BP's failure of execution, not strategy
BP's failure of execution, not strategy
By Craig Smith
Copyright The Financial Times Limited 2006
Published: August 9 2006 03:00 | Last updated: August 9 2006 03:00
The aerial shot of the leak from BP's Prudhoe Bay oil transit pipeline in Alaska shows an affected area smaller than half of a football field. However, this leak of around five barrels (200 gallons) of oil on to the Alaskan tundra coupled with evidence of severe corrosion elsewhere in its pipelines has led BP to shut down the Prudhoe Bay oilfield, the biggest in the US providing around 8 per cent of US crude oil production.
Oil prices rose on the news that ageing infrastructure needs to be added to the growing list of factors that are reducing security of the world's oil supplies, along with war in the Middle East and disruptions in Nigeria. BP has been credited with acting decisively - it has announced that it will replace all 22 miles of the field's transit lines - but its share price fell markedly on the news. The shutdown, in itself, is not expected to have a big effect on earnings. Of increasing concern is the company's reputation in the light of a string of bad news stories from its US operations.
In March, BP reported the largest spill since oil production began on the North Slope of Alaska in 1977 - 4,800 barrels (200,000 gallons) of crude that came from a hole the size of a penny in a corroded pipe. US state and federal investigations followed, though the scale of the spill was modest relative to other spills worldwide - the Exxon Valdez spill on the Alaskan coast in 1989 was 50 times greater. Far more troubling was the fire at BP's Texas City refinery last year that killed 15 people and injured 500 more - the explosion was attributed to poor maintenance. Charges of market manipulation levelled against BP traders in its natural gas liquids business in June this year have not helped either.
Oil spills are not supposed to happen at BP. Neither are fatal accidents owing to sloppy maintenance or, if proved, corrupt trading practices. This is from a company widely regarded as a leading-edge exponent of corporate responsibility. Is such a reputation warranted? Is this more evidence of a company providing the rhetoric but little substance? BP is the company that invested millions of dollars in telling us it is "beyond petroleum" and that it is committed to protecting the environment - and it has been more than advertising spin.
John Browne, as chief executive of BP, committed the company to action on climate change specifically as early as 1997. The move was controversial at the time, though now is being increasingly emulated by the company's competitors. BP withdrew around then from the Global Climate Coalition, an industry group opposing action to reduce greenhouse gas emissions, and has since reduced its carbon dioxide emissions to below 1990 levels and developed CO2 capture and storage projects at its production facilities.
In 2005, it launched BP Alternative Energy, with $8bn (£4.2bn) investment over 10 years and the aim of gain ing market leadership in low -carbon power generated from the sun, wind, natural gas and hydrogen - its solar panels business is already a market leader.
Yet for all this attention to climate change, BP appears to have been caught unawares by unacceptable levels of corrosion in its Prudhoe Bay pipelines that could result in more elementary environmental problems - oil spills. This is in spite of earlier reports from whistleblowers of leaks and inadequate maintenance at the facilities. The company has also been accused of paying insufficient attention to safety in investigations of the Texas City fire.
For all the question marks over its reputation, BP's sustainability strategy - it prefers the term "sustainability" to "corporate responsibility" - remains sound. What we are seeing is not a failure of strategy but of execution.
Lord Browne, speaking at London Business School last year, said: "Our commitment to responsibility has to be expressed not in words, but in the actions of the business, day-in and day-out, in every piece of activity, and every aspect of behaviour." This is the challenge and the tough work of corporate responsibility: making it happen.
Some are saying the series of unfortunate events in BP's US operations marks a turning point - that this is BP's "Brent Spar" moment. This is a reference to Royal Dutch Shell's loss of public trust following protests by Greenpeace, which led it to abandon plans to sink the Brent Spar oil platform in the North Sea. The company's reputation plunged over the affair.
For BP, the concern has to be as much with US regulatory scrutiny as with public confidence. Over the Prudhoe Bay facilities, the company failed to take pre-emptive action, but since its problems became public, has taken some of the right steps by acting decisively. Fundamentally, however, only by redoubling its efforts to ensure its operations throughout the world are sound will BP minimise the risk of the reputational blows it has suffered in the past 18 months. One area of particular concern is its operations in Russia, where it is in a joint venture with TNK, a Russian oil company. BP can recover the trust it has lost - and so desperately needs - and restore its tarnished reputation in the US. But the most important lesson for now is that getting the basics right must be at the core of corporate responsibility.
