Oil

by Tom Bower

  Two BP directors in America regarded Walters’s cuts and style as merely scratching the surface rather than offering a revolution. In 1983, Bob Horton, a brash 46-year-old fellow of the Massachusetts Institute of Technology, and his 35-year-old deputy John Browne had arrived at BP’s American headquarters in Cleveland, Ohio, to supervise BP’s 54 percent investment in Sohio, the successor to the Standard Oil Company of Ohio, the original John D. Rockefeller corporation. The purchase had given BP an entrée into Alaska, but London had failed to prevent the American directors buying a copper-mining company, wasting $6 billion of Alaskan profits. “Sohio’s completely out of control,” exclaimed Horton. “They’re losing $1 billion a year.” Originally acquired in 1970, Sohio was Horton’s platform to prove his credentials as Walters’s successor. As head of BP chemicals in 1980, he had closed 20 plants and fired two thirds of the workforce. The cure at Sohio in May 1987 was to buy total ownership for $7.9 billion (£2.5 billion) and dismiss swaths of staff. Sohio, Horton and Browne proudly announced, would earn profits of $560 million within two years. Renamed BP America, it represented 53 percent of BP’s total assets. From Ohio, the warts of BP’s culture in London were glaring. Deprived of courage, hope and energy, BP could only be resuscitated if the employees’ historical aversion to risk was replaced by American entrepreneurship. Their successful remedy in Cleveland, Horton and Browne decided, should be applied to the whole company after they returned to London in 1989.

  Like most oilmen, Horton and Browne believed in 1989 that “demand had peaked,” and oil would remain cheap because high prices stunted demand. Exxon, Mobil, Chevron and other more powerful competitors argued that prices were unpredictable, and survival depended upon cutting costs. Horton encouraged Walters to follow the herd. “BP cannot survive with this culture,” he told Walters after listing 11 layers of management. “It’s sclerotic. Get rid of the brigadier belt. Too many have a vested interest to sabotage change.” Starting from scratch, said Horton, BP needed to be repositioned and to duplicate Shell’s “wonderful worldwide brand.” Browne, as the new chief executive of exploration, echoed that criticism. In June 1989 he commissioned a presentation for investors in London and at the Rockefeller Center in New York. “This is dreadful,” he said after previewing the slides. “We’re declining.” BP’s access to 70 billion barrels of reserves had dropped to four billion, and were not being replaced. Production was falling from 1.5 million barrels a day to below one million. While its rival Shell had successfully retained profitable oil and gas fields in Nigeria, Oman, Malaysia, Brunei and Holland, BP would go out of business unless it found new, big prospects. Tom Hamilton, the American chief for international exploration, was told by Browne to present a scenario for a new strategy. “I’m going away with my family on holiday,” explained Hamilton. “Take the company plane and come back early,” ordered Browne. “I’ll need 90 days to do it,” replied Hamilton. “You’ve got three days to calculate the best odds to discover more oil,” replied Browne. In September 1989, Browne commissioned new exploration operations in Yemen, Ethiopia, Vietnam, Angola, Gabon, Congo, South Korea and the Gulf of Mexico.

  Few doubted the need for brutal surgery. Peter Walters’s retirement in early 1990 provided the opportunity for change. Persuaded by Bob Horton’s presentation about his achievements and by his argument in favor of a cultural revolution, the board unanimously picked “Horton the Hatchet” as BP’s new chairman and chief executive. “Project 1990,” said Horton, “is my personal crusade to revolutionize the company.” Twelve thousand employees would be dismissed and $7 billion of assets sold. Horton espoused drama as a resolution to the crisis.

