BP's Dudley Faces Daunting To-Do List

The Wall Street Journal

 

As BP PLC's board approved Robert Dudley as the troubled oil giant's new chief executive, his to-do list includes overhauling a U.S. operation badly tainted by the Gulf of Mexico oil spill; mending fences with perturbed U.S. government officials; and possibly making further executive changes at the top of his own company.

BP's board met Monday and approved a plan for Mr. Dudley to succeed current Chief Executive Tony Hayward, according to a person familiar with the matter. The embattled BP chief has been lambasted for his handling of the crisis that unfolded following an April 20 explosion and fire on the Deepwater Horizon drilling rig that killed 11 people and unleashed the worst offshore oil spill in U.S. history.

BP worked Monday to reconnect a drilling ship to a relief well that is supposed to end the leaks permanently, a process U.S. officials said should begin next month. Another effort to kill the broken well, by pumping drilling mud through the top, could start by Aug. 2.

Mr. Hayward will not completely sever his ties with the company. He will be nominated for as a non-executive director of TNK-BP Ltd., BP's Russian joint venture, which he was instrumental in creating, according to a person familiar with the matter.

Investors, meanwhile, hoped Mr. Dudley's appointment would reduce the political heat on BP and help it on the path to restoring its

"An American CEO will clearly be better able to improve BP's political relationship with the U.S. government," said Will Riley, a fund manager at Guinness Atkinson Asset Management.

BP is expected to report second-quarter earnings Tuesday. Excluding spill-related costs, an average of analysts' estimates forecasts a $4.9 billion profit for the second quarter—up 60% from year-earlier levels. But analysts have issued a wide range of projections for spill-related costs, so the company's actual profit for the quarter remains hard to pin down.

Mr. Dudley had previously garnered attention as chief executive of TNK-BP, which he ran for five years from its creation in 2003 and which quickly became one of BP's most lucrative businesses.

Now, in addition to mending political fences and his company's bruised image, many are calling for a root-and-branch overhaul of BP's U.S. business, another duty that would likely fall to Mr. Dudley.

The U.S. operations account for 40% of the company's asset base but has also suffered three calamities in the space of five years—a fatal blast at a Texas refinery in 2005, an oil spill in Alaska in 2006 and now the Deepwater Horizon incident.

There is also an expectation that some executives in the company's exploration and production, or E&P, division, could see a change in status, according to a person familiar with the matter. They could include Andy Inglis, the current head of E&P, who was once widely viewed as a likely successor to Mr. Hayward, and Doug Suttles, chief operating officer of E&P and one of the public faces of BP's cleanup effort.

Both men are closely associated with BP's Gulf of Mexico strategy, and have been hurt by allegations that, in its drilling operations, the company might have cut corners on safety, something the company has denied.

In addition, the two have frequently fought with the Obama administration. Mr. Inglis, who heads the campaign to contain the spill and cap the leaking well, has had heated arguments with Energy Secretary Steven Chu in BP's Houston crisis center.

The White House stopped holding joint news conferences with BP after disagreeing with some of Mr. Suttles's comments, according to a White House official.

BP declined to comment on Messrs. Inglis or Suttles or to make them available for an interview.

"This is the battle for the survival of BP [and] Dudley has to be a little bit ruthless," said Fadel Gheit, an oil analyst at Oppenheimer & Co. "Regardless of the people who have to be fired, he must prevent any such accident from happening in the future."

Mr. Dudley is expected to call White House chief of staff Rahm Emanuel, White House energy and climate adviser Carol Browner and cabinet secretaries to assure them that he is "not abandoning the Gulf," said one person familiar with the matter.

"He will reinforce [the point] that the Gulf is more front and center" for BP now that he is taking over as CEO, the person said.

Mr. Dudley will be succeeded as head of the standalone unit BP created to deal with the long-term consequences of the spill and restore the Gulf by Lamar McKay, according to a person familiar with the situation. Mr. McKay is the chairman of BP America Inc. and has often represented BP in Congressional hearings into the Deepwater Horizon.

