March 19th, 2006:

A report from Cazenove, financial adviser to the UK's biggest company, says a demerger may be in everyone's interest, writes Richard Wachman
Sunday March 19, 2006
Oil giant BP is Britain's largest company and one of its most profitable, so why would anyone want to break it up? The issue is all the more intriguing because the question has been raised by JP Morgan Cazenove, BP's financial adviser.
'There is no way that Cazenove would come up with something as radical as this without being egged on by BP management. They are flying a kite to gauge market reaction,' says one observer. But could BP really be considering a radical revamp of its global empire in what might appear to the outside the world to be a wanton act of self-destruction?
It is not beyond the realms of possibility, say analysts. BP chief executive Lord Browne, who has won more business awards than any other corporate leader in Britain, is not renowned for his timidity. As Cazenove says: 'BP is the one company that might consider taking such a bold step.'
Browne is unhappy about the group's lacklustre share price performance. Although he has delivered record profits, – albeit off the back of sky-high oil prices – as well as promising to return up to $65bn of surplus cash to shareholders over the next three years, the shares are roughly where they were five years ago. BP has underperformed the oil and gas sector by 40 per cent since 2002. Why?
Bruce Evers, oil analyst at stockbroker Investec says: 'It is difficult to say. To the outside world, BP is rolling in it, but in the City, people keep thinking that the oil price has peaked, and that the next move will be down.'
Last month Tony Woodley, head of the Transport and General Workers Union, suggested that a portion of the oil companies' record profits could help workers who lost their pensions when their companies went bust. But in the Square Mile, BP's shares fell despite the firm notching up a profit of £13bn in 2005. Shareholders were spooked by production losses that followed in the wake of the hurricanes in the Gulf of Mexico in the summer, costing BP $950m. More recently, the company lost output from its Texas City refinery, where an explosion killed 15 people. The incident was investigated by the US authorities who handed out a fine of £21m for safety violations.
But something else has affected BP's share price. Rightly or wrongly, BP is viewed as a lumbering giant when compared with more nimble-footed competitors such as Cairn Energy, which has focussed solely on oil and gas exploration. Cairn, whose shares have done far better than BP's, doesn't get involved in expensive refining, processing and distribution operations.
So could BP extract value for investors by restructuring its operations and demerging exploration from the rest of the business? Yes, says Cazenove, which challenges one of the industry's most sacred orthodoxies – that it makes commercial sense for multinationals such as BP to have both an 'upstream' research, exploration and drilling arm and 'downstream' businesses that process, refine and deliver gas and oil products to customers that range from power generation firms to garages which sell BP petrol to motorists.
The practice was first put into operation 100 years ago by JD Rockefeller, who was keen to protect his growing oil empire by controlling every aspect of the supply chain. In modern times, oil giants have argued that owning upstream and downstream operations makes sense because when oil prices are high, downstream earnings fall, and vice versa; in other words, integrated businesses offer a hedge against volatile oil prices.
Cazenove shoots down this argument. Researcher Fred Lucas said: 'Financial data for Exxon, BP, Shell and Chevron shows that upstream and downstream earnings are actually very positively correlated. The arguments for adhering to an integrated structure have lost much, if not all, of their historical validity.'
Lucas's proposed solution is to demerge BP's downstream business from its exploration activities, offering investors shares in two companies. Lucas reckons that a demerger could yield $35bn of lost value to shareholders.
He said: 'This restructuring could address the 15-20 per cent equity value gap that we believe BP suffers and that, we understand, is a growing concern for its top management.'
A BP spokesman commented on the plan: 'We have seen [Cazenove's] paper which is interesting, but the plan is not under active consideration.' He added that it made financial and commercial sense to remain 'a single company'.
Institutional shareholders are not as dismissive. 'Investors prefer focused businesses; if Lord Browne can demonstrate it makes economic sense, he will have an audience and my guess is that shareholders will back him,' said Stuart Fowler, head of equities at Axa investment management.
Robert Talbut, chief investment officer of Royal London Asset Management, said: 'The company has been trying to satisfy the market but, to date, they have not been well rewarded. This would be a radical move; we shouldn't dismiss it out of hand.'
