THE BRITISH PETROLEUM COMPANY, LIMITED

Press, Volume XCVIII, Issue 28895, 15 May 1959, Page 16

THE BRITISH PETROLEUM COMPANY, LIMITED

RECORD GROUP SALES

FACTS OF THE FIFTY-FIFTY PROFIT SHARING PRINCIPLE

The fiftieth annual general meeting of the British Petroleum Company, Limited., will be held on May 21 at Britannic House, Finsbury Circus, London, E.C. The following are extracts from the statement by Sir Neville Gass, K.8.E., M.C., the chairman, which has been circulated to stockholders w’ith the report and accounts for the year ended December 31, 1958:

For the year 1958 the Group sales amounted to 62 million tons, the highest yet recorded and nine million tons more than for 1956 or 1957. It should be borne in mind that in 1957 expansion was arrested by the effects of Suez, and accordingly the large increase in 1958 should be regarded as related to a two-year period rather than indicative of a single year’s expansion. In spite of the increase in tonnage in 1958 the Group net sales figure of £s9Bm shows an increase of only £2m on that for 1957 by reason of the lower prices ruling in 1958. The difficult trading conditions already being encountered at the beginning of the year, as reported in last year’s statement, continued without relief through 1958. The Group income before taxation is up by £llm, this higher increase being mainly due to the relief from certain excentional expenses incurred in 1957 as mentioned last year.

Our supplies in 1958 were drawn almost wholly from our own sources, including, as mentioned later in this statement, over 60 million tons of crude oil from producing countries in the Middle East. Supplies from these countries are obtained under agreement which provide for profit sharing on the fifty-fifty principle. In total the sums included in the 1958 accounts for payment to these countries under fifty-fifty amount to £ll9m. The comparison between this figure and the net income for the Group—£63m, as shown on the Group income statement—is instructive. The figures show that the fifty-fifty principle, and the manner in which it is applied, serve the producing countries well. For the assessment of the producing country’s 50 per cent, profit share the crude oil is valued at the Posted Price, which is the published price available generally to buyers on a day-to-day basis. Large buyers prepared to contract with the supplier over a period naturally look for some discount; the result is that the average realisation is below posted price on which the producing country’s 50 per cent, share of the profits is assessed. Moreover the fact that the assessment is made by reference to the crude oil price has sometimes been criticised as excluding the producing countries from any further profits made in activities outside the country, ie., in refining and distribution in the consuming markets.

The criticism lacks foundatioi in principle—there is no economi< precept that the provision of i natural resource of raw materia (be it crude oil or, for example iron ore) should create a right tc share in the earnings of th* capital and effort devoted t( transforming it into consumptior commodities and distributing those commodities to the user in othei countries. That in spite of thii lack of essential foundation suet a view has been advanced, ii presumably attributable to a mis taken belief that large extra pro fits are made in refining and dis tribution operations, so that con cems such as ours, which are involved in the whole range o operations, from crude oil pro duction through to distribution o products, derive an income mucl higher than that of the producing countries from the crude oil whicl is the basis of the operations. Th* fact that the Group incomes o £63m for 1958 mentioned abov* includes our income from crud< oil production, refining, trans portation and marketing, demon strates how mistaken the belie is. Magnitude of Sums Involved Attention has been drawn t these matters because it is fel important that stockholders shouh be aware of the true facts of th. situation and so be better abl to appreciate how unsupporte* by the facts are suggestions which gain publicity from tim. to time, that the fifty-fifty prin ciple fails to give fair and gener ous treatment to the countrie whence the oil is obtained. On< other important feature of thes< arrangements should ’be men tioned. This is that the oil com panies find the capital, on th. provision of which everythin) depends. As demand increases the facilities have to be provide* to produce, refine, transport an* deliver to consumers large quantities year after year. An* this requires capital expenditur. on a very large scale. As an illustration of the magni

tude of the sums involved in production operations alone, it can be mentioned that there are in pro- i gress in the Middle East operations in which we are interested, schemes for the development of production and associated handling facilities costing over £lsom. The recurring need for heavy capital expenditure means that a high proportion of the companies’ earnings must be ploughed back into the business. In our, case this porportion has averaged 73 per cent, over the last 10 years.

The producing countries do not' have to spend any part of their income from the oil to provide the facilities needed to make possible the expansion in offtake, which will increase the revenue-earning tonnage for them. They have their I income fully available to spend as they consider best serves their national interest. This feature is a great benefit to the countries, and in this respect our type of fifty-fifty agreement differs from the partnership type of agreement which has recently appeared, under which the producing country would be required to find its proportion of the capital necessary for the development of the undertaking if and when production has been found. The development of newly found production usually takes a long period and necessitates heavy expense. Production and Exploration In 1958 our main sources of crude oil were again Iran, Iraq. Kuwait and Qatar, from which we obtained 60.700,000 tons, 12.000,000 tons more than in 1957, when the dislocations had resulted in a reduction of 1 000.000 tons compared with 1956. In New Zealand geophysical survey work proceeded in the North Island and an exploration well was begun in January, 1959 Refining In 1958 our total refinery throughput was just under 38,000,000 tons, some 6,000,000 more than in 1957. It has to be remembered, however, that the BP Group refinery throughputs in 1957 were adversely affected by the dislocations of that year. Sea Transport BP Group tankers, comprising the fleets of BP Tanker Company. Ltd,. BP Clyde Tanker Company, Ltd.. Tanker Charter Company. Ltd., and Societe Maritime des Petroles BP totalled 157 ships at the end of 1958. the same as at the end of 1957 but of larger deadweight tonnage. 2,600.000 tons against 2,411,000 tons. The balance of our shipbuilding programme under construction or on order comprises 44 tankers ranging from 15.000 to 65,000 deadweight tons whose delivery dates are being spread over a longer period than was at first envisaged. In addition Societe Maritime des Petroles BP has three ships on order. Distribution and Sales During 1958 Western Hemisphere product prices at main export centres showed a general downward trend except for middle distillates which, due to severe winter conditions, were subject to an upsurge in demand and consequently a rise in price later in the year. At main export centres in the East product prices, apart from fuel oil. showed little change throughout the year. •In both West and East the greatest reductions were in heavy fuel oil. Selling prices in the consumer markets were affected also by the lower levels of freight. Vigorous competition was met in all our marketing areas and in some countries this was accentuated by supplies from Russian sources. In general our marketing associates were successful in holding their position, but in some areas under competitive pressure prices fell to unsatisfactory levels.

In the United Kingdom consumption was 24 per cent, above the 1957 figure, which had been curtailed by rationing, and 20 per cent above the 1956 figure. In spite of severe competition and the continued recession in world shipping movements mainly affecting the tramp and cargo section, sales of the BP International Oil Bunkering Service reached a higher level than ever before. Our International Aviation Service, renamed AIR BP, has continued to increase its sales of aviation fuels and we have made available to the airline operators of the world knowledge gained by our research and development both in fuels and fuelling techniques. All sections of the lubricants market expanded. Sales of BP Energol Visco-Static motor oil showed an increase of some 40 per cent, over 1957. A new petroloil mixture for two-stroke engines sold under the name of BP Zoom was successfully put on the market. Our bitumen sales showed an improvement. —P.B.A.