As well as a formal announcement on Mr. Dudley's new role, investors are also hoping BP will provide more concrete numbers for the costs of the Gulf oil spill. Together with its second-quarter results, BP is expected to give guidance Tuesday on total cleanup costs and provisions for future liabilities and fines. Analysts' estimates have ranged from $15 billion to $60 billion-plus, but so far the company itself hasn't presented a final bill.

"The range is enormous, and if they can do anything to narrow it, that would be extremely useful," said Stephen Thornber, global equity fund manager at Threadneedle Investments in London. "We need to get some figures that we can work with."

BP Preparing to Replace Hayward

Bloomberg News

Dudley 

BP Plc plans to appoint Robert Dudley to succeed Tony Hayward as chief executive officer as the board looks to recover the company’s position in the U.S., two people with knowledge of the matter said.

Dudley, the director of BP’s oil spill response unit, is ready to be announced as the company’s first American chief on July 27 and to take the helm Oct. 1, one of the people said, asking not to be identified because a final decision hasn’t yet been made. The decision was reached in discussions with board members about how best to take BP forward and rebuild its U.S. position, the person said. The BP board meets tomorrow to “rubber stamp” the plan, the second person said.

“The fact he is American should help to keep things a little more straightforward in his dealings with the U.S. administration,” Ted Harper, who helps manage $6.8 billion at Frost Investment Advisors in Houston, said today. He doesn’t hold BP stock. “Dudley’s most important task will continue to be making sure that the well is capped.”

Hayward has faced public anger in the U.S. and criticism from lawmakers over his handling of the spill that was triggered by an April 20 explosion on the Deepwater Horizon rig, which killed 11 people. Dudley, 54, was born in New York and grew up in Mississippi, part of the Gulf Coast region suffering environmental and economic damage from the spill. BP on June 23 appointed him to manage its response to the leak.

BP is preparing an announcement for tomorrow that will note press speculation, confirming a board meeting will be held and announcements to be made as needed.

Lost Value

The company, which announces second-quarter earnings on July 27, has seen its market value fall by about 50 billion pounds ($77 billion) as it battled to stop the spill. The well has now been sealed, and BP plans to permanently plug it with cement next month.

Hayward “has the support of the board,” BP spokesman Mark Salt said by mobile phone today in London.

Dudley spent about 30 years in the oil industry, including a stint as CEO of BP’s Russian joint venture, TNK-BP, starting in 2003. That job ended after disputes with Russian partners led to Dudley fleeing Russia in 2008, citing “sustained harassment” amid court battles and labor and tax inspections.

While seeking to contain public outrage over the environmental damage, Hayward made several gaffes, including saying he wanted his “life back” and calling the spill “relatively tiny” in a “very big ocean.” The well spewed 35,000 to 60,000 barrels of oil a day from a mile deep in the water, according to a U.S. government-led panel of scientists.

‘Most Hated’

The New York Daily News said he was “the most hated -- and clueless -- man in America.” U.S. President Barack Obama said he would have fired Hayward, while White House Chief of Staff Rahm Emanuel said on ABC in June that “Tony Hayward isn’t going to have a second career in PR consulting,” while criticizing the CEO for taking a yachting trip.

“Hayward turned the heat up on himself, and some of his misstatements served to boost the move for him to be replaced,” Harper said.

“The new leaders of BP will have an uphill climb to correct the legacy left by Hayward,” U.S. Representative Edward Markey of Massachusetts said in a statement today. Markey, a Democrat, is chairman of the Select Committee on Energy Independence and Global Warming.

The company’s success capping the runaway well after three months will keep its final liability for the spill to $33 billion, according to analysts.

Well Cap

The 40-foot stack of valves halted the flow a week before Tropical Storm Bonnie blew through and forced a temporary halt to drilling of a relief well that will seal the leak for good. Worst-case forecasts for the crisis had pegged the bill as high as $100 billion.

