LORD BROWNE, chief executive of BP, the world’s second-largest oil company, has warned the City and British industry to prepare for a long period of high oil prices.
Browne said the current assumption of an average of $16 a barrel should be upped by at least 25% to $20-$25 a barrel.
“We cannot forecast the oil price but we have a lot of history here. We will use $16 for certain tests, but we tend to use the average price of $20,” he said in an interview.
With oil currently trading at about $31 a barrel, investors and managers need to start making their investment decisions on the basis of the new number, Browne urged.
His warning, if correct, will have far-reaching ramifications for the economy. The price of energy is one of industry’s biggest costs and other oil companies seem likely to follow Browne’s lead and confirm a new era of high oil prices.
He said BP has already shifted its investment decision- making to take account of oil remaining above $20 a barrel.
Taking four-year cycles, the average price of a barrel of oil has been around $21, Browne pointed out. And with Opec becoming more disciplined in controlling its members’ output, BP believed the average price of oil will remain in the mid-$20s a barrel over the next 20 years. “We cannot deny that history,” said Browne.
For BP, a sustained period of high oil prices should be good news. Analysts said that using a higher oil price could encourage the market to revamp BP’s battered share price, which is calculated using assumptions about the future price of oil.
Despite producing mammoth profits during 2003, the oil sector has made investors wary. BP recorded a pre-tax profit of £2.2 billion in the third quarter of 2003, yet the share price ended on Friday at 433p, some way off its peak of 671p in September 2000.
Investors have grown nervous about oil companies investing in ever- riskier projects. They are also concerned that high oil prices will not last.
One adviser said: “Analysts always worry that the oil price is going to go down, so the task for Browne is to convince investors to raise their assumptions because then they will pay more for the shares.”
Browne’s price declaration comes amid continuing investor worries about Royal Dutch/Shell, which nine days ago told the market it had overstated its reserves by one-fifth.
Institutional investors are now planning to write to Lord Oxburgh of Liverpool, the company’s senior non-executive director, suggesting a full structural review of the company.