For the second time in a generation, BP finds itself at a crossroads. Its role in the Macondo oil spill, the worst environmental disaster in US history, has now resulted in the departure of Chief Executive Tony Hayward, a record quarterly loss, and liability provisions of more than $32 billion to be funded in part by massive asset sales. Hayward’s replacement, Robert Dudley, will take over in October and faces an unenviable set of challenges. The early 1990s saw the ignominious exit of another BP chief executive, Robert Horton, amid recriminations over strategic direction, job losses and dividend cuts. There are some parallels with what is happening now, but there is much more at stake in the current crisis. BP today is a bigger company, but Macondo is also a much bigger disaster, with implications for industry regulation, offshore drilling practices, contracting relationships, insurance costs and investment, and direct economic impacts on the communities of the US Gulf Coast and the US oil-field services sector (PIW Jul.19,p3).
The most obvious dividend from Dudley's appointment should be an improvement in the company’s fraught relations with Washington. BP’s vast US business is critical to the company’s long-term financial well-being, but Macondo has placed those interests in jeopardy, and Hayward had become a hate figure for many US lawmakers, some of whom would have cheerfully run BP out of the country. Dudley, a Mississippi native who comes from the Amoco side of the BP family, should help take the sting out of those relations -- he dealt, after all, with even greater political pressures during his time as head of the company's TNK-BP affiliate in Russia (PIW Jul.28'08,p9). But BP will also need to further lower its US profile, most likely with the divestment of more assets on top of those already sold to Apache. (PIW Jul.26,p1).
Restoring BP’s reputation in the US may, however, come to seem like a walk in the park compared with fixing the company's internal safety problems. Despite promising a focus on safe and reliable operations, Hayward did not mend what US regulators in 2007 described as BP’s "broken safety culture." But nor did he create it -- that accolade must go to his predecessor, John Browne. Nimble deal-making during Browne’s 12 years at the helm saw BP catapulted to supermajor status, but it failed to properly integrate its new acquisitions and to develop the internal checks and balances appropriate to its new size. Browne wanted to increase production and maintain returns by holding down costs, but trying to square that particular circle led on the one hand to missed output targets and on the other to the neglect of basic operational standards evident in the Texas City refinery explosion in 2005 and the Alaska pipeline spills a year later.
So how does Dudley address the safety issue? For a start, BP needs to make a long-overdue move from denial to acceptance. The company maintains that other parties may ultimately have to take some blame for Macondo, and that its design and management of the Macondo well were perfectly adequate. These assertions contain strong echoes of BP’s defensive response to federal investigations into the 2005 Texas City refinery tragedy. A US Chemical Safety Board (CSB) probe into Texas City concluded that "overzealous cost-cutting" by BP had contributed to safety problems at the plant. BP took issue with many of the CSB findings, and also argued that Texas City faced a unique set of challenges, even as other US regulators were uncovering identical failings at another BP refinery.
What lessons are there for the industry from what has happened to BP? Beyond the obvious implications for deepwater drilling, it perhaps also shows that it is time to come clean with investors and tell them that it is impossible for big oil companies to deliver growth at the pace they desire without also taking risks -- financial, operational, political -- that may ultimately endanger the "shareholder value" the companies are trying to create. The biggest corporate problems affecting major oil companies over the past 15 years all have their roots in an overaggressive focus on growth. Royal Dutch Shell threw away decades of sound business practice to go for growth in the 1990s, a path that led to the reserves de-booking scandal of 2004 -- a trauma from which the company has still not fully recovered. ConocoPhillips' $35 billion gamble on Burlington Resources in 2005 has now come back to haunt the company in the form of write-downs, asset sales and slashed capital spending, and like BP, the US major will now have to shrink before it can grow (PIW Mar.29,p1).
