The Wall Street Journal: Scandal, Crises Hasten Exit For British Icon

EXTRACT: Almost until the end, Lord Browne and his executive team were thinking about the next big deal. In recent years, say two people familiar with the matter, they even considered a tie-up with Anglo-Dutch rival Royal Dutch Shell PLC.

THE ARTICLE

First Page

BP Chief’s Tenure
Was Increasingly Rocky;
Then He Lied to Court
Hiding an Escort Service

By CHIP CUMMINS, CARRICK MOLLENKAMP, AARON O. PATRICK and GUY CHAZAN
May 2, 2007; Page A1

The career of John Browne, one of modern Britain’s most celebrated business leaders, has unraveled in a personal scandal. But the story of the BP PLC executive’s demise has deeper roots and a more traditional moral: that of a legendary executive who allowed his company to lose its way in the autumn of his tenure.

Lord Browne, who was awarded his title after turning a sleepy oil company into a global titan, yesterday resigned after Britain’s highest legal body triggered the release of court documents detailing his relationship with a former lover. Since January, the 59-year-old Lord Browne has been battling in court to prevent a London tabloid from printing the story, while planning to resign later this year.

The documents detail Lord Browne’s life with Jeff Chevalier, including that their relationship began on the Web site of an escort agency. Lord Browne initially lied to the court in a statement about how he met Mr. Chevalier, and that lie led to the documents’ release. The papers also contain statements from Mr. Chevalier that he sold to the London tabloid the Mail on Sunday. The relationship had ended early last year and Mr. Chevalier decided he had little prospect of money or career.

Mr. Chevalier told the paper about Lord Browne’s dinner parties, including one with British Prime Minister Tony Blair in which Mr. Blair talked about life after politics. Mr. Chevalier claimed BP staff had helped him set up his own business, which ultimately failed. A BP investigation found that any help Lord Browne or BP staff provided Mr. Chevalier in setting up his own business was inconsequential.

Witness Statement

Lord Browne lied about how he met Mr. Chevalier in a witness statement in January when his lawyers were seeking the injunction, just after he and BP board members had battled about how long he would stay in his CEO post. He said he met Mr. Chevalier when they were exercising in London’s Battersea Park. In fact, according to a person familiar with the matter, they met on a Web site called “Suited & Booted,” which touts itself as London’s premier male-escort agency.

Two weeks later, just before a hearing on Jan. 23, Lord Browne admitted he had lied and apologized, saying he wanted to set the record straight as a matter of conscience. But the judge in the case, David Eady, castigated Lord Browne over the issue in his final judgment. “I am not prepared to make allowances for a ‘white lie’ told to the court in circumstances such as these,” he ruled, according to the court documents. The House of Lords declined to take up Lord Browne’s appeal.

News of that decision and document release yesterday was swiftly followed by word of Lord Browne’s resignation — and then capped by a wrenching apology from the oil baron, who had kept his private life carefully out of public view throughout his career.

“My initial witness statements…contained an untruthful account about how I first met Jeff,” Lord Browne said in a statement. “This account, prompted by my embarrassment and shock at the revelations, is a matter of deep regret. It was retracted and corrected. I have apologized unreservedly, and do so again today.”

Britain’s tabloids have a long history of taking down establishment figures over sex scandals, but Lord Browne’s case was unusual. The head of the nation’s largest company, he was venerated in business circles, and the British press had never before delved into his private life. The Mail on Sunday, which is owned by Daily Mail & General Trust PLC, says it had intended to publish the article, in early January, because it involved an important business figure and suggested improper use of BP resources.

BP yesterday put into play the succession plan it originally unveiled in January, when Lord Browne announced he would be stepping down this July. That date was already about 18 months earlier than he had once planned. BP said Tony Hayward, anointed by the board in January as Lord Browne’s successor, has taken over as CEO. A career BP executive, Mr. Hayward isn’t expected to quickly change BP’s strategy, but has said he will put a new emphasis on safety amid a series of image-pummeling operational problems over the past two years.

