CEO says it’s time to invest

By LOREN STEFFY Copyright 2009 Houston Chronicle

Feb. 14, 2009, 12:10AM

Tony Hayward seemed strangely relaxed given that oil prices have fallen by more than $100 a barrel since last summer.

Lounging on a couch in a suite at the Westin Galleria last week, the BP chief executive talked at length about how the low prices will affect the oil industry. He predicted the next few years will be “difficult.” 

Difficult, though, is a relative term coming from BP. The past few haven’t exactly been easy for the company. 

Hayward took office in May 2007 amid a legal scandal that ended the career of his predecessor, John Browne. Since then, the company has pleaded guilty to a felony related to the 2005 explosion at its Texas City refinery that killed 15 people, and it’s agreed to a $50 million penalty to settle violations of the Clean Air Act. It’s endured an international scuffle over control of its Russian joint venture, TNK-BP. 

Hayward also inherited the aftermath of an oil spill and maintenance issues with BP’s Alaskan pipelines, a fire at its refinery in Whiting, Ind., and embarrassing delays in bringing its massive Thunder Horse and Atlantis platforms in the Gulf of Mexico on line. 

Against that backdrop, plunging prices for oil and natural gas are difficulties Hayward almost seems to welcome. 

“We’ve tried to change the whole focus of the company,” he said. “It is working. We’re on the right track.” 

Wrenching change

Just as BP seems to be putting its past behind it, though, it faces a global oil market that has undergone wrenching change in six months, as futures tumbled from a high of $147 a barrel to $37.51 on Friday. 

Hayward, though, seems sanguine about the plunge. He’s quick to note that it’s been less than five years since crude last traded below $40. 

“The industry worked very well at $40,” he said. “The industry has a great opportunity to get its cost base back in shape.” 

That’s the message Hayward delivered at the annual Cambridge Energy Research Associates conference in Houston last week: that the current price slump gives oil companies a chance to invest in the downturn. The oil majors, after all, have a lot of cash on their books, and Hayward believes it’s time to deploy it, to take advantage of global deflation from the financial crisis and bulk up operations. 

The industry needs to be ready when demand — and prices — rebound. 

“The reason that prices are as low as they are is not because we’ve created lots of new supply. It’s because we’ve seen a very significant fall-off in demand,” he said. “When the world starts again, which it will — the future has not been canceled, it’s just been delayed for a year or two — demand will be very strong. It’s going to very quickly run into a supply constraint. So it’s a very critical time for the industry.” 

Creating opportunity

The world’s biggest untapped reserves now lie with state-owned oil companies, from which many Western companies are barred. As prices fall, government tends to reduce investment in developing reserves, which can create opportunity for independent oil companies, or IOCs, Hayward said. 

“The lower the price, the more the need for efficiency,” he said. “What IOCs bring is efficiency.” 

I asked Hayward if the lower prices would trigger mergers among the majors, as happened in the 1990s. BP used the low prices a decade ago to snap up Amoco and Arco. Rumors have been circulating in the European press about a possible union between BP and Shell. 

“The industry logic for consolidation is not too compelling,” he said. “All the existing markets are shrinking. If you put BP and Shell together, you don’t add anything to the resource base. You just make the challenge twice as big.” 

In less than two years on the job, Hayward has faced more than his share of big challenges. Surviving the more routine demands of an industry downturn is one he almost seems to welcome. 

Loren Steffy is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at [email protected]. His blog is at http://blogs.chron.com/lorensteffy/.

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