Outlook: BP puts Shell to shame as oil price gushes

Yen intervention; RAC club dinner

It's payback time for investors in BP. While Shell flounders, BP was yesterday able to announce "significant extra cash" to shareholders over the next three years, both through share buybacks and increased dividends. The contrast with Shell could scarcely be greater. BP is utterly confident of its proven reserves, which have been hugely expanded over the last five years, so much so that the company has been replacing its annual production at an average rate of 153 per cent a year. As we now know, the equivalent figure at Shell is rather less than 100 per cent.

Lord Browne, BP's chief executive, wouldn't have wanted to rub Shell's nose in it, but that was the effect of yesterday's strategy statement. Alongside the svelte, thorough bred form of BP, Shell looks like a clumsy old cart horse mired in a muddy lane. For all the effort Shell is making to extract itself, it's not a contrast that looks like changing anytime soon. Missed production forecasts caused BP to stumble a couple of years back, but now it's back in supremely self confident form. Yesterday's statement was the most upbeat in years.

The extra ingredient is the oil price, which has remained much stronger than anyone anticipated. Soaring demand from China makes Lord Browne's forecast that "there appears, at present, to be overwhelmingly more chance of the oil price being above $20 a barrel for the next few years than not" seem almost laughably cautious. None the less, it allows for a new benchmark which will enable BP to distribute all its free cash flow to shareholders in excess of operating investment as long as the price remains above $20 a barrel. It will also allow BP to look at developing more fields which have up until now looked commercially marginal.

If the oil price remains above $30 over the next three years, which doesn't seem impossible, the new policy would allow for roughly $15bn of share buybacks, or approaching 10 per cent of the company's present market capitalisation. On present form, Shell will struggle even to pay the dividend.

Can the oil price possibly maintain its present lofty elevation? In the past, a high oil price has always ultimately proved self correcting. Too much demand equals too high a price, which raises business costs. In the subsequent inflation, interest rates are jacked up, demand falls, and the price comes back to earth with a bump. The ups and downs of the oil price correspond almost exactly with those of the economic cycle.

This time it might be a bit different. For a start, there's the added factor of China. What's more, the world economy is no longer as dependent on oil as it was, so the effect of a rising price isn't as great. The upshot is that the world economy might be able to sustain a permanently higher oil price without undue damage to its health. Last month, Opec bizarrely ordered a cut back in quotas in anticipation of a seasonal fall off in demand in the second quarter. The new quotas have been largely ignored and still the price has continued to rise. The way things are going, a new Opec target range cannot be long in coming.

For BP everything looks set fair. That's assuming, of course, that the company's multi-billion dollar investment in Russia doesn't suddenly turn bear shaped.

Yen intervention

The trouble with "scoops" about reversals in exchange rate policy is that they are almost by definition bound immediately to be denied, even if they are highly likely eventually to be proved true. So it was yesterday with the story that Japan is ending its policy of massive foreign exchange intervention to keep the yen depressed against the dollar.

As Chancellor, Norman Lamont was required to lie through his teeth about Britain's determination to keep the pound in the European Exchange Rate Mechanism. His problem was that if for a moment he wavering and admitted the truth, forex dealers would have moved in and eaten the pound for breakfast. In the end, the inevitable happened anyway.

The Japan Ministry of Finance is unlikely to prove such a pushover. In January and February alone, it poured a mind boggling $95bn into the quest for a weaker currency. The story that intervention on this scale is now officially at an end proved an easy one to deny, for it was attributed to sources at the Bank of Japan, which acts as agent for the Ministry of Finance in executing the foreign exchange intervention but doesn't itself determine policy.

None the less, there has been growing concern at the Bank of Japan about the effect of the intervention on monetary policy, which the BoJ is very much responsible for. The BoJ also worries about the exit strategy. Common sense alone would dictate that Japan cannot indefinitely keep accumulating dollar assets at the present rate. The longer it carries on, the bigger the portfolio loss will be when eventually it comes to an end.

There is also a sizeable faction on the BoJ's monetary policy committee which worries about "sanitation" of the intervention in the domestic markets. Sanitisation refers to the practice of mopping up the extra money put into the system by selling yen with an equal and opposite sale of MoF bills and bonds. If not fully sanitised, the intervention tends eventually to become inflationary.

That might not seem something Japan has to worry about, but the truth of the matter is that both the BoJ and the MoF would very much like to end foreign exchange intervention if they possibly could. Unfortunately, they put Japan's still nascent economic recovery at risk if they do so. The markets are again testing Japan's resolve by pushing the yen towards the 105 to the dollar mark. To date that's proved the level at which another massive dose of intervention kicks in. Anything higher and Japanese manufacturers start to feel the pinch.

I cannot claim to have have spoken to anyone at the BoJ or the MoF in recent weeks, but I'd be amazed if Japanese policy makers allow the yen to go beyond this all important threshold any time soon. It would be tantamount to admitting that they've given up on economic recovery, and would be similar in its consequences to announcing that the BoJ was abandoning its zero interest rate policy. For the time being, Japan remains an addict of foreign exchange intervention. Eventually it must seek a cure, but like all addicts its attitude is "yes, eventually, but not yet".

RAC club dinner

Corporate governance is a dreary old subject where you are never going to see much agreement, so I doubt that those who attended the "bridge building" dinner last night at the RAC club in London between captains of industry and leading fund managers would have come away in better mood than they went in. Many business leaders believe that shareholder activism is out of control. A box ticking attitude has crept in which is destroying flexibility and stifling freedom of action.

Two points seem worth making. One is that even individual fund management firms no longer speak with a single voice, let along collectively. On the one hand are the money managers, who are only interested in whether the share price is going up. On the other are the corporate governance officers, who are only interested in whether companies are complying with the various codes. That in itself cannot be the correct formula for good governance. Fund managers must adopt a unified approach.

The other is the growing disconnect between companies and their investors. About 40 per cent of stock market volume is today accounted for by hedge funds and other short term holders of stock. In most companies, the average duration of investors on the share register is less than a year. Again, this cannot be a solid grounding for good, long term corporate governance.

jeremy.warner@independent.co.uk