Can BP bounce back?
A disastrous leak. A deadly explosion. CEO John Browne must turn his troubled oil giant around, but time is running out.
(Fortune Magazine) -- "This is where it all started," says BP Prudhoe Bay field manager Kemp Copeland, pointing to a rust-colored steel pipe snaking its way across the bleak Alaska tundra 250 miles north of the Arctic Circle. Normally this line carries 100,000 barrels of oil a day, the first step in a journey that takes crude from America's biggest oilfield to the Trans-Alaska Pipeline and then on to the port of Valdez, where it is loaded into supertankers bound for the West Coast and millions of gas-hungry drivers.
But the 34-inch pipe has been down since March, when a dime-sized hole caused by corrosion sent nearly 5,000 barrels of crude spilling out across the snow. The oil has been cleaned up, leaving behind a bare two-acre patch of ground, but the leak - and the subsequent discovery that six miles of BP (Charts) pipeline was badly corroded - led not only to the shutdown of much of Prudhoe Bay and the loss of hundreds of millions of dollars but also to a PR disaster that, in a single blow, undid the green reputation CEO John Browne had meticulously crafted for BP over the past decade.
Alaska and Prudhoe Bay are also where it all started for Browne. The man now formally known as Lord Browne of Madingley began his career with the British energy giant as a junior engineer in Alaska in 1969 in what was then a newly discovered field of tremendous potential. The rawness of Alaska was a shock for the Cambridge-educated Browne, and he still delights in telling stories of his time overseeing drilling rigs on the North Slope and his ramshackle Anchorage digs.
Today Prudhoe Bay's glory days are behind it. Production is down 75% from a peak of almost 1.6 million barrels a day in 1988, and Alaska's importance for BP has dimmed, as new fields in Russia and West Africa have come to the fore. At the same time, Browne's ability to shape BP's destiny and preserve his legacy is ebbing: He has pledged to retire in two years.
Browne says he is determined to turn things around before then. "There has been a monumental shift for the company, and for me personally," Browne told Fortune. "I am 58 but can still learn, and we need to go back and ask ourselves what we were doing and what we should do differently now." So he and his U.S. brass are appointing outside experts to determine what went wrong, hiring a former federal judge as an ombudsman to handle employee complaints, and pouring billions into Alaska, Texas, and other major BP sites in North America to improve safety over the long term.
That's a departure from the cost discipline that Wall Street has long admired, especially BP's ability to find savings after buying U.S. giants Amoco and Arco, deals that made Browne's name as a player in the fiercely competitive global oil patch. Indeed, soon after becoming CEO of BP in 1995, Browne boasted that "the drive to manage costs and to raise unit margins has now become a way of life."
But the turnaround process promises to be expensive - and embarrassing. Federal investigators in Anchorage have launched a criminal probe into BP's maintenance practices on the North Slope, convening a grand jury and ordering BP to turn over a six-foot section of the pipe that burst, as well as reams of data and personnel records. "Complying with the subpoena has become a big part of our lives since March," says Copeland, the Prudhoe Bay manager.
Tangled in litigation
At the same time, BP has become the oil company Washington loves to hate: Over three days of hearings last month on Capitol Hill, lawmakers attacked BP and its environmental record, while hammering the company for high gas prices, an explosion at a BP refinery in Texas City, Texas, that last year killed 15, and alleged manipulation of propane prices by BP traders.
If that weren't enough, a civil suit on behalf of victims of the Texas City accident is set to start in Galveston next month, and the plaintiffs lawyer in the case says he has thousands of damning internal BP documents he intends to introduce at the trial.
Still, it was Alaska that Democrats and Republicans alike kept coming back to at the recent hearings, and while Browne wasn't present, he was singled out for blame. "I have always respected BP, and I met John Browne and respected him," said Senator Dianne Feinstein, a California Democrat. "I thought finally there was an oil company that has a sense of conscience. I no longer think that."
Senator Jim Bunning, a Kentucky Republican, was just as tough after BP's top Alaska official, Steve Marshall, testified that BP had increased its spending on operations and maintenance to $787 million this year. "That's chicken feed when you're looking at $70 billion in profits," he said. "Don't tell me you didn't have an inkling that the pipes were eroding." (At an earlier hearing Richard Woollam, the BP official formerly in charge of anticorrosion efforts at Prudhoe Bay, refused to answer questions, citing his Fifth Amendment protection against self-incrimination. Woollam, says BP, has been placed on leave.)
