t's one of the great business stories of the 1990s. In 1992, it was a debt-ridden company that shed its chief executive and was forced to pass its dividend. Now it is Britain's largest company and one of the world's great oil producers.
Last Thursday, Sir John Browne, chairman of BP Amoco, underlined the transformation of his company's fortunes when he proposed the pounds 15bn acquisition of Arco, the Los Angeles-based oil group.
BP Amoco is now set to become the world's second largest oil company after Exxon-Mobil. It is more than twice the size of Chevron or Texaco and its market value at some $190bn (pounds 120bn) represents over 10 per cent of the UK's top 100 quoted companies. It is a behemoth among giants.
The spectacular success of BP derives from the lessons learnt during the early 1990s when the Gulf War undermined its expansive strategy. Robert (now Sir Robert) Horton departed, while Sir David Simon (now Lord Simon of Highgate) and Sir John Browne effected fire sales of food and mining interests while cutting costs, reducing bureaucracy and investing more efficiently.
"We set up this company to be sound at $10 or $11 a barrel," Sir John said on Thursday.
One of the greatest tributes to Sir John and his team was the call made in January by Mike Bowlin, chairman of Arco, offering to sell. BP had formally completed its mega-merger with Amoco in December. It was a clear admission of defeat from a company with prime assets making a valiant effort to cope with low oil prices.
Last year, Arco sold its coal and chemicals businesses, acquired Union Texas Petroleum for $2.5bn to strengthen its North Sea and Indonesian interests, restructured its exploration and production portfolio and wrote down $1.4bn in assets. Cost savings of $500m were announced. These steps turned Arco into "a focused, well-run operation", as Norman Rosenberg, an oil industry analyst with Standard & Poors in New York, remarked. This did not, however, lift the Arco share price. In January, crude prices were around $11 a barrel and the future looked very bleak. The Arco annual report, issued in February, stated: "Prices below $14 are not sustainable."
Defeat came, ultimately, at the hands of the stock market. Despite the depressed price of crude, BP shares had risen 40 per cent since the merger with Amoco was announced in August. By contrast, Arco's stock languished. The strength of BP Amoco stock expresses investors' confidence in management's ability to squeeze costs and create value even in adverse conditions. It will now allow the Arco board to exit on attractive terms, selling out at an all-time high.
To BP Amoco, this surely seems a price worth paying. Arco provides a string of assets that it once could only dream of owning. In the Far East, Arco brings a 40 per cent stake in the huge Tangguh gas field in Indonesia. Gas, a less environmentally-damaging fuel than petrol, was a traditional weakness of BP. Demand for gas is growing twice as fast as for petrol. Tangguh makes BP Amoco a world-class gas supplier. With signs of economic recovery in the region, a liquified gas project is likely within a decade. Sir John calls Tangguh a "crown jewel".
On the east coast of America, Arco is market leader in petrol retailing and owner of two world-class refineries. Its AM-PM service stations are considered the best in the industry. With no east coast presence, BP Amoco is the only oil major that could buy Arco without encountering anti- trust problems. So a counter-bid is unlikely.
But Alaska is the crux of the Arco deal. Arco has the bulk of its reserves in Alaska. It and BP Amoco operate jointly the legendary 13 billion-barrel Prudhoe bay field. While BP Amoco produces more, Arco's acreage is thought to have the better potential. Its 360 million-barrel Alpine field is due on stream within two years.
The bulk of the $1bn cost savings predicted by Sir John will be achieved here. But he is careful to stress that cost savings cannot be the sole rationale. The aim must be to turn Alaska from a declining into a growing asset but the job losses could be larger than the 2,000 redundancies Sir John has predicted.
Fadel Gheit, an oil analyst with Fahnestock, said: "All of the departments of the company are mirrored by the other company."
Acquiring Arco while merging with Amoco raises vast management issues. In fact, BP has not combined cultures with Amoco but imposed its own. The same will happen with Arco. Byron Grote, who headed the acquisition team and will effectively lead Arco during the coming months, said: "It is not a question of new systems or new structures but of slotting their systems into ours. We will know more when we get inside the company."
BP's assimilation of Amoco - once proclaimed "a merger of equals" - has surprised even Americans. Some 10,000 jobs have gone since last August. In January, BP Amoco shed 600 jobs in Alaska, cutting one-third of its staff. In Houston, Texas, 1,500 jobs were shed.
The Amoco experience of the merger with BP has produced such quips as: "What do you call the new chief executive? Sir John. Our old chief executive? Sur-render. The management in Chicago? Sur-plus."
One striking difference between the cultures of BP and Amoco is the more open and flexible methods adopted by BP. To create a more entrepreneurial attitude, the company treats its assets as individual businesses; managers' pay reflects the profits of their business. Competition, co-operation and criticism are encouraged.
Amoco's system was more rigid, authoritarian - and less questioning. One executive complained after the merger that people would now enter his office without an appointment. When Bryan Sanderson, head of BP Amoco's chemicals business, visited a former Amoco plant in Atlanta, Georgia, he was taken aback by the absence of questions from his audience. Finally, he started asking them himself. He said: "My questions got really tough toward the end. It is too bad I was the one asking them."
The oil industry is a harsh, masculine business - Sir John is a notorious workaholic and stories abound of phone calls made early in the morning to colleagues - and this is clearly reflected in BP Amoco's head office. There are no female executive directors. But there is great loyalty to the company. All executive directors have over a quarter of a century's service. Sir John, though still 50, has worked for 32 years for the firm; his studies at Cambridge were financed by the company.
Such loyalty is called into question when jobs are being lost. However, Sir John insists internal surveys indicate that 80 per cent of staff still support the merger with Amoco and 75 per cent think that its implementation has been legitimate and fair. Some analysts think that Arco will offer the opportunity to lose up to 10,000 more jobs: an unhappy prospect.
Ultimately, Sir John and his team are responding to economic reality. At $20 a barrel, everyone is happy. Below $13, the industry is in crisis and the North Sea is unprofitable.
Steve Turner, analyst at HSBC, said: "This is not a growth industry. When oil prices decline, margins are squeezed and the inevitable response is to cut costs."
Much now depends on the oil price. Last week, Brent Crude closed at $14.17.
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