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David:
This is Money Talk, the weekly investing podcast from the Motley Fool. I am David Kuo, and nearly one year ago, on 20 April, an explosion on a BP (NYSE: BP) oil rig in the Gulf of Mexico caused one of the worst oil spills in marine history. It was called an accident, though some people say it's more than a story about technical failures, or human error. Some say it was an accident waiting to happen.
Here to explain more is Stanley Reed, reporter-at-large for Bloomberg News and the co-author of In Too Deep, a story about BP and the drilling race that eventually brought down an oil titan. Welcome to Money Talk, Stanley.
Stanley:
Thank you.
David:
Now, in my opinion, this book is not only relevant to BP investors, but I think investors in general, because it highlights why it is so important to delve into the culture of a company as it is important to look at things like balance sheets and profit and loss accounts. So let's start by having a look at your assertion that we should not be entirely surprised that it was a BP oil well that blew, rather than one that belonged to say Exxon or Shell. Why do you make this assertion?
Stanley:
A couple of reasons: BP has a history of bad accidents. They had one at a refinery in Texas City about five years before this accident. They've had trouble with their operations. BP is a risk-taking company; it's a company that's been cobbled together from several other companies, and not integrated that well. It's not that good at physical operations. It's more of a commercial company, a financial company, and it doesn't pay as close attention to things like drilling and doing things properly as Shell and Exxon, and probably Chevron, do.
David:
But accidents do happen, though, Stanley? I mean, if we have a look back at say, something like the Exxon oil tanker that ran aground in the Prince William Sound off Alaska, so it does happen to other companies as well. But you seem to be saying that it's more specific to BP?
Stanley:
Well, I think it is. As I said, they have a track record of having accidents. Other people in the industry worried about ... a lot of people weren't surprised that this happened. Exxon learned a lot from the Valdez spill, which was 20 years ago. They put in a much more rigorous safety culture, and so on.
BP didn't really learn the lessons from its accidents, according to people that we've talked to for the book, and were still vulnerable. If you look at what happened specifically on this Macondo well, BP people, along with their contractors, Halliburton and Transocean, made a whole bunch of mistakes out of concern for saving money, moving quicker, perhaps just pure sloppiness and bad judgement, that I don't think would have happened at other companies.
David:
But it's interesting that you bring up the point about the contractors, because if we have a look at one of BP's earlier transgressions -- we're talking here about the illegal dumping of hazardous wastes on the Alaskan North Slope in 1995. That was surely the responsibility of the contractor at the time, Doyon Drilling, rather than BP itself. So if you have a contractor, how can the company then be held accountable for something that a contractor has done?
Stanley:
Well, on the Gulf of Mexico well, most of the bad decisions were made by BP. It's a much more specific situation where the oil company is ultimately in charge of the well and the drilling process, and makes the ultimate decisions. The bottom line is, they did not know that that well was safe. They had a lot of inconclusive, or perhaps negative, tests of the well's integrity, and they went right ahead anyway and basically took the drilling mud out of the well, which is what keeps the well under control; filled it with sea water, and it blew up on them.
David:
But can we have a look at something like, say, Prudhoe Bay? They had to shut down a pipeline in Alaska as the result of leaks. What brought about that accident there in Alaska?
Stanley:
That's going back a while, but it looks basically like they didn't do the maintenance that one should do. Pipes get old and rot through. They weren't paying attention, and they leaked. Again, this was a much, much smaller incident than the Gulf of Mexico spill, but still quite damaging to them and their reputation, and it made them halt production on the North Slope for quite a while.
David:
So are you saying that BP never actually learnt from the accidents at the Alaskan North Slope, and also Prudhoe Bay?
Stanley:
Yeah, and the most important one was the refinery explosion in Texas City in 2005, which actually killed more people than the Gulf of Mexico spill did. They went through all sorts of internal and external investigation led by James Baker, the former Secretary of State; said they were going to reform the whole company, and so on.
But as I understand, the business unit in the Gulf of Mexico which was responsible for the well, kind of said, we're so important that we're exempt from this new regime you're putting in, and pretty much was allowed to get away with it.
David:
But a lot of this was the result of John Browne, Lord Browne's strategy of win at all cost. I mean, this was almost a culture that he tried to cultivate within BP itself. So how do we link the win at all cost culture with the accidents that happened at BP?
