Carl Mortished: World business briefing
They are earning billions, costs are coming down and the oil price is rising. Having stepped over the crude price trough without serious mishap, the oil majors were well-placed to celebrate an early end to recession.
The mood inside the petroleum club ought to be serene — yet within the top two energy companies the atmosphere is funereal. The Grim Reaper is striding the corridors at Shell and BP, cutting, chopping and shredding careers.
The process started more than a year ago at BP, when Tony Hayward, its chief executive, put his stamp on the organisation with a decision to cut overheads by a fifth.
Overall, 5 per cent of the workforce was to be shed but the accent was on desk-top, not well-head workers. Of the top 500 senior BP managers, a third were to go or be redeployed.
Last month it was the turn of Peter Voser, recently appointed to the top job at Shell, to frighten the horses.
At a management conference in Berlin, he told colleagues that jobs were not secure and the magical formula — one out of three — popped up again. More uncanny was Shell’s decision to abolish an entire division, Gas and Power, making redundant its chief executive, a year after BP did the deed, folding its gas business into upstream oil exploration.
No doubt this is more than a simple grab from the BP strategy book. For the ranks of Shell mid-career middle-managers who turned up in Berlin, it will have been a rude shock.
Shell has a collegiate culture, where every initiative is discussed, sometimes to exhaustion. The company has not suffered a big corporate upheaval since it was created in 1907. Its executives are not used to looking to the person seated on the left and on the right and wondering which will survive.
Tempting as it is to believe that BP and Shell share the same management consultant, this urgent and brutal cull of managers is not merely a display of muscle by a new chief or even corporate oneupmanship; it is about survival.
These companies are timid giants that fear a low-growth future of shrinking opportunities and shrinking dividends. Denied access to new oil reserves by volatile nationalists, they fear that a failure to deliver fatter dividends will, ultimately, lead to their takeover.
Taunting BP and Shell is a different model — ExxonMobil’s.
Its consistently higher profits and shareholder returns are a continuing reproach to the Europeans and there are signs that investors are finally losing patience and the top brass at Shell and BP are feeling the heat.
These three companies are of a piece, each one integrated with upstream exploration and downstream production. ExxonMobil is the refining giant, while BP is weaker in that department.
The Europeans have dabbled extensively in renewable energy, a business that Exxon has studiously ignored.
Within a slender margin, each company is producing about four million barrels per day of oil and gas, Exxon a bit more, Shell a bit less, but out of its package of investments Exxon delivers about 50 per cent more profit than BP or Shell. Exxon is valued by the stock market at $356 billion (£224 billion), while Shell is worth $169 billion and BP $158 billion.
Why is this so? American investors like success and typically give it greater reward. Yet performance tells. BP and Shell have both suffered very public humiliations over, and delays in, big projects.
BP acquired a reputation for failing to meet its oil output targets and then suffered a series of engineering mishaps at Thunder Horse, a huge oil platform in the Gulf of Mexico, and a deadly explosion at a Texas refinery.
BP’s internal disciplines were found wanting. So, too, was Shell, pilloried over the past decade for cost overruns and delays at big projects, for lax standards and lack of discipline in the boardroom, notably in the scandal over reporting its oil and gas reserves.
Look for the big humiliation at Exxon and you must reach back to 1989, when the Exxon Valdez supertanker ran aground in Alaska while the captain was drunk and in charge.
It may not be too fanciful to imagine that it was that disaster that persuaded ExxonMobil its business was not the romance of drilling wildcat wells but something more humdrum, such as steering a ship on a true course.
Crude oil can be bought cheaply, if you time it right, but selling petrol every day for a good profit is the real challenge. ExxonMobil has a reputation for topping up its tank of reserves with clever takeovers. BP and Shell suspect that this might be the horrible truth. Mr Voser is said to be fed up with the “chatting clubs” of disputatious senior managers. Mr Hayward wants fewer arguments about strategy.
The executive team at Shell has shrunk. Lines of communication are shorter. The fluffy world of Communications and Corporate Social Responsiblity is relegated. Shell’s upstream business in the Americas becomes a separate unit, reflecting its enhanced importance in a world of fewer opportunities.
More efficiency should lead to more profit and less vulnerability to a predatory raid. No one yet thinks that ExxonMobil is plotting a bid for either BP or Shell, but the American company will soon need to fill its tank and the oil price is currently weak.
All three companies are knocking at the doors of Pashas in the Middle East, Russia and Africa seeking favours. But the easier prize may be at home. In the end, BP and Shell may decide that going it alone is a wasted effort. Together, they could eliminate even more chit-chatting managers.
carl.mortished@thetimes.co.uk
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