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Financial Times: Oil price drop ‘will force consolidation’: ‘Browne refused to comment on speculation about a merger between BP and Royal Dutch Shell’

By Ed Crooks, Energy Editor: Published: October 25 2006 03:00 | Last updated: October 25 2006 03:00

A falling oil price is likely to set off further consolidation of the oil and gas industry, Lord Browne, BP’s chief executive, said yesterday, as he warned of a “more difficult trading environment” ahead.

He was speaking asBP reported third-quarter results showing a decline of about 11 per cent in underlying replacement cost profit.

Lord Browne also confirmed that he expected this year’s production to be about 3.95m barrels of oil equivalent per day, down from last year’s 4.014m.

Allowing for the effect of disposals and higher payments of oil to governments under production-sharing contracts triggered by the high oil price, he said, underlying production rose about 1 per cent.

The headline profit figure was a 58 per cent increaseto $6.975bn (£3.72bn) for the three months to September but that included $1.23bn of non-operating items such as disposals and about another $1bn profit from other items, including the gain on the sale of Udmurtneft, an oil company, by TNK-BP, its Russian joint venture.

The third quarter of 2005 was affected by a $921m non-operating charge. Stripping out those factors, underlying profit fell by about 11 per cent. While oil prices were high at an average of almost $70 a barrel, refining margins were squeezed and the price of gas fell in the US.

BP’s medium-term view is that oil prices will exceed an average of $40 a barrel.

Lord Browne refused to comment on speculation about a merger between BP and Royal Dutch Shell. But he predicted the industry was likely to consolidate if oil prices weakened.

“If oil prices fall, that probably exposes the questions people have about the type and nature of the investments being made by some players,” he said.

“If you look at this industry, there are an awful lot of players dealing with quite a small proportion of the oil and gas, because most of it is in the hands of the national oil companies. So any reader of industrial strategy would look at it and say ‘this industry has to consolidate’. How, I don’t know.”

Peter Hitchens, analyst at Teather & Greenwood, said a BP/Shell merger was likely to be impossible because of competition concerns that would be raised over their downstream activities.

Lord Browne also said BP had added $400m to the $1.2bn it has set aside to settle law suits following the fatal explosion at its Texas City refinery.

The dividend was unchanged from the previous quarter but 10 per cent higher year-on-year at 9.825p. BP’s shares closed up 6½p at 608p yesterday.

FT Comment

* Battered by its problems in the US, BP shares have underperformed Shell this year and in the short-term appears to have more potential to bounce back. In spite of Lord Browne’s caution about production, the company should have new sources of output coming on stream next year in Angola, Azerbaijan and the US. BP is also less committed than Shell to higher cost projects that need high oil and gas prices to make good returns. That said, the oil price is still the decisive factor for BP and, with stocks still high and demand slowing, there is a good chance that oil will continue to decline next year, in spite of the Organisation of the Petroleum Exporting Countries’ attempts to prop it up.

Copyright The Financial Times Limited 2006

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