Financial Times: BP clears the decks for Hayward with procession of bad news

By Ed Crooks, energy editor
Published: February 7 2007 02:00 | Last updated: February 7 2007 02:00

“My bias is not to have regrets,” Lord Browne said yesterday.

This followed his decision last month to step down as chief executive of BP at the end of July, 17 months earlier than planned. “Things are the way they are; one has to be a concrete realist.”

From such an intensely cerebral man, that was probably as much of an outpouring of emotion as one could have expected, even at his last full-year results presentation after 12 years at the top.

But he did sound a little wistful as he reflected on BP’s “great people, great assets”, adding: “I know Tony Hayward will look after these and put his own stamp on the future of BP.”

Yesterday showed how far the company is going to smooth Mr Hayward’s passage into the job.

It is standard practice for new chief executives to get the bad news out as soon as they arrive; BP is doing it while the old chief executive still has nearly six months to go.

BP’s new guidance onproduction was the big shock in yesterday’s strategy update. On Monday, Goldman Sachs put out a note changing its recommendation on BP from neutralto buy. It estimated that 2009 production would be 4.515m barrels of oil equivalent per day.

Yesterday, BP said it expected that year’s production to be only 4m b/d – less than 2 per cent higher than last year’s 3.926m.

A year ago, the company was talking about 4 per cent average annual production growth and suggesting it could reach 4.85m b/dby 2009. The new guidance is 18 per cent less than that.

In part, the diminished expectations for production growth reflect BP’s problems.

Mr Hayward said his priority was simple and clear: “To implement our strategy by focusing like a laser on safe and reliable operations.”

It seems that focus will, to some degree, come at the expense of growth. Mr Hayward said BP would “in some cases deliberately slow the pace of our activity to improve safety and efficiency”.

That constraint bites particularly because of the shortage of skilled people in the industry. BP and its subcontractors have been recruiting a new generation of people into the industry, after years of job losses, and newer people need to go more slowly, it has learned.

The search for oil in ever more hostile environments is also taking BP to the “technological frontier”, Mr Hayward said.

An example is its Thunder Horse platform in the deep water of the Gulf of Mexico, which was last year put back another 18 months to the second half of 2008.

The delay to that and the Atlantis project, also in the Gulf of Mexico, will cost 100,000 b/d from 2008’s production.

But there is also an element in the new figures that is entirely presentational. A higher oil price means that countries in which BP operates take higher volumes of oil under their production-sharing agreements, cutting BP’s share.

The previous guidance was based on an oil price of $40 a barrel; the new guidance is based on $60 a barrel. That has the effect of cutting 300,000 b/d from expected production in 2009.

Whether $60 is a more realistic estimate of the oil price in 2009 than $40 is open to debate. But using the higher assumption creates more room for pleasant surprises in the years to come.

As Mark Ianotti of Merrill Lynch put it, there is a “distinct possibility that BP has taken the market to a place where it can now (forthe first time in two years) exceed expectations”.

Amid all the bad news surrounding BP, its success in finding oil stands out. Last year it replaced 113 per cent of its production with booked reserves and it has made important discoveries at Kaskida in the Gulf of Mexico, the deep water off Angola and the Nile Delta in Egypt.

Unlike Royal Dutch Shell, its closest rival, BP has not invested in high-cost sources such as oilsands and can make good returns at a lower level of the oil price.

With those advantages in place and the decks cleared for him, Mr Hayward has a fair chance to turn BP’s performance and reputation around. It is up to him now to take it.

Copyright The Financial Times Limited 2007

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