Posted on Sunday, May 6th, 2007
By David Strahan. First published in the Independent on Sunday, 6 May 2007.
Is it possible that Lord Browne’s humiliation is not yet complete? It may be hard to credit in a week when he was forced to resign with immediate effect – at a personal cost of £15m – after lying in a witness statement about a lover he met through a male escort agency. But however salacious the details, the sex scandal is about the least interesting aspect of Browne’s reign as the ‘Sun King’ of BP. Far more significant was his vociferous rejection of the growing evidence that global oil production will soon go into terminal decline with potentially devastating consequences. That position now looks equally untenable. Lord Browne may be about to lose not only his throne and his payoff, but also his rose-tinted spectacles.
No oilman likes the suggestion that his might be the next sunset industry, but more than any other executive Lord Browne has made it his business to attack ‘peak oil’, regularly denouncing this growing school of thought at industry gatherings. In one typical speech in 2004 he proclaimed “we have to demonstrate that there has been no shortage of oil, and that there is no shortage of oil, and that there never need be a shortage…there is no reason why there should be any shortfall in the foreseeable future.”
But despite Lord Browne’s protestations, a whole range of indicators now suggest that global oil production will soon hit fundamental limits: the amount of oil discovered each year has been shrinking for four decades; for every barrel we discover annually, we now consume three; and oil production is already in terminal decline in 60 of the world’s 98 oil producing countries. New countries join the slide almost yearly, and since the late 1990s have included significant producers such as Britain, Norway, Denmark, Mexico, Argentina, Columbia, Australia and Oman. In aggregate, OECD oil production has been in decline since 1997, and most forecasters – even noted optimists such as the International Energy Agency and ExxonMobil – now predict that the entire world except for OPEC will peak by early in the next decade.
Once non-OPEC production starts to fall, the only thing standing between us and the conventional oil peak is the cartel. But as I report in The Last Oil Shock, there is now documentary evidence to suggest that OPEC has been exaggerating the scale of its reserves for decades, meaning its twelve members may not be able to maintain output for long. The energy consultancy PFC Energy has briefed Dick Cheney that on a more realistic assessment of OPEC’s reserves, its production could peak by 2015. That would tip global output into terminal decline, almost certainly bringing soaring oil prices, deep recession and worse.
Given that dismal background, it is hard to see how Lord Browne could remain so confident about the future oil supply. But for many years at least he had the stellar growth of BP under his stewardship as ammunition. When he took the top job at the tender age of 46, the company was still reeling from a financial crisis in which it had been forced to halve its dividend. Within a decade Browne had transformed BP into Europe’s largest publicly traded energy company. The City loved it, of course, but even BP’s rampant expansion is capable of a darker interpretation than Lord Browne’s own sunny outlook would suggest.
BP’s growth came in large part through series of massive takeovers around the turn of the century as the company snapped up Amoco, ARCO and Burmah Castrol in quick succession. But adding reserves and production capacity by cannibalising other companies does nothing to increase the total oil available to humanity; it simply reshuffles the same deck of assets. Total also expanded by this route, but the broader picture among the ‘supermajors’ – ExxonMobil, Shell, BP, Total and Chevron – is far less encouraging. Once growth by acquisition is stripped out, in aggregate the world’s biggest oil companies were producing no more oil in 2005 than a decade earlier. And that’s despite the world market having grown by 20%, and despite their having spent billions of dollars on their upstream operations. These figures speak louder than Lord Browne’s bullish words.
Even more suggestive are Lord Browne’s own spectacular gambles in Russia, one of the few non-OPEC countries with any remaining oil growth potential, culminating in 2003 with the formation of TNK-BP – a deal that was all the more surprising given the debacle of his previous foray into the ‘wild east’ a few years earlier. In 1997 Browne had spent $500m buying a 10% stake in a Siberian oil company Sidanco – a deal signed in Tony Blair’s office – but lost much of the investment when the company promptly went bust, and some of its powerful Russian shareholders ruthlessly manipulated the local insolvency courts to their own advantage. Asked why BP hadn’t simply cut a deal with its Russian tormentors, led by the oligarch Mikhail Fridman, one senior executive reportedly said “you don’t talk to someone who’s stolen your wallet”. Just a few years later however Lord Browne committed $7 billion to Fridman and his associates to form TNK-BP. During the negotiations, he felt compelled to ask his new friends “are you going to take the money and run?”, yet still he signed the contract.
For the time being the gamble appears to be paying off, having boosted BP’s oil production by about half a million barrels per day. But closer inspection of the figures shows that had Lord Browne flinched and not done the deal, the company’s output would have fallen by almost as much. With its operations elsewhere around the world in steady decline, BP’s output in 2006 would not have averaged almost 2.5 million barrels per day, but just under 1.6 mb/d, a rather harder story to sell to shareholders. Given the dearth of such opportunities elsewhere, it looks as if Browne had little choice.
The true scale of the gamble is now becoming clear, as Russia threatens to take control of one of TNK-BP’s prize assets, the important Kovykta gas field, just as it seized Sakhalin from Shell. Even some of Lord Browne’s biggest fans believe the fact that he has taken such enormous risks may call into question his persistent denials that global oil production will peak anytime soon. Robin West, a former US Assistant Secretary of the Interior, and founder of PFC Energy, considers Browne one of the industry’s brightest talents. But he adds: “I think his actions belie his words”.
When the dust has settled, Lord Browne’s reputation will not be determined by his sexuality, nor having lied to the court, nor even by the shocking Texas refinery explosion that killed 15 people on his watch. He may finally be remembered for his dogged refusal to acknowledge the impending oil peak despite the mounting evidence from around the industry and even his own actions. His denial matters in particular because of his undoubted influence over Tony Blair. With luck the departure of both men will herald a more realistic attitude to the oil supply outlook and galvanize policymakers to prepare for the inevitable global peak that Total chairman Thierry Desmarest expects by 2020 – and others much sooner. If not we may find out the hard way the true meaning of BP’s Delphic slogan, Beyond Petroleum.
David Strahan is the author of The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man, published by John Murray Ltd. www.lastoilshock.com