The Observer: Alaskan oil spill threatens to stain the image of BP’s Lord Browne

Sunday August 13, 2006

The glowing reputation of Lord Browne as the leading oil man of his generation, and of BP, the company he led from gentle decline to rampant rebirth in the late Nineties, are now both in dire peril.

The accepted wisdom is that Browne is Britain’s best executive. A BP lifer, he built a global super-major via US and Russian acquisitions, avoided catastrophes such as the reserves scandal at Shell, and added a green feather to his cap by taking climate change seriously, unlike Exxon of the US. Investors loved him and loved the company – for a decade shares in BP traded at a premium over its flat-footed Anglo-Dutch peer, Shell.

Now, however, thanks to a litany of troubles, most recently the shutdown of the Prudhoe Bay oil field in Alaska, the lustre on the company and chief executive is dulling to the point that some now ask if Browne can expect to retire in 2008 with his legacy intact as Britain’s most admired businessman since GEC’s Lord Weinstock.

BP announced last Sunday it was shutting down Prudhoe Bay – which, as if in testimony to the size of the group Browne has created, represents 8 per cent of US production but only 2.5 per cent of BP’s – because of corrosion in pipelines that had led to a spillage. BP said the closure would reduce production in Alaska’s ‘North Slope’ oil field by an eventual 400,000 barrels of oil a day. On Monday crude prices shot up by nearly $2, touching close to $79 a barrel in some markets. Shares in BP fell by some 3 per cent.

Things got worse on Friday, when it emerged that the company’s decision to shut down Prudhoe may be the subject of a congressional probe into whether it was trying to manipulate the oil market.

One senior fund manager who preferred, as everyone talking about Lord Browne prefers, to remain anonymous, said: ‘The market reaction is about right. There is considerable disappointment in Browne.’ Another analyst said: ‘In terms of Lord Browne’s reputation this is a worry, but this is more a question for BP’s image. People are now asking if this is endemic throughout BP.’ One fund manager added: ‘There does appear to have been some underinvestment.’

It is difficult to tell if BP has underinvested in these pipelines because it does not specify the amounts it spends on them in accounts. In July it said it was spending $1bn on all US refinery and Alaskan pipeline operations – but admits it had not carried out the ‘pigging’ diagnostic procedure (sending a metal ‘pig’ along the pipeline to measure corrosion physically) that exposed the problem, instead using imaging techniques that clearly failed. Meanwhile the chief complaint among analysts of late has been ‘capex creep’ – consistent group-wide increases in capital spending above expected levels – which has added some $500m to this year’s costs, and is forecast to increase by $2bn in 2008. Analysts are asking why, if there is more spending, are problems of underinvestment surfacing?

But increasing capital spending – in fairness, an industry-wide issue – is by no means the only recent complaint, and here lies the real trouble for Browne and BP. Prudhoe Bay is only the latest in a string of operational problems that are blighting the company.

In March there was a much larger oil spillage in Prudhoe Bay: the biggest there. Earlier in the summer the US Commodity Futures Trading Commission accused BP’s gas traders of trying to corner the market in propane. Analysts criticise the company for its response to last year’s hurricanes in the Gulf of Mexico, one of the company’s two core areas of future growth. Plans to return the Thunder Horse platform there to production have been delayed, and last year an explosion at its Texas City refinery killed 15, injured 500 and cost the company $700m.

And throughout, Browne’s and BP’s once rock-solid reputation for under-promising and over-delivering was stripped away, as, after missing its production targets three times in 2002, it abandoned the measure, once seen as the yardstick of its performance.

According to one fund manager: ‘BP has been missing production expectations for several years now, which has created a sense of frustration among investors.’ Last month Browne announced that production fell for the fourth quarter in a row.

Few deny that these problems chipped away at the reputation of the company and Browne, who then came into the spotlight because of a clash with BP chairman Peter Sutherland over the date of his retirement, with Browne being forced to stick to company policy of leaving at 60, reportedly against his wishes. The retirement issue saw some in the City question whether Browne saw himself as a special case, which, pointing to recent events, they argued he increasingly was not. Those sceptics point to the fact that BP shares have fallen some 10 per cent since before the March spill. According to Citigroup analysts, BP’s premium to the sector has now gone.

The scattering of question marks over the company’s good name could be leading to a shift in sentiment – while the current Prudhoe problems may a year ago have been viewed as a one-off technical problem, analysts are now questioning whether they are endemic.

Although BP is the operator of the Prudhoe field, it has less of a financial interest (26 per cent) than its partners Exxon and ConocoPhillips (36 per cent each), yet its shares fell 3 per cent while Exxon’s rose and Conoco’s dropped by only 1 per cent.

And yet Lord Browne and BP are not in the position of Shell and its former chief executive Sir Philip Watts. Watts was forced out after Shell overestimated its reserve figures by a third; the company’ shares collapsed and it took two years and a thorough corporate restructuring to achieve rehabilitation in the City.

Just as for Browne, things had not been going well for Watts – he was seen to have overpaid for certain acquisitions, the group was considered undynamic and its reputation for project management was faltering.

Browne still has many supporters in the City. They point out that he has built the company into the world’s number two oil group and given it a future that a decade ago it did not have.

However, others say that although BP has excellent near-term production prospects with the concentration on the Mexican Gulf and Angolan oil fields, in a decade’s time it may be outpaced by Shell and Exxon, which are developing more innovative methods of extraction, such as through oil sands in Canada.

And those in the sceptical camp add that one more glitch could be the tipping point for Browne and BP.

‘If anything else goes wrong from here, there will be big problems,’ says one.

Another points out: ‘BP is not the stand-out company in the sector; that is BG, a much smaller group. BP has attracted people because of its size; many focus on company builders [Browne] rather than creators of value [such as Frank Chapman, who has headed BG through its period as an independent exploration and production company].’

The implication? That Browne’s reputation, like so many in the City, rests on doing deals. So in five years’ time, could his reputation come unstuck in retrospect, in the same way as that of, say, Sir Chris Gent of Vodafone? Even the sceptics say that is unthinkable … for now.

http://www.guardian.co.uk/oil/story/0,,1843466,00.html

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