It isn't over yet for Lord Browne

His bullish refusal to accept that oil is in terminal decline may prove still more haunting than his lies to a judge

By David Strahan

Sunday, 6 May 2007

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Is it possible that Lord Browne's humiliation is not yet complete? It may be hard to credit in a week when he was forced to resign with immediate effect - at a personal cost of £15m - after lying in a witness statement about a lover he met through a male escort agency. But however salacious the details, the scandal is about the least interesting aspect of his reign as the "Sun King" of BP. Far more significant was his vociferous rejection of the growing evidence that global oil production will soon go into terminal decline, with potentially devastating consequences. That position now looks equally untenable. Lord Browne may be about to lose not only his throne and his payoff, but also his rose-tinted spectacles.

No oilman likes the idea that his might be the next sunset industry, but more than any other executive, Lord Browne has made it his business to denounce this growing school of thought. In one typical speech in 2004, he proclaimed: "We have to demonstrate that there has been no shortage of oil, and that there is no shortage of oil, and that there never need be a shortage ... there is no reason why there should be any shortfall in the foreseeable future."

But a whole range of indicators now suggest that global oil production will soon hit fundamental limits: the amount discovered each year has been shrinking for four decades; for every barrel we discover annually, we now consume three; production is already falling irreversibly in 60 of the world's 98 oil-producing nations.

New countries join the slide almost yearly, and since the late 1990s these have included significant producers such as Britain, Norway, Denmark, Mexico, Argentina and Colombia. Most forecasters - even optimists such as the International Energy Agency and ExxonMobil - now predict that the entire world's production, except for Opec, will peak early in the next decade.

Once non-Opec production starts to fall, the only thing standing between us and the conventional oil peak is the cartel. But, as I report in The Last Oil Shock, there is now documentary evidence to suggest that Opec has been exaggerating the scale of its reserves for decades, meaning its 12 members may not be able to maintain output for long. The consultancy PFC Energy has briefed US Vice-President Dick Cheney that on a more realistic assessment of Opec's reserves, its production could peak by 2015. That would tip global output into terminal decline, almost certainly bringing soaring oil prices, deep recession and worse.

Given that dismal background, it is hard to see how Lord Browne could remain so confident about the future oil supply. But for many years, he had the stellar growth of BP under his stewardship as ammunition. When he took the top job at the age of 46, the company was still reeling from a financial crisis in which it had been forced to halve its dividend. Within a decade, he had transformed BP into Europe's largest publicly traded energy group. The City loved it, of course, but even BP's rampant expansion is capable of a darker interpretation than Lord Browne's own sunny outlook would suggest.

The company's growth came, in large part, through a series of massive takeovers around the turn of the century as it snapped up Amoco, Arco and Burmah Castrol in quick succession. But adding reserves and production capacity by cannibalising other groups does nothing to increase the total oil available to humanity. Once growth by acquisition is stripped out, the world's biggest oil companies were producing no more of the black stuff in 2005 than a decade earlier. And that's despite the world market having grown by 20 per cent, and the spending of billions of dollars on their upstream operations. These figures speak louder than Lord Browne's bullish words.

Even more suggestive are Lord Browne's own spectacular gambles in Russia, culminating in 2003 with the formation of TNK-BP - a deal that was all the more surprising given the debacle of his previous foray into the "Wild East" a few years earlier. In 1997 he had spent $500m buying a 10 per cent stake in Siberian oil company Sidanco - a deal signed in Tony Blair's office. He lost much of that investment when the company went bust, and some of its powerful Russian shareholders ruthlessly manipulated the local insolvency courts to their own advantage.

Asked why BP hadn't just cut a deal with its Russian tormentors, led by oligarch Mikhail Fridman, one executive reportedly said: "You don't talk to someone who's stolen your wallet." But just a few years later, Lord Browne committed $7bn to Mr Fridman and his associates to form TNK-BP. During the talks, he felt compelled to ask his new friends: "Are you going to take the money and run?". Yet still he signed the contract.

For the time being the gamble appears to be paying off, having boosted BP's oil production by around half a million barrels per day. But closer inspection of the figures shows that had Lord Browne flinched and not done the deal, the company's output would have fallen by almost as much. Given the dearth of opportunities elsewhere, it looks as if he had little choice.

But the true scale of the gamble is now becoming clear, as Russia threatens to take control of one of TNK-BP's prize assets, the important Kovykta gas field. Even some of Lord Browne's biggest fans believe that the huge risks he has taken may call into question his persistent denials that global oil production will peak any time soon. Robin West, a former US Assistant Secretary of the Interior, and founder of PFC Energy, considers Lord Browne one of the industry's brightest talents. But he adds: "I think his actions belie his words".

When the dust has settled, Lord Browne's reputation will not be determined by his sexuality, nor having lied to the court, nor even by the Texas refinery explosion that killed 15 people on his watch.

He may finally be remembered for his refusal to acknowledge the impending oil peak despite the mounting evidence from around the industry and even his own actions.

His denial matters in particular because of his influence over Tony Blair. With luck, the departure of both men will herald a more realistic attitude to the oil supply outlook and galvanise policymakers into preparing for the inevitable global peak that Total chairman Thierry Desmarest expects by 2020 - and others much sooner. If not, we may find out the hard way the true meaning of BP's slogan, Beyond Petroleum.

David Strahan is the author of The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man, published by John Murray. www.lastoilshock.com