[A-List] BP watch

["Keaney Michael" <Michael.Keaney@xxxxxx>]

BP: Pumped up and still rising
The oil group's acquisitions have brought economies of scale and won it
a place in the first division of world producers. John Browne is eyeing
further savings - but not from a new round of mergers, writes David
Buchan
Financial Times, January 21 2002

Third place is not where John Browne wants BP to stay for ever. "I would
like to be able to overtake our competitors in profitability and size,"
he says. That may not be just a pipedream,even though the head of BP
alsorecognises the difficulty of repeating the recent big mergers that
have enabled his company to join Exxon Mobil of the US and Royal Dutch/
Shell in the select league of the world's oil supermajors.

"Dimensionally - in output - we are smaller than Shell or Exxon Mobil
but today we are valued the same as Shell," he says in an interview at
his Britannic House office in London. To keep that valuation up, he is
now looking more to reducing unit costs than to the big merger synergy
savings that BP has made in the past three years. But he is also eyeing
several spots on the globe for expansion.

One deal is close to home and near to completion. BP has already won
half the regulatory battle for its expansion in German petrol retailing.
It has got approval from the Berlin and Brussels antitrust authorities
to buy Eon's Aral chain of service stations to give BP the leading
market share, just ahead of Shell. This week Lord Browne expects to hear
whether he can pay Eon partly with BP's quarter stake in Ruhrgas. The
Berlin cartel office investigation centres on whether Ruhrgas would
allow Eon to dominate the German gas market. But the outcome is
important to BP, which sees the deal as an ideal chance to get rid of
its Ruhrgas interest.

Further east, Lord Browne sees Russia as "a place where we could deepen
our interests". BP has come through a minor nightmare there. In 1997 it
invested $571m in Sidanco, only to see that company's assets disappear
into the control of a rival. Sidanco has now regained its main assets.
BP now wants to build on that and on its separate stake in the Kovytka
field in east Siberia.

Along the way, says Lord Browne, "we have built up a lot of
relationships and understand a lot about doing business in Russia,
because we've been at this for five years, in arguably the toughest
times the Russian energy industry has ever seen . . . Our philosophy is
to work through a Russian company. They are pretty good. How else do you
explain the 6 per cent compound annual increase in output they are now
achieving?"

His third area of interest is in Iran, where BP was born in 1909 as the
Anglo-Iranian Oil Company. "The Middle East used to be our home but we
lost almost all of it [to nationalisation] except for Abu Dhabi," says
Lord Browne. "We would like to be back in Iran - the issue is
negotiating the right deal."

But what about US sanctions on American companies doing business in
Iran? Until recently this made BP hold back, because its acquisitions of
the US companies - Amoco and Arco - made it feel quasi-American.

"We are very struck," replies Lord Browne, "by the precedent set by
TotalFinaElf and Shell [which have gone into Iran] that we believe we
should be able to follow. In spite of being a very big American company,
we are British-based." Lord Browne says he has been "pretty outspoken"
about his new intentions. So he evidently has not been gainsaid by the
Bush administration.

If BP were to return to Iran, it would do so as a quite different
company from the one that lost, to Opec nationalism, most of the 4m-5m
barrels a day of oil equivalent it was producing up to the early 1970s.
Luckily it had its 1960s discoveries in the North Sea and Alaska to fall
back on and to develop. But, relying heavily on these two oil provinces,
it spent the following 20 years basically as a "two-pipeline company".
The acquisitions of Sohio in the US and Britoil raised BP's output but
gave it no geographical diversity.

All this changed with the purchases of Amoco in 1999 and Arco and Burmah
Castrol in 2000. BP's output is now approaching its old dimension but
with far greater profitability. In pre-nationalisation days "we made 10
or 20 cents on the barrel. Last year our net profit post-tax per barrel
was around $8," says Lord Browne.

The new acquisitions have paid off in many ways, he claims. They have
given BP "the physical scale to present itself to governments as fully
capable of taking on bigger projects - and a bigger share of those
projects". This, he says, is apparent in the choices made by China to
get BP to build a liquefied natural gas terminal and by Saudi Arabia to
let BP in for the first time to help build gas projects in the kingdom.
Scale also makes for sustainability. "Not everything goes right. Oil
fields are late coming on stream or fall into decline, or suffer from
some production restraint. A lot of this happened to us last year but we
still made our 5.5 per cent production growth target."

Equally important, BP has now paid off the premiums for the new
acquisitions, says Lord Browne. It paid the $57bn for Amoco and the
$26.8bn for Arco in shares. But earnings per share have not been
diluted. "We expanded the equity base but expanded the earning power of
the company by even more, doubling it since 1998." Synergy savings -
half in the reduction of staff, half in operational economies of scale -
have totalled $6bn (£4bn), or double what BP originally estimated.

Not all proved wonderful in what BP bought. "When you buy a company, you
buy the meat but you get the bones as well." In the category of meat,
Lord Browne puts Amoco's gas assets, which make BP today the biggest US
gas producer, as well as Amoco's gas reserves in Trinidad and Egypt,
which were "very much better than we expected", Arco's Gulf of Mexico
assets and its "world-class" Tangguh gasfield in Indonesia, Amoco's
polyester chemical business and the US refineries of Amoco and Arco.
Most of the bones were to be found with Arco - specifically, some of the
Asian gas it held through Vastar, Arco's Venezuela operations and "some
parts of its Algerian portfolio which still need sorting out".

With the bones, "the key is not to sit around and do nothing", says the
BP chief, "but to take action, to sell pieces you don't want and repair
the others". Disposals are a way of life for BP, which under Lord Browne
aims to sell about 3-5 per cent of its capital base each year.

Deal-making is part of the way the big oil companies stand out against
each other. In an industry whose product - oil and gas - changes less
than in most other sectors, Lord Browne says the supermajors produce
roughly "the same returns [and] dividend pay-out and our profitability
moves up and down in parallel with each other, affected by oil and gas
prices". So how do they distinguish themselves? Part of the answer is
"how we invest for the future, how we divest and how we acquire", though
he says he is not interested in size for its own sake. The other part is
keeping efficient, because "there are still cost savings to be made".

But do not count on another round of mega-mergers to produce these
savings, the BP chief says. It was not just the oil price, which
plummeted to $10 a barrel in 1998-99, that sapped the will of the Amocos
and Arcos to resist the overtures of the BPs. "It was also the erosion
of confidence, the sense of fewer opportunities in the future, so that
people said 'now's the time' to merge or to allow themselves to be
purchased."

Lord Browne does not see such a time recurring soon, partly because of
the way the Organisation of Oil Exporting Countries' cartel has been
able to keep the oil price higher than it would otherwise be. "Opec has
built up a bit of a record in restraining production and this will take
time to wear off," he claims. There may also be something self-serving
in his prediction. After all, Lord Browne has no interest in seeing
others play merger catch-up.

Full article at:
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT35XNM4PWC

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney@xxxxxx