BRITISH PETROLEUM (PLC) AND JOHN BROWNE: A CULTURE OF RISK BEYOND PETROLEUM (A)1 In April 2007, the board of British Petroleum (BP) faced a difficult decision. A month earlier, two independent reports (the first commissioned by BP and chaired by former American Secretary of State James Baker; the second commissioned by the U.S. Chemical Safety and Hazard Investigation Board) were released investigating an explosion in 2005 at a refinery in Texas City in the United States that killed 15 people and injured more than 180. After exhaustive investigations, the reports identified a history of poorly regulated safety measures in the plant and risk management, the blame for which seemed to focus on the firm's group chief executive, Lord John Browne. After the Baker report was released, the company attempted to mitigate the damage in its 2006 annual review: Importantly, the panel did not conclude that BP intentionally withheld resources on any safetyrelated assets or projects for budgetary or cost reasons. The panel interviewed hundreds of employees in the course of its work and observed that it had seen no information to suggest that anyone - from BP's board members to its hourly paid workers - acted in anything other than good faith.2 In fact, there had been other independent reports, one in 2004 and then again three months after the 2007 Baker report, that were less forgiving of BP's culture of safety. The 2007 report from the U.S. Chemical Safety and Hazard Investigation Board suggested that safety in the company's facilities had been compromised in favour of profits, cost savings or lack of management supervision. The Texas City disaster was caused by organizational and safety deficiencies at all levels of the BP Corporation. Warning signs of a possible disaster were present for several years, but company officials did not intervene effectively to prevent it.3 These reports were just the most recent of many concerns hurting the reputation and performance of the world's second-largest super major oil company and leading to a drop in share price from US$70.41 on January 17, 2006, to US$63.28 on January 16, 2007.4 As well, the public release of this information had destroyed nearly US$39 billion of market capitalization since August 2006.5 (Exhibit 1 presents a comparison of the stock performance of the world's super-major oil companies). During this period, the price of crude oil had risen nearly 20 per cent.6 In January 12, 2007, Browne announced that he would retire from BP. This was somewhat of a shock to the board and the investment community because his retirement date was roughly 18 months before his mandatory retirement date7, and, in the past, he had campaigned to remain in his post past the retirement date. Others were concerned that his successor may not yet be fully prepared to step into the top job. What was also a shock was the announcement of the over US$50 million severance package Browne was set to receive upon retiring. Many wondered how the board could award him such a large package after such poor performance over recent years. Browne had been credited with saving and taking BP to new heights and was one of the most respected business leaders in the United Kingdom. At the same time, however, it was clear that in recent months the firm's performance had suffered significantly. More and more evidence pointed to systemic problems within BP that had been allowed to grow during his tenure, creating the culture of risk in which the BP board now found itself reducing shareholder confidence and risking lives and the firm's reputation. It was up to the board to decide what to do next. BRITISH PETROLEUM British Petroleum plc, (BP) was founded in 1908 as the Anglo-Persian Oil Company and was started with a single well in a remote area of Persia after nearly eight years of searching. From this humble beginning, in less than half a century, the firm grew to be the largest in the United Kingdom and one of the largest in the world, employing over 100,000 people in over 100 countries.8 (Exhibit 2 presents selected financial information for the year ending 2006, and Exhibit 3 presents the biographies of the BP board, as published in the 2006 Annual Report.) The petroleum industry, while lucrative due to insatiable global demand, was also one that involved enormous risks. The days of cheap, easily accessed oil appeared to be over and what remained was often located in areas that were politically and socially unstable. Huge amounts of capital were required to find oil, refine it and then deliver it to the many end users. Risk also stemmed from the fact that although the timing was up for debate, no one doubted that, eventually, either through the development of new technology to replace petroleum or through a simple lack of product, a company that was focused only oil would go out of business. To that end, BP tried to protect itself by attempting to stave off the loss of product by spending billions on exploration for new reserves and on the downstream technology of refining and distribution to control the entire value chain. At the same time, BP also tried to diversify into new