Oil giant BP Plc said it had increased its cost reduction targets for 2009 by 50 percent to $3 billion, as it reported a halving in second quarter profits due to lower oil prices and weaker refining margins.

Europe's second largest oil company by market value said on Tuesday it had achieved its original 2009 target of $2 billion in cuts in the first half of the year, confounding analysts who predicted the industry would be unable to roll back the big cost rises of recent years.

BP may not be able to control the price of oil, but their measures to streamline the business and reduce costs shows the board is in tune with the ebbs and flows of the market, said Manoj Ladwa, senior trader at ETX Capital.

Oil companies are reacting to the collapse in oil prices from a high above $147/barrel in July last year to around $70/bbl now by slashing exploration, production and refining costs, which doubled since 2004.

BP has now thrown down the gauntlet to the rest of the oil supermajors, who will report their numbers over the next few days, said Richard Hunter, Head of UK Equities at stockbrokers Hargreaves Lansdown.

The five biggest Western oil companies by market capitalization, which includes Royal Dutch Shell , France's Total and U.S. companies Exxon Mobil and Chevron are known in the industry as the Supermajors.

However, BP's impressive cost cutting performance partly reflects the stronger dollar, Mark Bloomfield, oil analyst at Citigroup said.

BP shares fell 1.29 percent to 512.3 pence at 0904 GMT, against a 0.33 easing in the DJ Stoxx European oil and gas sector index <.SXEP>.

While 2Q's results showed further evidence of the considerable progress BP has made in its operational recovery, we feel this is largely discounted in valuations, said Collins Stewart analyst Gordon Gray.

Panmure Gordon analyst Peter Hitchens said that while BP is now starting to see its much promised production increases and is starting to close the gap with its peers, the operating environment will continue to depress the shares.


Cost cutting is a controversial subject at BP. During the last oil price downturn, when crude fell below $10/barrel, Hayward's predecessor John Browne enforced swinging reductions.

These were later blamed by regulators, politicians and industry figures for safety and environmental problems including the 2005 Texas City explosion which killed 15 works and oil spills in Alaska.

However, BP has insisted this round of cost reductions will not impact safety.

BP said replacement cost (RC) net profit, which strips out unrealized gains or losses related to changes in the value of inventories, was $3.14 billion in the second quarter.

Excluding one-off items RC net profit was $2.94 billion, ahead of an average forecast of $2.81 billion, from a Reuters poll of eight analysts.

Oil prices have been buffeted by falling consumption in many developed countries due to the global economic crisis and Chief Executive Tony Hayward gave a downbeat assessment for energy demand going forward.

We see little evidence of any growth in demand and expect the recovery to be long and drawn out, he said in a statement.

BP said production of oil and gas rose 4 percent in the quarter compared to the same period of 2008, to 4.0 million barrels of oil equivalent per day, as new fields ramped up.

The company predicted output would continue to grow in the second half, suggesting it could report its first meaningful growth since 2004 this year.

BP said profits from trading oil and gas returned to normal levels, after being boosted by $500 million in the first quarter thanks to successful trading around volatile markets and sharply higher crude futures prices relative to spot prices.

(Additional reporting by Paul Hoskins, Dominic Lau and Jon Hopkins)