japanese maple

Sweeping away the clouds of mistrust

A series of recent mishaps in the US has affected both BP’s public trust and its share price. CEO Lord Browne needs now to do his best to fix the problem and recover the company’s green image before his retirement.

With the sun as its logo and green as the dominant colour of its advertising, oil company British Petroleum seems to really care about appearing “Beyond Petroleum”.

Over the last 18 months though, BP’s sunshine appears to be growing faint, as recent mishaps in the US have begun hammering its “green image.” Indeed events such as the Alaskan pipeline leak and the blast of a Texan plant have hit BP and its share price, and have caused it a dramatic loss of public trust. If it’s true, as it seems, that reputation affects value, the company needs to take prompt precautions as shares are already dramatically slumping. That said, will BP manage to sweep away the clouds on the horizon and restore its tarnished reputation? If yes, the sun might shine on it again.

As the five year chart shows, it’s clear that the situation for BP is not very rosy. With crude oil price swinging around $60 per barrel, share value is today 590p, up one per cent since last year. However, a closer look reveals that the current shares are approximately at the same level as 2002, when oil was $20 a barrel. Besides, a comparison between BP’s stagnant performance and oil giant ExxonMobil’s amazing upward trend over the past six months, demonstrates that the British Petroleum tendency on the market might need a shake to turn around.

In early 2002 BP share price rose 22 per cent to reach a high of 630p. By April though, after the company reported its first quarter results, share value suddenly began to decrease. Indeed, global BP’s profits had turned out to have halved from the previous year. “Both refining and marketing felt the effects of the poorest trading environment seen for a decade,” chief executive Lord Browne said . With income decreasing from $3.71 to $1.58 billion, by January 2003 BP share price experienced a steep 46 per cent decline, reaching 400p .

Chart 1- BP share price compared to ExxonMobil’s (2002-2006) and to S&P500 index.

Nevertheless, as a brand new year began a brand new deal made BP investors smile again. In fact in February, BP announced that soon it would invest £4 billion in a joint venture with Russian oil company TNK. Galvanized by the agreement, investors started the engine for a new share price increase. Share value began to recover convincingly throughout 2004, although the growth was not constantly sustained. As 2005 began, shareholders also enjoyed a rapid increase that saw shares rise 20 per cent by the end of the year.

Although if compared with S&P500, BP share trend appears to be reasonable, oil US giant Exxon Mobil impressive 100 per cent increase in three years highlights how BP’s performance has been disappointing. After having reached its 730p highest peak ever by spring, BP share price has started a steep shortfall (25 per cent so far), which is making shareholders quite gloomy about the future.

BP’s latest quarterly results also served up bad news for investors. In fact production turned out to be down, refining margins had slumped and the company had paid more taxes . Overall 2006 third quarter turnover was quite disappointing. Although the Exploration and Production division increased its revenues by 52 per cent since October 2005, Refining and Marketing reported a 19 per cent decline in sales.

Chart 2 – BP p.l.c. Income growth rates 2002- 2006 (first three quarters)

Gas, Power and Renewables division, for its part, has performed inconsistently since 2002, as chart two reveals. Since then, Lord Browne has fostered a reputation as environmental leader as BP was the first company in the oil industry to acknowledge the threat of global warming, and put into practice a series of alternative-energy projects .

Even so, during the next years, Gas, Power and Renewables’ sales swung dizzily. From a high of $1961 million in 2002, the division’s revenues decreased 70 per cent in one year. In 2005, as Transport Secretary Alistair Darling announced that “five per cent of petrol sold in the UK” should “come from renewable sources by 2010,” clean energies’ revenues grew 11 per cent from $964 to $1077 million. However, a fluctuating alternative energies turnover, not yet stabilized, is not a remarkable sign for a company that claims itself green.

As regards BP’s incomes, when last October Lord Browne announced its third quarter results, more than a few eyebrows raised. Indeed results has turned out to be misleading.

Chart 3 – BP p.l.c. Replacement cost profits 2003- 2006 (first three quarters).

Over the last five years, BP’s incomes have experienced an upward trend. With an average growth rate of 25 percent, as chart three reveals, BP’s profits appear to have reached record levels. Earnings per share also increased from 56.14 cents in 2003 to 105.74 cents in 2005, up 88 per cent in three years.

