THE SUNDAY TIMES (UK): Focus: On top of the world: “Shell faces questions as to whether it can survive at its current size. It was forced to cut about one-third of its proven oil reserves last year and is expected to announce further cuts when it releases its annual results next month. Like BP in the early 1990s, Shell must find huge new reserves if it is to survive. These difficulties have led many to speculate whether Shell is ripe for a takeover, but BP and Total, the French oil giant, are unlikely to move on their rival unless invited to do so by the board of Shell itself.” (ShellNews.net) 23 Jan 05
January 23, 2005
The glass wall slides open silently and through it potters a short, slight man, smiling amiably. He sits down at the head of the long board table, leans back and lights a large Cohiba cigar. His smile widens. Right now, Lord Browne, chairman of BP, has a lot to smile about.
He may be physically small but in corporate terms he is a global colossus — and so is his company. Since he took the helm, he has led BP out from the shadow of Shell, its main European rival, to a position where it threatens to leave its competitor behind.
His reputation is more than secure, as is his company. But with just three years left before he steps down in February 2008, what must Browne do to prepare BP for life without him? Almost 10 years after he took control of BP in July 1995, Browne is Britain’s most respected businessman and his company is Britain’s biggest, with a market value of £111 billion. BP’s shares closed on Friday at 512p.
Last year the oil industry enjoyed record prices of more than $50 a barrel, a figure that some analysts expect to see again in coming months. As a result, BP’s cashflow is “staggering”, said Browne. Next month BP is expected to announce an annual pre-tax profit of $25.4 billion (£13.5 billion), a record for any British company and a 47% increase on the previous year.
Amoco and Arco, the American oil firms Browne bought in the 1990s, have finally been fully integrated. Many were sceptical when he first announced these deals. Today he has proved his doubters wrong.
Equally, despite the gloomy warnings from the City that accompanied BP’s venture into Russia in 2003, its Russian subsidiary, TNK-BP, has survived the Kremlin’s pursuit of Yukos and is pumping money back to the parent company.
Browne is also looking to expand BP’s Chinese operations, while other huge projects in Alaska and Central Asia are on the horizon.
Best of all, Shell faces questions as to whether it can survive at its current size. It was forced to cut about one-third of its proven oil reserves last year and is expected to announce further cuts when it releases its annual results next month.
Like BP in the early 1990s, Shell must find huge new reserves if it is to survive.
These difficulties have led many to speculate whether Shell is ripe for a takeover, but BP and Total, the French oil giant, are unlikely to move on their rival unless invited to do so by the board of Shell itself.
Taking a slow draw on his cigar, Browne looks content. “If we did nothing other than just carry on doing what we are doing in our existing areas, they would have huge growth for the next 10 years,” he said. “The areas we are in are very rich in terms of resources, with plenty more to do.”
Realistically, he is unable to plan much beyond those 10 years, he said. Looking back over the past 10, it is clear that he is in an industry where things change fast.
Is this as good as it gets? Browne thinks not.
“The big thing I believe with companies is to make sure they are sustainable,” he said. “To make sure they have a future. Each year you should be able to say the next year is the best.”
And with the oil price likely to stay above $30 a barrel for the foreseeable future, as he believes it will, who is to say things will not get better yet?
IN THE early 1990s the crisis facing BP was even more severe than the problems at Shell today. There were doubts about the company’s financial survival before David (now Lord) Simon was promoted to lead a turnaround.
BP’s position was still weak when Browne took over from Simon, having made the step up from head of BP’s exploration and production division. The company’s main assets were tired fields in the North Sea and Alaska and its market value was £24.9 billion, just over a fifth of today’s figure. The price of oil had fallen to less than $16 a barrel.
First, Browne cleaned up the company’s finances and management structure, and then he went hunting.
