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BP should look to Anglo-Dutch rival Shell to help refine the way forward

One of the most striking features of the oil industry in recent times has been the divergent fortunes of Royal Dutch Shell and BP.

BP has well-publicised problems that explain its recent under-performance, such as uncertainty over its future in Russia and the shock of last year’s Deepwater Horizon drilling rig explosion in the Gulf of Mexico’s Macondo area, which left 11 workers dead. Photo: REUTERS

Damian Reece
By Damian Reece, Head of Business: 29n April 2011

The past two years has seen Shell outperform the All-Share index by 7pc, while BP has under-performed by 58pc.

Results on Thursday from Shell once again underlined the companies’ differences, such as profitability and prospects, which are driving investor sentiment.

BP has well-publicised problems that explain its recent under-performance, such as uncertainty over its future in Russia and the shock of last year’s Deepwater Horizon drilling rig explosion in the Gulf of Mexico’s Macondo area, which left 11 workers dead.

Going further back, under Lord Browne’s regime we had his own troubled exit, the Texas City refinery blast, the Prudhoe Bay spill, problems in the Gulf’s Thunder Horse field and price-fixing allegations in New York.

If you consider the Texas City blast, which killed 15, was back in August 2005, BP has been beset by serious problems for nearly six years. This begs the question, can BP ever really change?

However unpalatable it might be, chief executive Bob Dudley could look across at his age-old rival, Shell, for the answer. Shell had its own Macondo moment back in 2004, with its reserves scandal. For nearly 10 years prior to that, Shell had been trying to change its culture, a process that had been largely ineffective.

Since the reserves scandal, under chief executives Jeroen van der Veer and latterly Peter Voser, it has changed tack, focusing on more investment upstream in exploration and production, more investment in OECD countries to reduce political risk and to replace its declining heart lands, more investment in gas and more large projects.

It has developed four key strategic partners in PetroChina, Gazprom, Aramco and Qatar Petroleum and shaken up its downstream refining and retail operations. Internally, Shell workers are now subject to a continuous improvement programme that stresses the speed of decision-making, the operational effectiveness of its assets and their integrity in terms of safety.

Another crucial difference has been the creation of the modern BP from a strategy of acquisitions (Amoco, Arco and Burmah Castrol, to name a few) bequeathing different cultures within the group.

Shell, an Anglo-Dutch construct, was a federal structure that found it difficult to issue shares to pay for deals, so stuck to organic growth. Even since adopting a unified structure it has avoided major deals. It is arguably a more unitary culture than BP.

This, then, is all the boring nitty-gritty behind Shell’s numbers on Thursday. But it goes a long way to explaining the increasingly marked difference between Shell and BP.

Oil investors rank companies in terms of what they deliver today in terms of earnings, the prospect of improving on that with more assets and management’s credibility and strategic vision. BP is struggling in all these departments. Maybe Bob Dudley should consider what he can learn from the way Shell has learned from past problems before deciding on how BP moves on from its own.

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