Stanley:
Two things: John Browne built BP with a series of takeovers. The most important one was Amoco in 1998, and then there was Arco also in the US shortly after. That, size-wise, put BP into the super-major category with Shell and Exxon. But it's hard to integrate a bunch of companies like that, and people weren't all working together. The Texas City refinery was an Amoco refinery.
The second thing Browne did was put a lot of financial pressure on people. I don't think he necessarily realised that that could lead to bad decisions about, say, well we need a million dollars to fix this piece of equipment (I'm just talking hypothetically), and the manager might think, that's going to really screw up my evaluation this year. It's working OK now -- let's wait for a while. In fact, exactly things like that happened at Texas City. That was even more of an accident waiting to happen.
David:
But are you saying that mergers and acquisitions is not the right strategy for oil companies, because I can probably say that, if you have a look at Exxon Mobil, that is one merger that seems to have worked pretty well. So how can it work well for one company, and yet in the case of BP/Amoco, not so well?
Stanley:
Well, getting more speculative here, but there you had two American companies, maybe closer cultures and so on. BP really gutted out Amoco and got rid of a lot of the key people. I think things were not really under control there. Also, going back to Browne, I think he thought what they call the upstream exploration and production, doing deals in foreign lands, doing M & A, was interesting. I think he thought refineries, which sometimes lose money, sometimes make a little money, was kind of back office stuff that was not worth a great deal of time and money.
David:
Is that because John Browne is a very intellectual man and he actually sees risk taking as being worthwhile sometimes?
Stanley:
Yeah, and it is. I've talked to him about it. He thinks, or he thought, he was the CEO from 1995 to 2007. He was someone who could have been a physics professor -- a star student at Cambridge, decided to go into the oil business, and he thought he was better than other people at sizing up risk, calculating a deal, seeing more value in something than someone else did. So that's fine, making those sort of decisions is how you make money, but I think they took risks in the wrong way in some cases. In an industry where you're basically riding a volcano, dealing with fluid and gases coming from deep in the ground at tremendous pressure, you can't afford any shortcuts on safety.
David:
So how much of that risk taking was encouraged by the City? -- because presumably the City loved John Browne; they just absolutely loved what he was doing, and seeing the share price going up day after day?
Stanley:
Sure, well I think financial pressure, what the analysts want and what investors want, puts tremendous pressure on these oil companies. They don't tolerate any delays or any excess spending beyond forecast and all that kind of thing. I think the people who run these companies are under a great deal of pressure to perform financially, and then when something blows up, everybody throws up their hands.
David:
Now, apart from being very acquisitive, John Browne was also very keen on right sizing. In other words, he wanted the company and the costs associated with each one of the units to be right. What's wrong with that?
Stanley:
Well, nothing's wrong with it, if you don't take it too far, but BP, I would say, went further. John Browne and his generation of top oil executives had their mindset formed when prices were very low. I mean, the prices dipped below $10 a barrel in the late '90s. It's amazing where prices are now, when that was just not long ago. They did a great deal of cost-cutting, taking people out.
I think BP probably more than any other major company relied on outsourcing, contractors. It cut its R & D spending to almost nothing. As I understand it, it had a lot of good scientists and so on, very few of them still left -- not just BP, but they have been the most extreme. The whole industry is suffering from this period. It's an industry that's short human resources.
David:
But I remember once talking to a banker who was telling me that, if you run a business, there are only three ways in which you can make more profit. The first way is to increase your price, and in the case of oil companies, they have no real control over oil prices -- that is dictated to by the market. The second way is to increase your volume, and that is something that BP can do -- it can keep on drilling more and more holes. The third way is to cut costs. So BP is really in control of only two things: to either drill more holes, or to take more costs out, in order to produce the profits that the City actually wants. So isn't John Browne really just doing what the City is expecting of him as a CEO of a company: to produce increasing profits year after year?
Stanley:
Yes, and we should note for listeners that he's not there any more. He's actually in the private equity -- he works for a company called Riverstone that was founded by some Goldman Sachs people.
David:
And he was also recently responsible for coming up with the new tuition fees for university students, for which he is not particularly well liked by students.
Stanley:
Yeah, I think you're right -- he was a cost-cutter. I think he understood the value of exploration, and put his weight behind some quite interesting exploration directions, notably the Gulf of Mexico, where despite this big problem, BP has been the leader in the deepwater, and helped turn around U.S. oil production from a twenty year decline to positive. But as you say, cost cutting, also financial engineering -- his strategy was to buy a company, clear out the so-called excess people, and also that gave you a new set of opportunities to drill or produce or whatever, and he'd sell off the other ones. So very much a wheeler dealer and a cost cutter, I think that was it.
