BP Learns Crisis Management in the U.S. the Hard Way

Relevance: It’s been a torrid time for BP in the U.S. these last few years. Well publicized (and well debated) safety and environmental incidents and alleged misdemeanors (mainly in the trading division) have kept the company on the front pages for all the wrong reasons. BP lost control over the public relations aspects of its business in the U.S. some time ago, only adding fuel to the fire for many there who are already suspicious of foreign run businesses. The debacle probably contributed to the demise of John Browne, BP’s former CEO and arguably the most gifted oil leader of his generation. Tony Hayward, on the other hand, has just given his predecessor a valuable lesson in crisis management. He understands that in crises it’s perceptions that matter and that operating reality is of no consequence. He has seized the moment to establish his agenda on the company. Never mind that in actual fact the safety and environmental performance of BP is at least as good as its peers.

Analysis: At the end of the 1990s BP was riding the crest of a wave. Under the leadership of John Browne it had initiated a mega round of industry consolidation with the purchase of Amoco (1998) that was quickly followed by the takeovers of ARCO, Vastar and Burmah Castrol and others. It had taken an aggressive stance over the environment and was watching its competitors fall in line behind it. The firm was getting ready to make the largest investment ever by a foreign firm in Russia. To cap it all, senior executives were taking congratulatory calls from Al Gore (then Vice President) and his ilk, explaining that a nicer company could not have purchased America’s oil and gas firms. So, what went wrong?

Undoubtedly a part of BP’s problem led in the failure to integrate acquired companies into a common set of expectations, standards and procedures. The fact that BP had much more work to do in this respect than its super-major competitors (given its smaller starting point and greater number of large acquisitions) will, rightly, leave most industry observers with little pity for the company.

That the perception of BP in the U.S. has much to do with the fact that it is not a U.S. company is also an issue that management should have known and responded to more effectively (especially given BP’s long and successful operating history in the country). The BP case illustrates that foreign companies are judged by a higher standard in the U.S. than local companies. BP’s response to its poor (and tragic) operations over the last couple of years only made a bad situation worse.

The U.S. has a mono cultural tendency, especially in business, that shows itself in a deep suspicion (and sometimes mistrust) of foreign firms. Americans like fellow Americans to own and run American businesses. Look at the furor over the bids by CNOOC for Unocal and by Abu Dhabi for U.S. ports, or at the scarcity of foreign CEOs running American firms. The list of economic studies that shows the abject failure of most foreign M&A activity in the U.S. is long and uncontroversial, the latest high profile case being Daimler.

With its aggressive takeover activity, BP had catapulted itself to the number one spot in U.S. gas producers and to one of the U.S.’s biggest oil producers. Although it had generated goodwill over the years it should have realized that it was always going to find itself under a higher level of scrutiny. No doubt, too, that the political establishment under a Bush administration would be even keener to knock BP, with its environmental stance, links to Iran (which have since been broken) and lead in Russia over its U.S. peers.

With all this negative perception, reality takes a back seat. But consider reality we must, and when we do we see that BP’s safety and environmental performance is at least as good as its peers:

1. Safety. Data published in the Wall Street Journal (and elsewhere) shows that over a 4 year period, the number of fatalities in the supermajors is broadly comparable and that BP is by no means an outlier in this respect. See http://blogs.wsj.com/energy/2007/03/20/, second article down. Without wishing to invite a debate about the generation and use of safety statistics, these data are broadly in line with more sophisticated analysis (that relies on frequency, accident rate and other measures).

2. Environment. Nothing illustrates better the nature of BP’s problems in the U.S. than the outcry over the environmental impact of its operations in Alaska. How many of these same critics are aware that 50% more oil has been discharged into Newtown Creek, New York by an ExxonMobil refinery than was lost in the Exxon Valdez disaster? The perception remains that BP is the poor environmental performer, even if its actual performance across all its operations is good.

Given this backdrop, Hayward’s response has been instructive. His lesson in crisis management includes a quick, fulsome and open admission of guilt followed by a radical action plan to correct past failings. He will move to take out layers of management and put more resources and responsibility on the front line (surely those close to BP will see the irony here – it was exactly this model that Browne used in BP’s heyday during the 1990s and before the large acquisitions). Hayward has all the bad news out in the public domain, and can now start reaping the praise for a succession of expected good news in the form of the start up of Plutonio (Angola) and imminent first oil for Atlantis (GOM). Hayward has taken a text book approach to change management, stamping his agenda on BP in response to a company crisis (change is always easier to push through when dealing with a crisis). His action plan, on the other hand, will take many years to have its impact on the company – short term results will have little to do with it.


17 October 2007

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