“The doomsday scenarios are looking very remote,” said Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh, who expects BP’s final bill to reach $28 billion. “The biggest estimates were based on massive criminal negligence and the worst-case of the well not being stopped at all.”

BP will probably say net income before extraordinary items rose to $5 billion from $4.4 billion a year earlier because of higher oil prices and better refinery earnings, according to the median of 12 estimates in a Bloomberg News survey. The $4 billion the company has spent on the spill so far won’t be included in that figure. The increase in underlying profit will help BP in its campaign to bolster its financial position.

Second-Quarter Results

“In terms of second-quarter performance, they’ll be quite strong aside from the spill,” said Alastair Syme, an analyst at Nomura Holdings Inc. in London who predicts the bill will rise to about $17 billion. “The market will try to press them on future costs.”

The median estimate of the total costs is $33 billion, a Bloomberg News survey of 11 analysts shows, with predictions ranging from $17 billion to $60 billion. Louisiana Treasurer John Kennedy has said the total cost of the spill may reach $100 billion.

Tropical storm Bonnie stopped BP’s drilling operation near the Macondo well, setting back a permanent solution by about two weeks. Without the week-old cap holding back the flow, the spill would have worsened.

Exxon Mobil Corp., the biggest publicly traded oil company, and Royal Dutch Shell Group Plc, Europe’s largest, will report earnings July 29.

Stock Plunges

The spill has wiped about 40 percent of BP’s market value since the Deepwater Horizon blowout. That’s more than double the median estimate among analysts for the cost of the spill, suggesting investors are taking a dimmer view of BP’s future. The stock dropped 2.1 percent last week.

Before the spill, Hayward led BP to become the biggest non- state producer of oil and gas last year and aimed to increase output by as much as 2 percent a year through 2015. The company now plans to sell assets, reduce investments and suspend the $10 billion annual dividend for three quarters to pay for the spill.

BP Chairman Carl-Henric Svanberg agreed with president Obama last month to set aside $20 billion for spill victims and cleanup. The payments into the fund will take place over several quarters, starting with $3 billion in the third quarter and $2 billion in the fourth.

BP said last week that it sold $7 billion of assets in the U.S., Canada and Egypt to Apache Corp. It has also said it plans to sell holdings in Pakistan and Vietnam. BP may revive the sale of fields in Alaska after they failed to make it into the Apache deal, two people with knowledge of the matter said last week.

Refining Margins

The 61 percent increase in oil prices since the beginning of 2009 may bolster BP’s revenue across the world. In the first quarter, BP profit more than doubled from a year earlier. In March, BP agreed to buy $7 billion of assets from Devon Energy Corp. in the Gulf of Mexico, Brazil and Azerbaijan.

Refining margins are also picking up after averaging $5.49 a barrel in the second quarter from $3.08 in the first three months of the year, according to BP.

BP’s own survey of analysts showed a mean estimate of $5 billion for so-called replacement cost profit, with a range of $4.83 billion to $5.29 billion. Chief Financial Officer Byron Grote told investors on June 4 that the company will treat spill costs as a non-operating, identified item and that it will create a separate area on the income statement for it.

None of the analysts in the Bloomberg Survey had changed their cost estimates since BP stopped the flow of oil from the Macondo well this month. Politics will determine BP’s eventual bill, and the U.S. will ultimately want to keep BP alive, said Gudmund Halle Isfeldt, an analyst at DnB NOR ASA in Oslo.

“There has to be some limitation on the costs,” said Isfeldt. “If BP can go bankrupt, who will want to drill in the U.S. anymore?”

BP CEO Hayward tested by Gulf of Mexico Spill

 

LONDON (AP) - Tony Hayward promised to focus "like a laser" on safety when he landed BP's top job three years ago, heralding a new era for the company after a series of accidents - including the 2005 Texas City refinery explosion that killed 15 people.

But the baby-faced geologist may find his words haunt him.