  Eighty-two committees at BP’s London headquarters in Finsbury Square were axed, leaving just four. The 11 layers of management were also reduced to four. To inspire enthusiasm and to reincarnate BP’s 120,000 staff as open-minded and freethinking, Horton participated in “cultural change workshops” with 40 senior staff to discuss the “new vision and values.” His propagandists praised “the terrific buzz which motivated us to get the change moving,” but others carped that the balance between pain and progress was wrong. Horton had chosen Jack Welch’s operation at General Electric as his model for a centralized, focused corporation. In the oil business, no one could ignore Lawrence Rawl, the chairman of Exxon. Although Exxon was, in Horton’s opinion, “wildly overmanned and too engineer- and lawyer-led,” Rawl consistently produced successful results. Horton’s public predictions, accompanying jerky attempts to build solid corporate foundations, compared poorly with Rawl’s rare but pertinent statements about Exxon’s unflustered deliberations. As oil prices gyrated in late 1990 from $40 down to $31, Rawl cautioned that uncertainty made investment decisions difficult: “This is a long-term business. We cannot turn the money off and on every time someone clears his throat in the Middle East or elsewhere as the price goes up and down.”

  The “cough” was Iraq’s invasion of Kuwait in August 1990. America’s oil industry was still struggling. Oil production had fallen every year since 1986 by between 2.5 and 6.5 percent. Banks remained reluctant to lend because of the continuing uncertainties. The oil business, it was said, was as safe as rolling dice in Las Vegas. Even Exxon lacked sufficient money and personnel to instantly boost production. The US government offered no leadership to fashion a new energy policy. In 1988 America had believed that George Bush Sr. was the oil industry’s dream candidate, although as Ronald Reagan’s vice president he had offered it no help, and he had in fact campaigned for the presidency as an environmentalist. During his single term Bush would dilute an energy bill giving the industry minor tax relief, would not limit imports, and would cancel the sale of eight offshore leases. Texans, surrounded by abandoned derricks, were angry that the president sent the army to Kuwait out of fear of losing 1.5 million barrels of oil a day, but that no one appeared to care about Texas’s similar losses since 1986. Their anger spread to contempt for East Coast liberals and Californian environmentalists who nevertheless still harbored a sense of entitlement that energy should be abundant and cheap. Hoping for a cautious recovery from that economic devastation, Horton concluded that “the fundamental realities point to higher oil prices.” BP, he decided, needed to change fast.

  The hyperactive Horton lacked Rawl’s gravitas. He misunderstood Exxon’s foundations, created in around 1865, and built on vast untapped reserves of oil. Ever since John D. Rockefeller’s retirement in 1897, the corporation had been led by domineering personalities molded by Exxon’s character and caution. Unlike that prototype, Horton was not fashioning himself as a conservative, sober, confident chieftain, but was duplicating the caricature of a brash American chief executive. After four years in Cleveland, he had forgotten that BP was a British boys’ club, uniting in a collegiate atmosphere people who had lived, worked and played together for 25 years. Running too fast, he was failing to implement his own plans. Instead of focusing on the cuts, he ordered BP to expand despite the continued recession. At a time when the price of oil was about $16 a barrel and slipping, he expected that it would rise to $21 or even $25. Convinced of his own genius, he welcomed personal publicity. Impulsive and careless with his language, he told the first journalist invited into his office: “I’m afraid because I am blessed by my good brain which is in advance of my colleagues’, I tend to get to the right answer rather quicker and more often than most people.” (He would forever regret this remark: “It came out wrong, and I have had it hung round my neck ever since — never ever did I think I was a genius, far from it.”) The cover of Management Today featured Horton holding a hatchet, while Forbes magazine photographed him sitting on a throne. There was gossip within BP’s headquarters about Horton asking his secretary, “Should I go to a charm school?” His insensitivity bewildered his colleagues. Newspapers began reporting Horton’s unpopularity, one asking: “When Robert Horton and his wife return from their holiday in Turkey, many BP staff will hope that their plane will crash.” David Simon, a managing director, was told t
hat Horton concealed such criticisms from his mother. “Good God,” exclaimed Simon. “Horton has a mother!” Another executive told Horton to his face, “Why don’t you bugger off to Chessington Zoo and watch the gorillas and monkeys?” “Why?” asked Horton. “Because you might learn a lot.”