Bunning and fellow conservative Pete Domenici, Senate Energy Committee chairman, aren't just angry about what Domenici termed BP's "black eye" in Alaska. They're also furious because the spill at Prudhoe Bay has made drilling in the neighboring Arctic National Wildlife Refuge - a long-cherished goal of congressional Republicans, as well as of President Bush - impossible for now.
But the worst blow to BP's image came not from a politician but from the federal official in charge of pipeline safety, Admiral Thomas Barrett of the Department of Transportation. "Given the many risk factors in the North Slope environment," he testified, it is "a mystery" why BP didn't clean the lines on a regular basis. As if to underscore his criticism of BP, Barrett added, "Most operators demonstrate a higher standard of care in their operations."
During the hearings and in subsequent interviews with Fortune, BP officials walk a fine line: They insist they were blindsided by the extent of the corrosion in Alaska but acknowledge that long-festering problems in Alaska, Texas City, and the trading operations can't simply be chalked up to bad luck. "I knew full well we had problems in North America when I accepted the job," says Robert Malone, a Texas native and 32-year BP veteran handpicked by Browne in July as the new president and chairman of BP America after previous boss Ross Pillari stepped down. "There's no doubt the issues we were having in America led to my coming here."
'We were blindsided by the recent leaks'
How could a company that has made being green a core part of its identity, even rebranding itself as "Beyond Petroleum," suffer within one year both the worst oil spill in the history of the North Slope and the worst U.S. refinery accident in more than a decade? And how did the energy visionary who publicly broke with his industry to acknowledge a possible link between emissions and global warming, earning a prominent spot in Vanity Fair's recent green issue, become a scapegoat for Big Oil?
The answer is clear to some current and former BP employees, union reps, and other whistleblowers interviewed by Fortune. Until recently, they say, BP's internal culture was characterized by intense pressure to keep costs down, and budgeting often took precedence over routine maintenance and occasionally over safety. "The catchword we heard was 'managed risk,'" says Kristjan Dye, the leader of the United Steelworkers local at Prudhoe Bay and a 20-year North Slope veteran. "If you pointed out problems, you weren't told to shut up. You could bring it up - but it might not get fixed."
Indeed, in a March 2002 letter obtained by Fortune, inspection and quality-assurance specialist Bill Herasymiuk warned superiors in BP's corrosion, inspection, and chemical team of a potential "catastrophe" and complained about "the larger lack of consistency and lack of standardization across the North Slope."
Herasymiuk, who still works for BP, has been called to appear before the grand jury in Anchorage. As oil prices recovered over the past few years from their lows in the late 1990s, says Dye, BP did begin to put more money into Prudhoe Bay, but it was too late. "It's unfortunate that as everything got better, things kind of caught up with BP," he says. "The chickens came home to roost."
Since the March leak and the subsequent shutdown this summer, much of the controversy has focused on a practice called pigging - sending a device known as a pig through the pipe (old oilfield hands say pigs take their name from the squealing noise they make going down the line) to clean it as well as monitor it for corrosion, cracks, sediment deposits, and other threats that might lead to a leak. Practices vary, but everyone now agrees the low-velocity transit lines that failed should have been pigged more often. On the west side of Prudhoe Bay, they were last cleaned and checked in 1998, while on the eastern side of the field, the last pig was run in 1991. The Trans-Alaska Pipeline, by contrast, is pigged every 14 days.
BP did take other measures to keep the pipes running, like adding chemicals to combat corrosion and performing spot checks with ultrasound in places where they expected corrosion to occur. But in the past few years, as Prudhoe Bay's production sank and the velocity inside the pipe slowed, sediment apparently built up. Meanwhile, underneath the sediment, bacteria were eating away at the walls.
By the time BP shut down the pipes in August, Barrett testified, more than 70% of the wall of the tube had eroded in 12 places. At another 187 spots, wall loss exceeded 50%. "We were blindsided by the recent leaks," says Bill Hedges, a plainspoken Englishman who is leading the effort to combat corrosion and get the pipes back in working order. "A lot of people feel devastated. In hindsight, obviously we wish we had been pigging. But the data we had told us we were doing the right thing."
