By Bhushan Bahree

23-05-04

Roger Skinner's job is to execute the oil industry's new strategy for where to strike it rich: at the negotiating table. Since 1998, the head of BP's in-house mergers-and-acquisition team has brokered at least $ 125 bn of acquisitions for the British oil giant, including a string of trophy takeovers. Inside the company, his serial sales of BP units make equally big waves: about $ 32 bn of assets shed in the past six years.

When the 59-year-old visited BP's Spanish operation last year, he says, his presence sparked rumours that the unit was being sold. The head of BP's Spanish operations banned him from the premises. (The unit wasn't for sale.) Skinner says he once spent Christmas Eve scrutinizing BP's holdings to find things to sell -- "just for fun."

Skinner's milieu is a world away from Big Oil's storied realm of rigs, pipelines and refineries. But as BP's lead deal maker, Skinner is at the forefront of a drive that is redefining the energy industry: a relentless shuffling of oil fields and other assets. Increasingly, the world's major oil companies operate like investment banks.

Through most of the 20th century, the major petroleum companies focused on exploring for oil and natural gas. But the age of "elephant" strikes is over. There has been just one great find in the past 30 years: the 1999 discovery of Kashagan, a field off Kazakhstan in the Caspian Sea. Today, the oil fields in the Western oil majors' traditional strongholds -- Alaska, the North Sea, and Texas -- are in decline. Most of the world's untapped reserves are in the hands of state-owned oil companies in the Middle East.

The relative dry spell has left the majors -- ExxonMobil, BP, Shell, France's Total and ChevronTexaco -- under intense pressure to replace the reserves they use up, and to increase their profits. Even though they still hunt for new oil, their focus has shifted to "high-grading": selling tired fields or entire operations and replacing them with riskier but more-profitable ventures.

This emphasis on shifting around existing pools of oil and gas poses a problem: It does little or nothing to increase the world's overall petroleum stockpile. With US oil prices hitting a record high of $ 41.55 a barrel on the New York Mercantile Exchange amid war worries and soaring demand, concerns are mounting about the industry's ability to ensure supply keeps up with consumption.

The world isn't about to run out of oil. But oil consumption is outpacing the industry's discovery of new reserves. At current rates of production, there were 40.6 years of consumption covered by proven oil reserves in the ground in 2002, the most recent year tracked, according to the BP Statistical Review, an industry-data bible. That was down from 44.7 years in 1989.

The trend has put oil companies under mounting pressure to show robust reserves. Shell, which long struggled to boost profits and energy holdings enough to keep up with BP and Exxon, announced early this year that it would slash by 22 % its reserve tally -- the amount of oil and gas it expects to exploit commercially. The admission triggered the ouster of the top two executives and investigations by US and European authorities.

BP also trimmed its reserves tally, by 2.5 % in March. But it said its total reserves still rose last year. The company increased its reserves through high-grading and new discoveries more than enough to outweigh the revaluation.

All the major oil companies have deal teams, but none is as active as BP's. During Skinner's tenure atop the deal unit, BP has binged on major acquisitions, including Amoco in 1998 and Atlantic Richfield in 2000. Last year, it spent $ 8 bn to buy a 50 % stake in Russia's TNK International. That gave BP large oil reserves and production in Russia just before the Russian government jailed oil tycoon Mikhail Khodorkovsky in October, slamming the door, at least for now, on equity investments there by BP's main competitors.

These acquisitions already have pushed BP ahead of Shell as the world's second-biggest oil company in terms of market value, and near parity with Shell in oil and gas output. Now BP has its sights on No. 1: ExxonMobil.

ExxonMobil still is pumping more oil and gas than BP: 4.5 mm bpd for the US company, compared with 4 mm for its British rival. Tom Cirigliano, an ExxonMobil spokesman, says the best measure of oil-industry performance is return on capital employed. Although the companies use different methods of calculating the figures, both agree that ExxonMobil has consistently led. ExxonMobil also still leads on what may be the most telling performance gauge, cash generated from operations. Last year, it generated $ 27.4 bn, compared with $ 19.2 bn for BP.

Just as important to BP as bulking up with strong acquisitions is shedding what it regards as fat. Last year, the company sold $ 6 bn of assets -- more than Shell's $ 4 bn and ExxonMobil's $ 1.5 bn, according to Deutsche Bank. Among the items BP dumped: the fabled Forties field, a North Sea hoard of oil that kept the company afloat in the 1980s after BP lost mammoth fields in Iran and Nigeria to nationalizations.

Forties was showing its age. Its output had fallen to some 50,000 bpd, just one-tenth of its peak in the 1980s. Worse, to produce and transport oil from Forties, BP was spending $ 5.80 a barrel, more than double the $ 2.40 a barrel at newer fields. So BP decided to cash out and deploy the capital elsewhere, selling Forties and some fields in the Gulf of Mexico to Apache of Houston for $ 1.3 bn.

"It's very easy to fall in love with assets," says Tony Hayward, BP's chief of exploration and production. "But if you're not aggressively developing them, it's much better to sell."

