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The Guardian: City fears BP will be seen as ‘dead money’ until new king is crowned

· Analysts give warning on eve of US safety report
· Company braced for strong criticism

Terry Macalister
Tuesday January 16, 2007

The management vacuum left by the unexpected announcement that Lord Browne will leave his chief executive post this summer – 17 months earlier than planned – could mean that investors will regard BP as “dead money”.

City analysts gave the warning yesterday over Britain’s biggest company on the eve of what will be a highly damaging report into safety procedures at its Texas City refinery. An explosion killed 15 workers there in 2005.

Tony Hayward, 49, BP’s head of exploration and production, was named as Lord Browne’s successor in a surprise and chaotic announcement late last Friday. He is due to start his new job on August 1.

The sudden change of direction – BP had said that Lord Browne would retire at the end of 2008 – came with conflicting messages from company insiders. The normally smooth public relations machine appeared to have broken down, giving the impression there were differences about whether the chief executive felt compelled to quit ahead of the publication of the Texas City report.

Lord Browne, 58, is unlikely to be named in the 250-page document drawn up by former US secretary of state, James Baker, but it will make clear safety was not addressed properly at board level and failings were not just the fault of local managers.

There has been speculation that John Manzoni, the chief executive of refining and marketing, could also quit. But within BP it is believed that Mr Hayward will not be held responsible – even for wider problems in oil production.

The company’s shares have lagged behind in a strong oil market and now an awkward period of six months looms with Lord Browne on his way out and Mr Hayward preparing to take over in the summer.

“The risk is that for the next quarter BP is ‘dead money’ although BP will be meeting its top 100 shareholders after its February 6 results,” said Jonathan Wright, oil analyst at Citigroup. “It is hard to see BP outperforming until Hayward defines his vision for BP this summer and the evidence of operational improvements becomes manifest, which is unlikely before the second half of 2007,” he added.

Despite that uncertainty and its problems in America , Citigroup said it continued to have faith in BP as a financial performer and was “sad” that Lord Browne’s reign was ending in such a way.

Over the past 18 months the man some commentators call the Sun King has seen his reputation tarnished by a series of accidents and investigations, prompting the BP share price to jump 3% over the past two days on news of his early departure. Lord Browne has presided over Alaskan pipeline corrosion and spills, regulatory investigations into its US propane and oil trading plus delays to some production start-ups in the Gulf of Mexico.

These and other problems were not enough to stop him being named yesterday as Britain’s most impressive businessman in a Mori poll – for the seventh time in eight years – while in America, BP’s image is in tatters.

When Lord Browne took over as chief executive 12 years ago BP was a second-tier oil company that had been through some financial traumas. He built the group into the world’s second largest independent oil producer with a series of daring “megamergers” in the US at a time when company values were devastated by low oil prices. In quick succession from 1998 he seized control of Amoco, Arco and then Burmah Castrol in 2000 before later moving into Russia with the acquisition of TNK. He was already working on a similar initiative in China and had even considered the possibility of buying BP’s nearest rival Shell. But his plans began to unravel with a series of mishaps in America which began to look like systemic failure, something he has always denied.

New questions began to be asked about whether the enormous cost-savings that had justified the mergers and driven the share price upwards had been achieved at the expense of operational safety. The US Chemical Safety and Hazard investigation board has already criticised a 25% cut in fixed costs at the 70-year old Texas City refinery between 1998 and 2000.

Mr Hayward’s task is to rebuild the company’s reputation and he will do this in part by implementing recommendations that will be made by Mr Baker in his report. Mr Hayward will take the top job at a time when the Russian business is under pressure from the Kremlin over alleged environmental violations in Siberia.

And at the heart of Mr Hayward’s own fiefdom are difficulties that the group needs to sort out quickly: delayed start-ups on the Thunder Horse field in the Gulf of Mexico and stagnation in wider oil and gas output. On top of this BP’s respected finance director, Byron Grote, retires in two years and the company is entering a period of lower oil prices.

With his baby-faced smile and shy charm, Mr Hayward might, at first glance, seem out of his depth, but those close to him insist he is smart and robust as well as ambitious. Fadel Gheit, a BP-watcher for many years as oil analyst at the Oppenheimer brokerage in New York, has met Mr Hayward on many occasions and regards the BP lifer as a “perfect choice”.

So while Lord Browne moves off to become chairman of the non-executive advisory board at private equity house, Apax Partners, Mr Hayward will move in, probably appointing his deputy, Andy Inglis, as head of exploration and production.

Mr Hayward was a favourite of Lord Browne, not least because they come from a similar exploration background, but the younger man will be keen to avoid the traps of high office. Critics believe that Lord Browne partly came unstuck when he began to believe his own rhetoric after being lionised by his industry peers, analysts and journalists.

Mr Hayward has already made it clear that he will adopt a less aggressive and more inclusive management style. He told staff last month that BP needed to move away from making a virtue out of “doing more for less” and said management had been “too directive and does not listen sufficiently well”.

His task over the next few months will be gently to add to this philosophy – perhaps when he meets shareholders early next month as part of an attempt to breathe new life into dead money.

http://business.guardian.co.uk/story/0,,1991071,00.html

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