Refilling BP's Tank

New CEO Hayward has major safety and expansion issues to resolve

When he abruptly resigned as chief executive of BP PLC (BP ) on May 1, John Browne left the company in disarray. The giant energy producer was struggling with a legacy of accidents and spills in the U.S. It was embroiled in a property dispute that threatened its position in Russia, a region that provides a quarter of its output. And morale had flagged as its shares, once among the hottest in the oil and gas industry, were losing ground to rivals. The job of fixing BP's problems fell to Tony Hayward, Browne's successor and a 25-year veteran of the company.

Browne, who rescued BP from financial trouble in the early 1990s and then built it into a global leader, once looked like he'd be a tough act to follow. But the company's woes and revelations about Browne's personal life that preceded his departure have made it much easier for Hayward to pursue his own instincts. While still early, it looks as though Hayward, 50, will try to boost BP's results more with efficiency gains—possibly including job cuts—than with the wheeling and dealing that was Browne's hallmark.

Hayward's style so far has been the antithesis of that of his former boss. Browne was a natty dresser and opera buff who was aloof from most BP staff members. Hayward, by contrast, goes in for rugby and Eric Clapton, and often drops by the basement cafeteria of BP's London headquarters in his shirtsleeves for coffee. On recent visits to the company's U.S. refineries, he spent hours talking to equipment operators rather than huddled with senior managers.

While the company's catalog of woes might seem overwhelming, Hayward is determined to restore BP's "winning ways," as he wrote in a May 1 staff memo. He thinks that can be done by focusing on a few key issues. The company has always been good at finding oil, whether by discovering new fields deep beneath the ocean floor or by schmoozing potentates such as Libya's Colonel Muammar Qaddafi, who awarded BP an exploration tract the size of Belgium in May.

But Hayward realizes that BP has been weak at running basic operations such as refineries. Some think he needs to come up with a radical solution, much as Browne did at the beginning of his tenure, when he launched a wave of industry consolidation by taking over both Amoco and Atlantic Richfield in the late 1990s. One possible tactic: closer ties with a national oil company, such as Russia's Gazprom, which would give BP huge reserves in exchange for access to its distribution network.

But first Hayward will have to demonstrate that BP can manage the sprawling array of businesses assembled under Browne. If not, hedge funds and other investors may start calling for his head and a breakup of the company. Job One will be fixing the safety problems that came to light after an explosion that killed 15 people at a refinery in Texas City, Tex., two years ago. Hayward has boosted spending at BP's U.S. refineries—where the most serious problems have occurred—by $500 million per year, to $1.7 billion annually over the next four years. The money will go into new and better equipment as well as safety training. At the same time, BP and its partners are moving ahead with plans to renew the infrastructure at Alaska's Prudhoe Bay oil field, which has suffered a series of leaks and other mishaps. "There can be no compromise [on safety]," Hayward said in the May 1 memo. "We must pay particular attention during this time of change."


Hayward needs to get the U.S. refineries running smoothly to keep up with rivals such as Exxon Mobil Corp. (XOM ) and Royal Dutch Shell PLC (RDS ). One reason BP let the facilities deteriorate is that refining profit margins were paltry for decades. But now, with U.S. capacity tight, the business has become a major moneymaker for most companies. But not BP. The Texas City facility, which is currently operating at just about 50% capacity, is costing nearly $2 billion per year in lost profit. Another key refinery, at Whiting, Ind., is also running at half speed.

Meanwhile, Hayward also wants to open up two giant fields BP is developing in the Gulf of Mexico. The company had hoped they would begin producing by 2005, but now neither will go into service before 2008. At today's sky-high price levels, the projects could provide a major shot to BP's bottom line. Together, they're likely to produce about 340,000 barrels per day, or 9% of BP's current output. Powering the refineries back up and getting the new wells pumping are crucial to Hayward's hopes of reversing the 24% slide, to $4 billion, in net income that the company reported for the first quarter. It would also help make up for the half-million barrels per day in production capacity that BP has sold in recent years—sales that in hindsight appear to have been a mistake.


One lesson Hayward learned from watching Browne is not to promise too much. Browne got burned several years ago by setting overly ambitious production targets. Under Hayward, BP has tamped down forecasts to a flat 3.9 million bbl per day or so in 2007, then rising slowly to 4.3 million bbl per day in 2012.

Still, Hayward is hardly a complete break from the past. During his long BP tenure, he worked closely with Browne, spending five years as the head of exploration and production before being tapped as chief executive earlier this year. Often at Browne's side at meetings with Russia's President Vladimir V. Putin and other power brokers, he had ample opportunity to observe his predecessor's negotiating skills.

Some industry hands criticized BP for selling its stake in the rich but largely undeveloped Kovykta gas fields in eastern Siberia. But Hayward was satisfied to get as much as $900 million for the fields, with an option to buy back a 25% stake later. BP has invested more than $300 million in Kovykta, and Hayward could have lost everything. Instead he has settled a dispute, at least for now, that was a distraction for BP and possibly solidified the producer's leading position among international oil companies in Russia by making a friend in Gazprom (OGZPY ) CEO Alexei B. Miller.

Hayward's Russia strategy, though, could still backfire. And a lax corporate culture that investigators say was a big factor in BP's accidents won't change overnight. Although many of the lawsuits over Texas City have been settled, the U.S. Justice Dept. is pursuing investigations of BP's conduct there and in Alaska. "BP is the most challenged of the supermajors at this time," says J. Robinson West, chairman of Washington-based consultants PFC Energy. It will probably take a year or two of hard work, and perhaps some good luck, for Hayward to change that assessment.

By Stanley Reed

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