The Independent: BP warns boom times over for oil: BP Shell mega-merger?

By: Saeed Shah, 
Published: Oct 25, 2006

BP warned that the boom times for the oil industry were over yesterday as it revealed profits and production growth had stalled in the past three months.

The oil giant also reported that the impact of an explosion at its Texas refinery last year had cost the company $1.4bn (pounds 747m) so far in lost profits – in addition to the $1.6bn it is putting aside to settle legal claims over the blast, which killed 15 workers.

Reporting quarterly profits, BP’s chief executive, Lord Browne, said: “Overall the trading environment is now weaker than it has been for the last five quarters. Of particular note is the significant reduction of global gas prices in the face of significant supplies, along with weak demand.

“It is clear that the last period has been exceptional in terms of the market and we have been fortunate to have a strategy in place which has enabled us to capture the benefits. But the outlook is for a rather different set of market circumstances – a more difficult trading environment. We have a strategy which is robust to such volatility but no one should expect that the absolute levels of performance, which we have recently seen, will be sustained.”

He said that trading conditions would ease as a result of extra supply coming on to the market, after record oil prices seen recently had led to a flood of investment in new projects.

“We’re not suggesting a crash, but we are suggesting moderation,” Lord Browne said.

BP reported a third quarter net profit of $6.98bn, up 58 per cent on the period in 2005. However, this figure was boosted by a series of one-off gains. Analysts said that the underlying figure was around $4.65bn, well below the $5.33bn that BP saw in the third quarter of last year. The company was hit by lower refining margins, “very weak” gas prices and increased taxation. It was the first fall in quarterly profits for at least two and a half years.

The oil giant revealed that it would miss its production target for this year. As recently as July, BP had predicted that output this year would be 4.1-4.2 million barrels per day. Yesterday it said that it now expects production to average 3.95 million bpd, down from 4.01 million bpd in 2005, due to the “linger effects” of last year’s hurricanes, divestments and higher oil prices.

Over the last 12 months, BP was hit by a triple-whammy of problems in the US, generating negative headlines across the world. Aside from the Texas explosion, it emerged that the company’s oil pipelines in Alaska had badly corroded and BP faces allegations of improper trading activity. Lord Browne insisted that the problems in Texas and Alaska were not related to over-zealous cost-cutting.

Lord Browne said: “What you haven’t read [during 2006] about is the story of the whole of BP – the overwhelming balance of which is a story of continuing success on the base of a strong strategy and a great deal of hard work by tens of thousands of people.”

There has been renewed speculation this year that BP will be involved in another mega-merger deal, fueled by reports over the summer that Lord Browne had discussed a bid for rival Shell with other board members.

Although he would not comment on Shell specifically, Lord Browne made it clear that he believed in further consolidation of the industry.

“Even the biggest [oil] companies have small market shares. Looking at it from 50,000 feet you’d have to say there’s an awful lot of players dealing with very small pieces of an industry which probably in the fullness of time will change shape,” Lord Browne said.

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