If Browne were to grasp the nettle, he would be moving against the tide of economic protectionism in Europe where the French and Spanish governments are trying to promote national energy champions to ward off foreign competition.
But Cazenove said that BP would be the winner if it took advantage of Britain's more open economy and sought to split itself in two.
Lucas said: 'Nationalist energy tendencies are contrary to European law and have no place in today's competitive markets.'
As for the argument that integrated oil giants are a protection against unwanted bids, he added: 'Companies typically perform better when exposed to the disciplining threat of takeover.'
Britain's oil baron
He has turned BP into the seventh-largest company in the world and Britain's biggest, with a market value of £131bn. Lord Browne, 58, has been at BP for most of his working life and is one of the most feted businessman in the country. He is also one of the best paid: his pay and perks package rose by 14 per cent last year to £6.5m.
But nothing can take away from Browne the honour of transforming BP into a goliath. When the oil price was at rock bottom at the end of the 1990s and assets were going cheap, he went on an acquisition spree, buying Amoco and Arco of the US for about $80bn, and Britain's Burmah Castrol.
More recently, Browne stole a march on his American rivals by forming a 50/50 joint venture in Russia with TNK, giving BP unrivalled access to new resources. The Russian offshoot now accounts for a quarter of BP's daily oil production. Now Browne is knocking at China's door, seeking 25 per cent of Sinopec, the country's largest producer. He retires in less than two years' time – cementing a deal with the Chinese would be a good way to go out. read more

Lorna Siggins, Marine Correspondent
Mar 18, 2006
Shell E&P Ireland has welcomed the outcome of two court rulings in relation to planning approval for its Corrib gas terminal at Bellanaboy, north Mayo.
It has also denied that there are any difficulties with water quality in Carrowmore lake as a result of run-off from the terminal site.
On Thursday, Ms Justice Fidelma Macken turned down a Supreme Court appeal application by Martin Harrington over her earlier High Court decision to refuse leave for a judicial review. She also refused to refer the case to the European Court of Justice.
“This means that no further challenge to the gas terminal planning permission can now be brought by way of judicial review,” Shell E&P Ireland said in a statement.
The company also welcomed a separate High Court ruling by Mr Justice Thomas Smyth last Tuesday, which confirmed that Shell had not breached the conditions of its planning permission for the Bellanaboy gas terminal.
Andy Pyle, Shell E&P Ireland's managing director, said that the company was fully committed to following due process in relation to the Corrib gas project and “takes very seriously its responsibility to comply with planning conditions and all consents it has obtained in relation to the project”.
“Shell has worked closely with Mayo County Council to implement the planning conditions set by An Bord Pleanala when it granted permission for the gas terminal and will continue to do so in the future.”
The company has emphatically denied claims by the Shell to Sea campaign that water quality in Carrowmore lake is being affected by run-off from the Bellanaboy terminal site.
A company spokesman said that Mayo County Council had also denied these claims. The spokesman described the protest on the site this week by objectors as “provocative” and in breach of health and safety regulations.
The Minister for the Marine is still deliberating on recommendations drawn up by his advisory group on the safety of the onshore pipeline. Mediation involving objectors to the pipeline and Shell is also currently suspended. read more

Russian activists have stepped up pressure on the European Bank for Reconstruction and Development to refrain from financing an expansion of the Shell-led Sakhalin oil and gas project in Russia's far east.
At a six-hour consultation meeting in Moscow last Tuesday, lawyers, environmentalists, geologists and community leaders said the Sakhalin II project did not merit the EBRD's symbolically important blessing.
“We are now in a situation where the company is violating the law from all possible aspects,” said the deputy head of the Rodnik non-governmental legal centre, Irina Saveleva, referring to Shell. “There is no reason for this project, in its current form, to receive funding from the EBRD because what is being done contradicts all its ecological declarations and principles,” Saveleva said.
Located on the island of Sakhalin, 40 kilometres (25 miles) from Japan's coast, the project would expand existing facilities and lay pipelines that will supply a Liquefied Natural Gas plant under construction as well as an oil export terminal in the south of the island.