BP faces challenges recovering from regulatory and safety problems including a refinery explosion in Texas that killed 15 workers, oil spills in Alaska and an energy-trading scandal in U.S. markets. Along with the rest of the industry, BP also is struggling to get access to fresh reserves of crude, as oil-producing nations in the Middle East and elsewhere seek to capture more of their resource wealth for themselves.

Because of his long and successful track record, Lord Browne until recently had a secure grip on BP’s board. But that began to weaken in the last two years in the wake of problems. In the past few months, Mr. Browne misplayed his hand, ultimately losing the support of board members he had once dazzled.

Last year, the CEO made comments that led several board members to wonder whether he was lobbying to stay on beyond late 2008, when he would hit the mandatory retirement age of 60. Then in January, BP and the board learned about the Mail on Sunday article. Some BP officials say the planned story didn’t force the January announcement that he would retire in July. But people familiar with the situation said the story was obviously weighing on Lord Browne’s mind.

The board wasn’t dismayed by the pending revelations of Lord Browne’s personal life, people familiar with the situation say. Rather, they say, it was his admission that he had lied to a court that triggered his hasty departure yesterday.
 
Lord Browne had long presented a tony public image, as an art collector and opera buff, in sharp contrast to the rough-hewn American oil barons who dominated the industry for most of the past century. He lived for many years with his mother, a Holocaust survivor from Hungary, who accompanied him to BP events, before she died in 2000. Queen Elizabeth II knighted him in 1998, and in 2001 the government gave him a life peerage, with the title Lord Browne of Madingley.

His fall caps a four-decade career. Lord Browne joined the company as a university apprentice in 1966, during which time he studied physics at Cambridge. Soon after graduating, the company sent him to Alaska, at a time when big discoveries there helped the West weather the oil shocks of the 1970s and 1980s.

BP was founded by an Englishman who struck oil in Iran in 1908. By the time Lord Browne took over in 1995, the company, which for a time was state-owned, was limping along. Over a decade, Lord Browne transformed the oil icon from an also-ran into a global powerhouse. At one point it was the world’s largest publicly traded oil company by market capitalization behind Exxon Mobil Corp., and remains in the top handful.

When oil prices hovered close to $10 a barrel in the late 1990s, Lord Browne convinced his board that acquisitions and cost cutting were the only way to survive. In 1998, he forged a merger with Amoco Corp., setting off a rash of copycat deals. More recently, critics have blamed the big spending cuts that accompanied the industry’s consolidation for curtailing supply and contributing to today’s super-high oil prices.

Lord Browne also buffed BP’s environmental image years before the corporate green movement caught hold in other boardrooms. In 1997 he warned that global warming was real, and later came up with the slogan “Beyond Petroleum” for BP. The company was long known as British Petroleum.

Almost until the end, Lord Browne and his executive team were thinking about the next big deal. In recent years, say two people familiar with the matter, they even considered a tie-up with Anglo-Dutch rival Royal Dutch Shell PLC. That idea never made it to the board for consideration, but was part of a series of scenarios that executives tossed around in brainstorming sessions, said one person familiar with the situation.

But Lord Browne’s cost-cutting strategy came back to haunt the company in March 2005, when an explosion ripped through its giant Texas City, Texas, refinery, killing 15 workers and triggering a series of investigations. By the time of the explosion, the cost cutting was taking a serious toll on the company’s operations, according to regulators and internal BP documents.

The 2005 blast capped a series of deadly accidents at the Texas plant, which BP acquired in the merger with Amoco. Regulators and BP employees alleged that deep cost cutting worsened plant safety and contributed to the accident, a charge BP denies.

In a review conducted by BP executives, Paul Maslin, a vice president for refining technology, said he thought the plant’s problems were “significantly aggravated” by cost reductions of 25% ordered after the merger. That report hasn’t been made public, but notes from interviews conducted for it have been reviewed by The Wall Street Journal.

