BP Feels The Heat

2006 was a horror, and problems remain. Will John Browne leave early?

Editor's Note: On Jan. 12, BP announced that CEO John Browne will step down in July, 2007, more than a year earlier than his expected retirement date. He will be replaced by Tony Hayward, currently the company's head of exploration and production.

Executives at BP's headquarters on London's leafy St. James's Square are marking their calendars with grim resignation. In mid-January, a panel led by former U.S. Secretary of State James A. Baker III is due to release a long-awaited report on a series of mishaps at the energy giant. The study could further bruise BP's already battered reputation and might hasten the departure of CEO John Browne, until recently one of Britain's most celebrated corporate chieftains.

If the findings are as harsh as some BP insiders fear, it will probably re- focus attention on Browne. In 11 years as CEO, he has transformed BP from a middling player into an intensely competitive money machine. Browne consummated five big deals in five years, including the $62 billion takeover of Amoco in 1998 and a $32 billion buyout of Arco in 2000. But in his quest to boost financial returns, Browne may have overlooked problems for which he has paid dearly. In 2005, a refinery accident in Texas City, Tex., killed 15 people, sparking a firestorm of lawsuits. Last June, U.S. regulators alleged that BP manipulated the propane gas market. Then in August, BP was forced to cut production in Alaska's Prudhoe Bay field after inspectors discovered corroded and leaking pipelines.

The Baker report is likely to criticize top management for being lulled into complacency. While safety statistics showed improvement, the report is expected to say not enough was done to ensure correct procedures were followed. Browne might not disagree. "We learned a lot from what happened at Texas City," he says. "We are redoubling our efforts in safety processes."

The Baker panel, however, isn't Browne & Co.'s only upcoming worry. The U.S. Chemical Safety & Hazard Investigation Board (CSHIB), a federal agency that oversees refineries, has also been looking into the Texas City explosion and is expected to release its findings in March. As the inquiry has progressed, CSHIB Chairman Carolyn W. Merritt has emerged as one of the British giant's harshest critics. Among the shortcomings contributing to the Texas explosion, according to Merritt: failure to assess the impact of cost pressures on safety, and blindness to growing risks at the plant, which had already experienced three fatalities in 2004.

Merritt further faults BP for not learning the lessons of refinery accidents at Grangemouth, Scotland, in 2000. Following those incidents, BP was fined and criticized by the Scottish authorities for poor safety management, including inadequate maintenance. In its drive to increase production and slash costs, Merritt says, BP's leadership failed to communicate the importance of prudent work practices. "You can't assume that everyone understands that safety comes first," says Merritt. She says she was so shocked by the lapses her investigators were turning up that she recommended that BP finance an independent investigation into safety and maintenance practices, which led to the creation of the Baker panel.

Executives privately say that problems were allowed to fester in a few of the less glamorous corners of the BP empire. Industry insiders say this may be partly due to Browne's view of the oil industry as a kind of three-dimensional chess game against rivals, particularly Shell and Exxon. "He has a restlessness; he is only interested in new ground," a close associate once said. Refining clearly didn't fall into the category of "new ground." It tends to be a low-margin business, and BP's focus has been keeping a lid on costs. BP executives say they recognized that the Texas refinery needed fixing, but the company did too little too late.

BP also commissioned its own study shortly after the Texas incident, which could hardly be called glowing. The 176-page report revealed a demoralized workforce that didn't follow the rules and where "safety knowledge and skills within management and the workforce were generally poor." The report identifies numerous problem areas that could be tied to cost-cutting measures, including poor training and failure to replace a crucial safety device that was outmoded and "potentially hazardous."

Yet Browne's intense drive for results combined with BP's entrepreneurial culture may have also played a role in the company's woes. While Browne puts his managers through tough, detailed reviews each quarter, BP is less of a command-and-control company than rivals. It operates with a decentralized structure designed to reward individual initiative, and managers are expected to use their own judgment in running their operations. One source says Browne may have been guilty of "naivete" in trusting that managers in Texas and Alaska could achieve his demanding financial goals without compromising operations.

Some put it more bluntly. BP "is a financial culture gone wild," says Bernard Picchi, an analyst at Wall Street Access in New York. "The company has been doing deals for the sake of doing deals with an almost maniacal focus on the bottom line, to the [detriment] of normal operating standards." BP shares traded on the London Stock Exchange are down about 17% in the past year—making it one of the worst performers among major European companies. BP's recent travails have stripped "the management premium out of the stock, which takes years to build up," says Jonathan Wright, an analyst at Citigroup (C ) in London. Brokerage Morgan Stanley forecasts that BP will earn $21.1 billion in net income in 2006, a 7% decline from 2005.


The question now is whether Browne will stick around until his scheduled retirement at the end of 2008. For several months, the board has been mulling possible successors. The leading candidate is Tony Hayward, who heads up exploration and production, BP's most important businesses. But he could be hurt by recent disappointments such as BP's estimate on Jan. 9 that its fourth-quarter 2006 production would fall by 5%. Another possibility is Robert Dudley, CEO of TNK-BP, a joint venture in Russia that accounts for about 25% of BP's production. Dudley has pulled off the tricky task of pleasing both top management and BP's Russian oligarch partners without running afoul of the Kremlin. As an American and an alumnus of Amoco, Dudley could also help bolster the company's U.S. credentials.

No matter who gets the nod, BP's continuing turmoil has sent a wake-up call to the company. The "mantra of more-for-less holds that we can get 100% of the task completed with 90% of the resources," Hayward said in a speech to employees in December. "But it needs to be deployed with great judgment and wisdom. Otherwise you run into trouble."

By Stanley Reed

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