Record oil profits set to fuel anger

Special report: the petrol war Money Unlimited

by Oliver Morgan, Industrial Correspondent Sunday October 29, 2000

The oil giants are set to announce record third-quarter profits as the spiralling price of crude and huge refining margins combine to produce results 100 per cent up on last year. Analysts are predicting that the third-quarter profits to be announced over the coming weeks from UK and European oil majors will represent a 10-year high.

Shell kicks off the reporting season on Thursday, with analysts predicting increases of between 70 and 90 per cent on last year's numbers. BP's figures are expected to be even higher.

The timing of the results could not be more sensitive for UK oil companies. BP's come on 7 November, the day before Chancellor Gordon Brown is due to announce his pre-Budget report, and six days before the deadline for a fresh round of refinery blockades by demonstrators protesting at fuel duty levels.

The Government was angered by the role of the oil industry during the fuel crisis and has sought to deflect blame for the unrest on to the high price of oil, which, it argues, is the cause of the majority of the increase in prices at the pump, rather than high fuel duty.

There has been speculation that Brown may alter the North Sea tax regime. But Ministers are concerned that this may undermine investment in the North Sea; they recently said publicly that Brown is unlikely to do this in his pre-Budget statement.

However industry analysts and motoring groups argue that Brown could link Petroleum Revenue Tax to the crude oil price without frightening off investment.

Commerzbank oil analysts Steven Turner and Clay Smith stated in a research note last week: 'It is difficult to imagine a more favourable environment than that which existed in the third quarter, 2000. Oil prices hit their highest average level since the Gulf war while refining margins have more than doubled in all major refining countries compared with the third quarter 1999.'

The average price of Brent Crude in the third quarter of 2000 was $31.3 a barrel, compared with $20.9 a year ago.

Commerzbank calculates Shell's net income at $3.17 billion, up 75 per cent on a year ago, although Lehman Brothers has the figure higher, at $3.4bn, up 88 per cent.

BP is expected to declare net income of $3.47bn, up 77 per cent on the previous year. Both sets of figures have been driven by the crude price.

Commerzbank's Clay Smith told The Observer: 'This certainly represents a 10-year high - and may be an all-time high - but I have only been covering the sector for 10 years. It is worth noting that the US majors have been reporting, and their figures have come in 5-25 per cent higher than analysts' forecasts, so the UK figures could be higher still.'

Another reason for Brown's reticence is the threat by oil companies to scale down North Sea investment plans - slated for a 33 per cent increase to B#4bn next year.

Oil companies argue that their returns are minimal during cyclical troughs in the crude price - determined in part by the Opec cartel - and that they are facing problems downstream at the petrol pump, where high prices work against their margins.

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-- Martin Thompson (mthom1927@aol.com), October 29, 2000