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The Scotsman: BP throws oil on burning shell of arch rival




28 April 04


BPS REGAL progress, including apparently exemplary geographic expansion, a seeming sureness of touch on strategy and good relations with the City, throws rival Shells well-chronicled problems on cover-ups of overstated reserves into stark relief.


Lord Browne at BPs helm had more good news for the City yesterday. Strong first-quarter trading (admittedly, a serious oil player would have to show cutting-edge incompetence not to trade well at current oil prices) was just the half of it.


Investors have been concerned for some time about BPs underperforming petrochemicals division.


Tying chemicals onto Big Oil has been a prevailing orthodoxy for decades. After all, oil produces the raw material for much chemical production so there is obvious vertical integration.


But an increasing problem has been that barriers to entry in the petrochemicals sector are not unfeasibly high. Gradually, a serious over-capacity has built up in the industry.


This has meant returns have been squeezed.  


In the longer-term, BP should only benefit from the move as it will cut capital expenditure requirements.


It has made oil companies wonder whether they would not be better off focusing on the day job of "upstream" oil and gas exploration and "downstream" marketing and refining, particularly in a period of high oil prices.


The problem of diminishing returns is shown by the fact that BPs chemicals division earned only $600m on $11bn of assets last year.


BP has now decided to bite the bullet and float off roughly half the chemicals division, the olefins and derivatives arm, by the end of 2005.


It will retain its aromatics and acetyls business, which is supported by strong Asian demand. Shell trod the same path a few years back, flogging off 40 per cent of its own petrochemicals business.


The flotation of a significant slice of the currently lossmaking division should also release further cash to sustain BPs popular share buyback programme with investors.


In the longer-term, BP should only benefit from the move as it will cut capital expenditure requirements over the cycle, and facilitate investment elsewhere in the business, no doubt with better returns.


Meanwhile, BPs joint Russian venture TNK-BP goes from strength to strength, currently supplying one in five of all BP barrels. And the dividend policy remains progressive, the first quarter payout up 8 per cent on a year ago.


Shell must be spitting tacks.

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