Questions

1 The case mentions 'culture' at several points. What subcultures can you identify, and what may this imply for senior management's attempts to establish a unified image of the business?

2 In what ways will managing in BP, with such an international exposure, be different from managing in a national company with no international business? List the three most significant.

Study Case: BP

In 2016 BP is the world's fourth-largest oil and natu- ral gas producer (after ExxonMobil, Chevron and Royal Dutch Shell), with over 65,000 employees. The com- pany is an 'integrated' oil company, in the sense that it has both 'upstream' (exploration and production) and 'downstream' (refining and marketing) operations. In this respect it is similar to other integrated oil compa- nies, such as ExxonMobil and Total.

This case is about the company's upstream activities.

The company is registered in Britain, but 40 per cent of its assets are in the United States, and it is that country's largest gas producer. It does 80 per cent of its business outside the UK, and is inherently engaged in international business, needing to succeed in many diverse political, economic and technologi- cal environments. In one recent year its sources of oil and gas (measured in 'barrels of oil equivalent per day') were:

Europe 201,000;

United States 778,000;

Russia 985,000;

Rest of world 1,478,000 (including Iraq).

The company expects that world demand for energy will continue to grow, possibly by as much as 40 per cent over 2010 levels by 2030. Advances in surveying and drilling technology mean that oil reserves previously out of reach can be recovered - such as those in deep oceans or beneath the Arctic ice cap. The company's future depends on being able to secure access to suf- ficient oil reserves to at least replenish what it extracts, and to meet growing demand. Securing these resources is competitive, as all of the world's major oil companies are seeking new sources. To access oil reserves BP must obtain permission from the country's government, and often the exploration and production is through a joint venture with a local oil company that usually has close links with the national government.

BP faces issues of corporate responsibility through- out the business, especially in exploration and production. Oil production inevitably brings some environmental damage and the 2010 explosion on a production rig working for BP in the Gulf of Mexico vividly demonstrated the hazards of deep-water production.

Environmental groups challenge oil exploration in sen- sitive areas, and a task for BP's corporate governance is to ensure that these concerns are given adequate con- sideration alongside commercial interests.

It also has a large presence in the United States, where it both extracts and sells large quantities of oil. Relationships have been damaged by the company's safety record, and it has had to pay significant compen- sation to individuals and businesses affected by these events, as well as fines to the US government.

The company's financial performance affects many stakeholders, as most pension funds hold shares in the company, using the dividend income they receive to pay their pensioners. Financial returns have been affected in recent years by the recession reducing demand, while production costs have risen. The company has also had to meet the costs of compensation and US Government fines following the Gulf of Mexico accident. The directors decided to pay a dividend to shareholders of 40 cents a share for 2015. The table shows the main financial indicators of performance in the two most recent years.

Managing to add value

A central preoccupation for management is to secure new oil supplies. The company has invested heav- ily to acquire licenses to search for oil itself and by acquiring, or creating joint ventures with, companies that already own such licenses. Since 2010 it has become more focused on building the upstream busi- ness, by acquiring 400,000 sq km of oil fields - more than double the acreage secured in the previous nine years.

It draws supplies from new oil fields in Azerbaijan and Indonesia, and in 2009 reached an agreement with Iraq to rehabilitate the giant Rumaila oil field, which it did successfully, well within the time allowed. This deal gave the company a presence in a country with the world's third-largest known oil reserves. In 2011 the Indian government approved a $7.2 billion oil and gas investment, which gave BP a 30 per cent stake in a large but technically difficult natural gas field off India's east coast. This positioned the company as the first oil major to gain a foothold in a country where demand for oil is growing rapidly. Its collaborator in the deal is Reliance Industries, a major Indian company with a good reputation for project delivery and strong politi- cal connections. A year later there were signs of dif- ficulty, with administrative delays to investment plans, and evidence that output from the field (which has been operating for several years) was declining more rapidly than expected.

The company has to face the political risks that these ventures entail, especially in politically unstable coun- tries where power conflicts among ruling elites can, directly or indirectly, threaten commercial ventures.

