The Observer: The challenges facing BP

Richard Wachman
Sunday January 21, 2007

Lord Browne is leaving BP 18 months earlier than planned, handing over to internal candidate Tony Hayward, in August. Analysts say his successor will have a demanding task: boosting capital spending to ensure that safety standards are tightened across the group’s global operations.

In a recent address to BP employees, Hayward said the company should never seek to get ‘100 per cent of the task completed with 90 per cent of the resources’. He must restore BP’s tarnished reputation in its most important market, the US, where it has faced a barrage of adverse publicity from politicians and the families of those whose friends or relatives were killed or injured by the blast at the Texas refinery. There also remains the possibility of a grand jury investigation.

Elsewhere, BP is struggling to boost production targets, which have been hampered by delays in extracting oil from its Thunder Horse platform in the Gulf of Mexico. And it must face a future where profits will be more difficult to come by: the price of a barrel of crude has slipped from last year’s high of about $70 to nearer $50.

Then there is the thorny issue of the future of BP’s highly profitable Russian joint venture with TNK. Only last week, the Russian authorities stepped up pressure on TNK-BP when it said it was checking whether the business was fulfilling the licensing terms of one its biggest assets.

Last September, the Kremlin raised the prospect of revoking the joint venture’s licence following alleged environmental violations. But observers believe Moscow’s game plan is to force BP to cede some of its 50 per stake to the Russian side. In December, Shell gave up its fight with the Kremlin when it agreed to sell a controlling stake in the £10bn Sakhalin-2 project to Gazprom, the state-owned utility.

Last, but not least, is the issue of raising the company’s standing in the City and getting the shares up. BP may have returned $25bn to investors over the past few years, but the stock price has trailed rivals and underperformed the market. The lowly rating of the shares infuriated Browne, who let it be known that he was prepared to consider splitting BP into two companies: exploration and production on the one hand, and refining and distribution on the other. An alternative remedy could be a merger with a rival multinational, such as Shell, or another big share buyback.

http://www.guardian.co.uk/oil/story/0,,1995076,00.html

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