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HOW FORTUNES HAVE CHANGED FOR BP SINCE 2004

FROM OUR JULY 2004 SHELL NEWS ARCHIVE… A FORTUNE MAGAZINE ARTICLE REPUBLISHED IN THE NOW DEFUNCT NEWSPAPER: THE BUSINESS

HOW FORTUNES HAVE CHANGED FOR BP SINCE 2004. THE SUN KING RESIGNED IN DISGRACE AND BP HAS SUFFERED DEBACLES IN THE GULF OF MEXICO AND RUSSIA.

THE ARTICLE: The new king of the oil patch

Lord Browne has put BP back on the map at the forefront of the global energy industry

By Nelson Schwartz

FROM FORTUNE Magazine

25/26 July 2004

IN an industry peopled with Texans who drop their “Gs” and seem fresh from the set of Rawhide, BP’s John Browne is decidedly different. Lord Browne is as content discussing his collection of crystal goblets or contemporary art as he is BP’s latest offshore find or next big pipeline project. He prefers salmon to steak and still speaks the Queen’s English he learned at boarding school and Cambridge.

And while other chief executive officers (CEOs) such as Exxon Mobil’s Lee Raymond are sceptical about global warming and blast Big Oil’s perpetual critics, Browne is eager to talk about how to reduce greenhouse-gas emissions and limit the energy industry’s impact on the environment.

Browne can afford to cut an unlikely, even idiosyncratic, profile in his industry. Through bold acquisitions and mergers, adept management, and silky-smooth PR, he has put once-stodgy BP at the forefront of the global energy industry. BP’s $232.6bn in revenues last year vaulted it to the No 2 spot on the 2004 Fortune Global 500 – ahead of Exxon Mobil, the largest US energy company. And sometime next year BP is set to pass its Dallas rival in total oil and gas production, another key yardstick in the competitive energy sector.

The rise of BP illustrates how oil provinces far from the Middle East – especially Africa and Russia – are becoming key sources of energy for the rest of the world. BP already pumps nearly twice as much oil and gas as Kuwait, and Browne is promising that BP’s production will outstrip its rivals by a wide margin in the years to come. At the same time, Browne’s outspoken support for limiting greenhouse-gas emissions has forced even traditionally sceptical companies such as Exxon to adjust their public stance on the issue of climate change.

It’s quite a turnaround from the company Browne inherited in 1995, when he became CEO of what was then called British Petroleum. When he took over, BP’s shares were below where they had been in the early 1980s, and the company’s main assets were tired fields in North Sea and Alaska. It ranked No 31 on the Fortune Global 500 that year, with revenues of $50.7bn.

Today BP is the leading oil and gas producer in the US and the first major Western oil company to enter Russia in a big way. Its offshore oil projects in the Gulf of Mexico and along the coast of Angola are among the most productive in the world. “Our history is very different from that of Exxon,” Browne says, puffing an H. Upmann cigar, the Cuban brand favoured by Winston Churchill. “We came from the middle of the pack, and we knew what it felt like to taste failure.”

That’s as close as Browne comes to boasting about BP’s recent performance. In 1997, Browne was the first major oil CEO to acknowledge a link between emissions and global warming – prompting one industry official to complain that Browne had “left the church” – or to focus on Russia. More than for either of those accomplishments, he’s likely to be remembered for launching the consolidation wave that transformed the oil industry over the past decade.

When he signed the deal to buy Amoco for $56bn in 1998, it was the largest ever industrial merger. Within months Exxon agreed to buy Mobil. But Browne wasn’t about to get left behind. Even as BP was digesting Amoco, Browne bought Atlantic Richfield in 1999 for another $32bn. “He is the father of mega-mergers in the oil industry,” says Oppenheimer analyst Fadel Gheit. Browne’s latest blockbuster was the $7bn purchase last year of half of Russia’s TNK, the first time a Western giant has acquired a significant piece of a major Russian energy company.

Browne is well aware of the risks of investing in Russia: in early July, the Kremlin was tightening the screws on Yukos and its jailed CEO, Mikhail Khodorkovsky. For now, though, BP’s partnership with TNK and oil oligarchs Mikhail Fridman, Viktor Vekselberg and Len Blavatnik is proving bounteous for BP’s bottom line. TNK-BP, as the Russian venture is known, contributed nearly 900,000 barrels per day (bpd) to BP’s overall operations in the second quarter of 2004 and will single-handedly lift the company’s oil and gas production by 10%, to more than 4m bpd by the end of this year.