The writer is senior fellow in marketing and business ethics at London Business School
By Craig Smith
Copyright The Financial Times Limited 2006
Published: August 9 2006 03:00 | Last updated: August 9 2006 03:00
The aerial shot of the leak from BP's Prudhoe Bay oil transit pipeline in Alaska shows an affected area smaller than half of a football field. However, this leak of around five barrels (200 gallons) of oil on to the Alaskan tundra coupled with evidence of severe corrosion elsewhere in its pipelines has led BP to shut down the Prudhoe Bay oilfield, the biggest in the US providing around 8 per cent of US crude oil production.
Oil prices rose on the news that ageing infrastructure needs to be added to the growing list of factors that are reducing security of the world's oil supplies, along with war in the Middle East and disruptions in Nigeria. BP has been credited with acting decisively - it has announced that it will replace all 22 miles of the field's transit lines - but its share price fell markedly on the news. The shutdown, in itself, is not expected to have a big effect on earnings. Of increasing concern is the company's reputation in the light of a string of bad news stories from its US operations.
In March, BP reported the largest spill since oil production began on the North Slope of Alaska in 1977 - 4,800 barrels (200,000 gallons) of crude that came from a hole the size of a penny in a corroded pipe. US state and federal investigations followed, though the scale of the spill was modest relative to other spills worldwide - the Exxon Valdez spill on the Alaskan coast in 1989 was 50 times greater. Far more troubling was the fire at BP's Texas City refinery last year that killed 15 people and injured 500 more - the explosion was attributed to poor maintenance. Charges of market manipulation levelled against BP traders in its natural gas liquids business in June this year have not helped either.
Oil spills are not supposed to happen at BP. Neither are fatal accidents owing to sloppy maintenance or, if proved, corrupt trading practices. This is from a company widely regarded as a leading-edge exponent of corporate responsibility. Is such a reputation warranted? Is this more evidence of a company providing the rhetoric but little substance? BP is the company that invested millions of dollars in telling us it is "beyond petroleum" and that it is committed to protecting the environment - and it has been more than advertising spin.
John Browne, as chief executive of BP, committed the company to action on climate change specifically as early as 1997. The move was controversial at the time, though now is being increasingly emulated by the company's competitors. BP withdrew around then from the Global Climate Coalition, an industry group opposing action to reduce greenhouse gas emissions, and has since reduced its carbon dioxide emissions to below 1990 levels and developed CO2 capture and storage projects at its production facilities.
In 2005, it launched BP Alternative Energy, with $8bn (£4.2bn) investment over 10 years and the aim of gain ing market leadership in low -carbon power generated from the sun, wind, natural gas and hydrogen - its solar panels business is already a market leader.
Yet for all this attention to climate change, BP appears to have been caught unawares by unacceptable levels of corrosion in its Prudhoe Bay pipelines that could result in more elementary environmental problems - oil spills. This is in spite of earlier reports from whistleblowers of leaks and inadequate maintenance at the facilities. The company has also been accused of paying insufficient attention to safety in investigations of the Texas City fire.
For all the question marks over its reputation, BP's sustainability strategy - it prefers the term "sustainability" to "corporate responsibility" - remains sound. What we are seeing is not a failure of strategy but of execution.
Lord Browne, speaking at London Business School last year, said: "Our commitment to responsibility has to be expressed not in words, but in the actions of the business, day-in and day-out, in every piece of activity, and every aspect of behaviour." This is the challenge and the tough work of corporate responsibility: making it happen.
Some are saying the series of unfortunate events in BP's US operations marks a turning point - that this is BP's "Brent Spar" moment. This is a reference to Royal Dutch Shell's loss of public trust following protests by Greenpeace, which led it to abandon plans to sink the Brent Spar oil platform in the North Sea. The company's reputation plunged over the affair.
For BP, the concern has to be as much with US regulatory scrutiny as with public confidence. Over the Prudhoe Bay facilities, the company failed to take pre-emptive action, but since its problems became public, has taken some of the right steps by acting decisively. Fundamentally, however, only by redoubling its efforts to ensure its operations throughout the world are sound will BP minimise the risk of the reputational blows it has suffered in the past 18 months. One area of particular concern is its operations in Russia, where it is in a joint venture with TNK, a Russian oil company. BP can recover the trust it has lost - and so desperately needs - and restore its tarnished reputation in the US. But the most important lesson for now is that getting the basics right must be at the core of corporate responsibility.
The writer is senior fellow in marketing and business ethics at London Business School
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