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The Sunday Times: Challenges pile up for BP’s next boss

January 21, 2007

Tony Hayward has a mountain to climb when he takes over but for now he is happy to let Lord Browne take the flak, writes Grant RingshawÂ
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TONY HAYWARD, BP’s chief executive-in-waiting, was keeping a low profile last week. As Lord Browne, the present boss, and John Manzoni, head of refining and marketing, received the equivalent of a public flogging for safety failures at BP’s American refineries, Hayward was apparently on a long-arranged business trip to the United States.

It was fitting that Browne faced the public grilling. As he admitted: “This happened on my watch and as chief executive I have a responsibility to learn from what has occurred.”
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But Hayward, a boyish 49-year-old BP lifer, will soon be thrust into the spotlight when he takes the top job on Browne’s retirement at the end of July. Formidable challenges are already piling up.

For a start, investors are restless. “There will be no honeymoon period for Hayward. Investors are looking for action,” said one leading shareholder.

Unsurprisingly, Hayward’s top priority will be to improve safety after the damning findings of the 374-page Baker report last week. But he also faces pressure over BP’s recent disappointing production performance and underperforming share price.

This has led some investors and analysts to suggest that BP should look at more drastic options. These range from a break-up, a merger with a rival oil giant or for BP to use its strong balance sheet to launch a big tender offer for its shares or pay a special dividend.

For a company as proud as BP, last Tuesday was one of the darkest days in its history. The panel, led by former US secretary of state James Baker, delivered a report that lambasted BP for “material deficiencies” in its safety procedures at its five American refineries, failures in leadership and apparent complacency about risks.

The panel, formed after the fatal explosion at BP’s Texas City refinery in 2005 that killed 15 workers and injured 170, accused BP’s management of failing to make process safety a “core value” and having a “corporate blind spot relating to process safety management”.

Although the report did not seek to blame individuals, it pointed out that Browne was a “very visible chief executive” noted for his leadership in reducing carbon-dioxide emissions and developing alternative fuels.

It said: “If Lord Browne had demonstrated a comparable leadership on, and commitment to, process safety, that leadership and commitment would have resulted in a higher level of process safety performance at BP’s US refineries.”

The report noted that while there had been cost-cutting at the refineries, there was no evidence that BP had deliberately cut spending on safety. This conflicted with an earlier interim report from the US Chemical Safety and Hazard Investigation Board which suggested this had been a factor in the Texas City disaster.

Even before the Baker report, BP’s reputation had been severely tarnished. Over the past 22 months, the oil giant has been hit by numerous troubles at its American operations, including an oil spillage in Alaska, production delays and probes into allegedly irregular trading in the propane and petrol markets.

For most investors the damage had been done long before the publication of the Baker report. Analysts argued that BP would weather the storm and Citigroup and UBS repeated their “buy” recommendations. However, many expect the report’s after-shocks to last for months. But if BP’s shares look cheap to some, the company is still under a cloud. Regulatory problems remain. The US Chemical Safety and Hazard Investigation Board’s final report on Texas City is due to be published in March and is expected to deliver a damning verdict on BP’s safety processes.

The most pressing task for Hayward is to prove that BP is taking decisive and sustained action on safety.

“We would like to see BP move forward from this,” said one shareholder. “To revive BP, Hayward will have to ensure that there are no more problems. Everything the company does will be under intense scrutiny. It just cannot afford any more slips.”

BP has made a commitment to adopt the Baker report’s 10 recommendations. These include providing effective leadership on safety, introducing new systems and appointing an independent monitor for at least five years to report to the BP board on the company’s progress.

Since the Texas City disaster, BP has taken significant steps. It has created a senior executive team to oversee safety procedures, and a safety and operations unit that reports direct to the chief executive. It has also beefed up its management, appointing Cynthia Warner to the new role of group vice-president for refining. Bob Malone, the president of BP America who was appointed last year, has been given new powers and responsibilities, including overseeing regulation and safety standards.
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BP is increasing spending on the American refineries from an annual $1.2 billion (£610m) to $1.7 billion over the next four years. But given Browne’s pledge to “apply the lessons learnt elsewhere in our global operations”, the costs will be far higher.

Spending money is not enough. BP needs to change its culture and last year launched a review of the entire business. Hayward has indicated his desire for cultural change. In an internal e-mail last month, he said BP’s leadership style was “too directive and doesn’t listen sufficiently well”. Hayward later claimed the comments were directed against himself.

While Browne had a dominant influence over his colleagues, Hayward is thought to favour a more collegiate management style. That is likely to play well with senior colleagues who lost out in the race to be the next chief executive.

These include Manzoni, Robert Dudley, the head of TNK-BP, and Iain Conn, who oversees BP internal functions. There are also suggestions that Peter Sutherland, the BP chairman, will take a more active role in strategic issues.

Hayward needs to address the problem of falling production. Like every oil company, BP has to find more oil and gas and get them out of the ground. Two weeks ago BP dashed hopes that it would meet its annual target of 4.1m to 4.2m barrels per day after poor third-quarter figures.

New projects in the Gulf of Mexico, Azerbaijan and Angola are due to come on stream at the end of 2007, boosting production. BP is also looking to North Africa for growth, particularly as Libya opens up its market. But exploration is a risky business and there remain concerns among some investors about the danger of more opera-tional slip-ups — especially after BP was forced to delay the resumption of production at its flagship and technically complex Thunder Horse platform in the Gulf of Mexico last year.

Hayward must also address concerns about the future of TNK-BP, the Russian joint venture seen as one of BP’s biggest suc-cesses in recent years. Since starting the venture in 2003, BP is thought to have already recouped its $8.5 billion investment costs.

But Russia’s determination to restore government control over energy assets means it is likely that Gazprom, the state-controlled gas giant, will succeed in its ambition of taking a stake in TNK-BP’s huge Kovykta gas field. Last week the national resources ministry stepped up the pressure on TNK-BP by launching checks into whether it had breached licensing terms at Kovykta.

The future shape of BP is also under intense scrutiny. Some analysts have suggested that a break-up, splitting the exploration and production operations from downstream assets such as refineries, could unlock an extra 20% in value for shareholders. However, such a move could be a risky gamble — potentially exposing the two parts of BP to tough competition from the remaining integrated “super major” oil companies.

Hayward could also look at pulling off a merger. Browne is known to have considered a deal with Royal Dutch Shell in 2005, but any mega-merger would face competition problems in America and Europe as well as daunting integration problems.

Meanwhile, some shareholders are understood to be agitating for BP to return more cash. The high oil price means that BP is generating huge amounts of surplus cash, which it has used in $27 billion of share buy-backs over the past two years. The problem is that, so far, the buy-backs have had little impact on the ailing share price.

Even so, BP has a low debt-to-equity ratio of 24%. Some investors say this gives it scope to gear up to 40% — a move that could release about $30 billion to pay for a special dividend or launch a tender offer for more than 10% of its shares.

Both would be big events, but there is no certainty they would be any more effective. Bumping up the dividend could be another option, boosting the yield on the shares and attracting income investors.

However, observers say that Hayward, who is described by insiders as “shrewd and deceptively tough”, is unlikely to consider the more radical options — at least not yet.

“He needs to get the organisation working the way he wants it to. There is a lot of internal work to do before he can consider doing big deals or changing the shape of the company,” said one analyst.

In other words, there are unlikely to be any quick fixes. Although Hayward has plenty of options, turning BP round is a big challenge and is likely to be a long slog.

http://www.timesonline.co.uk/article/0,,2095-2557745.html

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