Sakhalin II is key to the development plans of Anglo-Dutch giant Shell and has a projected 20 billion-dollar (16.4-billion-euro) price tag. It is estimated that 1.0 billion barrels of oil can be recovered as well as 500 billion cubic meters of gas.
The project's managers have insisted that they are in compliance with Russian law and are addressing environmental concerns.
But at last week's meeting called by the EBRD before it takes a decision on whether to finance the project, activists said it threatened precious species such as the western grey whale, which has its summer feeding ground in the area, as well as salmon that use the island's waterways for spawning.
Activists in particular pointed to the seismic instability of the area.
Rodnik accused Shell of denying the public full information on its work as well as other procedural violations and said the group would launch a new legal case against the company following previous such cases.
“While recognising the rights of groups to take issues to the courts, we are confident that we will be found to be complying with the law,” said an official at Sakhalin Energy, which is managing the project.
However, the Russian branch of the international environmental group WWF backed Rodnik's opposition.
“The WWF urges the EBRD and other banks not to consider the possible financing of the Shell project for as long as the company has not presented convincing proof that it has revised the project and has paid compensation for damage it has already caused to the environment,” the WWF said Wednesday.
The gathering last week was part of a 120-day consultation period established by the EBRD, which lent funds for the first phase of the Sakhalin project.
Consultations have already taken place in London and are to continue with meetings in Sakhalin itself and on the Japanese island of Hokkaido.
EBRD President Jean Lemierre said earlier that a decision on whether to part-finance Sakhalin II would probably occur “before the summer”.
Shell has a 55-percent stake in the Sakhalin Energy Investment Company while Japanese firms Mitsui and Mitsubishi own 25 percent and 20 percent respectively.
But Shell has signed a memorandum of understanding with Russian gas giant Gazprom to swap 25 percent of shares for half of a Siberian field.
Founded in 1991 to assist the transition of former communist nations to market economies, the EBRD operates in 27 countries from central Europe to Central Asia, including Uzbekistan. — AFP read more

By Sylvia Pfeifer (Filed: 19/03/2006)
Royal Dutch Shell, the oil giant, is putting its embarrassing recent past behind it with a multi-million pound refurbishment of its UK headquarters on the south bank of the Thames in London.
Designed by Sir Howard Robertson and opened in 1963 by the Queen, Shell Centre has dominated the London skyline by Westminster Bridge for more than four decades. It is built on land originally used for the Festival of Britain in 1951 and Shell retains a right to light over the Jubilee Gardens, affording executives panoramic views of the river.
Like many modernist corporate headquarters, Shell Centre is famous for its lavish facilities for staff, including various sculptures and a swimming pool. However, in the wake of the merger of its two separate operating companies, Royal Dutch and Shell Transport & Trading, to create Royal Dutch Shell plc in July 2005, executives have decided to give the company's sprawling offices a much-needed facelift.
Work on the main tower, Shell Tower, will start in June and will see the end of the old conference boardroom, where the boards of the two operating companies used to meet before the merger. The company decided to scrap its historic dual structure after a scandal that saw it writing down its proven oil and gas reserves. The furore led to the departure of its three most senior executives, including Sir Philip Watts, the then chairman. The merged group is listed in London but has its headquarters in The Hague.
The destruction of the historic boardroom will be seen as further evidence of Shell's break with the past. The “conference” – the meetings of the combined boards of the two companies – was symbolic of the oil company's previous -consensus–driven management structure. The boards used to meet around a 10-piece, 35ft table, finished in walnut.
Shell aims to create one of the most modern and environmentally friendly offices in London. The refurbished tower will be designed to minimise energy use while the air coming into the building will be fresh as opposed to the recirculated variety common in older systems. Daylight sensing lights, which dim to maintain optimal lighting levels according to the strength of natural light, will also be installed.
“The creation of Royal Dutch Shell plc, which is now headquartered in The Hague, gives us the opportunity to redesign the Shell Centre to fit its new role as Shell's downstream global headquarters and the offices for the UK country chair and the treasury division of finance,” said a spokesman. read more