BP CEO discusses challenges of BTC

Nov 03, 2004 01:00 AM

by Christina Tashkevich

With the BTC pipeline nearing completion, a group of Georgian journalists including our reporter spent in the UK to see how BP, which leads the BTC consortium, operates in its home country. They met with BP CEO Lord John Browne to discuss the pipeline, the recent surge in the price of oil, and Browne's impressions of Tbilisi from his various visits.
Lord Browne states that the 1 mm bpd of oil which the Baku-Tbilisi-Ceyhan pipeline will carry when finished "will be crucial for the maintenance of global energy security." He also points to the "environmental benefits" of the pipeline, saying that it will displace "some 400 tankers a year which would otherwise sail through the Bosporus."

Before such benefits can be realized, however, there are still many challenges to be overcome. The BP CEO says the main challenge has not been so much related to construction or complex and difficult terrain.
"Finishing the project on time and on budget has required the project leaders to develop all the skills of statecraft," Lord Browne said in a recent speech. However, Browne positively evaluated the company's relations with the new government of Georgia, saying his company is building "realistic and good" relations with the new government.

Browne says that BP is constantly working with the government on the security of the pipeline and these measures are "already in place." He adds that the company continues to have consultations with the government on its oil spill response plan.
"This spill will not happen. But you must have a plan," Lord Browne told the Georgian journalists.
Asked how BP can help the governments of the three countries to manage revenues from the BTC pipeline, Lord Browne told that "the company will help governments to demonstrate how they use these revenues."

The BP CEO believes there are a few sectors which could be prioritised when the government allocates the resources. He singles out the education sector, the creation of an "environment where people can create their own businesses," and social projects such as the restoration of hospitals.
Lord Browne also shared his impressions of his several visits to Georgia. He recalled his first visit to Tbilisi a few years ago when the country was hit by the energy crisis.
"Tbilisi looked like a person who was tired," he said, adding, though, that he was always surprised by the Georgian people's generosity, especially given Georgia's problems. However, a more recent visit brought very different impressions. "Now Tbilisi has become younger, fresher and brighter," Lord Browne thinks.

While the group of Georgian journalists were in the UK, two issues involving BP were headline news -- BP's third quarter profits, and the recent surge in the price of oil. Lord Browne addressed journalists from the UK on both these issues.
BP announced what Browne described as "very strong" results for the third quarter, with operating profits up to $ 3.9 bn, an increase of 43 % over the same period last year.The dividends of the company paid in US dollars are up 9 % from last year and the company's cash flow equalled $ 6.1 bn, which was used for capital expenditure, dividends and stock buybacks of $ 2.25 bn involving 241 mm shares.

One issue Lord Browne had to address as well was the recent increase in the oil price.
"The recent surge in the price of oil above $ 50 a barrel raised many questions about future prospects and whether or not there has been some fundamental change in the oil market," said Lord Browne.
According to him, this year has been "an exceptional year" for the price of oil. Lord Browne recalls that in the late 90s and early 2000s oil consumption growth was only half that of world economic growth.
"This year is an exception, and oil consumption is expected to grow almost as fast as the economy as a whole -- by around 3.4 % compared with 4 % GDP growth," he explains.

Lord Browne thinks that the most important factor behind this is the demand for energy-intensive products in Chinain particular.
"Oil production has responded to this demand, and despite disruptions in one location or another, supplies have been maintained. Production grew by 2.7 mm bpd in 2003 and is expected to grow by 3.4 mm bpd in 2004 -- which will be the fourth largest annual rise in history," Lord Browne said.
OPEC production of oil is "close to an all-time high," and Lord Browne notes that "non-OPEC oil production continues to expand as well."
"Between 2000 and 2003, non-OPEC daily production increased by around 1 mm barrels each year and this outpaced the growth in demand by around 100,000 bpd each year."

Lord Browne says then, that the surge in oil price has been despite this large rise in oil supply.
"To some degree this is because the rapid recent rise in demand has eaten into global spare oil production capacity, now estimated to be 1 mm bpd, compared with an average over the last decade of 3 mm bpd," he explains. As spare capacity has reduced, "prices have responded to demand in a more sensitive way." Lord Browne thinks that the prices are likely to stay above $ 30 a barrel in the medium term as demand for crude oil continues to grow.

Lord Browne estimates that capital expenditure of the BP group will be above $ 14 bn in 2004 and could be around $ 14 bn in 2005.
"That is higher than we previously estimated," he said. He mentions some new projects of the company in the sector. For example, BP and the Russian Rosneft have made a significant discovery at Sakhalin, "This opens up further exploration promise in this area."
Despite these new projects, UK newspapers noted that BP investment had increased at only a fraction of the rate that its profits have risen, and this provoked some criticism.
Jeremy Warner of The Independent wrote, "Many companies faced with such a strong price for their basic product would let rip on investment in an attempt to exploit it. BP is resisting the temptation." He warned that "if demand for oil continues to accelerate, then the Browne strategy will be open to criticism."

The Sun, however, defended Browne in an implicit attack on the British government's tax regime.
"Never forget that 75 % of the cost for a tank of petrol goes to the government. And the more profit BP makes, the more tax it pays," the paper suggested.
Lord Browne, however, is optimistic regarding BP's performance over the rest of the year.
"It has been a good quarter leading to strong distributions to shareholders and with prospects of more good performance for the rest of this year," Lord Browne said. He also adds plans for 2005 are in line with the company's strategy.

Source: The Messenger
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