No obituaries yet, says BP Amoco chief

David Knott
London
[email protected]

In his first major public speech as Chief Executive Officer of new supermajor BP Amoco plc, John Browne pointed out the dark clouds currently passing over the industry, but also a faint silver lining.

"Because restructuring usually involves the elimination of duplication and downsizing," Browne told the Institute of Petroleum in London on Feb. 16, "it can easily create the impression that the industry is in decline. That's an illusion, but it is a perception that is dangerously widespread.

"We can't rely on other people to set prices at a level that gives us protection from real competition. We can't rely on the public or politicians being passive in the face of environmental concern.

"And we can't rely on size-either to deliver performance or shield us from scrutiny by investors. But to say all that doesn't mean that anyone should start writing our obituary."

Common agenda

Browne said that companies need to go back to basics to survive in this hostile environment, and that a common agenda runs across the industry.

Companies will inevitably focus on activities that give them a distinct competitive edge, and while each will make different choices, there will be some common features.

"Upstream," said Browne, "I think the logic at these prices is for a focus on margins rather than volumes. Downstream, the logic is for growth only where that growth matches the expansion of the market.

"In the short term, no doubt we'll see a reduction in total capital expenditure and an increasing focus of the remaining funds on a narrower range of projects. That is the short-term response, but there's a longer term issue as well.

"The issue is capital productivity. It is clear that investors will examine the way in which this industry performs against other sectors and, in particular, the way in which we use capital."

Discipline

Sustaining the confidence of investors will be achieved by maintaining financial discipline, said Browne and by providing steady dividends despite the industry's cycles.

"Volatility in this area in particular would suggest that the industry doesn't have control over its own destiny and that returns are simply a function of oil price movements. That isn't true, but now we have to demonstrate that it isn't true."

Browne advocates reducing bureaucracy, with inevitable albeit painful job losses, coupled with trusting the skills and judgment of remaining staff so that they make more of a difference to the business.

"If we can deliver performance," said Browne, "there is every reason to be optimistic, because the products that this industry supplies are in greater and greater demand."

In terms of real basics there is hope, too: "In the last 50 years, world population has grown by 3.5 billion. In the next decade it will grow by another billion, to almost 7 billion. That means there are 250,000 additional consumers of energy every day."