Also, someone who I think very much saw that, was ahead of the curve in the globalization of the world, and was very good at making deals in oil countries that, for one reason or another, were just opening up; for instance, Azerbaijan, Russia, Angola -- those sort of places where BP's been very successful.
David:
It almost sounds as though, that Lord Browne would have been better suited as an investment banker than somebody who runs an oil company?
Stanley:
He may be better in the private sector, though he had a great run. He was like, I don't know if you know -- they used to call him "the Sun King." He was like God in that place for years. He had this adoring entourage. I've been part of it, on occasion.
David:
Now, I said we were going to have a look at John Browne's turtles. Tell us a little bit about these turtles, Stanley.
Stanley:
Well, they would take the promising young executives, nearly all of these were men, though not 100%, and they would basically carry John Browne's briefcase, do his schedule, reputedly even his cigar case. This was the route to higher things in the company.
David:
Did people do this willingly?
Stanley:
Yes, I think it was a great privilege. You got to be around the great man, absorb his wisdom, and also be in his sight, have him notice you. That was definitely the way up in BP. I think a bit of a drawback was that, for the company, I don't think they necessarily, when he finally left or was in the process of leaving, they tended to look at these people, who were all his protégés, as the only possible successors. I don't think that was a wide enough sample to look at. As it turned out, I don't think Hayward, a very capable guy, but ... all these people were kind of in the shadow of Browne and hadn't really been given a chance to do battle on their own. I think when he left, they were floundering a bit.
David:
So why was Tony Hayward selected as being the big turtle out of all the turtles that were there?
Stanley:
He's actually quite a small man. He was deemed by the board to be the best of these people, and he was in charge of exploration and production, which was the most important business at BP, so it was almost his to lose. He did a good job in Venezuela; I believe he was the corporate treasurer at one point, and did a good job there. But he's really quite a, I would say, quite a shy man. I'm not sure he has the same world view, sophisticated world view, that Lord Browne does. So he seemed to be doing fine, but then when he hit a crisis, he was the kind of deer in the headlights, as they say in the US.
David:
Yes! -- but in the case of John Browne, I presume he didn't want to leave the company? He still felt he had a lot to give to BP? So how did John Browne -- well, Lord Browne then -- how did he feel when he was literally drummed out of BP?
Stanley:
Well, in curt and very humiliating circumstances, where he was found to have lied in a court document. He was very unhappy about leaving, wanted to stay on and on. I think he stayed a few years too long. I really think he should have left after they did the TNK Russia deal in 2003, but he really stayed on for four more years, and didn't accomplish very much. I think he very much created BP as it is now, and was almost probably like an entrepreneur who feels, this is my company -- I can go on and on; no-one else can do the job. I think until things started going really bad, the board was inclined to go along with him -- things are good, let's not tamper with it.
David:
But it sounds to me as though he never had any obvious succession plan in place for the day when he decided, if he had decided to leave the company himself. So even though he had all these turtles around him, he never actually had a proper successor in place, did he?
Stanley:
Not until the last few months.
David:
That's a bit late then, isn't it?
Stanley:
Yes, I think this was very much a valid criticism, and also a criticism of the board. It's one of a corporate board's functions is to make sure you have a good succession plan. What he would always say is, I have these three or four people, and we're testing them out. None of these people was a slacker or not ...
David:
Capable of doing something?
Stanley:
Yeah, but they were always kept under, there's the old saying about mushrooms or whatever -- kept in the dark. Actually, someone told me that he would always, each year he would say, this is the year we're really going to bring them out, and let them sink or swim, but it would never happen.
David:
So he was just sort of teasing people most of the time. So I suppose the billion dollar question really is, Stanley, if John Browne had been in charge of BP at the time of the disaster in the Gulf of Mexico, would things have turned out differently?
Stanley:
I think he would have handled it better. I mean, Tony Hayward kind of wandered the shores of the Gulf aimlessly, putting his foot in his mouth, if all that is possible.
David:
Didn't he say things like, "I want my life back," in front of the camera?
