Monday, 10 May 2010

Browne’s legacy of cost cutting stored up barrels of trouble

Tom Bower
EVEN before taking over BP from Lord Browne, Tony Hayward admitted to a group of employees in America in 2006 that the group needed to restore the company’s core skills in engineering to reverse his predecessor’s drastic cuts.
Hayward knew that Browne’s legacy had made the company vulnerable to costly disasters. Four successive accidents in America in 2005 and 2006 had shredded BP’s reputation and, without insurance cover, had cost the company billions of pounds in repairs, compensation and lost revenue.
The explosion at the Texas City refinery that killed 15 people, the dangerous list of the $1 billion Thunder Horse oil rig in the Gulf of Mexico, and two oil spills from pipelines in Alaska had aroused outrage across America. In Hayward’s opinion, Browne’s strategy had been short-sighted.
“We have a management style that has made a virtue of doing more for less,” said Hayward. To increase BP’s profitability and share price, Browne had encouraged the departure of hundreds of BP’s skilled engineers. To save money, Browne believed BP should use subcontractors to drill for oil, maintain refineries, monitor corrosion in pipelines and supervise the construction of oil platforms. Investigations of the accidents blamed cost savings and the inadequate skills of BP’s own personnel for poor supervision of the subcontractors.
Opprobrium was heaped on BP in Washington. In 2006, a report on Texas City by the US Chemical Safety Board, a federal agency, warned that BP’s managers, scarred by “a cultural issue”, posed “an imminent hazard”.
In the aftermath of the Alaskan spills, congressional investigators unearthed testimony by a former BP engineer in Alaska who had complained: “There is no doubt that cost-cutting and profits have taken precedence over safety and the environment.”
Congressman Joe Barton accused BP managers in 2006 of dishonesty in their testimony on safety and expressed concern “about BP’s corporate culture of seeming indifference to safety and environmental issues”.
He added: “This comes from a company that prides itself in its ads on protecting the environment. Shame, shame, shame.”
Severe corrosion caused by BP’s cost-cutting and poor maintenance of the pipelines was responsible, according to the US Department of Transportation’s inspectors, for the leak of 270,000 gallons of crude oil from the Trans Alaska pipeline system.
BP’s investigation of the Thunder Horse disaster revealed that its subcontractors in South Korea had failed to detect the installation of faulty valves.
On becoming chief executive in 2007, Hayward knew that Browne’s cuts had denuded BP of the skills to prevent similar incidents. His model for near-perfection was Exxon Mobil’s practices.
Every oil man acknowledges that Exxon Mobil’s method of operations is the industry’s gold standard. Since the Exxon Valdez tanker polluted Prince William Sound in Alaska in 1989, the group’s executives had imposed demanding requirements.
Around the clock, its engineers on the oil rigs second-guess everything planned and done by every subcontractor. BP lacks the staff to replicate such rigour.
Despite acknowledging the criticisms of “systemic lapses” for its sins in 2005, Hayward’s recruitment of engineers has been too slow to remedy his inheritance from Browne.
Since the latest accident in the Gulf of Mexico, Hayward has laid the blame on Trans- ocean and other contractors on whose expertise BP relied.
“It was not appropriate to second-guess Transocean,” said Robert Wine, of BP in London. BP had six supervisors on the rig at the time of the explosion, but Wine admitted that it did not have an engineer there to oversee the regular checks of the blow-out preventor or the concreting.
He also said that BP had been recruiting more skilled engineers. Hayward knows that BP is incapable of monitoring its subcontractors and that this lapse will make BP more vulnerable in the forthcoming litigation.
Hayward may be lamenting that he failed to hire more engineers. In America, critics of the oil giants have restated their former criticism of the company by quipping that BP stand for “Beyond the Pale”, “Bloated Profits” and “Broken Pipelines”.
Tom Bower is the author of The Squeeze: Oil, Money and Greed in the 21st Century