Jeremy Warner's Outlook: Box of delights for Browne's BP oil gusher

Click to follow
The Independent Online

Tricky Stuff, oil. Virtually nobody managed to predict the present strength in the oil price, which is quite at odds with what was meant to have happened after Iraqi supplies had been "liberated" from the tyranny of Saddam.

Tricky Stuff, oil. Virtually nobody managed to predict the present strength in the oil price, which is quite at odds with what was meant to have happened after Iraqi supplies had been "liberated" from the tyranny of Saddam. Views are meanwhile deeply divided on how long the present spike in prices might last and what effect it would have on the world economy if it does.

Still, there is at least one certainty amid the fog of a $50 a barrel plus oil price and that's record profits for the oil majors, duly confirmed by BP yesterday at an astonishing $3.9bn for the third quarter alone. This latest milestone puts BP on track for net profits of nearly $17bn for the year as a whole. Lord Browne of Madingley, chief executive, is careful not to boast too much, for it can only be a matter of time if the present rate of cash generation persists before the Government faces calls for a windfall profits tax.

So what's his prognosis for the oil price and what's going to happen to the embarrassment of riches now being heaped upon his company? Lord Browne admits that the industry has been badly wrongfooted by the strength of demand this past year. Throughout the 1990s and the early 2000s, growth in consumption of oil was about half that of world economic growth. Most analysts assumed this pattern would persist. Yet fuelled by exceptional demand from China, growth in demand this year has been almost as fast as the economy as a whole - and this has been a near record year for world economic growth.

The effect has been to upset the balance of supply and demand. Opec and non-Opec production combined has risen strongly in recent years, and remains just about capable of meeting even today's exceptionally strong demand. But the margin of spare oil production capacity has shrunk to an historic low. Heightened security fears have created a field day for speculators, for it plainly wouldn't require much in the form of interrupted production for there to be an overall shortfall.

Heavy Opec and non-Opec investment means production is growing strongly again. Provided demand growth returns to its long-run average, global spare capacity should gradually return to normality too, allowing oil prices to settle at more acceptable levels. But if demand continues to grow at this year's pace, then all bets are off.

BP's response to all this is on one view a commendably disciplined one. Many companies faced with such a strong price for their basic product would let rip on investment in an attempt further to exploit it. BP is resisting the temptation. Capital spending this year and next at $14bn per annum is likely to be a little higher than planned, but only because strong demand has pushed up the capital costs of exploration and production. What's more, Lord Browne is leaving his benchmark for capital investment unchanged at a demanding $20 a barrel. What that means is that to qualify for Lord Browne's signature, the investment must wash its face even with the price of Brent oil as low as $20.

The result is oodles of surplus capital for return to shareholders. Has Lord Browne got the balance right, or is he missing out on the opportunity of a life time in giving so much back to investors when he could have been investing the windfall in his business? BP has been better than many of its peers - most notably Shell - at investing in its future, but if demand for oil continues to accelerate, then the Browne strategy will be open to question.

Dream team

Just coincidence, or something more auspicious? The fact that both Archie Norman and Allan Leighton, the partnership that turned around Asda, have at the same time announced plans sharply to reduce their commitments for next year has set tongues wagging in the City, and it is indeed hard to resist the view that something must be afoot.

Mr Norman's decision to quit business for politics was always an odd one. He was a big loss to business but frankly never a very impressive addition to politics and, as a Tory, he was always likely to face a long wait in getting a seat at the Cabinet table. Disillusioned and bored, he's now given up waiting entirely and announced his decision to quit his Westminster seat at the next election.

It can surely be no coincidence that Mr Leighton has decided to give up three of his much flaunted portfolio of jobs - lastminute.com, Dyson, and Cannons - at the same time. Whether the something they are planning is Sainsbury's is another matter. Every man and his dog have passed the slide rule over Sainsbury's this past year and if the two haven't talked long and hard about the possibility of bidding, they don't deserve their hard won reputations. Certainly Mr Leighton would have discussed it with Philip Green, whom he serves as chairman of Bhs.

Yet there are a number of obvious problems with Sainsbury's, the most obvious of which is the Sainsbury family with 36 per cent of the equity. It is still unclear whether they are sellers, and even if all or part of the family were sellers, their view of what the company is worth is likely to be a good deal higher than that of any private equity bidder.

Also counting against the dream team is that both Mr Norman and Mr Leighton are far too grand to want again to grubby their hands with the hard graft, long hours and attention to detail of a supermarkets turnaround. They can't both be chairman, but nor would either of them want to be the chief executive. Still, they are plainly intent on doing something together, and if they don't do it, someone else very probably will. The bold would go for it now. The more cautious will wait to see what Christmas brings.

United revisited

I spent much of yesterday morning responding to angry e-mails concerning my Outlook item on Manchester United, which argued that directors had breached their fiduciary duties by turning down the Glazer bid on the grounds that there was too much debt leverage involved. If I've failed to reply to all of them it is only because there is only so much abuse you can take in a single day.

In the process I've been introduced to a new word in the English language - ABU, as in "you abu southern prat". I'm told that the word stands for Anyone But United - ie you are so much against us that you'd like anyone to win but United. As an acronym, it seems to take on a meaning far more derogatory and threatening. Perhaps it should qualify for the Oxford English Dictionary.

I've no intention, as suggested by several correspondents, of doing a Boris Johnson and coming up to Manchester to apologise. For starters I wouldn't command the police protection afforded to the great Boris and, given the tone of some of the e-mails, would therefore fear for my life. And anyway, I doubt I've offended the whole of Manchester by being rude about United.

However, I'm willing to concede that I did perhaps go a step too far in suggesting that the death of Manchester United might actually be quite good news for English football. This is, of course, a ludicrous assertion which only the supporter of a rival club, such as Arsenal, could entertain. The idea that the game might benefit from being a more equal contest, rather than permanently dominated by a few super clubs, is an ignoble thought not worthy of a serious newspaper. So I apologise unreservedly for suggesting that a less predictable result might lead to a more engaging contest and look forward to the day when United has so utterly vanquished its rivals that there is no one left to play.

It is equally absurd to suggest that the shareholders should determine the company's fate on grounds of return on investment, owners of the business though they may be, when we all know that the first loyalty of a football club director has to be to the fans and players, not forgetting the preservation of the directors' box and attendant corporate entertainment perks. How naive of me to think otherwise.

jeremy.warner@independent.co.uk

Comments