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Reuters: Gaffes prompt re-examination of BP CEO’s record

Lord Browne BPBy Tom Bergin: A series of scandals at oil giant BP Plc’s U.S. operations, has shaken investors’ faith in its head John Browne and prompted some to re-examine the record of a man often rated among the world’s most respected CEOs. Revelations of sloppy maintenance at key oil pipelines in Alaska, investigations into alleged manipulation of fuel markets and a string of fatal accidents at a Texas refinery have acutely embarrassed a company which has spent hundreds of millions of dollars cultivating a green, ethical image.

The troubles have also hit London-based BP’s shares. The premium rating BP stock enjoyed to the sector has evaporated in the past several months, analysts said.

Browne’s personal reputation has also taken a drubbing.

Until recently he was one of the world’s most admired CEOs. In 2001 British Prime Minister Tony Blair gave him the honorific title ‘Lord Browne of Madingley’ and appointed him to the UK’s upper house of parliament.

His early recognition of the dangers of global warming endeared Browne to environmentalists. He sits on the board of environmental group Conservation International.

The takeover of rivals cheaply in the late 1990s when oil was at rock bottom, and a gutsy move into Russia in 2003, buying 50 percent of TNK, led him to be seen as a visionary in the oil business.

Now Browne has become a whipping boy for politicians, environmentalists and even oil industry executives.

His tenure at the helm of the world’s second-largest fully publicly-traded oil company by market capitalization is being re-examined with a more critical eye.

“From a management credibility perspective, the clouds have definitely not been cleared yet .. People will look with more scrutiny at his track record,” said Dirk Hoozemans who helps manage $14 billion in energy stocks, including BP shares, at Robeco Asset Management in Rotterdam.

COST CUTTING

Analysts are asking if the big mergers and tight cost control for which Browne was previously lauded also created underlying problems.

“When you’re meshing these systems together and trying to save costs at the same time you’re actually asking for these sort of (environment and safety) problems,” said Matt Simmons, head of Houston-based energy investment bankers Simmons & Co.

“It’s hard to be the best cost cutter in the business and to be good at maintenance.”

Investors are also questioning the true cost of earlier gains.

“People will ask why has BP been able to keep costs so low and to pay so much cash back to shareholders in dividends and buybacks. Has it been at the expense of necessary maintenance?” Hoozemans said.

Nonetheless, investors do not expect the U.S. troubles to cost Browne his job.

Paul Mumford at Cavendish Asset Management said while Browne’s record was now under a microscope, he did not think the CEO should go because overall BP was in good shape.

Indeed, Mumford said he was using the weakness in the BP share price as a buying opportunity.

BP has accepted its pipeline maintenance regime at Prudhoe Bay, Alaska was not adequate, despite earlier assertions it was, and placed the head of pipeline maintenance at the field – the United States’ biggest – on leave.

Top brass said they were unaware of the extent of the corrosion problems at Prudhoe. Simmons calls this “a pathetic denial” but investors seem not to blame them for their ignorance.

“You’ve got to empower your middle management and from time to time … they don’t deliver,” said Julian Chillingworth, fund manager at Rathbone Investment Management, which has assets of $11 billion including BP shares.

Shareholders’ loyalty to Browne and BP’s top management reflects the company’s record of outperforming rivals in terms of production and profits growth.

However, the U.S. problems will make it tougher to continue this record.

BP said in July it would spend over a billion dollars more than earlier planned to upgrade safety in the United States and to improve pipelines. The latest Alaskan problems will require tens of millions of dollars more investment on top of this, further limiting the cash available for shareholders.

Also, senior management will increasingly find themselves tied up in solving the problems uncovered, and in dealing with related lawsuits for years to come, Chillingworth said.

Browne was unavailable for comment.

Copyright © 2006 Reuters Limited. All rights reserved.

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