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The Sunday Times: Focus: Battered Petroleum

December 24, 2006

BP’s Lord Browne has had an annus horribilis but there may be worse to come in 2007, with probes of the company’s safety record and a looming battle to succeed him. Dominic Rushe reports 
 
The holiday season is a time for reflection. And 2006 has certainly given Lord Browne of Madingley plenty to think about. Once Britain’s most admired boss, the BP chief executive has seen his image tarnished this year by a series of scandals, disasters and an investigation into a fatal fire that killed 15 employees.

After a bruising fight earlier this year with his chairman, Peter Sutherland, Browne, 57, agreed to step down at the end of 2008 before his sixtieth birthday. Some are speculating he may be forced out earlier. 
 
As the BP chief executive prepares for Christmas and New Year, his deputies — men he once affectionately referred to as his “Teenage Mutant Ninja Turtles” after the fast-moving cartoon characters — are jockeying for his job. Last week one turtle, reportedly his personal favourite, even appeared to have aimed a low blow at his boss, criticising the cost-cutting strategies many have blamed for BP’s woes.

“We have a management style that has made a virtue out of doing more for less. The mantra of more-for-less says that we can get 100% of the task completed with 90% of the resources — which in some senses is okay and might work, but it needs to be deployed with great judgment and wisdom. When it isn’t, you run into trouble,” wrote Tony Hayward, chief executive for global exploration and production, in an internal document leaked last week.

BP has said Hayward was talking about himself, not Browne. Accusations of politicking remain, however, and it hasn’t helped that the company now seems to have more leaks than its damaged Alaskan pipeline. Rumours of divisions in the top ranks only intensified when another leak revealed that BP was looking to appoint a chief operating officer next year, someone who inevitably would be seen as Browne’s successor. Top headhunter Anna Mann is advising the board on the search.

Hayward’s rivals include Robert Dudley, chief executive TNK-BP, the company’s Russian joint venture, Iain Conn, executive director, and John Manzoni, head of refining and marketing.

It will be a difficult choice. All the candidates have their strengths and weaknesses. Manzoni, for example, may have damaged his chances in a careless e-mail sent after the fatal fire at the Texas City refinery. “I arrived in Texas City at 3am along with Lord Browne. And we spent a day there at the cost of a precious day of my leave,” wrote Manzoni. However, his experience and record make him a frontrunner.

Hayward is popular internally and “carried himself like a chief executive,” said one BP insider. But the politicking charge may stick.

Mann will look outside BP. But, given the scale of the company’s operations, an insider is the most likely choice. By April, when BP has its annual meeting, an appointment may have been finalised. But some analysts said the pressure that is expected to come to bear on BP early next year may force the company to choose a turtle sooner.

BORN in Hamburg after the war, John Browne has been associated with BP as boy and man. His father joined BP as a management consultant after leaving the army. Browne was sent to King’s School, Ely, and got a first in physics at St John’s, Cambridge where he was sponsored by BP. He joined the company on graduation and apart from a stint at Stanford Business School to take his MBA, he has been there ever since.

Identified early as a rare talent, Browne rose through the ranks and was appointed chief executive in 1995. When he took over, BP was still a mid-sized oil company, dependent on the dwindling wells of the North Sea.

He built his reputation with the acquisitions of the American oil giants Amoco and Arco, purchases that transformed the British company from a regional player into a global giant.

The way in which Browne and BP overcame regulatory obstacles to secure the two firms, bought when oil was cheap, and the way they cut costs and integrated the newly-acquired assets were seen as a textbook operation.

Browne’s takeovers came amid a wave of consolidation as the so-called Big Oil companies gobbled up competitors and pared costs to stay profitable.

As oil prices recovered, BP and its peers started generating huge profits and BP seemed to be looking beyond the oil market for its future growth strategy.

In 2000 the company rebranded itself with the slogan Beyond Petroleum as a self-styled green oil company. Its critics mocked that as an oxymoron.

But the move did its fortunes no harm. Today BP is the biggest company in Europe by stock-market value, it employs more than 96,000 people worldwide and its boss is on first-name terms with presidents and heads of state around the world.

Financially 2006 has been a golden year for BP and the oil industry as the price of oil has stayed high. Last year BP reported a 25% increase in annual profits to $19.3 billion. In October the company announced a 58% increase in profits for the three months to September to $7 billion.

But in securing record returns, was BP sowing the seeds of its own troubles? BP’s critics charge that while the newly environmentally-conscious company was tilting at windmills and solar panels, it was actually cutting costs at its American facilities at the expense of safety — something the company denies.

Oil is a messy, dangerous and controversial industry and accidents happen. But over the past few years BP has had by far the worst record of all the big companies.

It has suffered a string of disasters over the past two years, including a refinery explosion in Texas City that killed 15 — the worst industrial accident in America in more than a decade — and Alaska’s largest-ever land oil spill (see panel below).

Both disasters have been blamed on cost cutting. Even internally, penny pinching is now being seen as the prime cause of many of BP’s woes.

“The top of the organisation doesn’t listen hard enough to what the bottom of the organisation is saying,” Hayward wrote in his controversial leaked memo.

Charles Hamel, a former oil executive and long-time critic of Browne’s, said the chief executive was “like George Bush — you can’t reason with him.”

Hamel, who believes Browne is the root cause of BP’s current woes, has become a conduit for BP whistleblowers and is now Browne’s arch enemy. Information provided to Hamel has led to government investigations of BP that could end in criminal charges.