Promoted precisely to restore BP's tarnished reputation, Hayward now finds himself dealing with the company's biggest disaster yet. His handling of the Gulf of Mexico crisis - and investigations into how the London-based company let it happen - could determine his future, and that of the oil giant.

The 52-year-old CEO and company "lifer" has flown out to Louisiana to personally head up the damage limitation exercise, declaring in the wake of criticism from President Barack Obama that his company was "absolutely responsible" for the spill.

He has made a string of U.S. TV appearances in a bid to tame the backlash against Britain's second biggest company, promising the public that BP will do all it can to limit the damage from an accident that threatens the shores of five states.

His response to CNN when asked about his initial reaction to the explosion of the Deepwater Horizon rig that caused the oil spill and killed 11 workers - "How the hell could this happen?" - was characteristic of his straightforward, down-to-earth nature. But it is also a question being asked by many critics of both the company and its leader.

"Hayward may have personally done much to turn around the fortunes of a company accused of putting profits before safety after a blast at a Texas oil refinery. But he evidently had not done enough," the Guardian newspaper wrote in an editorial on Tuesday.

The company has remained at the forefront of lobbying against a tighter regulatory framework in the United States, advocating voluntary compliance instead.

As well as suggestions that Hayward underestimated the risk involved with drilling at the Deepwater rig, he has also been accused of a slow reaction to the disaster after initially failing to take on board its extent.

Hayward countered those criticisms - somewhat belatedly in the eyes of some - by arranging for an "armada" of ships and a "small airforce" of aircraft to try stop the slick from reaching the shore. He also sent 2,500 BP staffers to fight the fallout, both onshore and off.

Chris Skrebowski, director of Peak Oil Consulting and consulting editor at Petroleum Review, said that Hayward has "done pretty well. He's surprised most people by being more effective than they expected him to be.

"It's quite a hard balancing act to come over as suitably concerned without looking as though you've lost control, and equally not to look complacent about what is a threat to people's livelihoods," Skrebowski added.

Hayward was promoted to the chief executive's chair in May 2007, replacing former boss and mentor John Browne more than a year earlier than initially envisioned under the company's succession plan.

Browne was anointed the Sun King - a reference to the company's blazing solar emblem - for taking the company from minor player to global energy giant in his 12 years at the helm and moving "beyond petroleum," to other, greener energy sources.

But he ended his tenure in ignominy, irrevocably tarnished by events including the Texas City explosion and a major Alaska pipeline spill in 2006. He fell further from grace after admitting to perjury while giving evidence to a court to prevent a newspaper revealing details of his private life.

Hayward, then the head of exploration and production, was chosen from a shortlist of potential successors, all internal candidates.

The eldest son of a family of seven, Hayward had a far less privileged upbringing than his privately educated predecessor. He worked his way through the ranks after joining BP in 1982 as a rig geologist in Aberdeen, Scotland, immediately after graduating with a geology degree from Birmingham University and a PhD from Edinburgh University.

Spotted by Browne as a potential protege at a meeting in 1990, he was groomed from being a smart geologist to boardroom-ready executive. He then moved through a range of positions at the company, including president of BP's operations in Venezuela and group treasurer.

Hayward was instrumental in BP's expansion into the United States, which involved a number of takeovers, including the 1998 merger with Amoco and the subsequent acquisitions of Arco and Castrol.

Peter Sutherland, the former BP chairman who chose Hayward to lead the company in 2007, has stood by his man, saying last week that he has "been a superb chief executive by common consent, in terms of internal and external perception. That doesn't change because of this accident."

As BP's share price and reputation continues takes a battering - wiping more than $23 billion off the value of the company in a week - external watchers say the jury is still out.

"There are still considerable uncertainties over the impact of this oil spill, as much will depend on how quickly the company is able to bring this well under control and how the winds will drive this spill," Peter Hitchens, an oil industry analyst at Panmure Gordon, said in a research note Wednesday.