Royal Dutch Shell Group .com

THE LONDON TIMES: After a vintage year for oil where will Lord Browne take BP next?: “TNK delivers low-priced oil from old wells in western Siberia — not hugely profitable but a big boost to BP’s output and a snub to Shell, whose production is declining. Shell failed to make similar acquisitions and has paid the price with dwindling reserves and output.”: “One cannot help wondering if Lord Browne might be working feverishly on a colossus of a deal if the oil price were $15, instead of $45. But the BP chief doesn’t waste time in idle speculation.” ( 10 Jan 05


By Carl Mortished

January 10, 2005  


COULD Lord Browne of Madingley be just a bit fed up with the strength of the oil price? Last year was a sensational time for an oil company. The cost of a barrel of crude oil doubled, governments fretted about supplies and BP, of which Lord Browne is chief executive, added a billion dollars to its profits each quarter.


However, Lord Browne does not look like the cat that got the cream. If the truth were known — and this is a man who rarely reveals his inner thoughts — he could probably have done without that bundle of manna from heaven.


Lord Browne transformed BP in the 1990s era of cheap oil into a world-beater with derring-do and a string of opportunistic takeovers to its bow. Today, his job seems less that of a corporate raider than a dull banker, with the thankless task of keeping the energy group lean and fit when the waiter keeps serving extra portions.


He insists that the high oil price is merely an unusual coincidence not to be repeated. He has little time for those who worry where the next barrel is coming from or how much the Saudis have hidden under the desert sands.


“One will never know how much there is but I find it too convenient to bring the point up when the price of oil is high,” he says. “Nothing has actually changed. There is plenty of oil not to be worried about it for the reasons people are worried at the present.”


Oil prices soared, he says, because demand grew at the rate of world GDP — twice its normal rate. A surge in Chinese demand coincided with strong consumption around the globe. In a typical year, demand grows by little more than 1 million barrels a day. Last year demand rose by 2.7 million barrels a day. This caused temporary insecurity but that is now over, Browne says.


“There is still a lot of oil around and there is still surplus capacity in Opec which will build up over time,” he says. He insists that production is building outside the cartel, with 1 million extra barrels a day each year. The top 30 quoted oil companies increased their rate of investment by 15 per cent a year between 2000 and 2003, he says.


BP has added about a billion dollars to its annual expenditure, although half is due to inflation — steel prices have soared — and the falling value of the dollar. The company has been skimming the extra layer of cream from each barrel sold to buy back its shares. As oil soared to $50 and more, BP was running its budget on a $20 threshold, using the surplus it earned to buy back stock worth more than $5 billion in the first nine months of the year.


This is stuff the stock market loves — although private investors complain that they do not see the benefit. But it seems a dull game for what has been one of Britain’s more exciting companies and for a man dubbed the UK’s best businessman.


Spotting the opportunity of the century, Lord Browne led BP into takeovers of Amoco, Atlantic Richfield and Burmah Castrol, in the process turning Britain’s also-ran oil company into the fierce rival of Shell. In 2003 he propelled BP into Russia with the settlement of a feud with the Russian oligarch Mikhail Fridman, creating the joint venture TNK-BP.


By streamlining flabby US oil companies, Lord Browne generated quick bucks. But the real benefit over the longer term was probably the purchase of lots of oil and gas. Amoco brought with it a monster gas reserve in Trinidad that is generating huge profits from shipping frozen fuel to the US. Atlantic Richfield’s dowry was Tangguh, an Indonesian gasfield that will soon be servicing power stations in China. And TNK delivers low-priced oil from old wells in western Siberia — not hugely profitable but a big boost to BP’s output and a snub to Shell, whose production is declining.


Shell failed to make similar acquisitions and has paid the price with dwindling reserves and output. But what next for BP? Lord Browne recites from his list of treasured projects: gas in Trinidad, oil off Angola, 1 million barrels a day of Azerbaijan crude flowing into the Mediterranean and gas piped from Alaska to the US-Canadian border. All projects born or inherited in the 1990s. Where are the assets that will renew BP in the next decade?


Deals are a problem because everyone is making too much money. “We see no opportunities that fit the strategy,” Lord Browne says. “They are actually unusual circumstances. Some event has to happen . . . Clearly the circumstances that led to the big wave of mergers was a period of low oil prices. That is what did it. The view then was that the oil price could collapse to $5.”


An oil price above $40 a barrel covers a multitude of sins — perhaps even an extraordinary circumstance, such as the removal by one company of a fifth of its oil and gas reserves. One cannot help wondering if Lord Browne might be working feverishly on a colossus of a deal if the oil price were $15, instead of $45. But the BP chief doesn’t waste time in idle speculation.


