INVESTMENT THESIS
A key challenge faces the oil majors: Replacing reserves is becoming increasingly difficult. There's a lot of oil left in the world, but finding low-cost barrels has never been harder, in no small part because many governments now don't allow Western companies access to their resources.
Outside of Russia, BP produced the equivalent of 860 million barrels of oil and gas in 2013; this represents the level of reserves it needs to book annually to prevent reserves from declining. But there simply are not this many barrels of conventional (that is, low-cost) oil and gas reserves annually accessible to BP. This has forced the majors to increasingly focus on nonconventional resources (deep water, oil sands, and shale gas, for example). Therefore, at a given level of oil prices we'd expect BP's future returns to be lower as nonconventional resources are typically costlier to develop and produce. This is one of the reasons BP's finding and development costs have been rising in recent years.