Yet, underlying last quarterly results signalled an end to the growth. Although replacement cost profits reached $6.8 billion, up 58 per cent from the same period in 2005, a large contribution came from asset disposal . Profits benefited from oil prices and better petrol pump margins but were damaged by lower refining margins and reduced gas price income. The company’s tax rate also rose from 34 to 40 per cent, partly as results of the North Sea increases imposed by chancellor Gordon Brown in July .

Apart from that, 2006 has been overall an “annus horribilis” for BP . The company had begun to suffer from jitters by March 2005, though, as a violent blast at its Texas City refinery killed 15 workers and began to tarnish BP’s green hue. In October, US investigators said that cost cutting by senior managers had affected the state of safety and may have contributed to the explosion .

The tragedy was the first of a series of dreadful accidents, climaxed with the spillage at BP’s Alaskan pipelines by spring 2006. The Alaskan Prudhoe Bay field is the largest in North America. It produces 400,000 barrels of crude a day and accounts for 8 per cent of US domestic production. For these reasons the shut down of the eastern area of the oilfield, announced last August, raised more than a few concerns. According to Barclays Capital analyst Kevin Norrish, it “could not be happening at a worse time for the oil market.” As predictable, the shut down pushed up crude prices to level records to about $75 a barrel.

More recently the trend has changed though, and crude price has fallen. This has contributed to create a “more difficult trading environment” for BP, as Lord Browne underlined. Moreover, the leak at Prudhoe Bay; the Texas refinery fire; the damages at the Thunder Horse platform in the Gulf of Mexico (with consequent opening delay to 2008) highlight that the oil company has a problem with its US safety culture. Indeed BP’s eagerness to be seen and as a “green” leading edge of corporate responsibility has now made it an easy target for ridicule .

Unfortunate events in BP’s US operations, plus allegations of manipulating propane market, might be enough to make dark forecasts about giant oil company’s future. However, if BP has had plenty of criticism about its underinvestment in Texas and in Alaska, some voices raise for the benefit of the company. London Business School lecturer Graig Smith thinks that BP hadn’t “a failure of strategy but of execution,” and that “the challenge of corporate responsibility is ‘making it happen.’” Since problems became public, new president of BP America Bob Malone did promptly “take some of the right steps, by acting decisively.” BP can recover the trust it has lost, but it will have to “redouble its efforts to ensure its operations throughout the world are sound.”

And there is something else. CEO John Browne, regularly voted Britain’s most respected business leader, is probably more than eager to recover his and BP’s public image before its retirement in 2008. Therefore he’s likely to speed up all the necessary measures to fix the problem and the loss of general trust as fast as he can. But according to Mr. Smith the most important lesson for Lord Browne now “is that getting the basis right must be at the core of corporate responsibility.”

As regards the future, Beyond Petroleum will have to cope with the increasing scarcity of oil sources. Tapping into alternative forms of energy is the answer. To be fair a few steps have already been taken in this direction. In 2005 BP launched Alternative Energy, with $8 investment over 10 years and the aim of gaining market leadership in low carbon power generated from the sun, wind, natural gas and hydrogen. With the British Petroleum motto turning to Beyond Petroleum, the company became one of the world’s top three makers of solar panels .

However, Gas Power and Renewables’ income is only four per cent of the total profits. A quite miserable result for an alleged green company that highlights how BP needs to put more commitment into the exploit of clean sources. To deserve keeping the sun as its logo, BP needs to use it more.

What's next on BBC

Is privatization the next best thing for the British Broadcasting Corporation? The debate is open.

“Every individual(…) by pursuing his own interest (…) frequently promotes that of the society more effectually than when he really intends to promote it.” It was far back in 1776 when economist Adam Smith theorized the laissez-faire, forerunner of liberalism that ruled early 20th century political and economic thought. Harold Gafo’s recent statement about the obsolescence of the BBC as a state-owned broadcaster might be rather wide of the mark. He might not be aware that concepts such as modern privatization and neo-liberalism are not new, but expressions of the afore mentioned doctrine. Therefore, is privatization an anachronism too?