Joint ventures and governments

The company's most significant joint ventures have been with Russian companies. For several years its business in Russia was conducted by TNK-BP (set up in 2003), in which it had a 50 per cent share. BP saw this as a strategically important deal, providing about 29 per cent of its annual oil production. It also opened the way for further deals, giving it access to Russia's large oil and gas reserves in Siberia, and fitted a wider politi- cal strategy of reducing dependence on Middle Eastern supplies. By 2012 it was clear that there were severe differences between BP and the Russian partners in the joint venture - over strategic direction and how to man- age it - and soon afterwards BP sold its share of the venture to Rosneft, a state-owned Russian oil group. As part of the deal BP received a 20 per cent stake in Rosneft, giving it preferential access to resources, and a close alignment of their interests with those of the Rus- sian government.

Culture and structure

During John Browne's tenure as chief executive (from 1992 to 2007), the company became decentralised, in the sense that managers responsible for a business unit faced tough financial targets but had consider- able autonomy in how they met them. Senior managers believed this helped to reduce administrative costs and enabled unit managers to use their local knowledge and contacts to best advantage.

When Tony Hayward replaced Browne in 2007 he began to change the style, requiring managers to develop more common working processes across the business, to reduce complexity and cut costs. In an email to staff in October 2007 the head of exploration and production claimed that recent safety lapses in the US had shown that the decentralised approach had dan- gers. Many business units that had enjoyed consider- able autonomy under Browne would be eliminated, and the company would 'standardise more of what we do'.

That decentralised structure contrasted sharply with that at ExxonMobil, the acknowledged global leader in the industry for safety and engineering excellence. Exxon is organised on functional lines, so the worldwide exploration operation, for example, is a single division.

Safety

The company's reputation had suffered in March 2005 when an explosion at the Texas City refinery, its biggest in the US, killed 15 people and injured about 500, mak- ing it the deadliest US refinery accident in more than a decade. An investigation by the Department of Labour uncovered more than 300 violations at the refinery. An internal BP report found that senior managers at the plant had ignored advice to spend money on safety, though the plant was very profitable.

There was further damage in 2006 when a pipeline spilt 270,000 gallons of crude oil into Alaska's Prudhoe Bay. The Alaska Department of Environmental Con- servation blamed corrosion, which BP denied on the grounds that expenditure on corrosion maintenance was higher than it had ever been. When Tony Hayward took over as CEO in 2007 he stressed his priority:

BP had to implement strategy by focusing like a laser on safe and reliable operations.

This ambition received a severe blow when, on 20 April 2010, the Deepwater Horizon - a production rig - exploded in the Gulf of Mexico while taking oil from the Macondo well, which BP owned. The safety arrangements intended to cap the well in such circum- stances failed to work, and oil flowed into the sea for many months, polluting it and the nearby coastline. The explosion killed 11 workers and the ensuing pollu- tion caused economic damage to fishing and tourism, and widespread public criticism of the company in the United States. The company pointed out that it neither owned nor operated the production rig - but agreed to pay compensation to businesses and communities affected by the accident. It set aside $45 billion to meet likely costs, and the fines for breaching US safety and environmental laws. To meet this cost it suspended dividend payments to shareholders (which resumed in 2011) and sold several oil fields and refineries. In July 2015 it announced an agreed settlement for civil penal- ties and damages with US authorities - meaning that it had resolved one of the few remaining uncertainties arising from the disaster.

The company also made many internal changes - including the resignation of the chief executive, Tony Hayward. He was replaced by Bob Dudley, an American citizen who had previously been chief executive of TNK- BP. His immediate task in handling the massive distur- bance of the spill was to ensure the leak was plugged. The company's engineers did so in August 2010 - a remarkable feat of engineering, as the well was over 5,000 feet below sea level. Then he had to (among other things):

meet claims for damages without letting the costs run out of control;

stabilise BP's financial position by selling assets; establish the cause of the incident in conjunction with US government agencies;

reform relevant internal practices;

restore the company's reputation in the US; and develop a new strategy for the business.

Inquiries identified technical and managerial failures that had caused the accident - including inadequate maintenance and inaccurate interpretation of data from the well. BP acknowledged its own failings, but also argued that other companies were partially responsible, including Transocean, which owned and operated the rig, and Haliburton, a contractor working on it: Halibur- ton had supplied the faulty cement intended to seal the leak. BP sought substantial damages from both com- panies - alleging that Transocean workers failed to spot evidence of oil and gas escaping, and did not respond effectively when the escape became evident.