Did the expropriation of the main business of Yukos, Russia’s biggest oil company, cause him a fright?


He almost shrugs, suggesting that that those who listened to the voices from the Kremlin might have spotted the ultimate resolution of the Yukos crisis. “It (the sale of Yuganskneftegaz) was foreseeable. A lot of analysts said if it can happen to Yukos it can happen to others. Well, so far it hasn’t. It is a concern because it took away people’s confidence. But as a practical matter it had been on the cards a long time.” And he is unfazed by the signals about the strengthening of government control over Russian oil and gas, in particular with Gazprom, soon to be enlarged with the takeover of Rozneft. Western oil companies will need to come to an accommodation with national oil companies (NOCs), he says.


“The NOCs are in the places where oil and gas exist. Gazprom clearly controls the resources of the future and they have done so for some time,” he says.


For BP, that control is a stark reality. A major BP prize is Kovykta, a giant gasfield near Lake Baikal in eastern Siberia where development talks are embroiled in negotiations with Gazprom over how much of the resource the Russians want in exchange for their co-operation with a pipeline to China.


“Gazprom has a mandate to export gas from Russia so it must participate and it also has a mandate to build pipelines for gas,” he says. “So we must work with them.”


And sooner or later BP must find a way of working with the NOCs of Arabia and the Gulf. It is pointless, thinks Browne, to lecture state oil companies about the virtues of the private sector and free markets. They may not see it that way. “The relationship must be a mutuality of interest,” he says. He was unimpressed when, last year, some companies voiced their desire for the Opec states to reopen the door to Western multinationals ejected almost four decades ago.


“I was not surprised (by the negative reaction). It is like going to someone’s house for dinner and looking around and saying it is very nice and then to ask your host to move out because you like the house.”


Western firms have no right to be there but must offer something more. “If you say: I could help you to cook a better meal and they say yes, you have engagement and mutuality.” What recipes does BP have up its sleeve? Lord Browne becomes vague and talks about expertise, access to markets and technology. Surely, these skills are for sale on the open market, so what can BP offer a company, such as Saudi Aramco, pumping twice as much oil as BP? Lord Browne agrees that Saudi Arabia has everything it needs. “You cannot offer somebody something they don’t need. You have to find the need.” It may be skill in managing complex gas projects or even political reasons, such as providing a balance to an NOC or helping to drive out corruption. Relationships with the world’s biggest oil states are in flux. The contractual basis on which multinationals work in the Middle East is being debated. The traditional production sharing contract where individual barrels of oil are doled out between state and foreign partners according to complex formulae could be abandoned in favour of simple profit shares.


It would be an accounting revolution for oil companies. “We would have a tough time explaining it to analysts because oil companies would no longer have oil and gas reserves in any normal sense,” says Lord Browne. Meanwhile, he points out, the International Accounting Standards Board will eventually have to consider whether oil should be included as an asset on the balance sheet and adjusted to reflect the market price. “In an ideal world, most investors would like to know what an oil company is really worth,” he says.


These are long-term issues and, like the conundrum about the oil running out, do not preoccupy Lord Browne unduly. “One has to think of doing business in a long-term context, not a long-term plan. Those who plan for the long term tend to get really quite depressed. It is up to us to figure out how to make it not happen.”


Plaudits for ultimate company man


LORD BROWNE of Madingley, 56, edged out Sir Richard Branson as Britain’s most admired businessman, despite being a one-company career manager and the second generation of his family to work for BP.


The BP chief executive and Cambridge physics graduate, who smokes cigars and collects art, is said by one friend to have “a full spiritual, emotional and intellectual commitment” to the energy group. His reputation rests on being ahead of trends instead of reacting to them.


As head of exploration and production in the early 1990s, Lord Browne looked for oil in new provinces to rebuild BP’s reserves after it had been forced to shrink in the wake of the botched government share sales of 1987. As chief executive in 1995 he took advantage of low oil prices to lead the consolidation of the industry through mergers. He symbolically changed British Petroleum into BP, a global company with bigger interests in the US than Europe.


Lord Browne accepted the causal link between burning fuel and global warming when most energy companies were hostile to the notion. BP invested in energy-saving technology and became one of the world’s biggest makers of solar panels. Lord Browne earned a barbed compliment from Greenpeace for giving the best imitation of an environmentalist.




Click here for HOME PAGE

Click here to return to Royal Dutch Shell Group .com