Browne Burns The Midnight Oil - Sir John Browne, BP Amoco PLC - Interview - Statistical Data Included

Chief Executive, The, April, 2001 by J.P. Donlon

BP Amoco's Sir John Browne is working overtime to get you to think differently about oil companies--particularly his own.

Most analysts seem to agree that, no matter what your expertise, trying to predict the erratic price of oil is pretty slippery business. And despite being the leader of one of the most powerful oil companies in the world, Sir John Browne, CEO of BP Amoco Plc, readily admits that even he doesn't know just where the price of oil is headed.

Certainly, the oil market has been a complicated animal in recent years. After enjoying two decades of relatively stable oil market, the world watched prices fluctuate in the last two years from as low as $10 to almost $36 last autumn. The oil and gas industry is supposed to be a relic of the so-called old economy, yet the global energy business is a $1.8 trillion-a-year industry that dwarfs information technology, defense, and the auto industry. A nostrum of the new economy is that new technology allows us to use less energy. In fact the reverse is true. Some observers estimate that much of the surge in electricity demand in regions such as California comes from the reliance on abundant servers required to keep the Internet humming. Higher power demand and recent volatility of oil prices have rekindled concern about energy's impact on world economies, and particularly how it will affect the U.S. economy in the face of a slowdown. Where oil and gas prices go from here depends on hard-to-predict events, but almost certainly big oil along with OPEC will take center stage.

As the CEO of a company likely to be right in the thick of the action, Browne is keeping a careful watch on industry trends. Recently, at the World Economic Forum, he made this striking prediction, "The amount of oil used in the next 10 years will exceed all the oil consumed in the first five decades of the last century."

He went on to say that world oil demand will rise by 2 percent a year for the next 10 years up to a peak of 90 million barrels a day, a level he says might be close to the industry's maximum capacity. Browne further estimates that with new technology allowing deep water drilling in such places as the Gulf of Mexico, this level of production might be maintained for some 30 years before known oil re serves are exhausted. (Ali Rodriguez Araque, OPEC's secretary general, predicts oil consumption will grow by one-third from present levels in the next 20 years.)

In other words, big oil is here to stay--if not in precisely the same form as it has been. As a dealmaker and visionary, 53-year-old Browne, who became CEO in June 1995, quickly set a different course. In 1998, the same year he was knighted by the Queen, he gobbled up Amoco for $54 billion and later bought Arco for $27 billion, catching his rivals off guard. The acquisitions gave the London-based giant added reserves of cleaner-burning natural gas, thereby transforming a onetime state-owned oil company--dependent on two areas, Alaska and Britain's North Sea--into a diversified mega oil and gas colossus. It also set in motion a round of consolidation that included the Exxon and Mobil merger; Total gobbling up Elf and Petrofina; and more recently the marriage of Chevron and Texaco. Through vigorous rationalization, the combined company has shaved operating costs by $4.9 billion, or about 20 percent of the total, since 1998.

With cigar in hand and reading specs perched at the end of his nose, the soft-spoken Cambridge graduate gives the outward appearance of an erudite jockey in a Savile Row suit. His command of the facts appears total, as does his disciplined attention to financial performance. The $162 billion BP Amoco boosted net income from $5.33 billion in 1999 to $11.2 billion in 2000. The company's return on average capital employed--a closely watched performance measure in the oil industry--was 23 percent last year, up from 13 percent in 1999. Browne says 40 percent of this outcome was due to underlying performance improvement and 60 percent to favorable market conditions. With a market cap just below $200 billion, BP is second only to Exxon Mobil with $276 billion and is the third largest integrated major oil company behind Royal Dutch/Shell.

Having positioned the company as environmentally friendly--something he hopes will someday not be regarded as an oxymoron--Browne continues to emphasize that natural gas is a clean-burning fuel that technology is making even cleaner.

"The oil industry is already detested by people who think we're indifferent to the environment," he says. "We must persuade our ultimate customers that this isn't true."

Sizing Up Oil's Impact

With the recent volatility in the energy markets, the price of oil has jolted the world economy. How concerned should our readers be?

Everyone is concerned because the price of oil and gas is much higher than the lows experienced in 1998. Over the 1990s, with the exception of the Gulf War, prices were volatile, but they appeared to be coming down. So the mindset was that prices would deflate well beyond real terms to the low levels we had in 1998.