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The Wall Street Journal: As BP’s Hayward Takes Helm, His Priorities Should Be Clear (‘a merger with Royal Dutch Shell’ ?)

COMMENT FROM breakingviews
January 17, 2007

Dealing with a damning report on your company’s operations is hardly the best way to start life as a chief executive-in-waiting. But that is precisely the situation facing Tony Hayward, whose appointment at BP to succeed Lord Browne came on the eve of the Baker report on the oil giant’s safety record in the U.S.

Mr. Hayward’s priorities should be clear. First, improve safety. The oil giant has been sweating its assets in order to boost returns. That helps explain the problems at the Texas City Refinery and its Alaskan pipeline. In a letter leaked from BP’s intranet just before Christmas, Mr. Hayward admitted that getting 100% of the task completed with 90% of the resources doesn’t always work. BP has already upped spending on improving safety at U.S. refineries to $1.7 billion, but the figure could still rise.

Throwing money at the problem probably won’t be enough. BP’s culture needs to change, too. The oil giant became increasingly dominated by a “Yes, Lord Browne” culture. The scale of change isn’t as big as that confronting rival Shell after its reserves debacle in 2004. But it isn’t trivial.

Third, Mr. Hayward needs to address the problem of falling production. As the current head of the exploration-and-production division, pumping barrels is presumably something he should be good at. Here, Mr. Hayward should benefit from Lord Browne’s legacy: BP has a strong foothold in Russia, and a few juicy projects in the pipeline. Some big ones, like Atlantis in the Gulf of Mexico or various fields in Azerbaijan, are due to come on-stream in late 2007 and 2008. Although he’s set up reasonably well, there may be operational or political slip-ups for Mr. Hayward to manage.

What about something more radical? That may not be Mr. Hayward’s priority now. BP has looked at more extreme options in the past — such as a merger with Royal Dutch Shell, or even breaking itself up into two smaller and more manageable companies. But even BP, which has a deserved reputation for being responsive to investor concerns, hasn’t gone that far. Yet.

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