  Relations between Horton and his fellow directors were not improved after they arrived at Heathrow Airport on June 23, 1992, to fly to Alaska for a board meeting. Horton was overheard having an unseemly argument with the BA employee at the check-in desk. The atmosphere at the board meeting was fractious. BP would record its first quarterly net loss of £650 million ($1.24 billion) after its income fell by 82 percent, compared to a £415 million profit in 1991. The debt had increased to $16 billion and the share price had slid from 332 pence in June 1990 to 209 in June 1992. “We’re bleeding cash like crazy,” said one director, querying why the proposed cuts had not materialized, especially at the refineries. “You can count on BP’s DNA to find an inspired route out of the trouble,” countered a Horton sympathizer, only to be crushed by another director: “Exxon and Chevron don’t get into trouble.” Oblivious to the storm, Horton insisted during the board meeting that BP should pay a normal dividend to please investors. “Could you wait outside?” he was asked by the banker Lord Ashburton. Beyond his hearing, the reckoning was swift. “He’s spent too much time with ambassadors and playing politics in Washington,” said one voice. “And he’s spent too little time on the details of the business,” added another. “Bob is ambitious, abrasive and arrogant,” concluded a third. “We need a change.” The mood was summarized by Ashburton: “There’s been a build-up of small flakes which has become quite a lot of snow on the ground.” Three weeks later the nonexecutive directors, including Ashburton and Peter Sutherland, met at Barings bank in the City, London’s financial district, on a Saturday morning to decide Horton’s fate.

  The unsuspecting chief executive was summoned the following Wednesday. “Robert,” said Ashburton, “the board has decided to ask for your resignation.” “My God,” exclaimed Horton, shocked that his fate was even being discussed. “I was brought down as laughable,” he reflected. “I got a head of steam. My mistake was believing change could be done so fast. I should have shown more tenderness.” The public announcement was stripped of any charitable sentiment. “Hatchet Horton’s” decapitation matched the cultural change he had championed, except that his dismissal was interpreted by outsiders as the final collapse of a stodgy giant. BP, rival oil companies believed, would shortly be receiving the last rites.

  Horton was replaced by David Simon, a trusted team player with expertise in refining and marketing. “This is about the style of running the company at the top,” Simon said about his predecessor. “It’s not that I don’t have an ego. It’s just that it’s not terribly important to me.” Simon, a cerebral linguist, acknowledged his limitations. “Look, chaps,” he frequently smiled during meetings, “you know I’m not very bright, so could you explain this in simple language?” Six weeks after Horton’s dismissal, BP halved its dividend. Horton’s intention to copy Exxon and centralize BP was reversed. Power was devolved to trusted subordinates who would be accountable to business units, an innovation introduced by McKinsey & Company, the management consultants. That suited John Browne, the head of exploration and production and the heir apparent. Although Browne’s admirers described an occasionally soft and lonely character, fond of ballet and opera and not inclined to socialize, he espoused confrontation to resolve problems. BP’s style, he believed, should not attempt to mimic Exxon’s. Hierarchies and conformity were to be destroyed, and to encourage initiative there would be informal lunches, no lofty titles, and meetings between forklift drivers and accountants. Outsiders were greeted by charm, but employees understood the ground rules of a self-styled alpha male: “One mistake and you’re out.” His lesson from Sohio was the importance of consolidation and cuts.

  “I’m astute enough to know what I’m doing,” Browne told Tom Hamilton. In 1991, after working with him for six years, Hamilton admired Browne’s negotiating skills and passion to reduce costs, but questioned his limited experience. In his early career Browne had chopped and changed between jobs, spending just nine months at the Forties field in the North Sea and the same amount of time in Prudhoe Bay, never staying long enough to see his mistakes emerge. Not only was his knowledge about operating in the mud and sand of oilfields superficial, but he lacked any taste for solving engineering problems. Working in an office filled with monitors displaying information to feed his appetite for facts, he concealed his limitations by obtaining detailed dossiers on every face and every issue in order to brief himself before meetings. Browne’s impressive ability to absorb information, Hamilton feared, produced blindness about the whole picture and an inability to anticipate what could go wrong.

