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Financial Times: BP battles to clear its Augean stables

By Carola Hoyos
Published: September 20 2006 03:00 | Last updated: September 20 2006 03:00

On March 23 last year, a cloud of highly flammable hydrocarbons erupted at BP’s Texas City refinery, after a catalogue of mechanical failures. Alarms remained silent, level indicators failed to judge the mounting danger and valves jammed.

At 1.20pm, probably ignited by a spark from a pick-up truck, the cloud burst into flame, setting off a series of explosions.

Fifteen workers in two trailers next to the tower died and 170 others were injured.

Long after families had buried their dead and the refinery had been rebuilt, the explosion continues to tear through BP’s corporate fabric. Until the day of the tragedy, BP and Lord Browne, its chief executive, had enjoyed as celebrated and successful a run as is possible in one of the world’s most dangerous and unpredictable industries. Lord Browne was regularly voted Britain’s most admired business leader.

However, on March 23 BP crossed a “fault line”, Lord Browne would later say, that would force a “fundamental change” in the way the company operated. For BP, Texas City has been as profound an event as Exxon’s huge oil spill at Valdez in Alaska in 1989. The explosions at Texas City marked the beginning of a wretched 18 months. In that period, BP’s flagship Thunder Horse platform in the Gulf of Mexico was damaged in a hurricane in July 2005 and its Alaska pipelines corroded so badly that almost exactly a year after the Texas City disaster they caused the biggest onshore spill in the state’s history and forced the company to shut America’s largest oil field.

This summer, the US government accused BP’s traders of having tried to corner the propane market in 2004; and Lord Browne himself was strong-armed by his chairman into announcing he would retire promptly in 2008.

The run of trouble has prompted investors to sell BP shares and to ask whether the company had a systemic problem.

This week’s announcement that BP would have to delay the restart of Thunder Horse a third time deepened the company’s malaise. It prompting analysts to warn that, as a result, its earnings per share would fall 4.5 per cent in 2007 and 6 per cent in 2008.

BP’s shares have already retreated so far that Royal Dutch Shell in August knocked it off its perch as Europe’s second-biggest listed energy group.

Moreover, BP’s troubles have thrown Lord Browne’s succession into doubt, with four of the five candidates, many of them groomed for decades, embroiled in the trouble. Lord Browne and BP’s senior executives have steadfastly maintained that the recent events in the US were unconnected.

Nevertheless, they have appointed Bob Malone as the new president of BP USA, and Stanley Sporkin, a former federal judge, as its ombudsman. It is also spending $7bn (£3.7bn) over four years on the safety and integrity of its US operations. It has also promoted John Mogford to be vice-president of safety and operations, reporting directly to Lord Browne, to co-ordinate what is intended to be a company-changing overhaul of its operations.

BP’s root-and-branch revamp will take five to 10 years. It will allow the company to clean up a system thrown into upheaval by 15 years of low oil prices followed in 1998 by the most ambitious acquisition spree attempted by an oil company since the days of John D Rockefeller and the rise of Standard Oil a century ago.

Many analysts, oil workers and company executives believe repairs to old refineries, such as the one in Texas City and to pipelines, such as those at BP’s Prudhoe Bay field in Alaska, were delayed by oil companies’ cost-cutting in the 1980s and 1990s, when oil prices fell as low as $10 a barrel and thousands of workers were laid off.

One senior energy executive says: “One of the problems is that this industry was in decline for two decades. In such an industry you have to make assumptions and decide where to spend more.”

Matthew Simmons, a well-known Houston-based industry consultant, puts it more bluntly. “BP’s culture was designed to be the most efficient cost-cutter in the industry and they did that with a certain degree of arrogance and out of that came too many corners cut on maintenance and safety.”

Most of BP’s oldest operations are in the US and that the late 1980s and 1990s were a trying time.

Lord Browne has warned that the industry faces a shortage of engineers and workers as a result, noting that a disproportionate share of BP’s workforce is above 45, and in some areas, such as exploration and production, above 50.

As oil companies embarked on round after round of lay-offs from 1983 to 2002, the number of petroleum engineers in the US shrunk from 33,000 to 18,000, while the number of geologists and geophysicists fell from 65,000 to 48,000, data from the US Bureau of Labor Statistics show.

Meanwhile, students shied away from studying a subject for which there seemed no further use and the number of US colleges offering undergraduate petroleum engineering degrees fell from 34 to 19. The trend has been similar in the UK with the number of registered engineers falling more than 8 per cent over the past decade. For BP, the situation was magnified by the acquisitions of Amoco in 1998 and Arco in 1999, which led to further cost cutting.

