What keeps BP’s Lord Browne in the driving seat?

HE’S chief executive of Europe’s largest oil company, but hates driving. With an annual salary of £6.5m ($12.3m, E9.5m), BP’s Lord Browne is not one of Britain’s motorists struggling to finance petrol at £1 a litre.

“I do drive on vacation when I have to,” he says. “I regard it as something you have to do. I don’t drive for enjoyment, but for the purpose of getting from A to B and I only do it when I’m not working.” He’s in a cheerful mood when I meet him at BP’s headquarters in central London.

Fortunately, BP managed to top forecasts for its first-quarter results last month, with underlying profits of $5.3bn, made from customers who drive a little more frequently than Browne. He has become Britain’s biggest businessman on the back of this and transformed BP from a £20bn giant in 1995 to a global supertanker currently worth £139bn.

His achievements have not gone unnoticed and he is much championed as Britain’s foremost value adding chief executive.

Next month 58-year-old Browne will celebrate 11 years at the top, but he is fast running out of gas. He will have to drive to pastures new shortly because the oil giant has a strict policy on retirement at 60. Next year it will announce his successor. Before that Browne faces challenges on a number of fronts and last week he ran through with me some of the issues facing BP and the industry as a whole.

The big hurdle that is outside Browne’s control is the changing political landscape.

A conflict with Iran could send the price of oil on an upwards spiral far north of $75 a barrel. There are also fears that the Islamic world could shut off supplies if relations with the West deteriorate further.

Browne is also looking to grow the business – China, Canada and Russia are key areas – non-core disposals will also continue.

Safety is another unpredictable element. After the Texas City refinery disaster that resulted in 15 deaths the criminal division of the United States Department of Justice is reviewing the case.

Browne has much to do before passing over the reins. History has shown it’s a tough challenge for successors to emerge from the shadow of a strong leader. Vodafone’s Arun Sarin, for instance, has some way to go to shake off Sir Chris Gent’s legacy.

The question only time will reveal is whether BP in its current form can survive Browne. He has certainly put in place all the possible planks to ensure it will, including physically modernising the business.

Gone is the oak panelling and marble of the old corporate headquarters in Finsbury Circus harking back to the days of the British Empire where BP was almost seen as an extension of the Foreign Office.

In its place is a modern wood and glass affair in St James’s Square, stylish enough to make a boutique hotel proud.

Perma-grin receptionists stand in front of podiums below moody art-house photographs. Green LED floor lights lead to the lifts.

Up on the fifth floor Browne has transported all of his David Linley furniture to his immaculate corner office. The space seems larger than a filling station forecourt. Size is obviously important when you are boss of Britain’s biggest company.

Browne also likes his James Bond-style gadgets. At the touch of a button a frosted glass wall slides away to reveal a large boardroom adjoining the end of his office. A second frosted glass wall is supposed to turn transparent at the flick of a switch to reveal a team of support staff on the other side.

“It gets stuck,” says Browne, unable to make his staff appear and then vanish.

We are sat around a burr-oak coffee table in a far corner of Browne’s office.

Browne is short man, he is slightly built, with a kind face and unwavering gaze. In 1998 he staged the biggest industrial merger of the time, with Amoco, swiftly followed by the £26.8bn takeover of Atlantic Richfield (Arco).

I ask him whether he will punctuate his final two years with a large acquisition to knock Exxon Mobile, the world’s largest oil company, off its perch.

“Well not for the purpose of that,” he says. “This is not a matter of standing on the stage and having the last aria. We are a part of Sinopec in China. We are talking to them about whether we can do more things with them and we will have to see how that works.”

Currently Chinese oil companies are state owned with bits floated on public markets – they mainly work in partnerships with western companies. BP is well placed should the situation change and the government allows oil companies to own sizable stakes in energy businesses.

Browne won’t be drawn on whether he is talking to the Chinese government or Sinopec on ownership.

He says: “It’s not a question I’m going to answer because it will lead to speculation. What I would say is this, I would like to see the company have a bigger stake in China and I’d like to see how we can do that and it may take a very long time to do that. How we do that will depend very much on what’s on offer, what can be discussed, what can be negotiated. Right now nothing is on offer.”

BP funds its acquisitions from a rolling programme of non-core disposals. It ditches around $3bn assets a year but will exceed that figure over the next 12 months.

Nothing will be in the same league as the £5bn sale of chemicals business Innovene to Ineos.

The thinking is that there is no such thing as an asset that is good for all time. Things have a habit of either not being competitive in a market or a wasting asset which prevents growth in other areas. If it takes more resources to bring it back on-stream than the value it contributes it gets sold.

A major issue of the day among the oil firms is the political situation in the Middle East – there are fears a divide might affect crude supplies.

Browne is having to make contingency plans to pre-empt supplies being shut-off, should the worst happen, and relations with the Islamic world and the West deteriorate.

While Browne is planning for the worst he is measured in his prognosis: “The new slant on oil production is a questioning of our security. Can someone use political reasons to shut off my supply? They haven’t done it in the past, but people are concerned that it could be used because of a divide in the culture of the Islamic and western world.

“What I would say is we have to look at all eventualities as a company, and make sure that we maintain security of supplies to our customers. We have diversified sources of oil production which now come from different parts of the world. There’s all sorts of circumstances that could create a divide but I don’t think it’s likely. It’s something in peoples’ minds at the moment. It’s post 9/11.”

Geographical diversification is not the only solution especially with diminishing reserves.

