BP Bets Billions That Oil Prices Will Take Off

There was a big signal on the outlook for oil prices and especially for the value of oil reserves in Alaska on Thursday when British Petroleum declared that it would pay $70 a share, or a total of $7.4 billion, for 45% of the stock of Standard Oil.

What BP--which already owns 55% of the Cleveland-based company--is saying is that it now sees world oil prices staying at the current level of $18 rather than plummeting again to $10 or less.

And it is also saying that Alaska looks good, both in the Prudhoe Bay field where there may be more oil than previously thought, and in new areas in the Arctic coastal plain.

BP, along with Standard Oil, Exxon and Atlantic Richfield, discovered Prudhoe Bay, the largest oil field in North America, in the 1960s. In the 1970s, the British company converted its interest in the Alaskan field into a majority ownership of Standard Oil, or Sohio, as the company used to be called.

The stock market reacted to BP’s decision to buy the rest of Sohio by immediately raising the price of other oil companies Thursday, notably Los Angeles-based Arco, which is also big in Alaska.

Changed Its Opinion

What impressed Wall Street most was that BP Chairman Sir Peter Walters and his company, which is 32%-owned by the British government, were abruptly reversing their field.

Only last summer BP was saying that it wasn’t interested in buying the roughly 105 million Sohio shares it didn’t already own because its long-term view on the oil business was decidedly gloomy. With oil prices down, even Alaska was under a cloud.

Standard Oil’s shares were available then for about $40 a share, which means that BP could have bought the lot for about $50 a share, or $5.3 billion.

Now it is offering $70, and the stock market, by bidding Sohio stock up to $71.125 on Thursday, was betting that the British would have to pay more.

Why would they? Because the minority shareholders of Sohio, who are represented on its board of directors by the investment banking firm of First Boston, may force them to pay up for the heightened promise of Alaska. As it happens, one of the best reports on the outlook for Alaska was delivered at an energy seminar early this month by First Boston analyst Thomas Petrie.

Petrie, who makes his base in Denver, acknowledged that low oil prices and expensive drilling failures in recent years had made the oil industry skeptical about fresh prospects.

But there is one area that is an exception to that skepticism, Petrie said--northern Alaska. “Recent surveys by the oil industry and by the federal government have isolated the Arctic Coastal plain as one particular area in North America with world-scale geologic potential,” he declared.

Major Field Suspected

That coastal plain is a 1.5-million-acre strip in the 18-million-acre Arctic National Wildlife Refuge. The Department of Interior has recommended that Congress allow one part of the strip be leased for oil exploration, and there has been one well drilled on Alaskan native lands. As it happens, BP and Standard Oil drilled that well, along with Chevron.

There has been no report on what the drilling found--but oil people assume the results were encouraging, and that large oil and gas deposits lie beneath that Arctic Coastal plain.

How large? About the size of the East Texas field that was discovered in 1930 and only recently produced its 5-billionth barrel of oil. That’s very big, although not as big as Prudhoe Bay, which has produced 5 billion barrels in only 10 years, and has yet to slow its production--indicating that there’s a lot more oil in the field than originally thought.

All of which would be merely interesting if BP didn’t think oil was going to maintain or increase its value from here on out. Last summer BP didn’t think that way; Thursday it moved quickly to borrow $5 billion so it could pay $7.4 billion for the rest of Standard Oil.

What happened? Well, it could be that the world changed. British Petroleum, the former Anglo-Persian Oil Co., first developed the oil of Iran around 1910, and knows that country.

Current thinking in the Middle East, reports analyst Bruce Lazier of the Prescott Ball & Turben investment firm, is that Iran is going to win its war with Iraq and that Saudi Arabia is going to get closer to Iran--which means higher oil prices from the Organization of Petroleum Exporting Countries.

And that argues for greater value, and renewed exploration, for oil in the United States. That could be why shrewd investors have lately been buying drilling rigs at 5% of their original value, and why Houston rig brokers R. S. Platou & Co. report a pickup in prices for offshore rigs.

Such signs could be wrong, of course, and we could still be in for years of low-priced gasoline and heating oil. But BP on Thursday bet $7.4 billion that car pooling and lowered thermostats soon would be in fashion once again.