During that time BP launched Ghser, “Getting Health Safety and Environment Right”, which set out new expectations for the bigger group now heavily weighted in the US.

In the following eight years, BP managed to improve Amoco’s lagging safety record. Until the Texas City disaster, BP’s safety record was one of the best in the industry. But, privately, the company now admits it failed to integrate fully its different safety systems. Plants still use a range of procedures, entrenched by local custom and practice.

Leo Martin, director of GoodCorporation, which helps companies including Total and BG, BP’s smaller UK rival, assess their environment, health and safety cultures, says: “BP set the tone from the top but failed in the implementation. British culture would usually do it the other way round.” At BP, he says, it appears a gap emerged between the corporate centre, which tries to establish clear business principles, and local management, which is focused on day-to-day operational performance.

To be able to catch up with ExxonMobil, the industry’s undisputed leader, BP knows it must change its entire structure, not just its safety system.

Getting the revolution off the ground will be one of Lord Browne’s final big challenges before he retires at the end of 2008.

BP’s problems in the US have consumed the chief executive, people close to him say.

Lord Browne has grown more weary and retreated from the spotlight that he had in the past commanded with such obvious enjoyment. Meanwhile, even after their bitter public row over succession, he has called on Peter Sutherland, BP’s chairman, for guidance. Earlier this summer, he went to Marbella in search of his advice. “Golf was not on the agenda,” one insider notes.

Neil McMahon, analyst at Sanford Bernstein and a former BP employee, stresses that the executives’ focus must now be on centralising BP’s operations.

“BP’s organisational structure is comprised of numerous business units, surrounding assets or profit centres, versus the more old-school style of ExxonMobil, which has a few giant functions run centrally.

A more centralised organisation structure may help the top management of BP have greater control on the organisation as they strengthen procedures,” he says.

According to one senior executive of a big European energy group, ExxonMobil is the only major oil company with the operating structure that allows it to face the new challenge of taking on huge, technologically challenging projects at a time when oil rich countries are increasingly shutting the doors to their oil and gas fields to foreigners.

Exxon’s success was born from bitter experience. On March 24 1989, the Exxon Valdez tanker struck a reef and spilled 11m gallons into Alaska’s pristine Prince William Sound. Exxon spent $300m compensating victims, was fined $287m and is still contesting $4.5bn in punitive damages.

The company eventually overhauled its approach to safety, centralised its businesses, added checks and balances and created an internal communications system that improved everything from financial prudence and physical caution to technological innovation.

Based on the approach taken by Dow Chemical, the company structure is the same round the world so that employees do not have to relearn Exxon’s policies and procedures every time they move. It also allows problems to be communicated throughout the company so that others can help, or at least learn from them.

Mark Albers, president of ExxonMobil Development Company, who oversees all of Exxon’s new production and development projects, says the centralised structure is key to its success. From concept to production, all of Exxon’s big projects are managed from Houston.

“In terms of the management and the service that we provide to each of our affiliates, it’s all done in one location, which means we can provide the same world-class service to an affiliate in Angola as in Sakhalin, as in Qatar. And people are literally just down the hall from people who have worked on a similar issue on a project somewhere else down the globe, so the information transfer and the best practice transfer is immediate,” he says.

He points out that projects Exxon operates are within 3 per cent of the unit costs expected at the time of funding and the company finishes its projects about 5 per cent more quickly than it forecasts.

In contrast, Exxon’s peers, including BP, Shell and Eni, have all recently announced delays and cost increases on their flagship projects – BP at Thunder Horse, Shell at Sakhalin and Eni at Kazakhstan’s Kashagan field.

Exxon is a partner in Prudhoe Bay, Kashagan and Thunder Horse and some analysts, including Mr Simmons, feel it deserves some of the blame.

Although BP was the operator in Alaska, Exxon agreed the decisions surrounding the pipeline’s maintenance. At Thunder Horse, Exxon is now said to be urging BP not to rush the restart. At Kashagan, oil company executives say Exxon is trying to wrest control away from Eni.

However, the fact that Exxon’s shares have outperformed BP’s since the Alaska debacle – even though Exxon owns more of the field and therefore faces greater losses and higher costs – starkly illustrates where investor faith lies.

Yet, BP seems to have started on the right note.

Lloyd Whitworth, fund manager at Morley Fund Management, who has called for a one-on-one meeting with BP’s board, says: “We welcome BP’s announcement that it is implementing a comprehensive review of its global operations.

“We’re pleased that the company is in open and constructive discussions with shareholders.”

BP is just at the beginning of its long road to health. Whether Texas City will indeed be BP’s Exxon Valdez will be largely up to Lord Browne’s successor, who will have to finish the job his predecessor started in 1998.

Copyright The Financial Times Limited 2006

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