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Can BP’s investors give oil giant the time to learn from Shell’s mistakes?

Results clouded by rivals and identity crisis! Titanic court battle looms for oil company! Executives may face charges!

By Rowena Mason: 9:33PM BST 30 Jul 2011

If those headlines were meant for readers in 2011, the subject could be only one sorry corporate story: BP and its $40bn (£24bn) Gulf of Mexico oil disaster.

However, the real answer lies six years earlier in another just as painful oil scandal that hit BP’s nearest rival, Royal Dutch Shell. This was the heated reaction to news that Shell had over-stated its oil reserves by a third in the years leading to 2004.

Downgrade after downgrade kept hitting the company’s share price until matters came to a head over an email from Shell’s head of exploration to the chief executive.

“I am becoming sick and tired of lying about the extent of our reserves issues and the downward revisions that need to be done because of far too optimistic bookings,” it said.

Chief executive Sir Phillip Watts resigned and was escorted from the premises. No further action was taken against management, with official Financial Services Authority and US Securities and Exchange Commission inquiries into their roles dropped.

For a short period, this corporate giant, on which 1m people rely for employment, was run by just three interim leaders while there was a management clear-out at the top and merger between its Dutch and British divisions with Jeroen van der Veer taking the helm.

An array of authorities started launching investigations and the company began an amnesty, where all departments could take a cold hard look at their numbers and declare any discrepancies.

By its own admission, the energy major has really only just recovered from the scarring restructuring, cultural change and executive hand-wringing that ensued.

Now powering ahead of BP with profits of $8bn in the past three months alone, Shell is the largest oil company in Europe with an enviable pipeline of new oil and gas projects due to boost production this year. Lauded by investors and analysts, these are the same City faces who were back then pressing for the company to be taken over or split up – much like for BP today.

Although BP’s accident is a completely different, more expensive problem, there are still parallels with Shell’s historic corporate scandal – most notably its probable longevity. Herein lies the tale of how Shell regrouped from one scandal, to transform itself into a company that is today worth twice as much as BP, even though the pair are often mentioned in the same breath.

Despite today’s differences, industry insiders argue that both companies began to lose their way years before their respective disasters struck.

According to former Shell executives at the time the scandal hit, the seeds of the crisis were sown when the company started to base its business around trading and becoming more “asset-light”, cutting costs aggressively and setting tough bonus-related targets. The focus had shifted away from its historical expertise in engineering and operations, in much the same way that BP has been criticised for neglecting its traditional strengths.

What’s more, one disaster followed another, much like BP stumbled out of the Gulf of Mexico straight into an almighty row with its Russian billionaire partners and Kremlin-backed oil company Rosneft.

“Do we spy another PR disaster on Shell’s horizon after Nigeria, Brent Spar and the reserves debacle?” one Sunday newspaper asked in 2005. Environmental and security problems in Nigeria followed hot on the heels of the reserves scandal in the wake of greater public scrutiny and mistrust.

Shell’s ultimate solution for regaining the trust of the market was to go back to basics – investing billions of dollars in new production of oil and gas, particularly in “unconventional” extraction. Its management repeated buzz words such as “technology” and “engineering” to reassure investors the company was going back to its dependable core strengths.

It pushed into North American deepwater, pioneering liquid gas projects in Australia and Qatar, plus development in Russia’s remote Sakhalin region. All were technically complex, some suffered delays and cost over-runs, and in total, they needed $150bn of capital, but the gamble, supported by oil prices at near record highs, is on the brink of paying off.

Insiders say investors were not always supportive, pushing for immediate improvements and near-term returns, but in the end, Shell’s new management persuaded the market to endure years of patient faith in its turnaround.

The question is now whether BP’s shareholders, bewitched by the possible £180bn break-up value of the company, will be willing to grant it such leeway. BP has promised “consolidation” and extra capital investment in exploration and production, having completed a promising $7bn deal in India.

Yet some analysts are sceptical that BP has acted quickly enough in clearing out the old management and realising the scale of its problems, which could hinder any attempts to keep the 100-year-old corporate behemoth in one piece.

“It took Shell a long time to recover, but the Shell machine went into action quickly,” says Malcolm Graham-Wood, a long-time BP watcher from VSA Capital. “They found out what was wrong and they rectified it. The depth and breadth of management within Shell sorted it out. What’s a shame is that BP have not got depth or breadth of management and they’re making a mess of it. I think it will take them years to get back to the state they were in before. The Shell story is, and has been to me for a couple of years now, about the huge projects which have come on stream in this quarter,” he adds.

“Shell has not been distracted by any of the self-inflicted grief affecting BP and has outperformed accordingly.”

Stuart Joyner, analyst at Investec, agrees that it will take years for BP to recover.

“I think we have to be patient. In fact management has been quite explicit about telling investors that at least for the remainder of this year, and possibly into next year.

“In terms of when BP will organically start to improve, I think we’re looking at a couple of years out. It could take even longer than that if you look at the two key strategic plans [CEO Bob] Dudley has made. By their very nature they are very long-term, which is not to criticise, but realistically it means that anything they do in India and Russia will probably not impact the portfolio for the best part of a decade.

“Shell has really only just – in 2011 – started to reap benefits from what it put in place after the reserve scandal. It’s taken the best part of a decade for them to change the portfolio and that’s partly because their strategy was to invest in long-lived assets like Qatar, and obviously that has taken longer for them to turn around. But they are producing an enormous amount of cash at the moment and we saw that in both quarters.”

Now that Shell has won round its critics, the challenge will be to keep up the momentum and stave off those who believe BP’s crisis has exposed cracks in the over-sized, integrated oil major.

Shell’s chief executive, Peter Voser, argues that the company has proved the worth of owning both production and refineries through projects like the Canadian oil sands and Qatari developments. These look after oil and gas from extraction to point of sale. And he claims national oil company partners value the versatility of Shell’s skills across upstream and downstream and ability to invest in both areas.

The question now for oil investors is whether BP’s depressed share price offers more of an opportunity for increasing value than Shell, which must keep up its production growth and reserve replacement.

The jury is still out in the City, with little faith in BP’s management team in evidence at this early stage in its turnaround.

BP vs Shell

2000 BP unveils its new sunflower logo to symbolise “dynamic energy” and green sympathies, after a period of acquisitions and quick profits. Shell cuts costs, makes record profits.

2002 Low oil prices and new North Sea taxes hit profits at both companies. Shell says it is “uncertain about meeting output targets”.

2004 Shell reveals that reserves have been over-stated and merges its Dutch and UK divisions, with Jeroen van der Veer taking the helm. BP buys back $5bn (£3bn) of shares after moving into Russian oil with TNK-BP partnership.

2005 BP and Shell conduct secret early merger discussions, revealed years later by former BP chief Lord Browne. BP suffers blast at Texas refinery, which kills 15 people.

2006 Russia seizes Shell’s oil assets at Sakhalin. BP suffers oil leaks in Alaska and Lord Browne fights push for his retirement.

2007 Investigation into Texas blast points to serious safety failings at BP and Lord Browne steps down after lying about how he met a lover. Shell pays $350m to settle reserve scandal cases.

2008 Shell sets new record for company profits. New BP boss Tony Hayward embarks on round of cost-cutting.

2009 Shell suffers revolt over high executive pay. Plunge in oil prices prompts job losses at both companies. BP overtakes Shell to be biggest European major.

2010 Gulf of Mexico oil spill floors BP, as share price dives and losses accrue. Shell sheds more jobs and focuses on big projects coming on stream.



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