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BP Worsening Oil Spill Crisis Undermines CEO's Reforms

Source: WSJ

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Posted on 03 May 2010

British Petroleum (BP) CEO Tony Hayward thought he had finally slain all of BP PLC's demons. Now a new one has reared up, and it's the size of Puerto Rico.

Mr. Hayward is coming under mounting pressure over the vast spill spreading in the Gulf of Mexico, which was caused when a giant drilling rig there caught fire and sank, with the loss of 11 crew members. The oil, still spewing from the well on the ocean floor, threatens to blacken the Louisiana shoreline, and BP's reputation.

From the moment Mr. Hayward learned of the disaster -- in a 7:24 a.m. phone call over breakfast on April 21 --he has been faced with the reality that this incident could erase his rehabilitation of the British oil giant.

On Sunday, President Barack Obama, who has said BP would be held ultimately responsible for the clean-up, arrived in Louisiana to hold crisis talks with local officials. Strong winds hurt clean-up efforts as the slick drifted closer to the Louisiana coast.

When Mr. Hayward took over BP's leadership from John Browne three years ago this week, the company was at one of the lowest points in its history: badly run, accident-prone and accused in the aftermath of a deadly explosion at its Texas City refinery of putting profits before safety. Mr. Hayward turned BP around, boosting production, cutting costs and significantly reducing on-the-job injuries. Last month, he was confident enough to talk of an irreversible "change of culture" at BP.

None of that seems to matter now, as BP heads into the crisis grinder that has chewed up big names like Toyota and Goldman Sachs. And with about 5,000 barrels of oil leaking from the damaged well each day, Mr. Hayward knows it.

In an interview at BP's St. James' Square headquarters, Mr. Hayward, 52 years old, concedes the disaster off Louisiana will "undoubtedly" overshadow his achievements as CEO. BP's share price has fallen 12% since the crisis started.

The incident casts a harsh light on BP's business strategy, which is predicated on being a leader at the industry's frontiers—drilling the world's deepest wells in the Gulf of Mexico, scouring for oil in the Arctic, squeezing natural gas from the rocks of Oman.

Yet governments fearful of a repeat of the Louisiana catastrophe may be more reluctant to let the oil giants drill in their offshore waters, potentially robbing BP of some of its richest opportunities.

Accentuating that risk: On Friday, the White House banned oil drilling in new areas off the U.S. coast pending investigations into the cause of the oil spill.

Mr. Hayward, a "BP lifer," joined the company in 1982 after earning a doctorate in geology at Edinburgh University. He started off as a rig geologist in the North Sea, and was a member of the team that discovered the huge Miller oilfield on Christmas Day, 1982. He later tested rocks around the world, from North Yemen to the jungles of Papua New Guinea.

"I spent eight years with my hammer jumping out of helicopters and trucks," he says. "There's nothing like when you first drill into a reservoir."

Successes like Miller brought him to the attention of John (later Lord) Browne, who was at the time BP's head of exploration and production. In 1990, Mr. Browne offered him the job of executive aide, a role later dubbed "turtle" after the 1980s comic book heroes, the Teenage Mutant Ninja Turtles. Mr. Hayward's manager warned him not to take it, saying he'd end up being a "glorified secretary."

He ignored that advice, a decision that advanced his career. "When I went into that role I knew a lot about geology and almost nothing about business," he says.

Lord Browne was a controversial figure. Promoted to BP chief executive in 1995, he transformed the company from also-ran to titan with a series of megadeals, such as the 1998 takeover of Amoco Corp. But he failed to integrate the companies he acquired and reform BP's bureaucratic management.

The last years of his tenure were plagued by problems. In 2005, the blast at the Texas City refinery killed 15 people and injured more than 170. A U.S. Chemical Safety Board investigation found the explosion was in part due to cost-cutting and poor maintenance.

Also in 2005, a big production platform in the Gulf of Mexico, Thunder Horse, began listing 20 degrees due to a defective control system. In 2006, BP had to shut down part of its Prudhoe Bay oilfield in Alaska after oil leaked from a corroded pipeline. That same year, federal officials said they were pursuing allegations that BP traders manipulated the propane market in 2004.

In December 2006, in a meeting for his Houston staff, Mr. Hayward, at the time BP's head of exploration and production, lambasted BP's way of working, including himself in the criticism. "We have a management style that has made a virtue out of doing more for less," he said.

Soon he got a chance to change things. Lord Browne resigned in May 2007 over a scandal involving allegations about his private life. Mr. Hayward was named his replacement.

Investors cheered the choice. Mr. Hayward was seen as a no-nonsense, nuts-and-bolts man who would put the company back on track.

