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Sunday Herald (Scotland): Why BP is cutting back in Aberdeen as oil prices soar

By Selwyn Parker
Business comment

ABOUT THE only place in Scotland where the price of West Texas Intermediate Crude is on everybody’s lips is Aberdeen. But even in oil city there must be some confusion about the relationship between the wholesale cost of the black stuff and BP’s imminent cutbacks there.

The big question is why BP is taking the scalpel to its Aberdeen-headquartered North Sea business when the benchmark price of oil keeps on breaking new records and presumably boosting profits.

By week’s end, for example, crude prices broke the $90 (£44) barrier. That landmark inevitably raised the dreaded prospect of West Texas Intermediate Crude cracking $100 (£49), with mounting consequences for just about every other part of the British economy.

BP’s official reason for restructuring its Aberdeen operations is “to secure a long-term future for the company’s oil and gas business in the UK”. By implication, if it does not, there is no long-term future.

On the agenda, therefore, are cuts throughout 2008. All up, about 350 people out of 2100 will leave. BP says a lot about the new regime led by chief executive Tony Hayward, who replaced Lord Browne earlier this year, that the redundancies will all be office-based rather than front-line oilmen. Hayward has pledged to focus on operational efficiencies.

Deeper reasons lie behind the cutbacks, however, and BP’s economies may just be the first of others by competitors. It is no secret that the North Sea fields are running out. Of the six BP-operated fields there, all but two – Rhum and Clair – started producing in the 1980s and 1990s. And two – Valhall and Magnus, Britain’s most northerly field – date from the early 1980s. In oil terms that makes them geriatrics.

The maturity of the North Sea fields is reflected in BP’s bottom line for its domestic business. Financial results for the latest quarter show something of a collapse in profits for the UK (read North Sea) operations. Before interest and tax, profits in exploration and production fell by £400 million, refining and marketing posted a £10m loss compared with a £1 billion profit in the previous quarter and gas, power and renewables clocked an £85m loss.

The only bright spot in domestic operations was a £124m profit in “other business and corporate” – peanuts for a firm with an overall quarterly profit of £1.9bn. In short, nearly all the money came from elsewhere.

BP’s youthful new broom is obviously much more excited by prospects in far-flung regions such as Asia Pacific, which is expected to produce the greatest growth over the next decade.

Most of BP’s other projects are much younger. For example, BP’s half-owned TNK-BP field in Russia, which employs 71,000 people – roughly 35 times more than in the North Sea – will reputedly be a long-term gusher. Other exciting regions include Azerbaijan, where BP is the biggest foreign investor, Egypt (four projects), Algeria (two joint ventures from 2004), Angola (four developments producing since 2001), deepwater Gulf of Mexico (nearly two dozen interests and hundreds of leases).

And despite BP’s troubles in North America including last week’s $303m (£148m) fine for alleged improprieties the propane market over 2003-2004, Hayward remains excited about the region and the massive Wamsutter gas field where it plans to spend $2.2bn (£1.1bn) in the next 15 years.

On top of the fine BP must submit to three years of inspection and has agreed to pay $53.5m (£26.1m) in victim restitution, $100m (£48.8m) as a criminal penalty, $125m (£61m) as a civil penalty and $25m (£12.2m) to the US Post Inspection Services Consumer Fraud Fund.

But back to the global oil benchmark, West Texas Intermediate. Why is it climbing so high? The International Monetary Fund (IMF) insists that global oil markets are tight and practically promises higher prices around the corner. The International Energy Agency tends to side with the IMF.

By contrast, oil cartel Opec blames “geopolitical tensions” such as Turkey’s military operations against Kurdish insurgents for the tight supply. Royal Dutch Shell also attributes rocketing crude prices to “political premiums” among other factors.

Oil pundits pontificate about declining US inventories, counter-seasonal falls in distillate, which includes heating oil, massive demand from China’s factories and other complex variables.

Whatever the cause, do not expect Opec to oblige by turning up the taps. Saudi Arabia alone is sitting on $20 trillion (£9.8trn) in reserves and is in no hurry to lose it.

Be that as it may, it will not make the Aberdonians feel much better. While competitors like Shell posted third-quarter earnings of $6.39bn £3.1bn – nearly twice as high as BP – the London-based group suffered so many production setbacks, delays and outages at refineries that it has missed out on bumper profits from the record oil prices of the last two years.

It is reverses like these that gave Tony Hayward the freedom to knock BP into shape. Unfortunately for Aberdeen, it was first on the list. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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