Maintenance Spending

An independent panel commissioned by BP and led by former Secretary of State James A. Baker III found Amoco cut maintenance spending by 41% from 1992 to 1999. After BP bought the plant, BP headquarters ordered an additional 25% cut in total costs across its U.S. refinery operations. At Texas City and Whiting, Ind., near Chicago, plant managers cut staff and hired cheaper contractors for things like maintenance. In Texas, hourly maintenance and operations staff fell by an additional 18% between 1999 and 2000, according to the company.

Meanwhile, Lord Browne’s top deputies overlooked looming problems. John Manzoni, BP’s head of refining and a member of Lord Browne’s inner circle of executives in London, told BP executives during the internal review that he didn’t pick up on difficulties while touring the Texas plant. He had heard reports that “everything was fantastic” at Texas City, he said in a July 7 interview. Mr. Manzoni has declined requests to comment.

BP has said it quickly ramped spending back up, and Lord Browne has defended his consolidation strategy. “Integration never finishes,” he said in response to a reporter’s question at his last news conference as CEO, in London early this year. He added: “There is always more work to be done.” But “the pace of acquisitions was not too rapid,” he said.

Texas City was just one problem Lord Browne was wrestling with. In Alaska, the company suffered two oil spills last year because of corrosion problems at its Prudhoe Bay oil field, the country’s largest. In August, BP partially shuttered the field, triggering a temporary oil-price increase and congressional hearings. Outside attorneys hired by BP traced part of the corrosion problems to a botched integration effort between the Alaska operations of BP and Atlantic Richfield Co., which Lord Browne snapped up in 2000.

Meanwhile, an aggressive trading-room mentality in the U.S. led to a string of tangles with U.S. regulators. When the New York Mercantile Exchange doled out a record fine to BP in 2003, settling allegations of improper crude-oil trading, BP agreed to boost compliance at its U.S. energy-trading business. But last summer, regulators alleged that Houston-based BP traders strategized to manipulate propane markets as recently as 2004. BP denies it manipulated markets, but late last year disclosed that regulators also were investigating a series of its other energy trades.

Amid the problems, Lord Browne’s view toward his coming retirement started puzzling some board members, according to people familiar with the situation. At a speech earlier last year, he blasted statutory retirement limits. Newspaper articles mentioned the idea of an extended tenure. Directors started wondering if Lord Browne or his allies were floating trial balloons, according to people familiar with the situation.

These suspicions crystallized after the release of a research report in July by Merrill Lynch analyst Mark Iannotti. He wrote that Lord Browne’s retirement was a “medium term risk” for investors, and suggested shareholders write to the board to keep him on. Another “reasonable option,” he wrote, would be moving Lord Browne into the chairman’s slot, replacing Chairman Peter Sutherland.

Directors had no first-hand knowledge that Lord Browne or his allies were behind any of these ideas, according to people familiar with the situation, but they grew increasingly confused about his intentions. Mr. Iannotti declined to discuss his research report.

On the Friday that report was released, Mr. Sutherland, an Irish politician and banker who ran the predecessor to the World Trade Organization, called Lord Browne into his office at BP headquarters near London’s Piccadilly Circus. He told the chief executive to end speculation that he would stay on, according to people familiar with the situation.

Starting that weekend, details of the meeting leaked out in the British press — in one case describing Mr. Sutherland as “bullying.” Independent directors were livid at the leak, according to people familiar with the situation.

While directors had already laid the groundwork for a succession search, they quickened their hunt through the summer and fall. By December, a search group had interviewed leading internal candidates, including Mr. Hayward, head of exploration; Mr. Manzoni, and Bob Dudley, chief executive of BP’s Russian joint venture. They decided on Mr. Hayward and planned to announce the decision early this year.

Then, just before Christmas, came an email to the CEO from Mr. Chevalier: “I do not want to embarrass you in any way but I am becoming concerned by your lack of a response to my myriad attempts at communication.” The court papers note that Mr. Chevalier denied this was a thinly veiled threat.

On Friday Jan. 5, Roddy Kennedy, BP’s top spokesman, learned that the Mail on Sunday planned to publish a story about Mr. Browne’s relationship, according to a person familiar with the situation. Inside BP, the relationship wasn’t a surprise. Though Lord Browne is intensely private, several top BP executives and associates had met Mr. Chevalier at social functions. The next day, Mr. Sutherland, the BP chairman, began reaching out to other BP directors to discuss the matter.