Over the next four years BP’s production should grow by about 7% annually, predicts Bear Steams oil analyst Fred Leuffer. By contrast, rivals such as Exxon Mobil, Chevron-Texaco, and France’s Total will see their production increase by 4% a year – at most. “When John Browne became CEO, he directed the company toward higher-risk, frontier-type exploration,” says Leuffer, and that bet is now paying off.

“This guy is a visionary,” says Oppenheimer’s Gheit. Whether the issue is global warming, or consolidation, or opportunities in Russia, “Browne saw it coming before the competition.” Although the company dropped the “British” from its name five years ago and became simply BP, Browne is still British enough to be embarrassed by this kind of gushing. “It makes me very nervous to be called a visionary,” he says. “Very nervous indeed.”

High above the North Sea, as BP’s Gulfstream V speeds toward Moscow, breakfast is laid out – croissants, bagels, smoked salmon (there’s salmon pretty much wherever Browne goes), fruit, and Danishes. For half an hour after the spread appears, no-one talks or moves, and the G-V’s cabin seems like the library of St John’s, Cambridge, where Browne earned an honours degree in physics. Finally, Browne puts aside his reading on Russia and gets breakfast. That kind of single-mindedness in the face of a tempting breakfast is typical of Browne, who has often been described as donnish.

Browne considered a career in research or academia but followed in his father’s footsteps and joined BP after graduating from university in 1969. Browne’s father worked in community relations for BP overseas, and Browne spent his early years in places like Tehran and Singapore. “It gave me a taste of the oilfields,” he says. Even so, Browne’s first posting in Alaska “came as a shock. ‘All I would do is complain and say this place is deficient”.

After two years in Alaska, Browne worked for BP in New York and San Francisco. Despite his initial gripes about life in Anchorage, “for someone from Europe, it was the right place to go,” he says. “There was great growth and great change.” Working in the US also put its stamp on Browne, freeing him from the stuffy culture that permeated BP at the time. The British government had a majority stake in the company, and workers enjoyed daily tea service, with biscuits on bone china for the top brass. The tea service is gone—as is the typical British reserve. In fact, BP is more aggressive than many of its American competitors: It completed the Amoco acquisition twice as fast as Exxon swallowed Mobil, or Chevron bought Texaco.

Browne spends about half his time on the road, much of it in the US. That’s because while many still think of BP as a British company, by most metrics it’s actually more American. Of BP’s 104,000 employees, roughly 39,000 are in the US, more than double the number in Britain. It operates nearly 15,000 gas stations in the US, and of its $10.3bn in profits last year, more came from North America than from Britain and continental Europe combined. BP’s American operations are expected to grow as its investment in the Gulf of Mexico pays off.

The company is spending between $lbn and $2bn a quarter in the US – roughly a third of its global capital expenditures – and by 2007 is expected to be pumping 500,000 bpd of oil and gas from the Gulf, up from about 300,000 bpd today. Still, only a third of its production is in the US, and it is to places such as Russia and China that BP will increasingly look for future growth.

In China, the fastest-growing energy market in the world, BP is building two new liquefied natural gas plants to help slake that country’s thirst for power. It is also exploring ways of shipping natural gas to China and South Korea from TNK-BP facilities in eastern Siberia, in what could be the company’s next multibillion-dollar project.

That kind of capital investment is a major reason why BP was able to avoid the reserve nightmare Royal Dutch/Shell faces. Beginning in the early 1990s, when Browne headed BP’s exploration and production division, the company moved aggressively into areas that were just opening up, such as the deep-water Gulf, the Caspian Sea, and offshore Angola. Shell, by contrast, was a sluggish competitor; its executives ended up creating oil on paper because they weren’t finding it underground. Overall, BP’s proved holdings now total 18bn barrels of oil and gas, still behind Exxon Mobil’s 22bn barrels but well ahead of Shell’s 14bn.

Browne has certainly regained the lustre he lost when BP’s shares swooned two years ago, and, at the age of 56, is set to remain in the top job until he reaches BP’s mandatory retirement age of 60.

Although Browne enjoys hobbies like art collecting and photography, and treasures vacation time at his home in Venice, BP is his life. An only child who never married, Browne says that “when you don’t have a real family, you build a surrogate one”. So Browne can remain single-minded in his determination to solidify BP’s position as the world’s leading oil company “The game is afoot,” he says, echoing another British bachelor mastermind, Sherlock Homes. “The game should always be afoot.”

This is an edited version of an article which appears in the current edition of FORTUNE © 2004. Time Inc. All rights reserved.

Reprinted with permission of Time Inc.

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