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The oilman who went back to nuts and bolts

Times Online
From The Times
October 28, 2009

David Wighton: Business Editor’s Commentary

When Tony Hayward moved into the executive suite at BP’s London headquarters in May 2007, one of the first things he did was to order changes in the boardroom. This was not a shake-up in the traditional sense but a rearrangement of the pictures hanging in the room overlooking St James’s Square.

The abstract paintings favoured by his predecessor Lord Browne were quietly replaced with rather more prosaic photographs of BP oil rigs, refineries and tankers.

It was a simple touch but a sign of Mr Hayward’s determination that BP should focus on the nuts and bolts. To judge by yesterday’s third-quarter figures, that focus is now paying off handsomely.

Higher oil production and lower headcount are two important measures of progress. But another big change has been his ruthless approach to BP’s supply chain.

Historically, despite its size and wealth — or perhaps because of it — the oil industry has managed this area poorly. Manufacturers are forced to compete on minute details of their costs and supply chain every day, but oil companies tend to see themselves as fundamentally different — as explorers and producers of oil.

How they buy cement, steel, engineering services or paperclips has usually been a bit of an afterthought — and certainly not the area where the top talent would pursue their careers.

Mr Hayward himself may be a geologist by training, but to his credit he spotted the opportunity for BP to gain an edge. Even by the oil industry’s standards, BP was off the pace.

The company may be good at innovation. But Mr Hayward realised that, in this area, a bit of standardisation was needed.

By simplifying and reducing the number of contracts BP signs with everyone from suppliers of rigs to IT firms and catering companies, he has helped to lead a quiet revolution in the way the oil industry operates.

The gains have come through even more strongly than expected and BP said yesterday that it would cut an additional $1 billion (£610 million) from its costs this year.

The good news for investors is that while Mr Hayward may be approaching the limit of internal cost cuts, he still believes there is a lot further to go in the supply chain.

Outsourcing more activities to China and India is the next stage, and BP appears to be embracing it wholeheartedly — with the recession adding to the opportunity to strike new, long-term contracts. Other oil companies appear to be following BP’s lead, with Royal Dutch Shell — whose results are out tomorrow — heading down a similar path.

Helped by the cost-cutting, Mr Hayward has taken BP to a position where it can generate cash with oil at $60 a barrel, let alone the present $79. That has put paid to lingering concern that BP might cut the dividend, and now the question is at what point it will increase the payout.

With BP’s dividend so important for the London stock market as a whole, investors will be hoping the directors are inspired by those photos in the boardroom and sanction an increase in February.

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