Privatization advocates the belief that “in today’s changing market some of the traditional arguments for public service broadcasting are beginning to age”. They are convinced that “we should look forward to a new era of private value and individual consumer choice in which a perfect new market in programmes and service will be created by subscription and other forms of competition.” The private market, for its part, seems to be looking forward to welcoming such a massive leading broadcaster into its greedy arms.

Proponents of privatization assert that the market can provide a more efficient delivery of any goods or service than a state body can do. They prefer self-interest as a guide for the most efficient use of resources to the ‘anachronism’ of state-ownership. As many decisions as possible should be left in the individual’s lap, because no one knows your interests better that you. A part from that, making a profit will become the key concept. The admission of the BBC into the private market will inevitably lead the corporation to cope with wider competition. And competition will reduce costs while allowing quality to grow.

It’s generally held that a hypothetical shift of the BBC to the private sphere would result in the demise of fee funding, for which millions of British citizens are currently liable. Either a share issue privatization, that is selling shares on the stock market, or an asset sale privatization, which means selling the asset to a private sector entity , will lighten people of the TV licence payment .

A further argument for the privatization of a state-owned broadcaster might be escaping of an alleged control by the government. Because of public funding, many can object to the BBC having to submit to some form of political interference.

Nevertheless, according to other voices the BBC is not actually suffering from a lack of freedom, instead it’s one of the most independent broadcasters in the world. In fact the acquisition of the BBC by a strategic investor wouldn’t guarantee the complete freedom of the broadcaster from any form of bias and it could subdue it to the control of lobbied interests.

Therefore many people still appear to be sceptical, believing the main arguments for privatization of the BBC to be essentially weak. Won’t privatization affect the quality of one of the best and most respected broadcasters in the world?

At the dawn of the BBC’s creation, politicians and the British public decided that broadcasting should be placed in the public sphere and that it should be defined as a range of high quality programmes and services whose only aim is to serve the public interest.

As previously said, if privatised, the BBC will have to cope with the introduction of advertisements as a way of funding. We can have a good example of how commercials affect the quality of TV programmes, by watching the majority of British private channels. Mainstream programmes, in spite of their poor quality, turn out to be the most successful ones, so becoming the main target of the advertising industry. Since the most profitable commercials find their place at peak viewing times, private channels are somehow forced to broadcast programmes, such as reality shows and soap operas, that satisfy the majority of mass public demand. This entails private broadcasters being, in a way, obliged to submit to market laws, to the detriment of the quality of programmes.

A subsequent matter is that privatization is not always synonymous with improvement. Market laws can’t be indiscriminately applied to all sectors because they might turn out not to be suitable. Appliance of such laws to cultural products doesn’t necessarily lead to better outcomes.

As seen, the matter of the BBC’s shift to the private sector has given rise to a number of different opinions. It’s not easy to state whether privatization is applicable to the BBC because of the strategic importance of such broadcasting. The debate around the issue remains open.

Power to the Indian women!

Being a 20 year old girl is not easy in any culture. But being a 20 year old girl in a country which doesn’t always give women the chances they deserve is even more difficult.

After growing up and being educated in a broad-minded family environment, Nidhi Anand feels she has been lucky in her life. She says: “India is such a conservative and orthodox country. It offers quite few privileges to women.” Actually things are slowly changing and Nidhi had the fortune to be born into a family which always let her decide about her life. Nevertheless she didn’t take the decision to study abroad. Her father did instead.

Shaking her long brown hair and smiling, Nidhi tells me that she cannot bear the discrimination that still exists against females in her country. “Here in the UK, and generally in the western world, women are on a par with men,” she explains. “In a way, women are in a better position, they are given an equal chance. Here a woman can make up her own mind. In India girls have to submit to their family’s decision.”

Abroad for the first time in her life, Nidhi has the perception that in this country she has more opportunities to fulfil herself as a woman. On the contrary in India to be appreciated “women have to prove themselves at every point.”
Apparently, in spite of her young age, Nidhi has already proved herself much. In Mumbai, she used to work in Bollywood, the huge Hindi language film industry. As she comments, “even our local movie production shows the western world an unfair image of Indian women. A lot of them are fighting for their reasons to be understood, but still in the films they appear to be ‘puppets’ waiting for nothing else than to be married!” Nidhi feels she has to do something. “Anyway, I’m like a drop in the sea.” But, isn’t the immense sea a whole of small drops, after all?