energy generation technologies. BP's business was divided into three segments9: oil exploration and production; oil refining and marketing; and gas, power and renewables. Oil Exploration and Production In 2007, BP was actively exploring for oil in 26 countries around the world, which over the years had provided the firm with proven reserves of 18.5 billion barrels of oil and gas equivalents leading to daily production of roughly four million barrels per day. BP had plans to start 24 more major projects by 2009, which would provide additional reserves of over 3.7 billion barrels with an additional production of 850,000 barrels per day. Oil Refining and Marketing Oil refining and marketing took the crude oil BP pumped from the ground and turned it into various products like gasoline, kerosene and motor oil, products which were then sold to consumers either through the firm's own distribution network of over 25,000 gas stations or to other sellers. Oil refining was a technically complex and highly capital-intensive activity. In 2006, BP owned outright or was part owner of 18 refineries processing the equivalent of 2.8 million barrels a day. Petroleum could also be refined into chemicals known as acetyls that were used in numerous consumer products. A statement from the firm indicated the acetyls' pervasiveness: Our acetic acid can be found in jars of pickles. Our acetyls feedstock is used to make Viagra. We invented the purified teraphthalate acid (PTA), used in both clothes and polyethylene terephthalate (PET) bottles for water and soft drinks (and we recycle many of those bottles into fleece pullovers). We are proud to have a world-class PTA business. We also make paraxylene (PX), the raw material for PTA.10 Gas, Power and Renewables As one of the leading oil producers for most of the 20th century, BP, in more recent years, had attempted to reposition itself. The slogan BP: Beyond petroleum had been coined to present BP as a company that was preparing for a world that was past its dependence on petroleum. In 2005, BP Alternative Energy was launched to consolidate the company's low-carbon energy initiatives. By 2006, BP claimed to be a world leader in power generation from solar, wind and gas-fired power plants, with plans for additional investment and research into hydrogen power generation. JOHN BROWNE John Browne, The Lord Browne of Madingley, became chief executive officer of BP in 1995 at the age of 45. He was knighted in 1998 and was made a life peer in the British House of Lords in 2001. By all accounts, Browne was one of the most successful CEOs in the firm's history, credited with turning BP into one of the largest and most successful energy companies in the world. Browne became known for his willingness to take risks and to pursue big deals and, under his leadership, in 1998, the acquisition of American oil company Amoco was engineered. The deal was worth more than US$60 billion, an amount that literally doubled the firm's sales and reserves. In 2003, BP created a joint venture with Russian oil giant Yukos, providing the firm with 50 per cent access to reserves of over 44 billion barrels of oil or oil equivalent and additional production of about 1.2 million barrels a day, at a cost of US$6.8 billion and the associated risk of operating in the Russian business environment.11 By many accounts, Browne was a well-respected business person who, while being one of the most powerful business executives in the United Kingdom, was also very private; little was known about his personal life. He was reputed to be a close friend of then British Prime Minister Tony Blair. Along with turning the firm around, Browne was credited with setting the vision for BP as one that would focus on life beyond petroleum. That slogan meant more than merely planning to become an energy company rather than a petroleum company; it meant BP was a firm that cared about the environment and the safety of its employees more than it cared about oil and profits. Blair had appointed him to the U.K.'s Sustainable Development Commission. The commission described itself as: The Government's independent watchdog on sustainable development, reporting to the Prime Minister, the First Ministers of Scotland and Wales and the First Minister and Deputy First Minister of Northern Ireland. Through advocacy, advice and appraisal, we help put sustainable development at the heart of Government policy.12 The firm took great pains to provide evidence of its focus on the environment and safety in numerous reports and websites, and it undertook investments and made contributions to environmental groups. Codes of conduct for employees covering numerous activities including safety and the environment, policies on corporate governance and statements about social responsibility were all crafted under Browne's watch. The webpage on the BP corporate website entitled Responsible Operations had links to topics like Health and Safety, Management and Compliance, Environment, Compliance and Ethics and Our People. A CULTURE OF RISK: THE TEXAS CITY REFINERY EXPLOSION Having been involved in the process of refining crude oil for over 