"This is a business that had swung too far in the direction of pixie dust," says Robert Talbut, chief investment officer at Royal London Asset Management, a BP shareholder. "John Browne was a superstar CEO. Hayward sees himself as someone who's getting on with the business."

At last month's annual shareholders' meeting, Mr. Hayward decried the glitz of BP's previous culture, saying: "We thought it was all about doing deals and the latest flashiest viewgraph presentation."

One of the first things Mr. Hayward did upon becoming CEO was commission Bain & Co., the management consulting firm, to "hold a mirror" up to BP. "They said: 'This is the most complicated enterprise we've ever come across," he says. "They had mapped 10,000 organizational interfaces—one for every 10 people."

His next job was to instill his staff with an urgency about the need for change. In March 2008, he held a meeting for BP's top 500 managers in Phoenix, and invited a Morgan Stanley analyst, Neil Perry, to give an outsider's view.

Mr. Perry said BP "might not be here in a couple of years' time" unless it did something different, according to managers who attended, hinting it could become a takeover target. Mr. Perry didn't respond to a request for comment.

The figures spoke for themselves. The oil price was shooting up, but unlike the other oil companies, BP wasn't benefiting. Its share price had risen only 16% over the past three years, while crude oil had soared nearly 250%. Of the six supermajors, BP was bottom in terms of earnings growth between 2000 and 2007.

Mr. Hayward set about radically simplifying the company and cutting costs. Senior executives were cut by a quarter. In all, 6,500 people, or just under 10% of its work force, lost their jobs.

Gradually, delayed projects like Thunder Horse and refineries under repair like Texas City and Whiting, Ind., were brought on-stream. The new CEO also dialed back on Mr. Browne's Beyond Petroleum mantra, in which he emphasized BP's push into renewable energy sources.

Mr. Hayward's cost-cutting appeared to work. The inflection point came in October 2009, when BP announced $4.7 billion in profit for the third quarter, smashing analysts' expectations.

In September of that year BP announced a new, "giant" oil find, Tiber, in the Gulf of Mexico. The well, the deepest ever at 35,000 feet, was drilled by Transocean's Deepwater Horizon—the same rig that blew up in recent days. BP also entered Iraq and offshore Brazil, one of the world's hottest exploration areas.

In January this year, BP overtook Royal Dutch Shell PLC in market capitalization for the first time in more than three years. BP said it increased production in 2009 by 4%, while Shell's output fell.

But BP continued to run afoul of U.S. regulators. In October last year, the Occupational Safety and Health Administration hit BP with $87 million in penalties for failing to fix safety hazards at Texas City, the site of the 2005 explosion. A few months later, it slapped on another fine over lapses at another refinery, in Toledo, Ohio.

"The most shocking thing is that more than four years after the blast, BP still had very serious problems not only in Texas City but in other refineries as well," said Jordan Barab, deputy assistant secretary of labor for OSHA. "There is a systemic safety problem across the company."

BP has contested the fine and says it is in "constructive" discussions with OSHA on a settlement.

Then, late on April 20, disaster struck. Early the next morning Mr. Hayward took a call from Andy Inglis, BP's head of exploration and production. There had been an accident on Deepwater Horizon, which had been drilling a well for BP in the Macondo prospect, 5,000 feet below the surface of the water in the Gulf of Mexico.

As the extent of the disaster unfolded, Mr. Hayward's crisis team gathered on the sixth floor of BP's London headquarters. "Tony just had this icy stare," says one person present. "At one point he said: "What the hell have we done to deserve this?"

BP's initial reaction was measured. It was a Transocean rig, and the blast was the contractor's responsibility. Responding to that, Transocean said in a statement it was investigating the explosion: "We can't get ahead of ourselves with respect to the facts of this incident and to do so would be speculation."

But as news of the burgeoning oil spill trickled in, the mood changed. BP, as owner of the oil, was liable for the clean-up, and bore responsibility for the environmental catastrophe that might result.

The next day Mr. Hayward jumped on a plane to Houston, where his team had sent submarine robots to the seabed in an attempt to activate a shut-off switch on the well. He flew from there to the Gulf Coast where BP and the Coast Guard were coordinating a joint response to the crisis.

BP is now preparing for the worst, installing marine protection booms along the coast of Louisiana, Mississippi, Alabama and Florida to keep the oil at bay.

Acknowledging the damage the spill could cause to BP's reputation, Mr. Hayward flew to Washington, D.C., to meet federal officials such as Ken Salazar, Secretary of the Interior.

BP says it will honor any legitimate claims for damages. Still, the risk for Mr. Hayward is that the Louisiana oil spill could come to define his legacy, just as Lord Browne's place in history was defined and ultimately tarnished by the Texas City explosion.

Mr. Hayward says BP is bracing for a rough ride on Capitol Hill and the White House. "We have the wherewithal and capability to weather this storm," he said.


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