In 1998, he led the takeover of Amoco, a flabby American oil company, defying many of his critics who thought the acquisition would sink BP. The $56 billion deal was, at the time, the world’s biggest industrial merger, and a wave of others followed. Within months, Exxon agreed to buy Mobil.
Browne quickly struck again, with the purchase of Arco in 1999 for $27 billion plus $4 billion of debt.
Streamlining the companies generated BP quick cash, but more importantly brought with them reserves of oil and gas.
“Amoco has worked brilliantly for BP and they did it very systematically,” said Tony Alves, an analyst with KBC Peel Hunt. “The company was a shambles in the 1990s. They worked out a way of breaking management tasks into individual asset groups and empowering management to deliver.
“This built up their profits and a fantastic share price and they used this share price to buy unpopular companies and installed the BP method to turn these companies round.”
Having achieved this, Browne led BP into some of the world’s most dangerous business environments, including Russia, Angola and Algeria, searching for oil.
His latest blockbuster was the purchase of half of Russia’s TNK for more than $7 billion in 2003, the first time a western firm had made such an aggressive play for a Russian energy company. This month, TNK-BP announced a major restructuring and is now independently valued at $18.5 billion, which does not take into account significant dividends BP has already taken out.
The restructuring represents the final stage in a process that began with bringing TNK-BP’s financial management processes under control. The Russian company now accounts for about 20% of BP’s total oil production. It funnels more money to its parent company than even Browne first estimated. Production at Shell’s Russian investments, meanwhile, is declining.
Later this year, Browne will oversee the sale of BP’s plastics-derivatives division, which is to be spun off into a separate company with its headquarters in Chicago.
It is an impressive list, and achieving this much has taken a vast amount of work. Browne wakes every day at 6am, and both his Chelsea flat and Cambridge weekend home are equipped with video-conferencing facilities for late-night discussions with America and Asia.
THE QUESTION remains, however, what must Browne do next?
Were he to retire tomorrow, his reputation would be secure, but he wants more. He refuses to discuss retirement, saying only that his contract expires on his 60th birthday, in just over three years, and that he intends to honour it.
There are also some great challenges ahead. Browne would, no doubt, like his company to pump more oil than its great rival, Exxon Mobil. To achieve this, it almost certainly needs to expand in the Middle East, where BP lags behind Exxon, Total and Shell.
A few years ago — before the World Trade Center attacks of 2001 — Browne and BP were readying themselves to enter Iran, which sits on almost a tenth of the world’s oil. Now, he regards this as impossible.
“Right now it is impractical for BP, because 40% of BP is in the US and we are the largest producer of oil and gas in the US,” he said. BP currently produces a third more American indigenous oil and gas than its nearest competitor, and that share is growing. “Politically Iran is not a flyer,” he said. “One day I hope it is.”
Elsewhere, Browne would also like to see BP become the partner of choice for governments round the world.
“When the price of oil is high, people demand a lot even to let you in to explore,” he said. “Sometimes they have little reason to let you in. So you have to find the things that apply to different countries.”
Closer to home, the prospect of Shell moving its full listing to London, as part of its restructuring, concerns Browne. Fund managers are likely to increase their stake in Shell, partly at the expense of BP.
Browne is also tinkering with BP’s pay structure. He plans to abandon the use of share options in favour of a system linked to share performance. In addition, he intends to reduce the impact of that share performance on the remuneration of senior staff, in favour of bonuses linked to individual achievement.
The most tantalising incentive for a select group is the prospect of his retirement. There are likely to be five contenders to fill his shoes: John Manzoni, head of exploration and production, Tony Hayward, who runs the downstream business, Vivienne Cox and Andy Inglis, both executive vice-presidents, and Iain Conn, executive director. The fight will be bloody.
In the meantime, Browne worries about the public perception of companies and intends to improve the image of the corporate world. “People say that companies put making money above everything — they will do anything to increase their value — that they are of no value to society,” he said. “The best way to do business is to consider the mutual advantage between the company and the people you touch.”