CITY FOCUS: BP gambling on oil sands venture

By Elliot Wilson
Updated: 19:30 EST, 30 November 2010

When BP' s frazzled executives surveyed the splintered wreckage of the Deepwater Horizon oil platform in April, many will have feared the worst.

One of Britain's largest and most venerable corporate institutions appeared to be in danger of terminal decline: a target for Shell or Exxon-Mobil's mergers and acquisitions teams, or even the bankruptcy courts.

Yet that hasn't happened. Rather, just over six months after the fatal explosion of April 20, BP appears to be in better shape than ever.

It is sitting on a ton of cash, some of which is being returned to grateful shareholders.

It has made peace, if not friends, with its political adversaries in Washington, many of whom were mollified by the ousting of gaffe-prone former chief executive Tony Hayward and the insertion of a friendly 'local' face in the form of Robert Dudley.

And it is quietly investing again, this time in the form of a £1.6bn bet on Canada's oil sands industry, the first outward-focused deal of the Dudley regime.

What went right? The short answer to that question is, ironically, Deepwater itself.

When the platform exploded, 11 rig workers perished, their bodies lost forever to the ocean.

Millions of gallons of crude flooded into the Gulf of Mexico, washing up on the pristine shores of Louisiana and Florida.

But, oddly, Deepwater has handed the British energy giant a new corporate lease of life.

Since emerging from what Dudley referred to as a 'near-death experience', BP is once again, to quote its 1980s advertising campaign, 'on the move'.

The fatal events of late April have quietly provided BP with the perfect catalyst to do some internal spring cleaning. When Washington demanded compensation for lost tourism revenues and clean-up costs, BP went on a selling spree.

Stodgy or poorly-fitting assets in Venezuela, Egypt, America and Vietnam have been shed in an attempt to raise up to £20bn.

Its 60pc stake in Pan American Energy has gone too, sold for £4.5bn to a company from Buenos Aires. All told, BP has raised around £13bn in one of the world's biggest corporate car boot sales.

In doing so it has trimmed excess fat, regaining some of its former sleekness without losing its status as one of a handful of global energy 'supermajors'.

'The Discovery blow-out marks a transformation for BP, a reason to clear out old assets and focus on core strengths,' said Peter Hitchens, analyst at Panmure Gordon.

'They have the opportunity to streamline the business and become more focused. And if you are focused on ten countries rather than 20 you can also be more focused on safety.

Some of BP's newly-raised capital will be channelled into the ongoing Deepwater clean-up. More will be used to fill the pockets of investors, and stiffen internal safety controls. But it is also being reinvested wisely and, for the moment, in moderation by BP's quiet, craggy new chief executive.

The Canadian oil sands deal will be divisive. Alongside its Chinese owned partner, Husky Energy, BP is aiming to produce 60,000 barrels of oil a day from the Sunrise oil sands reserve in northern Alberta province by 2014, rising to 200,000 barrels at its peak.

While nowhere near as polluting as tar sands, the process relies on injecting high-pressure steam to loosen oil from shallow-lying subsurface rocks, and the long-term environmental impact remains unclear.

Some investors are already voicing their concerns. The Cooperative Asset Management, which holds a 0.24pc stake in BP, or 44.5m shares worth £190m yesterday, called the deal 'controversial'.

Niall O'Shea, head of responsible investing at the Co-operative, said he was 'disappointed but not surprised' by BP's announcement.

James Marriott at Platform, an independent research firm that has lobbied against oil and tar sand extraction, noted that BP's first major deal since the Deepwater disaster was in an industrial process that was 'hugely polluting, caused deforestation, was carbon intensive' and which had ' questionable economic value'.

Yet BP clearly feels it cannot miss out on Canada's subsurface riches any longer. It came late to the oil sands party, and in doing so it has paid more than it should for an entry ticket.

BP has been slow in other areas too. Its great rival Shell, an early investor in oil sands, emerged yesterday as one of only two energy supermajors along with America's ConocoPhillips to gain a licence to explore for oil off the coast of Greenland, widely seen as the next hydrocarbon frontier. That could be where BP heads next.

It would be a logical next step for a slimmer, sleeker oil giant that is, once again, on the move.