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The Times: Pressure mounting on BP chief as profit estimates are slashed

October 11, 2007
Carl Mortished, International Business Editor

A sudden collapse in profits from refining and a slowdown in US petrol consumption will put pressure on BP as its chief executive, Tony Hayward, today spells out his plans to streamline the oil company’s management.

Mr Hayward is expected to give more details of a drive to remove bureaucracy and management layers.

BP is under pressure to improve performance after the disastrous fires at its Texas City refinery and delays in major oil projects in the Gulf of Mexico. However, a worsening climate for big oil companies is weighing down on efforts to raise its game.

Stunned by warnings of a sudden collapse in refining margins, oil analysts have slashed third-quarter profit estimates for the company by as much as $500 million (£245 million). Evidence that US demand is weakening has also emerged.
 
Colin Smith, oil analyst at Dresdner Kleinwort Benson, said that underlying volumes are not good for the oil majors: “It appears that the third quarter will be worse even than what the raw refining margins might imply.”

Jon Rigby at UBS agreed that the climate has changed in the world’s biggest fuel market.

Demand in the US has got a bit shaky,” he said. “Growth in gasoline demand has gone negative and we are seeing the first evidence of a slowdown in the US economy.”

He doubted that BP would reveal significant job losses.

The skills shortage, which has been a major factor in the oil industry’s cost explosion, was mentioned by Mr Hayward in July when he referred to excessive reliance on contractors and a shortage of qualified staff.

Overshadowing BP’s drive to make its manufacturing business safer and more profitable is a margin squeeze caused by high oil prices and weakening product prices.

More alarming still is evidence that the slowing US economy is reining in petrol consumption.

Demand for fuel in California fell in the second quarter of the year, according to figures from the state’s tax board. As petrol prices soared on the US West Coast, motorists filled up less often, causing a 1.6 per cent decline in June against the previous year.

As evidence of the slowdown emerged, Valero, the biggest independent US refiner, said yesterday that profits would be well below expectations because of the high oil price. Valero’s warning follows a similar statement from Chevron that said profits in the third quarter would be significantly below the second quarter level of $5.4 billion.

The big oil firms are being squeezed by soaring crude oil prices and an inability to pass on quickly to consumers the higher cost of feedstocks used to make petrol and diesel fuels.

Refiners profited hugely from exceptional margins in the spring when BP reported a global average profit of more than $16 for every barrel of crude oil that passed through its plant. That margin collapsed to $8 per barrel in the third quarter, according to BP figures released in September.

Mr Hayward is expected to repeat today his warning of a cull of non-essential staff. There will be a reduction in the management layers which were created during the tenure of Mr Hayward’s predecessor, Lord Browne of Madingley, who quit in May after he was found to have lied in court over details of his private life.

It emerged yesterday that a fire at BP’s giant Prudhoe Bay oil field in Alaska has cut output by 30,000 barrels a day for two weeks.

The fire occurred at Gathering Centre 2, where a blaze also broke out in August.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article2633514.ece

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