Jeremy Warner's Outlook: As the cash gusher splutters, BP is forced to pay the price for past under-investment

FSA ups charges for City oversight; Capitalising on Metronet disaster
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The Independent Online

BP's corporate mantra used to be "more for less". To judge by the latest cuts in production forecasts, the motto has now been changed to "less for more". Shell similarly announced a cut in production forecasts last week, so the stock market had been prepared for bad news. Yet the scale of the cutbacks at BP is much bigger. Even taking account of divestments and the damage done by the higher oil price to production from revenue sharing arrangements, the underlying fall is still 10 per cent.

Blame for this can be roughly equally apportioned between lack of capacity in the offshore equipment industry and the new safety-first regime BP has been forced to put in place post the Texas City oil refinery blast. The whole industry has been operating at full tilt for some years now, putting severe constraints on its ability safely to meet ambitious expansion plans.

This has already led to substantial inflation in the costs of exploration and development. Across the board, BP's costs rose by 14 per cent last year. The market rate for an offshore rig increased by a jaw-dropping 44 per cent. In these circumstances, it is no wonder that the industry has failed to keep pace. Yet the situation at BP seems to have been exacerbated by its series of problems - oil spills, safety concerns and trouble with anti-trust regulators. "More for less" is no longer an acceptable modus operandi. Higher standards inevitably carry a cost.

The cutbacks mean that production will roughly flat-line for the next two years, against the original plan to grow at the rate of 4 per cent per annum. Like Shell, BP is also being forced to invest more to achieve those lower production forecasts than it originally thought it would need to spend to meet the higher ones.

"Less for more" already seems to be hardwired into the corporate ethos. The need to invest more to increase output is bound to compromise cash flow, which in turn means less money for buy-backs and dividends. The cash gusher of recent years is turning into an altogether less reliable source of profit, despite what now seems to be a sustainably higher oil price.

As regular readers of this column will know, I've long been concerned about apparent under-investment by the oil industry in its future. Rather than take advantage of the higher oil price significantly to increase future capacity, the industry seems almost deliberately to have taken the view that its interests would best be served by squeezing it. Instead, the money has been handed back to shareholders in one of the biggest corporate cash bonanzas of the modern age. That misjudgement is now coming home to roost, with the industry expensively forced to play catch-up.

Referring to his 12 years at the helm, Lord Browne of Madingley, the chief executive, candidly admits that "some report cards have been better than others". It's a shame that such a glittering career should be ending on a low note, but such are the vicissitudes of corporate life.

In any case, he's not going quite yet. There will be two more results presentations to preside over before the final curtain, and, by getting all the bad news out of the way now, Lord Browne ensures that by the time he takes his bow, things should at least be moving forward again.

FSA ups charges for City oversight

What a shocker. The Financial Services Authority is putting up its charges by an inflation-busting 10 per cent. The Chancellor has again been berating us to keep our wage demands low, but of one thing we can be sure - the costs of tax and regulation will keep on rising come what may.

Not that the City cannot afford it. After last year's bonanza in the capital markets, these extra charges are, for the big boys at least, just a drop in the ocean. Good regulation costs money, and as the financial markets grow ever bigger and more complicated, the costs of oversight are bound to rise.

But does the FSA really need to be spending an extra £7.4m a year on so-called "financial capability", or educating the financially illiterate public on the pitfalls and opportunities of the investment landscape? Strangely enough, the answer to this question is probably yes.

In any case, it has been given a guarded welcome by those who will foot the bill on the grounds that a more financially aware consumer may in time help to cut back on the perceived need for the current panoply of point-of -sales regulation, most of it designed to stop the investor buying something inappropriate. If the consumer is eventually taught to recognise these things for himself, then everyone's a winner.

A rather more difficult question is whether the FSA is actually any good at the business of financial education, or, even supposing that it is, whether anyone takes any notice. No one doubts the need for it; whether the FSA's millions are money well spent is another matter.

Then there are the costs of implementing the European Union's Mifid, a new IT outsourcing contract, which requires heavy upfront spending, and the expense of deploying the FSA's new "principles-based" regime. All of these things should in theory eventually lead to lower regulatory costs. So can we expect a corresponding cut in charges when these supposed benefits eventually feed through to the bottom line? Don't hold your breath.

Capitalising on Metronet disaster

The London Mayor's decision to seek an "Extraordinary Review" by the PPP arbiter of cost overruns incurred by Metronet in modernising the London Underground looks more like politicking than problem solving.

Ken Livingstone's opposition to the PPP on the Tube seemed to be largely vindicated by a damning report on Metronet published by the arbiter, Chris Bolt, last November. In it, Mr Bolt said the Metronet consortium was already heading for a £750m overrun for the first seven-and-a-half-year contract period. He also seemed to suggest that much of this overrun was down to Metronet's own incompetence, rather than changes in specification or unanticipated problems.

First set to Ken. Yet there is at this stage no necessity to go through an Extraordinary Review, which would both take a very long time and would be exceptionally costly. Metronet has already asked for guidance from the arbiter on what proportion of the overrun should be put down to its own inefficiency, and how much should fall to London Underground to fund. It has also indicated its willingness to abide by this adjudication.

The London Mayor therefore seems to be jumping the gun by calling for an immediate Extraordinary Review, where there would be a legally binding outcome. Mr Livingstone faces re-election next year. Is the purpose of demanding a lengthy review to push the issue of who is liable for what into the long grass until after the election? Surely not.

It is hard to imagine that London Underground won't be left with at least some of the liability after the arbiter issues his guidance. The London Mayor has been insistent that Metronet's failings are not to be paid for from the fare box. But if not fare payers, then who? His position on the PPP is similar to that on already looming cost overruns for the London Olympics. It will be the Government that has to pay, he insists, but what if it won't? In both cases, it is not exactly a vote winner to be telling Londoners that it is they who after all will have to foot the bill.

Since taking up the contract, Metronet has had a number of high-profile disasters for which the consortium has rightly been castigated. Yet would the public sector have done any better? Personally I doubt it. All big infrastructure projects end up costing far more than anticipated. Bizarrely, the sponsors never seem to think to follow the policy householders invariably adopt when embarking on any structural work to their properties - take the quote and then figure on 50 per cent more as the final bill.

Yet if there is a vote to be won by rubbing the contractors' nose in it, not to mention the Government which forced the PPP on the Tube in the first place, then why not?

j.warner@independent.co.uk

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