The Guardian: ‘Lord Browne did nothing to dampen speculation that he could engineer a mega-merger with Shell’

Guardian Headline: High taxes and low crude prices push down BP profits

· Hurricanes, fire and leaks contribute to poor results
· Industry faces bleaker outlook, says Lord Browne

Terry Macalister
Wednesday October 25, 2006
The Guardian

BP signalled an end to record oil company profits yesterday with lower underlying third-quarter results and warnings about a “more difficult trading environment” as crude prices fell and taxes went up.

Lord Browne, BP’s chief executive, also said production had been hit by high-profile problems in the US but dismissed any concerns about his legacy being tarnished before he stood down in 2008.

His sole worry, he insisted, was to put BP back on track and he was confident a raft of measures, including a review of the company’s global pipeline network, would do this.

Lord Browne did nothing to dampen speculation that he could engineer a mega-merger with Shell to regain the initiative against competitors such as ExxonMobil. Asked whether a takeover of his main European rival was a possibility, as some had suggested, he said: “I am aware that many people are talking about it but I have no comment to make.”

He said there was “probably” a case for further consolidation in the oil industry. “Looking at it from 50,000 feet, there are an awful lot of players here dealing with a lot of small pieces.”

Lord Browne was speaking as he unveiled third-quarter replacement cost profits – a measure used by the oil industry – of $7bn (£3.7bn), up 58% from the same period in 2005, but with a large contribution from asset disposals.

The “profit attributable to BP shareholders” came in at $6.2bn, which was down from $6.5bn in the same period last year and was also affected by rising costs.

The latest figures benefited from higher oil prices and better petrol pump margins but were damaged by lower refining margins and reduced gas price income.

The company’s tax rate also rose from 34% to 40%, partly as a result of the North Sea increases imposed by the chancellor, Gordon Brown, in July.

Lord Browne said BP had benefited from an “exceptional market” due to high crude prices, selling its West Texas Intermediate oil for an average of $70 per barrel in the third quarter.

“But the outlook is for a rather different set of circumstances – a more difficult trading environment. We have a strategy which is robust to such volatility but no one should expect that the absolute level of performance, which we have recently seen, will be sustained.”

The $70 figure compared with $63 for the same quarter last year and yesterday the price of oil on world markets was trading below $60, even though OPEC had promised to reduce output to stop a further price slump.

The BP boss said his company’s production levels in 2006 should average 3.95m barrels of oil equivalent a day, down from the 4.01m in 2005 and damaged by the lingering impact of hurricanes and pipeline difficulties at Prudhoe Bay in Alaska. BP lost 27,000 barrels from Alaska during the third quarter and although it is now producing 400,000 barrels, this is still less than it was putting out before pipeline corrosion was discovered.

BP has also been forced to delay the opening of its Thunder Horse platform in the Gulf of Mexico from 2007 to the middle of 2008. The huge drilling facility was damaged by Hurricane Dennis last year.

Lord Browne described the events at Prudhoe Bay, the ongoing inquiry into the Texas City refinery fire in 2003 and allegations of inappropriate trading activities as “unusual events”, which were being dealt with in a methodical way.

“We are determined to take very clear actions based on the learning from these setbacks and are determined to improve and improve continuously. I am confident, having spoken with over 10,000 staff recently, that they also have this determination.”

BP yesterday confirmed it had set aside a further $400m to cover compensation claims related to the Texas City blast in which 15 workers died and scores were injured. The total bill including repairs and lost profits is now close to $2bn.

Bruce Evers, an analyst with Investec Securities, said the BP figures were harder to judge given many exceptional items and special features “but in general they were in line with our expectations”. BP shares rose 1% to 607p but analysts at Charles Stanley pointed out they were at the same level as five years ago when oil was $20 a barrel.

http://business.guardian.co.uk/story/0,,1930577,00.html

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