The two men first met in 1979 at a BP office in Cleveland. They argued over fees charged to one of Hamel’s clients, and relations have been sour ever since.

If 2006 was a bad year for BP, there is every sign that 2007 will be worse, according to Hamel. His sources claim that cost cutting at BP has seriously undermined the company’s infrastructure.

“The basic problem is that they run their facilities to failure rather than replace when needed. They have more problems to come, just wait and see,” said Hamel.

BROWNE may not have long to wait. Next month James Baker, former US secretary of state, will provide an insight into BP’s problems. BP hired Baker in 2005 to head an independent investigation into safety at BP Products North America. His findings are being closely guarded.

But one Washington source said Browne “must be regretting he ever got involved with Baker”. And oil analysts believe the report will only make BP’s problems worse.

“It seems management was at least insensitive to safety risks at Texas City and, when you are dealing with people’s lives, safety really has to be job No1,” said Phil Flynn, an analyst at Chicago-based Alaron Futures and Options.

A 2004 staff survey painted a bleak picture. Don Parus, the Texas refinery’s site manager, commissioned the survey. In the report, disclosed during legal proceedings, Parus observed that “killing somebody every 18 months seems to be acceptable at this site” and added that when he inherited responsibility for the refinery in 2002, he found a culture of “keep it running with Band Aids and superglue”.

Employees reported broken alarms, chunks of concrete falling and staff being overcome by fumes. Asked to list BP’s priorities, staff rated “making money” as No1 and “people” as No9, the lowest.

One area of concern being discussed is how Baker will view BP’s treatment of contract workers. Many jobs at BP have been outsourced to cheaper contractors to save money. The 15 dead at Texas City were all contract workers and not employees. Most of the injured were also contract workers.

After the Baker report, Browne faces trouble on two more fronts, a potentially hostile investigation by the US Congress and — on the other side of the world — the threat of a Russian probe into TNK-BP’s plans to develop the Kovykta gas field in Siberia. The Russian gas monopoly Gazprom has already caused trouble for Shell and is proving a stubborn negotiator with TNK-BP.

Browne may be called to give evidence in Washington in February before the committee on Energy and Commerce and will testify under oath. “A slip of memory is equal to perjury in those situations,” said one Washington insider. “There’s nothing more fun for politicians than to beat up an oil executive,” said Flynn.

Immediately after the Texas City tragedy, Browne flew in to take responsibility for the accident. “Yesterday was a dark day in BP’s history,” he said. “We are responsible for what happens within the boundaries of our plant.”

And even as BP’s problems have multiplied, Browne has continued to talk about responsibility. “In our business we have to think about the cost of our wants, what society wants, and how we can be part of society, and be in a business that lasts more than just the next transaction,” he recently told The Spectator magazine.

This year he looks certain to start counting the cost of his wants.

“Browne was a very powerful figure in this industry and did some incredible things. But the buck stops at the top,” said Flynn.

THE YEAR OF THE AMERICAN NIGHTMARE
 
THINGS have just not gone right in America for BP and Lord Browne. The problems began last year and have not stopped.

March 23, 2005

A huge explosion tore through BP’s Texas City oil plant, near Houston, killing 15 people and injuring nearly 200. Initial investigations blamed the accident on mistakes by plant operators and supervisors. It was also found that two alarms had failed to operate.

July 2005

The same refinery suffered an unrelated fire, causing $30m of damage to surrounding property. Also in July, BP’s development oilrig in the Gulf of Mexico was battered and damaged by Hurricane Dennis. Thunder Horse, as the rig was called, was evacuated and left listing helplessly.

September 2005

BP was fined £12m by the US Department of Labor for 300 safety violations at the Texas City plant. But the company was still making record profits thanks to high oil prices caused by world shortages and instability in the Middle East.

March 2006

Some 260,000 gallons of oil gushed out of a BP pipeline in the Prudhoe Bay oilfield in Alaska. The American authorities launched a criminal investigation.

April 2006

BP was fined for safety violations at its refinery near Toledo, Ohio. The company contested the allegations.

July 2006

American regulators scrutinised BP’s dominance in the propane-gas market to see if the company had been involved in price-fixing. Also in July, there were reports of boardroom rows over Browne’s retirement date. It was eventually agreed that he would stay on until the end of December 2008 but no longer.

August 2006

A further spillage in Alaska led to the shutdown of almost half the production at Prudhoe Bay and the loss of 400,000 barrels a day of crude.

A subsequent inspection revealed extensive corrosion of the pipeline network. Full production was not restored until October.

September 2006

BP announced an 18-month delay in the start-up of production at the Thunder Horse platform. 1,000 barrels of gas oil were spilt from a pipeline in California.

October 2006

The US Chemical Safety and Hazard Investigation Board said it believed cost-cutting contributed to the Texas refinery explosion. BP has repeatedly defended the company’s safety record and denied that spending was a factor in the blast.

November 2006

On the eve of going to court, BP settled the remaining outstanding case arising from the refinery blast when it agreed to pay $32m on worker training and healthcare donations. In return, Eva Rowe, whose parents died in the fire and who had refused a private settlement, agreed to withdraw her action.

December 2006

This month Browne’s annus horribilis drew to a close with BP admitting that details of an investigation into whether the company tried to corner the market in petrol had been passed to the US Department of Justice. And last week the company announced that Mike Hoffman, the executive who oversaw the Texas City plant, had resigned as head of BP’s global refining division.
 
http://www.timesonline.co.uk/article/0,,2095-2517359.html

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