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Financial Times: BP faces sea change on way to recovery

By Ed Crooks
Published: July 24 2007 03:00 | Last updated: July 24 2007 03:00

Today’s half-year results for BP, presented by Tony Hayward for the first time since he took over as chief executive in May, are expected to be a stark reminder of the challenge the company faces.

Analysts think profits for the second quarter will be about $5bn (£2.4bn), roughly $1.5bn behind those of BP’s great rival Royal Dutch Shell, which reports on Thursday.

The company still has many strengths. It has good assets in places such as Angola and Azerbaijan and with the resolution of the dispute over the Kovykta gas field in eastern Siberia, it appears to have stabilised its position in Russia, albeit at the cost of losing control of the field at a knock-down price. The potentially significant exploration deal signed with Libya has raised hopes about BP’s future.

Mr Hayward has arrived with substantial goodwill from investors hoping for a new start, Initial reviews have been largely favourable, particularly for his talk about focusing on “safe and reliable operations”.

But he faces a daunting challenge in his bid to turn the company round. In the view of some analysts, he will need to overturn BP’s entire structure and culture.

Neil McMahon, analyst at Sanford Bernstein, says: “The key to a recovery story is a change to the organisational structure of the company.”

The roots of today’s BP go back to former chairman and chief executive Sir Robert Horton’s “Project 1990” restructuring plan. Although he was forced out in 1992, when the company cut its dividend, his emphasis on cutting back the corporate centre and giving more autonomy to individual business units survived.

Lord Browne’s BP was characterised by a combination of strict financial controls imposed from the centre and a high degree of operational independence for managers.

Business unit leaders – the “Buls” – were put in charge of an operation such as an oil field or group of fields, with staff numbers typically ranging from a few hundred to a few thousand, set demanding financial objectives and told to get on with it.

As one former executive puts it: “The business unit leader was pretty much a medieval lord, as far as the running of his fiefdom went.”

This is in sharp contrast to ExxonMobil, the acknowledged global leader in the industry for safety and engineering excellence.

Exxon is organised on functional lines, so the worldwide exploration operation, for example, is a single division. This helps it spread best practice and new technology rapidly round the company.

Rex Tillerson, the chairman, said recently: “Wherever you travel in the ExxonMobil world, you will hear consistent strategies and approaches, consistent expectations for the high standards for safety and operational performance.”

Senior management also takes a hands-on approach.

Lee Raymond, Mr Tillerson’s predecessor who stepped down at the end of 2005, would every morning review the progress of every well the company was drilling anywhere in the world. If he did not like what he saw, he would call the manager responsible.

BP’s much less centralised approach to operational decision-making had many strengths: it encouraged entrepreneurialism and initiative; it smoothed the rapid integration of the companies that BP acquired in its four-year spree from 1998-2001; and it helped drive down costs to deliver outstanding financial performance. But it also had its weaknesses.

As Robin West of PFC Energy, the consultancy, puts it: “BP was very well configured for the low oil price environment: it could outsource and slash costs very effectively. But getting resources into the right projects is a different challenge altogether. As chief executive of an oil company, the main challenge now is to get projects executed and completed on time and on budget.”

Decentralised operations have inhibited BP’s ability to share best practice round the group; which can be vital when investing in challenging and high-value projects, such as the troubled Thunder Horse platform in the Gulf of Mexico.

They have also militated against the board being able to know exactly what was going on on the ground.

“There is a dynamic between being cost and performance driven and creating an environment of distrust, where people don’t report to the centre things that they think may be going wrong,” the former executive says. “There is a sense that the centre doesn’t want to hear bad news.”

The incentives for the Buls to conceal problems and the lack of effective ways for top management to check what they were being told, have been blamed for slip-ups such as BP’s embarrassing failure to hit its production targets in 2002.

In the worst case, top management’s lack of detailed operational knowledge led to lapses in safety. An internal BP probe into the 2005 Texas City explosion found that John Manzoni, the then head of refining and marketing who left BP in May, should have carried out a “much deeper dive” into the true state of the refinery after “clear warning signals” from previous accidents.

Attempts at BP to pool the knowledge of its staff worldwide have had a mixed record.”Peer assist”, a programme to bring together experts from across the company to advise on specific operational problems, is said to have slipped into the doldrums after the Amoco and Arco mergers at the end of the 1990s. Great Operator Teams, another plan to spread best practice through the company, had only a patchy effect.

Mr Hayward, who is an admirer of the standards set by Exxon, does not want to replicate its top-down centralised structure, people close to him say. But, they add, he does want to strengthen BP’s global functions. The creation under Lord Browne of a global safety function, headed by John Mogford, is likely to be a model.

Strengthening the global functional units should also help curb BP’s costs.

Allowing so much operational independence to business units has encouraged them to develop their own activities, often chasing up blind alleys or duplicating initiatives elsewhere in the company.

“Instead of cutting money, they have now got to spend it,” Mr McMahon says, “and each unit is trying to reinvent the wheel.”

Last year, BP’s total costs of supply per barrel of oil, including exploration and production costs and depreciation of equipment, rose by 20 per cent.

Its net income per barrel of oil equivalent has fallen from near the top of its peer group among the big oil companies in 2003, to near the bottom of the range in 2006.

Taking on BP’s barons will not be easy, however. Trying to strengthen global functions without adopting Exxon-style centralisation risks foundering the way earlier efforts have failed and creating additional costs instead of cutting them. The outcome is likely to be the decisive factor in determining whether Mr Hayward’s tenure is a success or a failure.

Support for the arts flourishes

Any fears that BP would reduce its support for the arts following its recent change of leadership appear unfounded, writes Andrew Clark, chief music critic.

BP has instead renewed, and in some cases extended, its arts sponsorship since Tony Hayward succeeded Lord Browne as chief executive in May. Cultural luminaries had been worried that BP, internationally recognised as a frontrunner among corporate donors, would redirect its sponsorship towards sport. Unlike Lord Browne, who had a reputation as something of an aesthete, Mr Hayward is believed to be more interested in sport.

However, BP committed itself this month to an unprecedented five-year deal with the British Museum, under which it will finance a series of large-scale exhibitions, starting with one on the emperor, Hadrian, next June.

BP had previously contributed funds on a case-by-case basis, most recently to an exhibition of Michelangelo drawings in June last year.

Copyright The Financial Times Limited 2007

 

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