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Shell’s reputation among investors lies in tatters

London Evening Standard: How BP lords it over Shell “looking ahead, one is in terrific shape, the other could be in terrible trouble”: “Shell’s reputation among investors lies in tatters”

Steve Hawkes,

23 July 2004

Posted 25 July 04

AT FIRST glance, Shell and BP will appear to be running neck and neck when they post second-quarter results next week. The announcements should see both oil majors breaking the $4bn (£2.2bn) profits barrier by some distance. Making that sort of return from just three months’ business might indicate the two fierce rivals are in the rudest of health.

But the surpluses from past work do not tell the full tale of these two companies: looking ahead, one is in terrific shape, the other could be in terrible trouble.

Inspection of their production pipelines over the next four years reveals BP has a host of huge projects, from Angola to the Gulf of Mexico. So big are they, that Lord Browne’s corporation is predicting output growth of 7% per annum.

Shell? It simply has to find the black stuff. Its devastating reserves debacle this year means the group has cut almost 30% of its proved oil and gas discoveries. The Anglo-Dutch concern is now playing a frantic game of catch up.

The differences do not end there. Shell’s reputation among investors lies in tatters after the downgrades fiasco that sparked the worst crisis in its history. Critics are now braced for more mistakes – such is their loss of faith in a business that once lorded it over all-comers.

Towards BP, by contrast, analysts have learnt to their cost not to cast stones too quickly. Time and again, when the going has looked as thought it might be sticky, Browne has proved the pundits wrong. When his empire embarrassingly missed production targets three times in a row two years ago, his reaction was simple. Just a matter of months later, BP landed a huge deal in Russia that once more left competitors asking themselves, ‘Why didn’t we think of that?’

The crowning glory came last month when BP admitted its own reserves problem – one of upgrading: it had more assets than thought.

Analysts say the growing divergence between the two behemoths can be traced to the 1990s, when BP had assets as diverse as chicken farms, fish-breeding and forests.

‘Shell has gone down and BP has gone up,’ says Peter Hitchens, analyst at investment bank Chevreux. ‘John Browne is the guy that is been behind it all. He started the industry consolidation and got them into Russia. At the same time, Shell seems to have slipped and there’s possibly a bit of arrogance involved. It was always the world leader and I think it just sat on its laurels.’

For Shell 2004, read BP in 1992. As one market dealer put it earlier this week: ‘If you go back 10 years or so, you wouldn’t have given BP the time of day.’

It’s unthinkable now, as Lord Browne talks of £33bn of cash payouts to shareholders, that 12 years ago BP cut the dividend*, suffered its first quarterly loss and was castigated for being unfocused and poorly run.

Out went Robert Horton and in came David Simon as chief executive. More importantly, someone called John Browne came in to head the group’s troubled exploration and production arm.

While Simon slashed the workforce from 117,000 to 56,000 and sold fringe interests, Browne busied himself setting up a deals unit that was to change the shape of the company, and the oil industry, forever.

In 1998, BP snapped up struggling US oil supplier Amoco and in one swoop created a company, previously focused on a UK-US axis, capable of challenging Exxon and Shell for global supremacy. BP followed this by splurging on Atlantic Richfield. As BP transformed itself, the sector lineup changed: Exxon united with Mobil; Total got Petrofina; Elf merged with Chevron and Texaco.

It was not only acquisitions that shaped BP, though, but a focus on finding ‘Big Oil’. BP looked beyond traditional areas and poured money into West Africa and deepwater Gulf of Mexico – considered a pioneering frontier at the time.

Meanwhile, Browne continued to mould the business. Legendary fields such as Forties in the North Sea have gone through sell-offs and in have come potential new profit centres such as Trinidad.

Remarkably, while its chief competitor was a whirlwind of activity, Shell watched and did very little. Only now, for instance, is it beginning to consider a more daring exploration strategy. In fact, analysts scathingly point out that while BP was re-inventing itself in the 1990s, Shell went the other way and took a far less risky approach to finding oil and gas.

The Anglo-Dutch group concentrated on the ultra-cautious and uninspiring strategy of exploring around the fringes of an existing find. When Shell was the world’s largest energy group, this was fine and it did yield* results. But then, suddenly, it was no longer number one.

Along came BP-Amoco and ExxonMobil, just at the moment it belatedly began a cost-cutting exercise of its own. There it was, faced with bigger, aggressive rivals. But instead of spending more and fighting for the top slot, there was less money available for all-important new projects.

Between 1996 and 2000, Shell spent $6bn a year on finding reserves, against an industry average of $9bn, and missed out on key discoveries such as those made by BP in offshore Angola.

It now seems former chairman Sir Philip Watts and his team found the best response was not to drill new wells, but to move the numbers around on paper instead, to push US guidelines on reserves reporting to the limit in a bid to get back.

When the Shell house of cards came crashing down this year, Watts paid the penalty for his poor communications record. BP’s policy, orchestrated by Browne – a brilliant and persuasive communicator – of wherever possible bending over backwards to help analysts, also worked against the aloof and distant Shell.

New chief executive Jeroen van der Veer is trying to put Shell on the long road back to respectability and new exploration chief Malcolm Brinded is making the right noises about finding more crude. The City is also encouraged by appointments such as that of Peter Vosser, formerly of ABB, as finance director. But more is needed. The creation of one streamlined board representing UK and Dutch interests, for instance, is a must.

Yet, despite all its difficulties, Shell still has a wealth of treasures – such as the huge Sakhalin project in the eastern riches of Russia. So, can the City be sure of Shell again? Analyst Hitchens says: ‘BP had its shock to the system in 1992, Shell in 2004. BP is powering ahead and Shell has every chance of bouncing back just as strongly.’

These are difficult days for Shell; but it just needs to keep looking across at BP to see what is possible.

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