Monday, Jan. 10, 1977

Selling a Stake in a Big Sister

For many left-wing members of Britain's ruling Labor Party, it would have been preferable for the government to auction off some of the crown jewels. Transport Union Chieftain Jack Jones condemned the action as the squandering of a national asset. Grumped one Cabinet member in private: "It's like selling the paintings off the wall." What prompted all this indignation was the government's proposal last month to sell a substantial share of its stake in British Petroleum Co., the nation's largest industrial concern.

The government plans to dispose of 17% of BP's common stock--possibly to British institutional investors, possibly to foreign buyers (Iran is reportedly interested). The sale is expected to raise about $840 million, which the government sorely needs; it must reduce the budget deficit in order to qualify for a $3.9 billion loan from the International Monetary Fund. The transaction will still leave the government holding 51% of BP--at least if British courts let the Bank of England hang on to a 21.5% block of BP stock that it picked up two years ago in a bailout of cash-strapped Burmah Oil Co. (Burmah has petitioned to get the shares back).

Profitable Empire. Nonetheless, the left-wing fury is understandable. The Labor government came to power pledged to extend nationalization of basic industries; now it will be surrendering a large chunk of perhaps the most profitable investment any British government has ever made. FORTUNE ranks BP fifth among the seven international oil companies--the so-called Seven Sisters --with sales in 1975 of $17 billion. From London, Chairman David Steel, an affable Oxford-educated lawyer who is a tough negotiator, oversees a global empire. It embraces more than 650 production, refining and marketing subsidiaries in Europe, the Middle East and the U.S. (where BP has a production partnership with Standard Oil of Ohio for Alaska's North Slope oil and owns a quarter of Sohio).

More important, BP's profit prospects are bright. The company, hit hard by global recession, registered the lowest profits of any of the seven international oil giants in 1975--$336 million. In last year's first nine months, profit rose less than 6%. Estimates are that earnings will more than triple this year and will rise a further 60% or more in 1978.* Reflecting these great expectations, BP common has almost tripled since the start of 1975, to $13.44, making it Britain's hottest industrial stock.

The reason is that BP has huge interests in the world's two most exciting sources of new crude, Alaska and the North Sea. The BP-Sohio partnership has leased the largest chunk (its proven reserves: 5.1 billion bbl.) of Prudhoe Bay fields on Alaska's North Slope. According to an agreement between the two companies, as the flow of Alaskan oil increases so will BP's share in Sohio, rising from 26% now to 51%, probably some time next year. In the North Sea, BP's wells are expected to produce more than 650,000 bbl. a day by 1980--equal to one-third of all oil consumed daily in 1975 by the United Kingdom.

BP's strength has always been its ability to find oil. The company was started in 1909 by William Knox D'Arcy, an adventurer who somehow had wangled a concession to explore in Iran. The British government bought a 51% stake in BP in 1914 because Winston Churchill, then First Lord of the Admiralty, wanted a secure source of oil for the navy. Known originally as Anglo-Persian, the company was renamed British Petroleum several years after the government of Mohammed Mossadegh nationalized its Iranian concessions in 1951.

Early Warning. By then, BP had bought up concessions all over the Middle East. But the Iranian nationalization served as an early warning that the region's political instability made dependence on Middle Eastern crude risky. Realizing that its other concessions in the Middle East and North Africa might be nationalized too--in fact several of them have been--BP's management foresightedly stepped up the search for oil in politically friendly (though environmentally frigid) climates, from the North Sea to the Labrador shores and Alaska's North Slope. The company began buying leases in Alaska as early as 1959, and brought in a North Sea gas field in 1965. BP's competent but colorless management has never been strong on marketing, preferring to sell crude in bulk. For all its 23,000 gas stations in Europe and 3,000 in the U.S., BP gets almost half its oil revenues from sales to other oil companies.

Under a tacit agreement, the British government has left BP's managers free to go their own way, even when they have strained politicians' patience. During the 1973 Arab oil embargo, BP diverted shipments of Middle Eastern crude away from Britain, where prices were under government control, to Germany, where the market was free. The same year, BP pulled out of the unprofitable Italian market, with never a word from Whitehall about what that would do to Common Market solidarity.

Thus sale of part of the government's interest probably will make little or no difference in the way BP operates. Why, then, is the left wing so angry? Because the sale violates socialist ideology, which calls for the nationalization of more, not less, of British industry. The relative success of BP also dramatizes the value of letting proficient managers alone. Any attention focused on BP inevitably brings to mind the contrasting inefficiency of businesses controlled by the government in fact as well as name, such as the National Coal Board and the British Steel Corp.

* The estimates are calculated in sterling. Dollar equivalents may be lower if the pound continues to decline in value.

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