What does BP think the war is all about?

Charles Jannuzi b_rieux at yahoo.com
Sun Feb 23 02:45:55 MST 2003


Like so much of capital, no doubt, they think it
is a whole new set of risky opportunities that
could make or break their drive to be one of the
global oil oligopoly.

I think one of the best ways to see what the run
up to war and the run up in oil and gas prices is
all about is through microeconomics and business
planning. (BTW, I would argue there a price
bubble for oil--you can see it in things like a
gasoline barge explosion causing a spike in the
price per barrel).

So imagine you were running BP. What would you
do? It's obvious you need to renew your holdings
of reserves because the consensus is that you've
held off doing this and are behind your main
competitors. And you need to find some 'breakout'
investments to do so. So why not Russian oil
companies, since they supposedly hold reserves
that are fairly exploitable on the cheap, and
they are big dealers of Iraqi oil, too. Of course
you love the current high price of oil in the
climate of war fear because, even if your profits
don't fully reflect it, you need the high price
of oil to finance buying up other holdings so you
can report having global reserves for the long
term. And about those reserves. You might want to
under-report them now and have them show up later
on to make stock watchers happy, since right now
you are getting by on the artificially high price
of oil you are enjoying and there is no need to
clutter the market with such information now,
since the war is the dominant factor anyway. And
finally, you've got to hedge your bets with Iraq,
and Russian oil companies seem a good way to do
that, though there are risks involved, obviously.

See the article below to see what I'm getting at:


http://www.observer.co.uk/business/story/0,6903,896214,00.html

BP plays Russian roulette

Ever the political strategist, Lord Browne is
hedging his bets on Iraq by embracing its
friends, writes Oliver Morgan

Sunday February 16, 2003
The Observer

The United States is preparing to invade Iraq.
Oil prices are above $30 a barrel [Make that well
above $35.00 per barrel-CJ]. Funny time, perhaps,
for BP to pay up to $6.8 billion for a 50 per
cent stake in a joint venture in Russia. What
could Lord Browne, BP's chief executive, be
thinking of?

It looks like a delicate balancing act. On the
one hand Browne is in a hurry to increase BP's
spread of assets around the world to seal its
position as one of three 'supermajors' - a
process he began with the takeovers of US firms
Amoco and Arco. The fact that he has paid out for
TNK when the oil price is high suggests he wanted
to get on with it - and there are indications
that BP's rivals are keen to buy stakes in TNK's
competitors such as Yukos and Sibneft. But it
also indicates he is hedging his bets on Middle
Eastern uncertainty, as does his decision to
focus on five future growth areas - the Gulf of
Mexico, Trinidad, Angola, Azerbaijan and the
Pacific. Meanwhile, he is also quietly dispensing
with a 7 per cent holding (acquired with the Arco
takeover), in LUKoil, the Russian major that was
recently stripped by Baghdad of its contract to
develop West Qurna, Iraq's largest oilfield.

At the same time, Browne has emphasised the need
for a level playing field for Western companies
if circumstances in Iraq change. In hedging his
bets he is ensuring that BP is not left out in
the cold if the situation changes. Phil Watts,
head of Shell - which has a march on BP with a
production agreement with Iraq - has made the
same noises.

Rest of article at link above.

C. Jannuzi, Fukui, Japan

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