Outlook: Chinese burn for BP's unstoppable oil gusher

WE'VE HAD Shell, we've had Exxon Mobil; yesterday it was BP's turn to step up to the podium and although the size of its profits put the company firmly in bronze medal position, it was a performance worthy of the gold. Some $13.7bn was returned to shareholders in dividends and buy- backs last year, with a further $23bn promised for the next two. Since this is predicated on an average oil price of "only" $30 a barrel, there's a strong likelihood of a great deal more. At last year's rate of capital return, it would take only 16 years for BP to pay back its entire stock market capitalisation.

From where we stand now, there appear few clouds on BP's horizon, unless it be a windfall profits tax or a series of climate change initiatives that would both curtail fuel consumption and limit the search for new sources of supply. Neither seems particularly likely the way things are, and since the best hope the planet has got of putting the lid on consumption is for the oil price to rise higher still, even global warming seems to play straight into BP's pocket.

Despite an oil price which is way above its long-run average, BP's Lord Browne of Madingley remains wedded and glued to his $20 a barrel benchmark for all new development. So far this, in my view overly vigorous, discipline doesn't seem seriously to have damaged BP's ability to find and buy enough oil to replace the reserves it is using up. The truth is that BP doesn't as yet need to raise its benchmark, which means the higher the oil price goes, the more money there is to return to shareholders.

BP's reserve replacement ratio last year was 106 per cent, which compares to just 40-45 per cent for Shell. Even on the Securities & Exchange Commission's more exacting measure, the ratio is still a relatively healthy 89 per cent, against Shell's 30-40 per cent. Annual production is meanwhile expected to rise by more than 5 per cent over the next three years.

In the circumstances, the biggest mystery is why BP's share price isn't a good deal perkier than it is. One explanation is the technical reweighting going on within the FTSE 100, which is causing passive investors to switch out of BP into Shell, even though there can be little doubt which looks the better investment. Another is that nobody can yet quite believe the high oil price is here to stay. Investors, and indeed CEOs with their still stringent disciplines on new development, have been burnt too often before to think the cycle has been abolished for good.

Still, one sign that it might have been lies in a throwaway remark by Lord Browne at his namesake's Advanced Enterprise conference in London last week. Lord Browne is still three years away from retirement, but he already looks forward to the day when BP is run by someone of Chinese or Indian nationality. These are the world's two fastest growing areas of oil consumption. If the present rate of development persists, it is hard to see how production can anywhere near keep pace with demand.

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