At Tony Hayward’s inquisition in Washington last week, the hapless BP chief executive resisted the temptation to condemn his predecessor, Lord Browne of Madingley, by name. Instead, pressed repeatedly to explain why BP had breached safety regulations on over 700 occasions, Hayward described 2006 as the corporation’s worst year. That was John Browne’s last full year as chief executive. He left the job humiliated, having been exposed for signing an untruthful court statement. Ever since, Browne has defended that dishonesty as a unique aberration. But as the American investigation of the Gulf catastrophe develops, the blame for the poisonous legacy inherited by Hayward will increasingly be heaped on Browne. The credibility of the British government’s proposed ‘cuts czar’ will be shredded.
To his credit, Browne transformed BP from a dying corporation in the early 1990s into the world’s second largest oil behemoth. He refocused BP on ‘elephants’ — the big oil reservoirs — and ruthlessly cut costs. He used BP’s rising share price to stage audacious takeovers of failing oil companies, especially in America. His success earned worldwide plaudits. The man who re-branded BP as ‘Beyond Petroleum’ — the world’s most environmentally friendly oil company — boasted during his visits to Washington’s power brokers that BP was not only the largest producer of oil in America but the most successful explorer in the Gulf of Mexico, one of the most challenging areas in which to discover oil. By then, BP, with its expanding operations in Russia, Asia and South America, was the trailblazer for the oil industry. The company flourished by consistently discovering new reserves to replenish the oil it had extracted.
Browne’s fatal flaw was his ambition to overtake ExxonMobil and transform BP into the world’s biggest oil corporation. His goal could only be realised if BP’s high profits sustained a share price high enough to grease a merger with Shell. That strategy was rejected both by BP’s and Shell’s directors. Nevertheless, Browne went for broke. Targets became his gospel. On 11 July 2000, he announced that BP’s production would grow over three years by 5.5 per cent to 7 per cent each year, mostly in the Gulf of Mexico and Angola. ‘We are now ready to move from a phase of retrenchment to a phase of expansion,’ he said. His bravado and self-belief were hailed in Wall Street as genius and BP’s share price reflected his glory. In reality, he was betting the house on beating his competitors.
Accustomed to trampling over any opposition, Browne sidelined critics of his ambition in favour of ‘the turtles’, eager allies trusted by Browne to carry his burden and deliver his ambition. Tony Hayward ranked among the chosen ones, as did Robert Dudley, the new American supremo.
Cutting costs became BP’s obsession. The philosophy was ‘More for less’ — 100 per cent of a task would be completed at a cost of only 90 per cent of the previous resources. Conscious of its Orwellian overtones, Tony Hayward condemned the penny-pinching approach in 2006 as ‘a management style that has made a virtue out of doing more for less’.
Browne’s casualties included BP’s engineers. Hundreds were fired and replaced by subcontractors. Just as ExxonMobil was hiring engineers because ‘drilling is the core of our business’, Browne was ditching BP’s in-house expertise, which could second-guess every technical operation on land and under the sea. This saved money but changed BP’s culture. Instead of oil engineering, Brown pursued financial engineering.
Among the protestors were the American engineers and managers of BP’s refineries. After nasty arguments with Browne, they resigned and were replaced by a Browne ‘turtle’, John Manzoni, an accountant who zealously pruned safety and maintenance costs. After 15 subcontractors died at an explosion in 2005 at BP’s Texas City refinery, a US government report blamed ‘systemic lapses’ by BP’s management and budget cuts that left the Texas City site with ‘unsafe and antiquated designs... in place; ...unacceptable deficiencies in preventive maintenance were tolerated’. The government’s investigators, Browne feared, were motivated by a conspiracy. ‘Our enemies are stoking up the criticism,’ he complained to aides. ‘They want to create antagonism towards us in America.’
Shortly after, BP’s Thunder Horse oil platform tilted in the Gulf of Mexico. BP’s engineers had forgotten that only nickel valves could sustain the extraordinary pressures and temperatures on the sea bed. The simple mistake exposed BP to ridicule.
Instead of reversing BP’s culture of indifference towards engineering, the cost-cutting continued until an oil spill in Alaska in 2006 temporarily halted supplies to the whole of the US. Using his excellent contacts in Washington, Browne mitigated the outcry until corrosion was discovered in BP’s pipelines — a consequence of the cost-cutting orders of Browne’s turtles. US Congressman Joe Barton accused BP of dishonesty. ‘I am even more concerned,’ said Barton, ‘about BP’s corporate culture of seeming indifference to safety and environmental issues. And this comes from a company that prides itself in their ads on protecting the environment. Shame, shame, shame.’
At a critical moment, BP’s reputation in America was on a knife-edge. Oil prices were rising and Browne spotted the dangerous defect in the debate about the world’s oil supplies. ‘Peak oilists’ were propagandising that the world had already consumed over half of the original two trillion barrels of oil and that low-cost oil had been permanently depleted. Their arguments were based on bogus statistics and bad science. ExxonMobil’s studies suggest that over 11 trillion barrels of oil remained under the ground. The problem, Browne knew, was access to easy oil. Nations with huge reserves such as Russia, Venezuela and Mexico were denying western oil companies access in the hope that oil shortages would push prices up and, by producing less oil, they could earn more. To counter that greed, Browne chased deep off-shore drilling six miles beneath the sea bed in the Gulf at $100 million a throw, knowing that most attempts produced dry holes. But BP now lacked engineers who could scrutinise subcontractors. That poisoned legacy was Hayward’s inheritance. It has lead directly to the current catastrophe.
Appointed because no other suitable candidate had survived Browne’s management changes, Hayward was a good geologist but a weak leader. In 2008, his political naiveté was exploited by the oligarchs who were BP’s partners in Russia. Possibly to protect himself from being second-guessed as he reformed BP’s culture, Hayward insisted on the appointment of an insignificant chairman rather than a British candidate like Dick Olver, the chairman of BAE, or Paul Skinner of Rio Tinto. The botched compromise was Carl-Henric Svanberg, who tolerated Hayward’s snail-pace reform of Browne’s dangerous legacy. BP’s shareholders are now paying the price of Browne’s failed ambitions.