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Sunday Telegraph: We will not be a pale shadow of Exxon

Sunday Telegraph image BP CEO Tony Hayward

Tony Hayward believes sweeping changes to BP’s culture and behaviour will lead to recovery

The British oil major will steer its own course in the post-Browne future, Tony Hayward tells Sylvia Pfeifer

Last Updated: 12:24am BST 14/10/2007

Tony Hayward does not want to use the “B” word. The word is Browne, the name of his illustrious predecessor at BP. Hayward succeeded him six months ago when Lord Browne left the oil giant under a cloud after admitting that he had lied about details of his private life.
 
Last week Hayward finally set his stamp on the company, revealing plans to break with the past by slashing layers of management and streamlining operations. He said the company had a decent strategy that it had failed to execute. Despite this show of independence, Hayward is still clearly reluctant to address the looming shadow of Browne, who dominated the company for more than 10 years.

Interviewed in his office at BP’s Mayfair headquarters – tiny compared with that of Browne, whose own expansive suite has been turned into a meeting room – he shies away even from mentioning his predecessor’s name, preferring instead to talk about “the lessons of the last three or four years”.

When, after some prompting, Hayward does finally mention him, he chooses his words carefully: “John built a fantastic company. He assembled an extraordinary set of assets. BP was a tiny company when he took over, and over 10 years he built an enormous company. It’s our task to demonstrate we can run it.”

This neatly sums up Hayward’s keenly awaited revamp of the company, which emerged last week in the shape of an email to staff, excerpts of which were published in a stock exchange announcement. The sweeping reorganisation will involve cutting several layers of management and central costs, cutting down on the number of people working in head office and increasing the number of engineers out in the field. Hayward wants a complete change to BP’s culture and behaviour.

The news lifted BP’s shares by some 2 per cent to 593.5p on the day. But BP still faces enormous challenges.

The past three years have been dismal for the oil giant. Its reputation for safety has taken a battering in the wake of an explosion at its Texas City refinery in the United States in 2005 that killed 15 people and left many others injured. An oil spill in Alaska and delays to flagship projects have only exacerbated the situation.
  
Despite a multi-billion-pound share buyback programme and record oil prices, BP’s shares have performed dismally, lagging behind those of its peers such as Royal Dutch Shell and Exxon.

In his email to BP’s 100,000 plus employees last Thursday, Hayward admitted that the company had lost its way.

“Our problem is not about the strategy itself, but about our execution of it. BP’s performance has materially lagged our peer group in the last three years.”

Despite the market’s warm reception, for the company’s investors, the jury is out. The question everyone is asking is whether the new chief executive can deliver.

So what went wrong? According to Hayward, BP’s current predicament – he refuses to use the word crisis, instead describing it as “a serious lack of performance relative to our peers in what is a very benign operating environment” – comes down to two things. A lack of consistency in how it operates and a complex management structure.

He admits that the company’s operations, particularly in refining, lacked consistency and that, in hindsight, BP failed to integrate fully some of the big acquisitions it completed in recent years.

“With the benefit of hindsight we can see now that we need to get to much greater consistency in terms of operational execution,” he says. He dismisses the suggestion that BP is simply copying Exxon, its US rival, which is famous for its centralised and standardised way of doing things.

“BP will find its own way of creating a consistent and standardised way of doing things. That does not mean copying Exxon. It’s the last thing we will do. Becoming a pale shadow of Exxon is not what we are about.”

A complex management structure – the company has no fewer than 11 layers, compared with the typical seven to eight – has only worsened BP’s problems. Hayward says that the overriding message he took away from employees in his first six months, about what gets in the way of doing business, is that “it’s so bloody complex, it’s like running through treacle”.

There are likely to be job losses, but Hayward says it’s too early to say how many jobs will be hit, although the top of the organisation will bear much of brunt.

What of his own role at the company? As head of exploration and production, Hayward had a key role in shaping how BP worked.

“Am I in part accountable? Absolutely,” he admits. Does he believe that this complexity contributed to BP’s poor safety record in the US? No. “There is not one silver bullet that was to blame,” he says cautiously. He is restricted by what he can say on the matter as the company still faces legal action in the US. What he does stress is that, despite its operational problems, BP’s strategy is sound.

“We have a tremendous portfolio… We have the raw material, but we haven’t delivered the bloody projects. It’s nothing to do with strategy, it’s all about execution! We have a great portfolio,” he says passionately.

However, Hayward admits that morale among BP’s employees is low. “Would you be surprised if it was anything else?”

Nevertheless, he believes that morale will turn around “very fast” once people see things are happening.

So how long does he think investors will have to wait to see some improvement in BP’s performance? The company is due to report its results for the third quarter later this month and analysts have slashed their forecasts, with some suggesting underlying profits will be 20 per cent down this quarter to less than £2bn, despite the soaring oil price.

Yet the results could well prove to be the nadir for BP.

Hayward believes that, going into the fourth quarter, the company will see “very significant revenue pick-up”. A number of fields have recently started producing, notably the Greater Plutonio field in Angola and Atlantis, in Mexico. Plans are to start up another field, Mango, in Trinidad, at the end of this month. In addition, BP’s two big refineries in the US should be back working at full capacity at the end of the year; they have been running at just 75 per cent of their potential. All this activity will raise revenue.

“So we have a lot of revenue momentum,” Hayward says. “I would say that this is going to be step by step. It’s not whiz-bang, fireworks today, everything is fixed. It is step by step over two to three years, but we have going for us a bit of a revenue wave from the stuff that is coming in, so we will see if we can pick the wave.

“We’ve been on the downward spiral for three or four years and it will take us two or three years to come back up.”

It’s an ambitious target. A keen sailor in his spare time – his office is dominated by sailing pictures – Hayward knows that he has the wind in his favour, but turning around a supertanker like BP will not be easy.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/14/ccbp114.xml

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