Jeremy Warner's Outlook: BP's Prudhoe Bay debacle highlights a wider problem of underinvestment in oil supply

A Logical deal, or just empire building? M&S: benefits of ethical marketing
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The Independent Online

Matthew Simmons is a Houston-based energy consultant known for his alarmist predictions about the state of the oil market. His most famous is that Saudi Arabia, the world's largest single source of oil supply, has grossly overestimated the size of its remaining reserves, with the result that production rates will soon be declining precipitously, sending the oil price through the roof. Believe it if you will.

Mr Simmons' latest prediction is that the problem of corroding pipelines apparent in Prudhoe Bay, BP's 30-year-old Alaskan field, is endemic throughout an industry which faces a crushing bill for years of underinvestment and neglect in oil transport infrastructure and refining.

I've no idea about the Saudi prediction; only time will prove its veracity or otherwise, though for what it is worth, the notion is much ridiculed by mainstream opinion. On oil infrastructure, however, he may be more on the button. A growing number of analysts and oil industry insiders say industry infrastructure is hopelessly inadequate to the demands likely to be put on it.

The Alaskan pipeline debacle highlights what may be a much wider problem of under investment, deliberately pursued by an industry keen to keep the oil price high and counter past criticism of lack of financial discipline.

Few industries have conformed as much to the pattern of boom and bust in the business cycle as oil. Heavy demand for energy as the economy reaches its zenith causes the oil price, much as it is at the moment, to spiral upwards, encouraging oil producers to invest heavily in new sources of supply and supporting transport infrastructure just as demand begins to taper off. The consequent overhang causes the price to remain low for far longer than it would otherwise have done. Practictioners are subjected to deep and prolonged recession.

Determined to break free of this pattern, oil producers have this time around been much more parsimonious in their investment strategies. In so doing, they may have gone too far. BP now stands accused of two parallel disasters in America which have shattered its reputation as an efficient operator of oil assets. Prudhoe Bay is one. The explosion two years ago at the company's Texas oil refinery is the other. Lord Browne of Madingley, the chief executive, could face criminal charges on both counts on grounds of neglect. The eventual bill for crumbling infrastructure and sloppy operational management could be enormous.

The irony is that if Mr Simmons is right, and the problem of poorly managed, ageing infrastructure highlighted by Prudhoe Bay is industry wide, then the oil price can be expected to rise even higher as the world struggles to deal with persistent interruptions in supply. The main penalty of years of underinvestment will as a consequence fall not on the oil producers, but on consumers.

A Logical deal, or just empire building?

LogicaCMG is one of those companies which promises much but in recent years at least has struggled to deliver. The shares have been stuck in the doldrums for years now, and though much of the blame for this can be attributed to the dot.com boom, which drove the valuation of this British IT services company to absurdly high levels, investors have understandably become more than a little irritated by the lack of progress.

For the second time in less than a year, the chief executive, Martin Read, now risks angering them further by announcing proposals to issue a shed load of new paper to fund an acquisition. Is this just expensive empire building, or is there logic in the renewed spending spree? Mr Read is said to be frequently abrasive, short tempered and outright rude in his dealings with the City, though personally I've always found him charm itself.

There is as a consequence no shortage of those prepared to accuse him of pursuing size for the sake of it. Mr Read's unashamedly stated ambition to make Logica into one of the top 10 IT companies in the world by the time he retires is in itself good reason to set alarm bells ringing. There are very few cost synergies in this latest acquisition, WM-data of Sweden. The long-term rationale rests rather on the idea that Logica can deliver significant revenue benefits by accelerating WM's slow level of growth through offering more services at lower cost in the Nordic region.

As Ovum, the industry analysts, point out, deals built around the promise of revenue as opposed to cost synergies generally fail. Even so, the reaction of the share price yesterday - down 7.5 per cent - strikes me as harsh. Part of the problem Mr Read has got in getting the City to back him is that of disabusing investors of what are still some very exaggerated expectations for the IT services sector.

After the hectic growth of the 1980s and 1990s, the unpalatable truth is that IT is now a relatively mature industry, which as a proportion of GDP may already largely have reached its limits. In any case, growth failed to return to former levels after the last downturn. That's only partly down to the extraordinary level of overspend in the run up to the millennium. In the absence of some new technological breakthrough, the industry may in future struggle to show growth of much more than the economy as a whole. Hence the debate about whether Microsoft is now a largely ex-growth company which should both be returning all its surplus cash to investors and be valued like a utility stock

In such circumstances, those players silly enough to stay in the middle of the road are likely to get squished. As a middle-sized IT services provider in a fast consolidating industry, LogicaCMG either has to buy or be bought. Many investors would much prefer the latter, though with the shares so depressed, the price as things stand would be a miserable one.

Mr Read's other ambition for LogicaCMG is to return the company to the ranks of the FTSE100. Depending on how the shares perform in the weeks and months ahead, this latest transaction should put him within spitting distance again. It will also make him into the seventh largest IT service provider in Europe - a national champion of sorts. National champions and shareholder value are never easy bedfellows, but it would be nice to think that Britain could boast at least one company of size in an industry where it was once the dominant player in Europe.

Mr Read has constantly disappointed expectations, at least in recent years, but he's actually met most of the synergy benefits he has promised in his efforts to transform Logica from a mid-sized also ran into a leading player. The City's frustration is understandable, yet in the absence of some blockbuster bid for their company from one of the giants of the industry, investors have little option but to back him.

M&S: benefits of ethical marketing

Corporate social and environmental responsibility may be good for the conscience, but is it also good for business? One thing is certain; it invariably carries a cost, and if you believe that ultimately consumers will always buy on price, then other things being equal, it would seem almost bound by definition to be damaging to the bottom line.

One retailer which has been busily disproving this notion is Marks & Spencer, whose "look behind the label" marketing campaign is described in a research note published yesterday by Citigroup as one of the most successful ever. The decision to trumpet ethical milestones has had a bigger positive impact on the M&S brand than any previous marketing campaign, the investment bankers claim.

Of course, M&S attracts a particular type of consumer which may not be as price conscious as the majority. What's true for M&S may not be so for others. Even so, attempts by Tesco, Sainsbury and Asda to climb aboard the ethical bandwagon suggest powerfully that the ethical marketing card is here to stay. Those that ignore it do so at their peril.

j.warner@independent.co.uk

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