BP's preference for deals rather than risky exploration has roots in a disastrous drilling venture in 1983. At the height of the Alaska oil boom, an area in the Beaufort Sea called Mukluk was thought to be a huge reservoir of oil. BP and partners spent some $ 2 bn buying leases, building a gravel island and drilling for oil.They found salt water instead, making Mukluk infamous as the most expensive "dry hole" ever.

In 1986, world oil prices collapsed. Expensive exploration projects became even harder to justify.

The following year, Skinner moved to BP's deals unit, which CEO Lord Browne set up in the early 1980s. Skinner, with an economics degree from St Andrews University in Scotland, had joined BP as a marketing man decades earlier, when the sleepy company was dominated by elite graduates of Oxford and Cambridge.

Over one Christmas holiday soon after he joined the deals unit, Skinner sat down with a printout listing BP's assets, which had become bloated in a diversification spree.
"We had forests," he recalls, his voice rising. "Forests in Fiji!" BP also was in the fish-breeding business and was a huge purveyor of day-old chicks. It was the UK's leading supplier of store-brand detergents for supermarkets, with a 70 % market share. Hampered by these non-core businesses, BP was "a big destroyer of shareholder value," Skinner said.

BP began selling. First to go was its mining business, followed by a software house, a coal business, the chicks, the forests, animal feeds, and the detergents.

In 1990, at a meeting in Phoenix, Lord Browne, then head of BP's exploration and production operations, raised the bar for the kinds of projects the company would do. He called it the "Big Field" strategy. BP wasn't going to bother with developing or even retaining small fields any longer. It would invest in huge reservoirs.

"The object was to find big fields, which by definition are low-cost," a BP spokesman recalls.

In 1992, BP suffered a major setback: its first quarterly loss, as the company overspent in its effort to expand. By 1995, BP was churning out strong profits again, and Lord Browne, who by then had been promoted to CEO, made the idea of boosting "scale and reach" a mantra. The goal: reduce costs further by getting bigger -- as big as ExxonMobil and Shell.
BP long before had identified Mobil and Amoco as merger prospects. The US companies had assets that would dovetail well with BP's, allowing billions of dollars of savings by eliminating duplicate operations. A mega-merger would also create one of the world's largest oil companies, letting BP compete for the very largest projects. In the summer of 1996, Lord Browne met with his board in Berlin's Four Seasons hotel. Organic growth alone couldn't put BP in the top rank of oil companies, he warned. Only deals could do that. He got the green light.

Full-blown merger talks with Mobil fell through because of disagreement over which company's executive would head a combined company. So BP turned its attention to Amoco. In August 1998, Skinner told his team he was going on vacation, but he grabbed his briefcase and went to New York instead.

On a hot Friday afternoon, the talks with Amoco broke down over how to structure shares in the deal. Mr Skinner prepared to head back to London to brief his bosses. At John F. Kennedy International Airport, Skinner says, he was on the escalator heading to the first-class lounge when one of the BP lawyers on the deal appeared, punched the emergency stop button and shouted down.

"Stay here," the lawyer said, according to Skinner. "Let's do a conference call."

Skinner had a deal to merge BP and Amoco, creating a company with combined revenue of $ 108 bn. Bulking up paid off: The combined company promised savings of at least $ 2 bn a year, a target it reached in the first year. It went on to save another $ 1 bn in annual costs and, according to one official, it stopped counting.

The merger set off a broad industry consolidation. Mobil agreed to unite with Exxon. France's Total acquired Belgium's Petrofina and then merged with Elf Aquitaine, also of France. Later, Chevron merged with Texaco, and Conoco with Phillips.

BP's Lord Browne set his company's sights on more deals, and Mr Skinner found himself negotiating on multiple fronts. Among the most intense was with Veba, a unit of German utility E.ON that owned a chain of German gas stations.

Early in 2001, Mr Skinner began negotiating to acquire Veba. The deal included a swap of a stake BP held in German natural-gas distributor Ruhrgas. A few months later, Shell threw BP a curveball, announcing it was buying a competing gas-station chain from German utility RWE.

German regulators weren't likely to approve two big gas-station deals without demanding divestments to preclude too much concentration. Skinner rushed to finalize his Veba deal in hopes regulators would consider both BP's and Shell's purchases together, spreading the pain of any divestments between the two. But the talks stalled. After an anxious night, he faced a last-minute snag: E.ON demanded another $ 200 mm. Skinner wanted the deal so badly that he threw in the extra money.

He needn't have worried. Given the proceeds BP earned from selling its Ruhrgas stake to E.ON and selling some Veba assets, BP officials figure they acquired the German gas stations they wanted for virtually nothing. Last year, Lord Browne ordered Skinner to negotiate BP's purchase of the $ 8 bn stake in Russia's TNK. It would instantly boost BP's daily production by 18 % -- more than half the daily output of Algeria.

Lord Browne gave Mr Skinner a deadline of Feb. 11, when the BP chief hoped to announce the deal during President Putin's visit to London with British Prime Minister Tony Blair. Five minutes before Lord Browne was to walk into the summit, Skinner reached the BP boss on the phone: We have a deal.

Lord Browne says he is now taking a break to shape the huge company. But not forever. "There will be more assets in markets," he says, "and more skills that we will have to obtain."

Chip Cummins in London and Susan Warren in Dallas contributed to this article.

Source: MyWestTexas