BP has trimmed its production forecast as well as capital spending on the expectation that low oil prices and reduced demand amid the global recession will last through this year and possibly into 2010.

Chief Executive Tony Hayward said during BP’s annual strategy presentation to analysts in London that in the short term, oil prices will reflect a balance of production cuts by the Organization of the Petroleum Exporting Countries and reduced demand in the recession.

“We therefore do not expect a quick recovery, and it would be wise to prepare for continued volatility,” Hayward said.

OPEC has announced cuts totaling 4.2 million barrels a day since September. While members of the cartel seem to be complying so far, Hayward said, the cuts likely won’t reduce in inventories until the second half of this year.

And he said global oil consumption will likely decline this year as it did in 2008 — probably by more than 1 million barrels a day, the largest drop since 1982.

So BP has trimmed its production forecast through 2012 to 4.1 million barrels of oil equivalent per day from 4.3 million barrels. The company also reduced its 2009 spending plans to $21 billion from $22 billion.

Costs dropping slowly

The spending reduction reflects BP’s intention to capture savings on costs. Hayward reiterated a frequent refrain from all the top publicly traded oil majors that while crude prices swiftly fell to 2004 levels late last year, production costs are falling much more slowly, leaving BP and its competitors to push for savings.

“We’re seeing early signs of it happening already,” Hayward said. “The market is beginning to soften and, over the last few months, we have already seen sharp drops in the price of steel and petrochemicals.”

He said BP aims to be proactive and use its “significant global purchasing power” to negotiate better contracts on projects.

Neil McMahon, an analyst with Bernstein Research, said in a report Tuesday that all the majors face production disappointments this year because of OPEC cuts and mature field declines.

But he said BP’s exploration efforts haven’t tapped a really large oil field since its heyday in the 1990s, which included Thunder Horse in the Gulf of Mexico.

Over the last 10 years, BP has found oil or natural gas “in quantities befitting its iconic stature” in the Gulf, Angola and Egypt, he said. However, “the rate and size for these finds has been steadily dwindling, and with a tough year ahead, we could see exploration activity reined in due to the greater financial forces in action across the globe.”

That, coupled with BP’s expectation of flat production this year from its Russian partnership, TNK-BP, could prompt the company to add production through acquisitions. BP has already made footprints in Canada’s oil sands through a joint venture with Husky Energy, and in U.S. natural gas shale with acquisitions of Chesapeake Energy assets last year.

“We are expected to have faith that the oil companies can keep coming up with the goods,” McMahon said. “That of course involves a good deal of exploration and acquisition.”

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