Jeremy Warner's Outlook: Don't condemn BP's oil gusher. Polluter or not, this is a company for Britain to be proud of

Boots gets the all clear for its Alliance; Sir Martin's WPP: the Italian job
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The Independent Online

New accounting rules are apparently playing havoc with the way oil companies report their profits, yet however damaging they might be to the bottom line, they are as nothing compared to what would happen if the New Economics Foundation got its way.

By adjusting the £11bn of annual profits that BP announced yesterday to reflect what the NEF's sponsors believe to be the company's true environmental costs, this "green leaning" think tank comes up with a bottom line loss of £18bn, which would be enough to bankrupt even a company as mighty as this one.

Back in the real world, BP is in fact throwing off cash in quantities that even Lord Browne of Madingley, the chief executive, would scarcely have believed possible just a few years back - so much so that he feels confident enough to promise $50bn of dividends and share buy-backs over the next three years if the oil price averages an undemanding $41 a barrel, and even more - $65bn - if the price stays above $60.

So here are two very different views of BP. One paints BP as a polluter, the other as a vital cash cow at the heart of the British economy. According to the NEF, BP accounts for some 6 per cent of global greenhouse gas emissions from fossil fuels, or more than double the UK's total climate change effect. I've no idea how accurate the NEF's figures are - they sound exaggerated to me - yet whatever the numbers, if the greenhouse gases emitted by burning what BP extracts from the ground were charged for their environmental cost, profits would evaporate. Then again, if oil producers were charged in this way, the oil price would rise to compensate, so it's a somewhat ridiculous argument.

The second view depicts BP's customers as the customers, not BP itself, which is only responding to ever growing demand from a world that at this stage in its development seems quite unwilling to contemplate any curtailment.

This is also the view that has BP, a shining and relatively rare British example of world class corporate success, as about the only thing that stands between our financially beleaguered pension funds and outright insolvency. One pound in every six paid in dividends to UK pension funds comes from BP. The pension deficits look bad enough as it is, but without BP they would be beyond redemption.

From a moral perspective, some would see it as indefensible to be propping up our pensions by polluting the planet. Yet from where I sit, this seems a rather better use of the money than that suggested by the NEF, which proposes a massive windfall tax with the proceeds to be applied first and foremost to developing renewable sources of energy and if there's anything left after that, the monies to go to the special global fund set up to help poor countries adapt to climate change.

It is a continued curiosity of utopian thinking of this type that it hasn't yet grasped that the market provides the best possible hope of eventually achieving these ends. More money is already being thrown at renewables and energy efficient technologies than the system can possibly cope with or is ever likely to produce a return, a state of affairs that will only be accentuated by President George Bush's State of the Union commitment to end America's addiction to oil.

Through its massive dividends and share buy-backs, BP is one of the mechanisms by which money is recycled from older energy sources into newer ones. The NEF condemns this view of economic efficiency as "fossil fuelled fantasy", yet what is it really suggesting? That we surrender this massive source of wealth to others? Or that we drive it offshore to the developing regions of China and India, which are still not rich enough to afford such scruples and would quite literally kill to have a company like BP in their midst?

While Big Oil is condemned for its profits by the ignorant, it is punished by the stock market for failure to deliver in the quantities expected. The profits may look beyond the dreams of avarice to most of us, but to the stock market, which marked BP shares down nearly 3 per cent yesterday, they were not enough. This is largely down to disappointment with the performance of the downstream activities - refining and retail - which are failing to keep up with peer groups on efficiency.

Yes, indeed. There's no rest for the wicked. To keep up, Lord Browne must work even harder, but we can at least be assured that he's working for us, and not yet the Chinese, whose insatiable demand for oil is part of the reason for sky high oil price. But just in case you feel tempted to blame the Chinese for our ills, try this, heard recently from one of China's leading businessmen. "You pay more for your oil, but you pay less for your goods as a result of our development. On balance you gain more than you lose". Quite so.

Boots gets the all clear for its Alliance

So it looks as though the merger of Boots and Alliance UniChem is going to happen after all. Much to everyone's surprise - including, if the truth be known, the Boots board - the merger was cleared yesterday by the Office of Fair Trading with only minor conditions. Boots and Alliance had been planning on the basis of a long Competition Commission inquiry, meaning that the deal couldn't have been finally consummated until well into next year. That would have given private equity the opportunity to nip in with a lowball bid for Boots, which the City might even have accepted given that it has never been wholeheartedly behind the Alliance tie-up.

This is now going to be a good sight more difficult. With yesterday's decision, there's a clear road map to completion by about June this year, and though the Boots board has still got quite a bit of explaining to do, shareholders won't go with the alternative unless there's a very substantial premium involved.

As for the conditions, the disposal of 100 stores from a combined total of about 2,500 is hardly a big ask. The concern expressed by some over vertical integration between Alliance's drug wholesaling operation and the Boots retail network didn't appear to have been a consideration at all. If it was, there was no mention of it in the Office of Fair Trading press release yesterday.

The "merger" of these two companies has been quite widely depicted as essentially a reverse takeover of Boots by the wily Stefano Pessina, the driving force behind Alliance's meteoric rise.

As in all mergers, the proposed management structure is an unstable compromise, and if it lasts a year, it will surprise everyone. Mergers of equals inevitably end up as takeovers, with one of the cultures and sets of personnel emerging as dominant. It seems a bit of a comedown for what was once such a self-confident operation to submit itself to the gladiators ring in this way. Is it wise for Boots to be throwing in its lot with this hurriedly assembled drugs combine? Who knows, but in the absence of any remotely attractive alternative, it will just have to do.

Sir Martin's WPP: the Italian job

Sir Martin Sorrell, chief executive of the advertising Goliath WPP, seems to have fallen victim in his Italian operation to something of a national cliche - that there is one set of accounts for the taxman and the foreigner, but a different one kept in the bottom drawer that records the reality. Most non-natives say that doing business in Italy is a nightmare; you never know what set of rules, if any, are being applied. Yet if WPP is to be believed, what's been discovered goes way beyond even the loosest possible definition of acceptable behaviour. Both personally and professionally, the affair is proving an embarrassment for Sir Martin, but at this stage it looks as if the financial damage is relatively small. Despite the obvious temptation to sweep it all under the carpet, Sir Martin has acted with commendable urgency and openness in dealing with the problem.

In a more troubled, less well-led company, this would be a bigger crisis than it is likely to prove for WPP.