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Financial Times: Oil price cuts the downside for BP

By FT Reporters
Published: August 12 2006 03:00 | Last updated: August 12 2006 03:00

BP may find much of the cost of shutting its Prudhoe Bay oilfield in Alaska will be met by the rise in the price of oil that followed. But, one week after the decision to close North America’s largest field, that is the extent of the good news.

The company’s stock has been hit, Alaska’s governor wants compensation for lost taxes and royalties, and the Republican chairman of the House committee on energy and commerce is asking uncomfortable questions.

BP’s shares have fallen 4 per cent over the past week, forcing its market capitalisation to fall below Royal Dutch Shell’s for the first time in three years.

The fact that shares in ExxonMobil and Conoco­Phillips fell less than BP’s, even though their shareholding in Prudhoe Bay is greater, suggests that BP is not being hit purely for the impact the closure will have on its profits.

BP has suffered more because it operated the field and so is more likely to see its reputation suffer.

“The direct financial consequence of the Prudhoe Bay shutdown is likely to be very limited indeed,” says Colin Smith, oil analyst at Dresdner Kleinwort. “There is clearly a degree of reputational damage, the cost of which is difficult to assess. But it is unlikely to be sufficient to warrant the recent underperformance of BP’s shares.”

BP’s reputation in the US was already vulnerable. Last March, explosions at its Texas City oil refinery killed 15 people and injured hundreds. In June, BP was accused of price-fixing in the US propane market.

Samantha Lacey, analyst of responsible shareholding at Co-Operative Insurance Society, says BP had marketed itself as an ethical leader in the oil industry.

“But there have been a number of issues that are cause for concern. It is important to use [Prudhoe Bay] as a prompt to investigate other pipelines around the globe. Given that BP takes such a strong ethical stance, it needs to make sure its own house is in order and that there are no more problems.”

YouGov, the online research company that daily tracks UK consumer views on different brand aspects, found BP’s overall score had dipped from +11 to +7 since August 6, when the Alaskan closure was announced.

BP has invested heavily in its brand to improve its environmental credentials, rebranding itself “Beyond Petroleum”. Its brand is believed to be the world’s 76th most valuable, worth an estimated $4bn (£2.1bn) according to Interbrand, the consultancy.

Jan Lindemann, global managing director of Interbrand, says: “The reason why Alaska is becoming a bigger issue now is high oil prices. Otherwise, it would have been a scandal but it would have disappeared over time. Any shortage now has an instant impact on market prices, and that can alter perceptions.

“But the audiences that are really relevant for this brand are the regulators and the other forces that can ensure BP’s future access to resources,” Mr Lindemann says.

Joe Barton, chairman of the House energy and commerce committee, has written to Lord Browne, BP’s chief executive, saying he wants to explore whether BP maintains its US facilities properly, why the company waited for regulatory pressure to inspect the pipeline adequately, and if there was a market strategy component to BP’s decisions.

Chuck Hamel, an advocate for BP whistleblowers, says the company had been warned for years about the problems and its failure to act sooner was “all caused by budget constraints”.

He has provided the FT with copies of correspondence outlining years of workers’ complaints. These include a 2004 letter to Bob Malone, the man BP recently appointed to improve the company’s safety record, as well as letters to Greg Coleman, then BP vice-president of health, safety and environment, and Walter E Massey, chairman of the environment committee of BP’s non-executive board of directors.

BP’s response, he says, was to try to get him to reveal his informants instead of thoroughly investigating the allegations.

BP has long dismissed Mr Hamel as a troublemaker. Ronnie Chappell, BP spokesman, says: “I know there have been concerns raised about the adequate corrosion inspection programme raised by Hamel over time. We have looked into those.”

The company is steadfast in denying a corrupt corrosion programme, saying instead that the models it was using to determine corrosion were flawed.

Instead of using high technology “pigging equipment”, now forced upon it by regulators, BP had been using ultrasound, which it said failed to detect the corrosion. Yet the group counters that state regulators had signed off on its corrosion control programme every year.

Mr Hamel also has sharp words for the regulators. “Why didn’t the Alaska regulators catch this?” he asks. “Because the administration benefits by the cost-cutting by BP, and they just hoped that the Russian roulette that was going on would not blow a hole in what they were doing.”

The political pressure is likely to increase as environmentalists also speak out against BP. Some have used the discovery of corrosion in the Prudhoe Bay pipeline to argue afresh against theproposed exploitation of oil reserves in the Arctic National Wildlife Refuge (ANWR).

Greenpeace says it is “extremely concerned” at what happened. “This istestament to the fact that America’s largest oilfield has huge problems,” says Melanie Duchin, a Greenpeace energy specialist.

The political backlash will grow bigger still if Alaska’s oil-dependent economy unravels and drivers in California, who rely on Alaskan oil, find their refineries running dry and the price at the pump edging higher.

“Consumers on the West Coast certainly will be affected adversely, particularly in California – the extent to which retailers will be able to pass through increases into a market that is already the highest-priced in the US will determine how much,” analysts at Standard and Poor’s, theratings agency, said in a note.

At a time when US lawmakers are debating increasing energy companies’ taxes and drivers are blaming oil majors for making record profits at their expense, BP can ill afford such criticism.

ExxonMobil shows it is possible to turn disaster into triumph. In 1989, after the ExxonValdez tanker spill in Alaska’s Price William Sound, the company revamped its entire approach to safety, the way it managed its diverse businesses and how it communicated everything from financial prudence to physical caution to its employees. This has flowed through to ExxonMobil’s reputation and share price.

BP has already made a start. Lord Browne has announced a $1bn increase in spending on health and safety in the US and said the company would appoint an independent board for its operations there.

BP’s workers remain pessimistic. “With large fanfare, BP will announce many changes and new managers dedicated to change BP’s old ways,” a veteran Alaska worker says. “BP will promise a brighter, more focused company dedicated to safety and the environment but . . . managers’ compensation is still based on meeting short-term budgets.”

Reporting by Carola Hoyos, Rebecca Bream, Fiona Harvey, Kate Burgess and Carlos Grande in London and Sheila McNulty in Houston

Copyright The Financial Times Limited 2006

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