  That weakness, Hamilton believed, stemmed from Browne’s addiction to the wisdom handed down by McKinsey. Persuaded during his studies at Stanford in California that BP’s experts could be replaced by consultants, he appeared to become a financial executive surrounded by accountants focused on balance sheets to satisfy the shareholders, rather than harnessing engineering skills to manage a project. “To save money,” Browne had argued, “we can buy in what we need.” In Browne’s opinion, Hamilton did not understand the skill required to direct BP’s limited cash toward prospective windfalls. BP’s technicians, he felt, needed to be business-oriented. Making profits was his only criterion, whether by improved technology, lower costs, reduced interest payments or higher volumes. “The engineers in Aberdeen gold-plate everything,” he complained. “They’re inefficient and wasteful.” BP’s engineering headquarters at Sunbury, infamous for pioneering “space grease” and constantly reinventing the wheel, was to be closed. Browne saw no incongruity in an oil and chemical corporation relying on hired freelance engineers. “If this goes wrong, John,” Hamilton warned, “there’ll be no place in the world to run and hide.”

  Browne’s conception of himself as a different kind of oil executive leading a different kind of oil company did not appeal to Hamilton. The final straw was an argument about cutting costs during an 18-hour flight to inspect an oilfield in Papua New Guinea. Browne’s antagonism toward BP’s traditional embrace of engineers irritated Hamilton. “We may have to turn back, John,” he cautioned halfway through the helicopter flight across the jungle. “Cloud could prevent us landing.” Just before they arrived, sunlight burst through the clouds. “So why so many problems?” chided Browne. Hamilton resigned soon after, avoiding the profound change Browne demanded in exploration. Profits, said Browne, depended on cutting costs, especially exploration costs, by 50 percent, from $10 to $5 a barrel, while at the same time finding enough new oil to start replacing BP’s depleting reserves in 1994.

  Accurate forecasts of oil prices had become impossible after 1986. For the first time prices were varying during a cycle of boom and bust. Conscious that the oil majors had invested too much during the 1960s, Browne pondered the revolutionization of the industry’s finances. The new challenge was to balance the cost of exploration and production with the potential price of oil five years later. Oil companies, Browne knew, could only prosper if the cost of exploration and production matched market prices once the crude was transferred from the rocks to a pipeline. The yardstick for BP, the measure of future success, would be to equal Exxon, the industry’s most efficient operator. Exxon’s net income per barrel — the income divided by production — was about one third of BP’s. In estimating the cost of all new projects, Browne ordered that regardless of whether oil prices were low or high, BP would only invest if profits were certain. With losses of £458 million in 1992, the new wisdom reflected BP’s plight. The corporation could not risk losing more money. If his plan was obeyed, Browne predicted, BP’s annual profits by 1996 would be $3 billion.

  Predictions were also offered by McKinsey, which in 1992 forecast the atomization of the major oil companies into small, nimble operators. The consu
ltants foresaw excessive costs burdening the oil majors, restricting their operations. Too big and too expensive to run, they would give way to small private companies and the growing power of the national oil companies. By the end of the century, according to McKinsey, the Seven Sisters would shrink and their shares would no longer dominate the stock markets. Browne rejected that scenario, believing that only the majors could finance the exploration and production necessary to increase reserves. He would be proved partly wrong. Although the oil majors’ capitalization in 2000 was 70 percent of all quoted oil companies (McKinsey’s had predicted that their value would fall below 35 percent in the stock markets), Browne was underestimating — albeit less than his rivals — the resurgence of nationalism. The national oil companies were increasingly relying on Schlumberger, Halliburton and other service companies and not the majors to extract their oil. But, fearful of excessive costs, he was attracted by McKinsey’s formula to replace BP’s conventional management structure. To a man interested in the dynamics of the industry but not in the minute detail of “what you had to do after you bought your latest toy,” the idea of establishing competing business units answerable to a chief executive was appealing. By contrast, Exxon had neutralized individual emotions and relationships to standardize the response to every problem and solution. Depersonalizing employees to serve BP’s common purpose, Browne believed, would be self-destructive. BP, he knew, was too raw and too fragile to emulate Exxon’s self-confidence. The company’s staff would be encouraged to use their own initiative in the field. Taking risks was necessary for BP to survive and grow, but those risks would be subject to Exxon’s style of ruthless control of costs from headquarters.