70 years, the Texas City Oil Refinery, the third largest refinery in the United States, had long since paid for its initial investment. The facility came to be a BP asset with the 1999 acquisition of Amoco, and although the explosion on March 23, 2005, which killed 15 people and injured more than 180, was the worst in company history, it was by no means the first accident at the facility. Described as being held together by little more than Band-Aids and superglue by Don Parus, the refinery's director,13 there had been 23 fatalities in the previous 30 years. Since 2002, when Parus took over operations at the plant, there had also been an average of one fire a week, ranging from 50 to 80 a year.14 Parus is quoted as wondering why his staff actually came to work: killing somebody every 18 months seems to be acceptable at this site . . . why would people take the risk, based on the risk of not going home?15 In 2004, an independent Texas consulting firm called Telos Group was contracted by the Texas City refinery director to assess the safety culture of the plant. In its report, Telos exposed numerous pieces of evidence to suggest that safety at the refinery was being compromised as repairs or servicing were not effectively completed in attempts to save money or when workers simply were unable to follow the safety procedures. A report in the Financial Times mentions broken alarms, thinned pipe, chunks of concrete falling, bolts dropping 60 feet, and staff being overcome with fumes16 as well as numerous workers at the plant complaining of pressure not to report injuries and safety violations.17 The Telos report suggested that although there seemed to be a willingness on the part of the refinery's management team to maintain a safe working environment, desire and reality may have been two different things. Exhibit 4 provides excerpts from the Telos Report. The consultants concluded that there seemed to be an ingrained culture of risk at the refinery, which would require a great deal of effort to change, and that, in the past, after an accident, efforts to make changes started out strong but faded as management's attention drifted back to profits and efficiency. Many still too easily see a future where it all slides back to the way it was before the incidents,' and so people pray and hope that this will not pass' . . . we were told many stories about times that left the distinct impression that margins could beat out safety as long as they were good enough . . . here we are today and they still haven't kept promises that make our people out there feel safe'. . . Soon becomes never around here' mentioned one person in the refinery, pointing to successive postponements; starting with fixing it soon (meanwhile we put a clamp on it), which then becomes next week, which becomes next month, which becomes next turnaround, which becomes never.'18 In apparent support of this statement, a few months after the March 2005 explosion, there were two additional explosions causing over US$ 32 million in property damage, and then, in 2006, another worker was killed on the job. The 2007 U.S. Chemical Safety and Hazard Investigation Board (CSHIB) report, which examined the explosion and BP's safety culture in general, revealed that after the 1999 acquisition of Amoco, rather than making much-needed safety improvements, BP ordered a 25 per cent cut in fixed costs at all its refineries. The report went on to condemn the firm by suggesting: The combination of cost-cutting, production pressures and failure to invest caused a progressive deterioration of safety at the refinery. Beginning in 2002, BP commissioned a series of audits and studies that revealed serious safety problems at the Texas City refinery, including a lack of necessary preventative maintenance and training. These audits and studies were shared with BP executives in London and were provided to at least one member of the executive board. BP's response was too little and too late. Some additional investments were made, but they did not address the core problems in Texas City. In 2004, BP executives challenged their refineries to cut yet another 25 per cent from their budgets for the following year.19 These comments echoed the findings of the Baker report. This report, which BP had stated was very supportive of their safety culture, could be interpreted differently than BP's own interpretation. Exhibit 5 presents excerpts from the report's Executive Summary entitled Corporate Safety Culture. Clearly there were differences of opinion between the firm and the independent observers with respect to the depth of BP's culture of safety. Despite the difference of opinion, since the explosion, BP had paid out about US$2 billion in terms of compensation payouts and lawsuits.20 CONCLUSION With Browne's impending resignation, there was undeniable evidence of big problems throughout the organization with regard to safety and the firm's reputation. As a result, BP's lack of public credibility affected the already-stated strategy and goals of the firm. The board knew that changes needed to take place from the top down. The obvious question: Where to begin