Stanley:
Yeah, I want my life back, all sorts of things, and according to people who were close to him, kind of without a strategy. I've heard from people at BP that he did not understand that communication was strategic. I think Browne understood that very well, not that it all would have been wonderful. As long as you had that well spewing, it was very hard to look good, but I think Browne would have been clearer, more strategic -- yes, probably would have handled it better.
David:
And so I guess the final question really is, has BP finally learnt its lesson? This will be of interest to listeners who are following our subscription service, Dividend Edge, because BP is on the watch list now. So what they're saying is, BP has reinstated its dividend. It has also recently said it plans to embed world-class safety and operational risk management at the heart of all its activities. So do you think BP has learnt its lesson now?
Stanley:
I think ... it's a bit of a cop out, but in a way you'll have to wait and see. On the other hand, I think the new CEO, Bob Dudley, who was one of these turtles, but is different from the rest of the people around Browne in the sense that he's an American, he actually came from Amoco, one of the few at high levels who's left. He ran BP's business in Russia under very tough circumstances, and I think he's very serious about embedding safety in the whole company. He's a very hard-working guy and I think he will do whatever it takes to make this stick. I think he's very much a man of his words. So I would say yes, they likely have finally learned.
David:
Well, that's good news, but having said that, I can't let you leave without asking your opinion about how BP's strategy in Russia is going to pan out, because we're hearing some pretty dreadful stories about what is going on with its drilling operations out in the Russian Arctic region. How do you think that will pan out over the long term?
Stanley:
Well, that's really a future project. What's happened recently, which is disturbing, is in January BP agreed to a huge deal with Rosneft, which is a Russian state-controlled company that does have its shares listed. The deal involved basically a share swap between BP and Rosneft, which is a questionable move, I think; also, some very promising exploration treks in what's called the South Kara Sea in the Arctic, which some people think has as much as 50 billion barrels. Unfortunately, BP's shareholder agreement with its Russian partners in its affiliate, a 50:50 owned affiliate called TNK-BP, prohibited BP to make moves like this in Russia without the Russian partner's approval.
So they took BP to court, and just recently an arbitrator (not a Russian arbitrator, but an arbitrator or arbitration panel in London) ruled for the partner. So that deal is at best on hold now, and it's surprising that Dudley would have gone ahead with something like this. It's not like there's a lot of money at risk, because this is all in the future, but it's a very embarrassing thing to have this shot down, such a high profile deal. You had a Russian deputy minister, Igor Sechin, present, and a British minister when they signed; a huge fanfare -- actually all of us were made to go down to BP headquarters at nine o'clock on a Friday night to witness this, and now it's all ashes. It makes you wonder -- did they think it through? It seems reckless to me.
David:
So my final, final question, Stanley, is: If you have a look at your crystal ball, do you think BP is going to be a stronger company in five years' time than it is today?
Stanley:
I think BP will remain a strong company and will recover from all this mess, and the reason is that I think they're very good at exploration, and I think conditions for exploration are going to be increasingly demanding and they're good at that. They're also good at global plays in the non-Western oil producers, so I think they're well positioned. They have tremendous cash flow. Over the last year, BP's cash, despite all the hits they've taken, has actually more than doubled.
David:
That is the sign of a strong company, and I think the reinstating of the dividend will please lots of people, including pension funds?
Stanley:
Yeah, I'm sure -- especially in the U.K. it's a very big component.
David:
Thank you very much for coming in today, Stanley.
Stanley:
Thank you, it was a pleasure.
David:
And I have to say, I really enjoyed reading your book, and I do hope everybody goes out there and buys a copy of In Too Deep by Stanley Reed. Now, I have a final chore to do, and that is to find a quote that sums up today's podcast. I look around all over the place to see if I can find something that will sum up what today's podcast is all about. I found a quote from Tony Hayward, who said to fellow executives after the Gulf oil spill, "What the hell did we do to deserve this?" And I think sometimes, when people see disasters on their doorstep, they should have a look in the mirror and say, "Maybe it was me that did it." I don't know how true that is of BP, but maybe if we have a look back at the history of BP, this was really an accident waiting to happen, wasn't it?
Stanley:
I think so. The tea leaves were kind of there, but you never know when something's really going to happen.
David:
That's wonderful. Well, this has been Money Talk, I have been David Kuo and my guest has been Stanley Reed, reporter-at-large of Bloomberg News, and the co-author of In Too Deep. If you have a comment about today's show, please post it on the Money Talk web page, which you can find at fool.co.uk. Until next week, have a great week!
