range in mind, accounting for drops like November's, BP Middle East President Michael Townshend told CNBC on Sunday.

"You don't plan on today's oil prices — you plan on a range," Townshend said during a conference in Dubai organized by the Iraqi British Business Council. "We see a sensible range would be in that $50 to $70 range [?]. And that's what we plan on."

Crude prices have been on a rollercoaster ride, falling to a year-low on Friday, just weeks after hitting a nearly four-year high in October ahead of U.S. sanctions on Iran, OPEC's third-largest oil producer. Dubbed oil's "Black Friday," global benchmark Brent crude dropped 6.1 percent to $58.80, down 22 percent for the month on fears that the world is oversupplied.

The conference, centered on Iraq's reconstruction one year after the defeat of the Islamic State militant group, highlighted the need for investment and improved efficiency in Iraq's power sector. Asked if the lower oil prices would prove problematic for BP's Iraq operations, Townshend replied that the company was prepared for turns in the market.

"Our investment decisions are all based on a range of pricing, they're in that $50 to $70 range — whatever today happens to be, we have no control over whatever tomorrow happens to be," he said. "Our job is to make sure we're as efficient as possible so we can work through whatever the oil price is. We can't predict the oil price."

But if history is any guide, a drop in oil prices means a drop in Iraq's capital expenditure, according to Frank Gunter, professor of economics at Lehigh University in Bethlehem, Pennsylvania. Iraq's government will likely have a much harder time funding its own infrastructure development projects, he said. [?]

When oil prices collapsed in 2014, capital expenditure dropped by 50 percent — meaning important investment projects were abandoned and had to be completely restarted years after.

Iraq in the spotlight

Speaking at the conference, Gunter pointed out the day's Brent crude price, at just below $60 a barrel.

"At $60 a barrel, the Iraqi government can afford to pay its current expenditures — the pensions, the salaries, the social safety net — but there is nothing left over for infrastructure investment," he warned. "Sure, you can borrow," he added, but noted that borrowing has its limits, especially considering the substantial debt Iraq has racked up in recent years.

"A lot of infrastructure is needed — electricity and water come immediately to mind. Yet it does not appear that the money will be there."

Iraq's parliament this month rejected newly-appointed Prime Minister Adel Abdul-Mahdi's budget plan, which amounted to nearly $107 billion, with an estimated deficit of $19 billion.

Iraq's oil revenues can cover 88 percent of the draft budget, but the parliament's rejection of it stems from the fact that it overlooks several important aspects of reconstruction and infrastructure needs, local lawmakers say. Particularly opposed to the proposed plan are representatives from Basra, the oil-rich southern city that's been wracked by violent protests since July over a collapse in basic services such as drinkable water and electricity.

Mahdi, who formerly served as both oil minister and finance minister, has portrayed himself as a pragmatic economist with the will to take on Iraq's rampant corruption and diversify its revenue sources. Currently, more than 90 percent of the Iraqi government's revenue comes from oil.

After several months of legislative wrangling over government formation, following an election that saw the lowest voter turnout since Saddam Hussein's ouster in 2003, Mahdi has a formidable task ahead of him. Whether he will be able to sidestep the powerful political interests that have benefited from graft and party patronage for years, which contribute to Iraq's reputation for stifling corruption, will be crucial for boosting that much-needed investment.

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