BP’s days as a stand-alone company seem numbered. Shell has had discussions about a takeover of its rival, The Wall Street Journal reported last week. This won’t happen immediately – Shell has denied it is about to launch a bid, which means it is now not allowed to make an offer for at least six months. But the blunt truth is that BP has been in decline for a long time.
Rewind a quarter of a century to when the shift into green energy began, and BP and Shell were roughly equal. The two heavyweights of the European oil and gas industry had been slugging it out for a century without either ever coming out decisively on top. In the last decade, however, Shell has pulled ahead. With a market value more than twice BP’s, it still ranks in the top five in the industry, while BP has slumped to 14th.
There are many reasons for BP’s relative decline. The Deepwater Horizon disaster was a blow from which it was always going to take years to recover, no matter how well the company was managed. The management lost focus, with a succession of chief executives who failed to stamp their authority on the business in the way that John Browne did between 1995 and his departure in 2007. But the major problem was that by focusing on green energy, it made life very difficult for itself.
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Looking back, it was always a crazy decision. For an oil company to get out of the fossil-fuel business makes about as much sense as GSK giving up on drugs, or Unilever ditching soap manufacturing. A company abandons its roots at its peril, and BP’s roots, right from its origins as the Anglo-Persian Oil Company, were in drilling for, and distributing, black gold. Green energy may have been more fashionable, but it never managed to generate the same kind of returns for shareholders, nor did it ever quite seem that the company’s heart was really in it.
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Shell, by contrast, has always steered a more sensible path, developing its oil and gas interests, while also investing in alternatives. It is hardly surprising that it has grown so much larger that it is now in a position to make an offer for its great rival. One of the UK’s largest and once greatest companies looks set to pay the ultimate price for a rash decision about green energy.
Potential suitors for a BP merger
Given how badly BP has performed, a merger with Shell is almost certainly the best outcome we can hope for. The oil business has always been about scale, and BP has now fallen too far behind its rivals to survive on its own. If it doesn’t merge with Shell it will probably fall to a foreign owner. The US giants ExxonMobil and Chevron are the obvious suitors, especially given that BP has huge operations in the US and both companies would almost certainly be interested in its assets, and a deal would pose relatively few competition issues.
PetroChina could certainly afford it, but it would pose a big test for the British government if it made an offer. One of the Gulf giants might well be interested, with the giant Saudi Aramco by far the most plausible bidder. With a $1.5 trillion market value, it is far larger than any other oil company in the world. Brazil’s Petrobras is slightly smaller than BP, but might be able to pitch a deal as a merger of equals, and one that would create a new giant. One of the private-equity firms might even be interested.
Those are all plausible scenarios. And they would all be very bad for the British economy. The UK does not have enough genuinely global corporations left that it can afford to lose any more of them. And it would be a big blow for the London stock market if yet another of its heavyweight businesses left. It would be far better for Britain to have a healthy, thriving BP.
Oil used to be one of the global industries where the UK was a genuinely global contender. Sadly, that is no longer the case. BP has fallen too far down the rankings to be considered one of the giants of the industry any more. There is not much that can be done about that now. Given how far it has fallen, a merger with Shell would be by far the best outcome, both for the economy and for the stock market.
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