But the communications immediately came to a halt Saturday evening, because Mr. Browne succeeded in getting a court injunction against the story running the next day. Mr. Sutherland and others soon were told that they now were forbidden from discussing the matter. It was to remain a secret, and court papers wouldn’t be made available. Lord Browne told Mr. Sutherland that he had a robust defense, according to a person familiar with the case.

Lord Browne has said that his decision to move his departure up to July had already been made before BP learned of the tabloid story. But he didn’t inform the board of his decision until early January, after returning from a vacation in Barbados. In a news conference in mid-January, Lord Browne said he had made up his mind in early December to go “sooner rather than later,” but had kept that decision to himself.

This March, Lord Browne informed Mr. Sutherland that the court case had uncovered allegations that Lord Browne may have improperly allowed Mr. Chevalier to use company resources. In yesterday’s release of documents, Mr. Chevalier alleges that BP personnel assisted in helping him set up a mobile-phone ring-tone business.

Mr. Sutherland directed that BP’s chief counsel open an inquiry, but Mr. Sutherland couldn’t discuss the case with the board. On March 12, the chief counsel’s report said that the internal use of company property was immaterial, according to a person familiar with the situation.

Lord Browne’s explanation for the lie about how he met Mr. Chevalier, which became the key issue for the courts, was that he was embarrassed to be confronted by the allegations. The reference to Battersea Park had been the agreed-upon story between the two men when he introduced Mr. Chevalier at social events, according to a person familiar with the situation.

According to court papers, Lord Browne gave Mr. Chevalier gifts and money during their relationship, including Prada clothing. Mr. Chevalier accompanied the BP chief on business trips, and they stayed in five-star hotels and flew in private jets.

The breakup left Mr. Chevalier facing “hunger and homelessness” in Toronto, Mr. Chevalier told his former partner, and he sent the pre-Christmas email to ask Lord Browne for money, according to court documents.

Days later, Mr. Chevalier got in touch with a friend who worked at the Mail on Sunday. The editor, Peter Wright, agreed to pay for the story, deciding the homosexual relationship was an important background fact that should be included. It wouldn’t breach Lord Browne’s privacy, he reasoned, because the relationship was well known to business cognoscenti in the U.K. “Chevalier accompanied him [Browne] like a wife at the management functions,” says Mr. Wright. “It was hardly a secret.” Mr. Wright says the paper paid a “modest” amount for the story, much less than $200,000.

Despite his inglorious exit, Lord Browne still has fans who say he’ll be remembered for transforming the oil business and delivering big returns to investors over the years.

Steve Thornber, oil sector analyst at Threadneedle Investments, which owns 1.1% of BP, described Lord Browne’s resignation as “outrageous.” “Despite this and recent challenges, he’s been a fantastic manager of a good business for a number of years. It’s a tragic shame to see him so harshly treated and I think he should’ve stayed on despite the personal allegations,” he said.

RISE AND FALL
 
• 1908: Predecessor to BP is founded by an Englishman who strikes oil in Iran
 
• 1969: Browne joins BP
 
• 1995: Browne becomes CEO
 
• 1998: Browne orchestrates $52 billion merger with Amoco
 
• 1999: BP announces plans to buy Atlantic Richfield
 
• 2000: BP adopts ‘Beyond Petroleum’ motto
 
• 2003: BP creates big joint venture in Russia, TNK-BP
 
• 2005: Deadly explosion at BP refinery in Texas City, Texas
 
• 2006: BP oil spill in Alaska; partially shuts down Prudhoe Bay oil field
 
• 2006: BP traders accused of trying to manipulate propane-gas trading in U.S. by Department of Justice and CFTC
 
• May 2007: Browne resigns

Write to Chip Cummins at [email protected], Carrick Mollenkamp at [email protected], Aaron O. Patrick at [email protected] and Guy Chazan at [email protected]

 

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