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Financial Tmes: BP investors push for spending rise on safety

16 September 2006

EXTRACTS: In fact it has been Royal Dutch Shell, BP’s closest European competitor, which has had to increase its capital expenditure the most of its peers in the past five years as its production and reserves profiles have faltered. Shell spent much less than its peers in the late 1990s because Mark Moody-Stuart, the company’s chairman at the time, believed oil prices would remain low.

Jeroen van der Veer, Shell’s chief executive, said in a recent interview: “The public is very concerned every time something happens in our industry. The bar of having to have your operations very reliable is always going up. Shell puts a lot of emphasis on maintenance management.”

THE ARTICLE

By Carola Hoyos and Kate Burgess in London

Investors are pushing BP, headed by Lord Browne, to increase capital expenditure to avoid the safety lapses the company has suffered at its Alaska pipeline and its Texas City refinery.

The issue came up at the last meeting of the Association of British Insurers, with some members of the group pushing for a direct meeting between the ABI and Peter Sutherland, BP’s chairman.

It is understood that five investors have called for one-to-one meetings with BP management, including F&C Asset Management and Morley Fund Management.

One of BP’s top-20 investors said: “There is a big issue for the board. This is a time when the board needs to have very strong oversight. It needs to ask whether enough attention has been paid to spending on maintenance.”

Pinching pennies may have helped boost returns in the past but may now hit BP’s premium share rating and returns to investors, investors and analysts said.

Matt Simmons, a Houston-based analyst, pointed out that many of the world’s oil facilities were not built to last more than 30 to 40 years but were being run longer because of the high oil price. He said companies were now catching up on maintenance deferred during the 1980s and 1990s when oil prices fell to as little as $8 a barrel.

BP’s capital expenditure for 2006 is estimated at $15.5bn to $16bn ($8.5bn). The company in July announced it would spend and extra $1bn on the safety and integrity of its operations in the US, bringing the total to $7bn over the next four years.

Rory Sullivan, head of investor responsibility at Insight, who met BP executives at the end of last month, said: “The message from the company [BP] is that it recognises it has lost sight of the basics.”

Nonetheless, shareholders want assurances that BP is putting power behind the words.

Neil McMahon, analyst at Sanford Bernstein, said: “It is highly likely that BP may throw a lot more money at maintenance of all its infrastructure assets to ensure that its press coverage is kept to a minimum. For investors BP has lost its glow for the moment.”

In fact it has been Royal Dutch Shell, BP’s closest European competitor, which has had to increase its capital expenditure the most of its peers in the past five years as its production and reserves profiles have faltered. Shell spent much less than its peers in the late 1990s because Mark Moody-Stuart, the company’s chairman at the time, believed oil prices would remain low.

Jeroen van der Veer, Shell’s chief executive, said in a recent interview: “The public is very concerned every time something happens in our industry. The bar of having to have your operations very reliable is always going up. Shell puts a lot of emphasis on maintenance management.”

Adding to the pressure to increase capital expenditure is the rapid industry-wide rise in costs, which Cambridge Energy Research Associates, the Washington-based consultants, pegged at nearly 40 per cent this year.

For BP, making sure it lives up to its stated commitment to the environment is particularly important, Mr Sullivan said.

“BP must be able to generate sustainable value, managing the social and environmental impact,” he said.

For an oil company these issues are integral to financial success. It is particularly so for a company like BP that has traditionally been rated at a premium to its peer group because it has taken such a strong leadership role in environmental issues, such as climate change, he added.

Robert Talbut, chief investment officer of Royal London Mutual, said: “It is encouraging that BP now appears to be acknowledging that there was an issue and now determined to rectify it and address investors’ concerns with meetings.”

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