The Economist: Paying the price

Jan 18th 2007
From The Economist print edition

The British oil firm is in trouble. But its rivals face many of the same problems

NO ONE calls upon James Baker, an American elder statesman, to solve a trivial problem. George Bush recruited him to defend his interests in Florida during the disputed election of 2000, and more recently to examine ways out of America’s morass in Iraq. The United Nations once asked him to settle a 30-year-old conflict in Africa. So it says a lot about the state of BP, a big British oil firm, that it asked Mr Baker to head a panel to assess flaws in its safety regime.

John Browne, BP’s boss, turned to Mr Baker in 2005 after an explosion at one of the firm’s American refineries killed 15 people and injured 170 more. Since then BP has suffered a series of further disasters. Last year several of its pipelines in Alaska sprang leaks, briefly forcing the closure of America’s biggest oil field and prompting oil prices to jump. BP’s trading arm is under investigation for price-fixing. A showcase project at the Thunder Horse oilfield in the Gulf of Mexico has been delayed by a mix of hurricanes and engineering. Last year BP’s output declined, and its share price has lagged behind that of rivals such as America’s Exxon Mobil (see chart).

Now Mr Baker’s panel, which published its findings on January 16th, has determined that BP’s management did not devote enough money or effort to ensuring safety at its American refineries. Shortly beforehand, Lord Browne had said that he would bring forward his retirement by 17 months, to the end of July, reinforcing the notion that something had gone badly wrong at BP and that a fresh start was needed to set the firm to rights.

There certainly seems to have been something wrong with BP’s safety practices. Mr Baker’s report deliberately refrained from assigning blame for the explosion at the refinery, in the small American town of Texas City. But it did argue that the firm placed too much emphasis on preventing personal accidents, such as falls and car crashes, and not enough on preventing operational and engineering failures. Although the panel did not find any evidence that the firm had knowingly skimped on safety, it concluded that budgets had been inadequate and that staff had been overstretched. Moreover, it placed much of the blame for all this on the board and senior managers.

Lord Browne immediately vowed to fulfil all of the panel’s ten recommendations. At the same time, he pointed out that BP had already increased spending on maintenance and safety at its five American refineries, from $1.2 billion a year to $1.7 billion. It has also hired more staff, established a new unit to set and enforce safety standards throughout the firm and beefed up the role of its American operations head to include overseeing safety.

Similarly, BP is doing public penance for its failings in Alaska. It has hired three experts on corrosion to assess whether it is monitoring and maintaining its pipelines properly. In response to allegations that it gave whistleblowers short shrift when they pointed to penny-pinching, it has appointed a former judge as an ombudsman, to record and investigate complaints.

Lord Browne insists that there is no pattern to BP’s various problems and no over-arching failure of management. Not everyone agrees: Tony Hayward, his successor, said last year that BP’s top brass were too imperious and failed to heed the concerns of the lower ranks. Other observers think the management is not assertive enough. Neil McMahon of Sanford Bernstein, a financial-services firm, believes that BP needs to be reorganised to reduce the autonomy of its many units and so ensure more consistent standards and policies.

But for all the fuss, BP’s conduct is probably not too different from that of its rivals. Mr Baker’s report suggested that most American oil firms probably tolerated similar safety lapses. Fadel Gheit of Oppenheimer, another financial-services firm, points out that before the disaster at Texas City, many refineries used to keep staff and maintenance crews on site, dangerously close to volatile chemicals. By the same token, he says, none of BP’s partners in the Alaskan pipeline complained that it was spending too little on maintenance.

If anything, Mr Gheit argues, BP has handled disaster better than its rivals might have done: it has offered to settle all lawsuits arising from the explosion at Texas City and has set aside $1.6 billion to compensate the victims, whereas Exxon Mobil is still fighting a court case related to the massive spill from the Valdez, one of its tankers, off the coast of Alaska in 1989.

The rest of BP’s difficulties are hardly unique. BP’s rivals are also struggling to increase production, since nationalistic governments are increasingly inclined to exclude Western firms from the most promising exploration prospects. Indeed, BP is in a better position than most, in that it is still clinging to its prolific Russian joint venture, TNK-BP, despite the Kremlin’s growing hostility to foreign investment in oil and gas projects.

Likewise, the whole industry is experiencing embarrassing delays and cost over-runs with complex projects like Thunder Horse. That is thanks to the high oil price, which has prompted a boom in exploration and thus created a shortage of labour and equipment. Both Royal Dutch Shell and Exxon Mobil, for example, have increased budgets and stretched timetables for their respective developments on Russia’s Sakhalin Island.

Mr Hayward’s elevation will not change any of this. As head of BP’s exploration and production, he presumably would already be finding and pumping more oil and gas if he could. Furthermore, he has spent his entire career at BP, much of it as Lord Browne’s protégé, so he is steeped in its culture. The change of guard may prompt investors to reassess the firm and give its share price a corresponding boost, say analysts. But in the long run Mr Hayward will probably find the job even more gruelling than Lord Browne did.

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