When Tony Hayward took over at BP two and a half years ago, he knew things were bad. He just didn’t know how bad.
One of the first calls the new chief executive made was to Bain & Company. He wanted the consultancy to “hold up a mirror” to the oil giant so he could see exactly what he had inherited from Lord Browne of Madingley, his predecessor.
He was shocked by what he saw. “I was gobsmacked,” he said last week from his corner office at the group’s headquarters in St James’s Square in London. “I told them I didn’t want solutions. We would take care of that. I just wanted them to show us what we looked like. They said: ‘You are the most complicated enterprise we have ever come across.’ We were a very complex organisation with little clarity or accountability.”
Hayward started slashing. He gutted middle management, sold assets and centralised operations. Only one in three of the group’s top managers survival the cull. The results were dramatic. More than 6,500 jobs have been eliminated and overheads have fallen by a third. At a company the size of BP, with 90,000 employees in 29 countries, even profound changes take a while to feed through.
Now, though, that process is beginning. Last week the company smashed analyst’s expectations with a $4.7 billion (£2.9 billion) profit, about 50% better than had been though. Having already cut $3 billion from costs, he predicted that another $1 billion will be eliminated by the year end and hinted at raising the dividend as soon as February.
“We’ve had trouble forecasting ourselves because the momentum now has picked up so much,” he said. “Everything we have done has been about a cultural change and there’s a lot more to go internally.”
Yet the larger questions that have dogged BP for years have not gone away. Stanching the relentless drain on its reserves is more difficult than ever as governments tighten their grip on their own resources and new players like the Chinese join the game. BP’s share price hasn’t moved in a decade because the City doesn’t believe it can grow. “Without wishing to appear churlish,” Citigroup analyst Mark Bloomfield said last week, “the operational turnround has been largely delivered. As momentum slows, the relative case [for BP] may become more challenging.” An investor added: “Cutting is one thing, growth is another.”
Hayward is insistent that there is plenty of juice left to be squeezed out of BP’s existing structure. “Frankly we have only begun getting to our supply chain,” he said. “You can see the gap between ourselves and Exxon Mobil and that’s all about efficiency. Our asset base is at least as good as theirs. The gap is about cost efficiency and capital efficiency.” But what about the bigger problem: finding more oil? BP spent $22 billion trying to do just that last year. It yielded some finds but BP’s base of proved reserves decreased.
Hayward doesn’t seem particularly worried. “This notion that there is nothing available isn’t quite right,” he said, pointing to strong positions in Russia, Oman and, controversially, Libya. “We have good relationships in some difficult places and we have managed to make them work in ways that some other people in the industry haven’t.”
As one investor said: “Lord Browne’s legacy was taking BP into Russia. Tony’s could be taking BP back into the Middle East.”
TUESDAY will be a historic day in Baghdad. At a ceremony in the Iraqi capital, Hayward and Jiang Jiemin, head of China National Petroleum Company (CNPC), will sign a deal to develop one of the largest oilfields in the world. Iraq’s Rumaila field already accounts for half the war-torn country’s output. BP and its Chinese partner have pledged to nearly triple it to 2.8m barrels per day by 2015. To put that in perspective, that would represent more than two-thirds of BP’s total production.
Rivals scoffed when Hayward agreed the bid this summer. More than 30 companies, including Exxon Mobil and Royal Dutch Shell, were bidding on the fields, but all of them balked at the Iraqis’ harsh terms. BP will receive a fee of only $2 a barrel. Yet since Hayward took the plunge, several rivals have reopened talks. “It’s interesting now that everyone seems to have realised that actually this might be quite a good idea,” he said.
The deal is indicative of the shift in the balance of power as governments take greater control of their natural resources. A decade ago, BP, or any other oil company, would not have dreamt of accepting such terms. Now they have no choice. Indeed, it remains unclear whether BP will be able to include any of Rumaila’s 17 billion barrels of reserves on its books. It is a crucial point. Reserve replacement is one of the key ways oil companies are valued. A gradual creep towards fee-based contracts like this one, rather than deals that give companies ownership of the black stuff, could lead to a fundamental change in the way oil companies operate.
As the BP old guard is replaced by fresh blood, adjusting to that shifting reality may come more easily. Carl-Henric Svanberg, chief executive of the mobile-phone giant Ericsson, will replace long-standing chairman Peter Sutherland in January, and top of his list is a boardroom reshuffle. The ability to keep the revolution rolling hinges on the relationship between the two men at the top. Early signs are good. Both are keen sailors. Hayward owns a Farr racing yacht — Svanberg prefers a more leisurely day out. “He’s a cruiser, not a racer,” said Hayward. “We’ll have to remedy that.”
One area they will have to agree on is mergers. Talk about a big deal bubbles up every few months and often involves Shell. That deal won’t be happening on Hayward’s watch. “There is no industrial logic for it at all,” he said. He envisions more partnerships like the one with CNPC. Such alliances will be crucial because the growth markets are in the east. “We need to find ways to partner with resource holders or people who have access to the major growth markets of the world,” he said.
Outside Champaign, Illinois, a field of wild African grass — Miscanthus giganteus — that grows more than three metres, towers above the surrounding crops in America’s corn belt. The University of Illinois is researching this promising biofuel — supported by funding from BP.
“I have been widely misrepresented [on alternatives], not that I spend too much time thinking about it,” said Hayward. The alternative-energy business was one of the most visible casualties of Hayward’s scalpel. He argues that the company remains committed but said it was time to take a “few big bets” and jettison the rest. Those that got the chop included the UK and Indian wind businesses. Its solar arm was also hit hard. Biofuels fared better. He said: “It’s not unreasonable to expect biofuels will be 10% of the global gasoline pool by 2020. It won’t replace BP tomorrow, but it won’t be immaterial either.”
Hayward admits he spends “one day a quarter” on alternatives. Given that BP spends less than 1% of its money on the businesses it is, if nothing else, an honest treatment of what remains a marginal venture. It’s a far cry from the green evangelism of Lord Browne.
Indeed, much of the last couple of years has been about undoing what was done under the previous regime. Some problems refuse to go away. Last week, American safety authorities hit BP with a record £53m fine for failing to add safeguards at its Texas City refinery. An explosion there in 2005 killed 15 people and injured 170. Hayward is convinced the company has done enough to fix the safety issues and vowed to fight the ruling.
For someone who prides himself on keeping the machine running smoothly and safely, it is a black eye for the BP boss.
He is adamant, however, that BP’s chequered past, lurching from one disaster to the next, is behind it. “I want to put that to bed. We had a period when there was too much creativity and there was a new idea a week and nothing was ever finished,” he said.
“My whole focus has been to recognise that at its heart we’re an operating enterprise. The question is how do we create a BP that 10 years from now doesn’t end up back in the ditch.”
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