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THE WALL STREET JOURNAL: BP Safety Focus Is Crucial

Turnaround Depends
On Reducing Its Risks,
Fixing U.S. Troubles
By MATTHEW DALTON
January 2, 2008

BP PLC is hoping to reach operational health in 2008, but questions remain about whether problems within U.S. operations could undermine its turnaround.

The oil giant’s two largest U.S. refineries and its oil field at Prudhoe Bay in Alaska are expected to operate at capacity for most of the year for the first time since 2004.

But the main issue isn’t whether the London-based company has fixed problems that several investigations said caused a deadly March 2005 explosion at its refinery in Texas City, Texas. The question is whether BP has diminished the risk of catastrophic events that all companies engaged in the exploration, production and processing of hydrocarbons face.

The refinery blast was the first and most serious in a string of disasters that included oil spills from BP’s pipelines on Alaska’s North Slope, costing billions of dollars in profit.

BP’s shares have lagged behind those of its main competitors, Royal Dutch Shell PLC, Exxon Mobil Corp., Chevron Corp. and ConocoPhillips. After the Alaska oil spills in 2006, Royal Dutch Shell replaced BP as the world’s second-largest oil company by market capitalization after Exxon Mobil.

Wall Street analysts are optimistic that BP won’t see its performance in 2008 marred by explosions, corroded pipelines and government investigations. BP Chief Executive Tony Hayward, who took the reins in May, has refocused the company on operational integrity while avoiding the more high-profile role adopted by his predecessor, Lord John Browne, said Fadel Gheit, oil-industry analyst at Oppenheimer & Co.

BP seems devoted to improving safety at U.S. refineries, said Gary Beevers, international vice president at the United Steelworkers, the union that represents refinery workers. “I’m certainly encouraged with BP,” he said. “Their attitude has changed.”

The company has replaced the devices that were responsible for the Texas City explosion and is eliminating their use in refining units that process “heavier than air, light hydrocarbons,” BP spokesman Ronnie Chappell said. The company also plans to spend an average of $1.7 billion annually between 2007 and 2010 on the integrity and reliability of its refineries, up from $1.2 billion in 2005.

Last week, BP agreed to test a key United Steelworkers safety program at the Texas City refinery, with the goal of expanding it to BP’s four other U.S. refineries.

“We are becoming a better, safer operator as a result of the steps we’ve taken since the accident at Texas City,” said Mr. Chappell.

Cost cutting and a lax safety culture were to blame for the explosion at Texas City, according to a report issued in March by the Chemical Safety and Hazard Investigation Board, a federal agency.

“I don’t think I’ve ever seen anything that bad,” said Carolyn Merritt, former chairwoman of the safety board, of conditions at the Texas City refinery. The explosion, which killed 15 and injured more than 170, was one of the worst U.S. industrial accidents in years.

An investigation headed by former Secretary of State James Baker into safety at all of BP’s U.S. refineries found similar problems with the company’s safety culture, though it didn’t focus on the issue of cost cutting.

Changing the culture will be difficult, said Paul Tebo, a former executive at DuPont Co. and a member of the Baker panel. “It is not a simple task,” Mr. Tebo said. “I can’t tell you whether it takes one year, three years or five years.”

In October, the company pleaded guilty to a criminal violation of the Clean Water Act for failing to maintain its pipelines on the North Slope of Alaska properly, resulting in several large oil spills in 2006. The company took the costly step of shutting half of Prudhoe Bay, the largest U.S. oil field, to replace the pipelines.

If BP can operate its Texas City and Whiting refineries without major problems, while also bringing on production in the Gulf of Mexico, the company should be one of Big Oil’s top performers in 2008, said Mr. Gheit at Oppenheimer.

“BP is the only large company that I know of that has increased volumes both upstream [production] and downstream [refining],” he said. “No other company that I know of can even come close to that.”

Write to Matthew Dalton at [email protected]

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