Although the well had been sealed in late 2010, the event was continuing to affect the company's perfor- mance in 2012. The well had not yet resumed produc- tion, losing valuable output and income, while continuing uncertainty over the legal liabilities limited the dividends payable, and lowered the share price - adding to share- holders' dissatisfaction.

In June 2009 the company appointed a new Chair- man - Carl-Henric Svanberg. He was previously chief executive of the Swedish company Ericsson, where he developed a deep knowledge of the world's emerging countries. He also believes that the pace of growth of car ownership and air travel are unsustainable:

With a normal growth rate, the world's gross domestic product will triple by 2050, and we will probably see another 2 billion people in the world. If we continue to do things in the same way, it will not be easy for this planet to cope with that. So we have to find more intelligent solutions, and the energy industry is in the centre of that. BP is actively searching for alternative energy sources.

aspects of Bp's context

In early 2016 oil prices were about half the level they had been three years earlier. This severely affects the viability of new wells, so the energy groups had been cutting exploration investment - one estimate was that over $100 billion of planned investment had been cancelled or deferred by June 2015. All oil companies responded to the falling price by cutting costs - not only in exploration, but also improving operational efficiency - it changed from 'chasing barrels to chasing efficiency.'

Apart from this fall in prices, new fields that have been discovered are often in challenging areas - the rocks below the Arctic Ocean are believed to hold vast amounts of oil and gas, but which will be very expensive to extract.

Another technological change is the growing use of shale oil, especially in the United States, where oil pro- duction is (2015) at its highest level since 1979. One observer has predicted it may be self-sufficient in oil by 2025.

Governments with oil reserves on their territory often depend on the technical resources of the world's major oil companies to recover these reserves profitably. While the oil majors are eager to work there, they acknowledge that this requires them to work with business partners with different political and legal systems, including how they deal with human rights, democracy and bribery.

Oil exploration and production evidently affects the environment - even in normal working it can disrupt wildlife, damage indigenous communities, and pollute air and water. The production process itself contributes to carbon dioxide emissions when gas is flared from oil fields. Dealing with the industry's impact on the envi- ronment was a prominent feature of John (now Lord) Browne's leadership of BP prior to 2007, when it made significant investments in alternative sources of energy such as biofuels, wind farms and solar power.

Current management dilemmas

Major shareholders have been pressing management to improve performance - since the low dividend payments in recent years, and the continuing doubt about Gulf of Mexico costs has damaged share price: in 2007 they were trading at 600 pence, and in early 2016 they were around 400 pence - with a yield of about 5 per cent. The company's owners expect managers to improve this performance. They want clarity about strategic direc- tion on issues like new sources of supply, relations with partners and safety.

New energy sources

One strategic issue is how BP strikes the balance between investing in oil and alternative non-oil sources of energy, such as bio-mass or wind. During the tenure of John Browne these were a prominent feature of the company, but appear not to have been so significant in recent years. These alternative investments could bring environmental benefits, but may not help with the pres- sure from shareholders for better returns on their invest- ments. The fall in oil price from late 2014 meant that it had cut investment in exploration.

relations with partners

The company relies heavily on joint ventures with other companies, but they are hard to manage. The stake in Rosneft earns about 16 per cent of BP's profits: some investors worry that this investment will be endangered if relations between Russia and the West deteriorate due to differences over conflicts in Ukraine and the Middle East. A feature of the Gulf of Mexico accident was that the field was being developed in partnership with other companies. As these will be prominent in the company's future it relies heavily on the associated arrangements for oversight and governance. In each case govern- ments - Russia and the United States respectively - played a significant part in the outcomes. Coll (2012) shows how rival ExxonMobil exerts influence over the companies and governments with which it has to deal.

producing oil safely

Soon after taking over as CEO, Dudley made struc- tural changes to reduce the autonomy of the power- ful exploration and production division. This had had a high degree of autonomy, partly because it accounted for most of BP's profit. Dudley split it into three units responsible for exploration, development and produc- tion respectively: the heads of these units will report directly to the chief executive, giving him direct insight into their working. He also created a separate safety unit whose staff are embedded in the operating units, and whose head reports directly to the CEO.