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The Independent: BP: not drowning, only waving: ‘Would he ever be allowed to merge with Shell?’

Jeremy Warner’s Outlook
WEdnesday 25 October 2006

We have become so used to the spectacle of ever-more eye popping profits from the oil majors that it comes as quite a shock to see BP report that in underlying terms they actually fell in the third quarter, the first time this has happened in ages.

This column warned a couple of months back that the party for oil profits had already reached its drunken end game, and that thereafter it was likely to be all down hill. Lord Browne, BP’s chief executive, echoed these sentiments yesterday by saying that the trading environment is now notably weaker than it has been for the past five quarters.

Lower production, weaker refining margins, higher costs, higher taxes, and of course, lower oil prices, has brought to an end more than three years of steadily rising profits.

Absent of a sudden resurgence in the oil price, which seems unlikely given the amount of new capacity coming on stream over the years ahead, profits are almost certain to fall further still. It would be wrong to characterise this as a return to the bad lands of the early 1990s for Big Oil. The $7bn of net profit earned by BP in the third quarter is hardly suggestive of impoverishment. The price of oil is still relatively high by historic standards, and there is no collapse in profits in prospect.

Yet the supercharged profits of recent times are a thing of the past. BP and others are entering an altogether leaner period. In such circumstances thoughts turn naturally to consolidation as a way of keeping the bottom line growing. Lord Browne articulated the case for it again yesterday in pointing out what a fragmented industry oil really is outside the closed environment of the main Middle Eastern producers. Even in Russia, BP is struggling to remain welcome against a wave of anti-foreign sentiment.

Would he ever be allowed to merge with Shell? Rightly, the chairman, Peter Sutherland, has slapped down any such suggestion from the deal hungry imaginings of his executives. Even if it could be got through anti-trust regulators, which without demerger of downstream interests looks well nigh impossible, the management challenge of crunching such two such different corporate cultures together would very likely plunge both of them into darkness for years to come.

Any such notion remains in the realms of hubris. Yet smaller fry, as Lord Browne attempts to salvage BP’s reputation from the beating it has received in the US, seems a sensible enough response to the harder times in which the industry finds itself.

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