While we know that oil and gas will not disappear – they will be part of the energy diet of the world for many years to come – the mix will change and Browne’s successor will have to channel increasing resources into alternative energy.

The future of BP will depend on research and development into new areas.

Coal has the biggest market share of energy in the world and nuclear power stations look set to grow. But renewables will be an important part of the world’s energy equation.

It won’t solve everything but by 2020 it may be producing 5-7% of the energy mix which will be important.

Renewables are about how you make electricity using wind, solar and such like but there will be other ways of making gasoline and diesel.

It can be grown biologically and right now there is a target to put 5% of ethanol producedby corn, into the petrol and gas of the world.

Bio diesel production from rape seed is something which is growing in Europe and this is only the beginning. It comes under a category called second generation bio fuels which are used specifically to make fuel.

Some simply grow from plants that exist and some from plants that can be invented to actually increase the amount of these particular types of fuel that go into cars.

Browne says he has already started research and development through alternative energy in renewables: “It’s a profitable business right now and it will carry on growing and we will give it as much capital as it takes providing it’s successful. If it’s not successful obviously it won’t get much capital. So these are things about the future.

“We can make a decent real business out of it that makes the sort of returns shareholders want. But sometimes you have to do things which don’t pay back in the next quarter – not everything does. We are in the business, I think, of looking at things over a longer term. In our business we have to think about the cost of our wants, what society wants, and how we can be part of society, and be in a business that lasts more than just the next transaction.”

One incident that has marred Browne’s safety record is the Texas City accident, an explosion that killed 15 people and injured an estimated 500. It was the worst refinery accident in BP’s recent history.

BP has shut down the refinery and is spending $1bn to upgrade and repair it. The US Department of Labour has referred the case to the Department of Justice and there is talk that Browne will have to make a deposition but since he is not a director of that business it will be a matter for the subsidiary.

“Safety is I think in any industrial environment – and oil and gas is no exception a critical, critical factor, something we pay a lot of attention to,” he says.

“Texas City, which to the best of our knowledge now, was very much an isolated matter. We are aware that there was a breakdown in the chain of command, the way in which the management structure worked during an operation so we’ve learnt a lot from that. We are applying all the lessons and doubling our efforts around the world.

“Up until Texas City all the safety systems were improving, we had lower and lower accident rates and spillage and then we had this bad accident. We immediately said we accept responsibility and are now working through the consequences of it. The consequences of it will last a long time for BP there’s no doubt.”

Probably longer than Browne’s tenure as the chief executive. Almost as long as he has been in his job he has been putting in place a succession plan and the future of the business depends on him getting it right.

Browne, 58, has nurtured an array of candidates, testing out four “apprentices” à la Sir Alan Sugar, charging them with various tasks, and will recommend one to the board by the end of next year.

“I spend a lot of time looking at the succession,” he says. “Not just at the top but all the people in the company. We try and excite them and make sure they’re interested because it’s important for us that if they’re interested they stay and if they’re failing they leave.”

Browne is not thrilled with the company’s policy about retirement but thinks it is only fair to work within the rules.

“Let’s be clear,” he says. “I don’t subscribe to the concept of retirement at a fixed age but I also don’t subscribe to staying in the same job. I think one should never overstay one’s welcome and never get to the point where you take the job and say I’ve done it all now I can coast. Leaving a job like chief executive of BP doesn’t mean to say that you retire, you may go as indeed I will. The answer is I don’t know what I’m going to do yet – to another career and business – but I’m hooked on business.”

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The big oil companies target Canadian oil sands operators

STAFF at Calgary’s Fairmont Palliser Hotel are getting used to a resolutely international crowd. After decades on the fringes of the oil industry, the Canadian province of Alberta is hot. And a stream of investment bankers and company executives, from China, Italy, the UK, France and the US, have been traipsing through the lobby of Calgary’s smartest hotel for two years now, looking to strike a deal that will bring their companies a bigger slice of the prize.

Alberta’s vast reserves of oil sands and heavy oil, with more than 174bn barrels, rival Saudi Arabia’s and, thanks to the $70-a-barrel oil price, what was five years ago marginally economic is now highly profitable. So when Royal Dutch Shell last week snapped up Canadian heavy oil company Blackrock Ventures for $2.18bn (E1.68bn, £1.15bn) hopes were raised that the long-awaited oil sands takeover boom may have begun.

Shell certainly paid a full price. The offer was a 27% premium to Black Rock’s share price and more than three times as much per barrel of reserves than Shell’s French rival Total paid when it snapped up Deer Creek Energy for $1.6bn in September 2005.

Granted, Deer Creek’s assets were in oil sands, which have to be expensively scooped out of the earth, using the world’s biggest diggers, after which the oil is washed out. Blackrock Ventures, on the other hand, produces heavy oil from the Peace River bitumen reserves, where Shell already has a big project.

Days before the announcement, Shell had already announced plans to increase production at Peace River from 8,000 barrels per day (bpd) to 100,000 bpd by 2009. The idea is to apply what’s known as a “huff and puff” system, pumping steam into the grounds to help extract the bitumen. Applying the technology to Blackrock’s 12,000 bpd production would add at least an extra 30,000 barrels per day.

Even so, the $3.77 per barrel Shell paid is still more expensive than other oil sands companies of the same scale. According to Canada’s Peters Co, the only one more expensive would be Canadian Oil Sands Trust at $5.6, which, owing to its ring-fenced tax-free financial structure, is out of bounds to major oil companies.