BP’s Eat-or-Be-Eaten Survival Strategy Makes a Meal of Arco

BP Amoco’s aim in acquiring Atlantic Richfield Co. is to survive in the fast-consolidating petroleum industry by growing bigger. It plans to boost its profit by cutting costs, firing Arco personnel and eliminating duplicate operations to do so.

The British company, formerly known as British Petroleum, and its group chief executive, Sir John Browne, are unusually swift and direct in cutting costs out of the hides of acquired companies. BP completed the purchase of Chicago-based Amoco in December, with a plan to cut 6,000 Amoco employees. But it has cut almost 10,000 Amoco employees so far, reducing costs of the combined companies by $2 billion.

After it takes over Arco, BP will start cutting costs by combining Arco’s operations on Alaska’s North Slope with its own, looking for savings of $200 million. BP Amoco said its initial intent is to fire 2,000 Arco employees, although the number could go higher, and to achieve total cost savings of $1 billion.

BP’s purpose in all this is to broaden the range of its global operations and improve its return on capital. The oil industry has become a game of eat or be eaten. Companies today need an array of operations and financial strength to stay the course, earning profit from some deposits of oil and gas while spending to develop other resources.

This is not a trick that small companies can play these days when oil prices fluctuate wildly and remain low for long periods. In the simplest terms, the world’s pension and mutual fund investors have turned against the medium-sized companies such as Arco to favor the giants such as BP Amoco with higher stock prices.

Browne recognizes this. “To sustain the confidence of investors,” Browne said in a recent speech, the company needs to report reliable profit and dividends and not give investors the idea that the company is driven this way and that “by oil price movements.”

The need to court investors is a comedown for oil companies, which as recently as the 1970s were seen as behemoths threatening to dominate the world. But high oil prices in the 1970s quickly brought forth excess oil production in the 1980s. Oil prices and oil company returns on invested capital have been uncertain ever since.

So oil companies have been merging.

BP Amoco is already a giant, with $83 billion in annual revenue and a total value on world stock markets of $163 billion. That is quite close to the total value of Exxon, a far bigger company that is to become larger still with its acquisition of Mobil. In acquiring Arco, BP Amoco will become the largest oil producer and refiner in the United States.

The U.S. is familiar territory to John Browne. In the 1960s, he worked BP’s Alaskan oil fields after graduating with a degree in engineering from Britain’s Cambridge University. Browne also has an M.S. degree in business from Stanford Graduate School of Business.

Browne and his company, founded in 1909 as Anglo-Persian Oil Co. to exploit the oil fields of Iran, are no strangers to firing people to reduce costs. Browne took the reins as chief executive in 1995, after his predecessor had reduced the company work force from 129,000 to 53,000. Browne sees the firings as business therapy. “The process of reducing numbers is very painful, but it does mean that those who remain really can make a difference. They create the performance of the business,” he said in a London speech last month.

But Browne, who as a boy accompanied his BP oilman father to Iran, doesn’t see the industry in permanent decline--selling a fuel that will be displaced by environmental concerns in the next decade or so.

We need “to find a way to demonstrate that oil and gas can be found, produced, refined, distributed and used without damaging either people or the natural environment,” Browne said in a recent speech to petroleum industry executives.

As the soon-to-be-largest marketer of gasoline in environmentally conscious California, as well as the largest oil producer in Alaska, Browne and BP will be called upon to live up to those standards.

* ACQUISITION DEAL: BP Amoco agreed to buy Arco in a stock swap worth about $27 billion. A1