One current BP employee who worked at both Prudhoe Bay and in Texas and spoke to Fortune on condition of anonymity says no one should be surprised by what eventually occurred. "The mantra was, Can we cut costs 10%?" he recalls. At Texas City even money for painting and external corrosion control was tight - until leaks started appearing. "There was an it-can't-happen-here mentality on the part of middle management," he says.
Constant turnover only worsened matters, as new bosses would seek to beat the previous manager's numbers. Nevertheless, this employee says he still believes in BP's green ethos and retains his respect for Browne and other top execs. "The values are real, but they haven't been aligned with our business practices in the field," he says. "A scream at our level is, if anything, a whisper at their level."
Changes coming down the pipeline
Malone says he hasn't found evidence of a systematic breakdown at the company. "It's early days, and I don't know that we're going to come up with one answer," he says. But he suggests that BP's rapid expansion - acquiring energy giants Arco and Amoco within months of each other in 1999 - may have contributed to the recent troubles. "Did we grow too fast? It's possible. Did we get the corporate culture right? I'm trying to figure that out."
Another explanation is that as BP's U.S. operations grew in size and scope - roughly 34,000 of the firm's 96,000 global employees are in the U.S., and the country accounts for 38% of BP's revenue last year of $244 billion - lines of authority blurred and responsibilities became too decentralized. For example, U.S. safety officials didn't work directly for Malone's predecessor, Ross Pillari; they bypassed him and reported to London. And Pillari didn't report to Browne; instead his boss was David Allen, BP's group chief of staff.
In the wake of Texas City and Alaska, BP does seem to have finally gotten religion. Browne says personal safety, process safety, and environmental safety efforts at BP facilities around the world have been redoubled, and a huge effort has gone into adding additional engineers to address these areas. The Texas City disaster was a profound event for the company, says Browne, and the discovery of the extent of the corrosion in Alaska this summer "only reinforced the impact of Texas City. The reason we closed the field was to prevent something from happening. That's very important to remember."
In North America, Malone has shaken up BP's bureaucracy. Before accepting the job he asked Browne for greater authority than his predecessors had, as well as direct access to Browne and BP's London headquarters, known inside the company as "St. James," after its posh address in St. James's Square.
New positions are also being created, with a U.S. safety czar as well as a compliance chief reporting directly to Malone, not to St. James. "My authority is nothing like what my predecessors had," Malone says with a light Texas twang, despite years of service in London and California. "I cut across the line - if I say we need to spend more, I have the authority to act."
Belatedly, BP is indeed opening the spigot and pouring money into North America. In Texas City the company plans to spend $1 billion rebuilding the 70-year-old refinery over the next five years. In Alaska the company has earmarked an additional $550 million to improve the integrity of its 1,500 miles of pipes, along with wells and gathering centers. The entire system of transit lines that failed this summer will be replaced at a cost of $150 million, and 21 new corrosion and safety specialists are being hired. "Clearly the world has changed," says Hedges, the leader of the anticorrosion team in Alaska. "We can't afford to have any leaks."
Still, the impact of both the new money and the new corporate culture is more evident in Texas City than in Alaska, where many of the people who presided over Prudhoe Bay's decline remain in place, including BP Alaska boss Steve Marshall. In Texas City cranes rise over the 1,200-acre site, and scaffolding covers many of the cat-crackers and other machinery as fresh pipes, ducts, and insulation are installed.
The site where 15 workers died when their trailers were blown apart is now bare concrete - the trailers have been moved away from the dangerous areas where oil is transformed into gasoline at more than 800 degrees, and 400 workers have been moved out of the refinery entirely into a former Kmart that now serves as BP office space.
The inspection team has grown from fewer than 50 to more than 100, and the plant has a new manager, as well as a new safety boss and new chief of staff, all Britons imported from other BP sites. "At first the people here looked at us like we were Martians," says Rod McCracken, the chief of staff. "Now the culture is changing, but it needs to be sustained. If we were to stop now, the old culture would be more prevalent in six months."
Malone cites the progress in Texas City as a blueprint of what he plans to do in Prudhoe Bay. "Our whole ethos now is getting safety right," he says. "Not only keeping people safe, but making sure our procedures are right and our plants are in good shape. That's the goal."
Encouraging as that may be, what's unfortunate is that it took 15 dead and more than 170 injured before anyone at the top realized there was a fundamental problem. Browne and Malone insist they have no illusions about the challenges BP is facing. "We didn't get here overnight," Malone says. "It's going to take us years to get where we need to be."