Online Extra: BP Remains Confident Despite Big Changes

Oil giant CEO John Browne talks about his company's place in the oil game and the state of the industry

Since becoming CEO of BP (BP ) in 1995, John Browne has made a number of moves that now look prescient. First he set off the late '90s consolidation wave by buying Amoco in 1998. Then in 2003 he established a 50/50 joint venture called TNK-BP with a group of Russian oligarchs, acquiring a position in Russia that no other oil company has been able to replicate. Browne recently spoke to BusinessWeek London Bureau Chief Stanley Reed about the current environment of high prices and the strains it's creating in the industry. Here are edited excerpts:

What has happened in Venezuela?

They are toughening terms. I was surprised because the oil companies have done something good for them by developing marginal fields. The choice of how to deal [with the resource] is in the hands of the government. Success will be very much a function of getting PDVSA [Venezuela's state-owned oil company] to do the work the oil companies might have done.

The contractual terms have been changed rather significantly. That certainly won't help them access investment in the future. It takes time to get over a change like that. People will think, "Maybe we should think twice about doing this."

What are are the specific challenges the industry faces?

The first is taxes [on oil]. Countries have taken steps [to raise them]. Will they take more? Nobody knows. What's important, if they do go up, is to ensure they come down again when the oil price falls. The second is how long demand for oil will hold up. We are in uncharted territory here. You have to say that there must be an open question on what impact [high prices] will have on demand.

The third is the threat of changing the way energy is delivered and, therefore, substitution for oil in the long run. Will there be some move, which may not be wise, where governments will say "we want greener energy and more secure energy, and we will change incentives to get people off oil and onto bio fuels?" The fourth is access [to reserves] and relationships. The industry, as widely stated, has a challenge here. Who gets to do what?

One other subsidiary challenge is whether you can keep inventing technology that increases the recovery of oil and keeps the cost of development sensible.

Do you think the relationship between international oil companies and national oil companies will change?

My sense is something is going on there. What I have observed is a lot of the big oil producers have become big energy consumers themselves. Saudi Arabia, Abu Dhabi, Iran, Kuwait are saying, "We have got a bit of a problem here. Unless we get the right energy mix we are not going to keep exporting the barrels we currently export."

There will be a big demand for natural gas in the Middle East. There is a huge demand for electricity as people get richer. They are wondering about that, saying how can we do it? There may be an interesting role for the international oil companies.

What are the future opportunities for BP?

I happen to think there is still an awful lot of business to do. You have to be very careful not to let yourself be wowed into a self-belief that goes beyond reality, and make sure you keep costs under control and are spending capital efficiently. That is why BP looks at it [big profits] and say it has to go back to shareholders.

What areas of the business are profitable today?

Mature areas are profitable inevitably because the costs are sunk. I think the North Sea is a mature area. The terms are generally better where the amount of oil is lower. [Looking at newer areas], Russia is very profitable; so is the deepwater Gulf of Mexico. Angola is profitable but there are rate-of-return limitations. The new production-sharing agreements generally all have rate-of-return limitations.

How do you feel about BP's position?

We feel pretty comfortable. We have so much in our cupboard, and we are getting access. Things are changing in Algeria and Libya, to name but a few places. For the industry there is obviously a frenetic overdrive to get access.

How do you assess the oil markets?

I do think the markets are very fragile at the moment. Since they are financially driven, they could turn on a dime. People are betting that the news flow will be negative rather than positive. It is a speculator's market. Oil is being treated a bit like gold at the moment. The problem is it's a lot more important than gold.

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