BP pins oil price rise on speculators

Returns to shareholders may be even higher than the $65bn earmarked by British oil major

BP blamed the recent sharp increase in oil prices partly on speculators yesterday as it indicated the rise in the market gave it scope to return billions of pounds more to investors than previously indicated.

Unveiling a 7 per cent rise in underlying profits to $5.3bn (£3bn) for the first quarter, BP's chief executive Lord Browne of Madingley said the increase in oil prices had not been driven by the fundamentals of supply and demand. "There has been no shortage and in fact inventories of crude oil and products have continued to rise."

During the quarter, oil prices averaged close to $60 a barrel - some 30 per cent higher than the same period a year earlier. Since then they have continued to rise to more than $70, although Brent crude fell fractionally yesterday to close at just below $73 after President George Bush said the US would divert supplies destined for its strategic reserve into the market.

Lord Browne said the rise in prices appeared to stem from nervousness in the financial markets over the disruption to supplies from Nigeria and heightened tensions over Iraq and Iran.

But he also highlighted the significant increase in speculative trading in oil futures, driven in part by hedge-fund activity. The head of BP's gas, power and renewables division, Vivienne Cox, said the amount of financial trading in oil had risen tenfold in the past five years with many investors going "long" and assuming rising oil prices were a one-way bet.

BP said higher oil prices were responsible for $2.5bn of the $7.2bn in underlying profit from exploration and production. However, the shutdown of BP's Texas City refinery reduced profits by about $650m in the group's refining and marketing division, which recorded a 27 per cent decline in underlying profits to $1bn.

Including one-off items, replacement cost profit fell 4 per cent to $5.265bn.

BP said earlier this year it could afford to return $65bn to shareholders in dividends and share buy-backs over the next three years based on an oil price of $60. But BP said yesterday it was ahead of that run rate in the first quarter with a total of $5.9bn returned to shareholders. Lord Browne defended the increase in shareholder returns by arguing the money ultimately ended up in people's pensions, with BP responsible for £1 in every £6 that went into pension funds from their UK investments.

Lord Browne insisted he would not remain as BP's chief executive beyond 2008 when he reaches the company retirement age of 60. But he gave a strong hint that he will look for a major new corporate challenge elsewhere after that. "Retirement is not a concept I have much time for. I will be very interested in making sure I continue to do business."

There had been speculation that Lord Browne would be tempted to stay on beyond 2008 to ensure the success of BP's expansion into Russia. But BP said yesterday it had already recouped $5bn of the $8bn it had spent on its 50 per cent stake in the joint venture TNK-BP and expected its investment to be repaid entirely by the end of this year.

Blair urged to cut North Sea taxes

Tony Blair will today be urged to reverse the latest increase in North Sea taxation or risk seeing Britain's off-shore industry decimated, as exploration spending is switched to other areas of the world.

A delegation of business and community leaders from north-east Scotland, led by the Liberal Democrat MP for West Aberdeenshire and Kincardine Sir Robert Smith, will tell the Prime Minister that the doubling of supplementary corporation tax on North Sea profits to 20 per cent has created an unstable climate which threatens jobs and investment. The increase, announced in December's pre-Budget report, will leave some North Sea operators facing a marginal tax rate of 75 per cent. BP said yesterday that its overall tax rate this year will increase to 39 per cent, largely as a result of higher UK taxes.

The UK off-shore industry supports some 260,000 jobs and will contribute more than £10bn in taxes to the Exchequer this year. But it will cost an estimated £200bn to exploit the 16 billion to 27 billion barrels of recoverable oil still left in the North Sea

The delegation will tell Mr Blair that this investment could go elsewhere unless the tax regime is made less punitive.

Sir Robert said: "This meeting with Tony Blair is a timely opportunity to reinforce the message that when the oil price falls there needs to be a quick response from the Government."