A Mission to Repeal Murphy’s Law

By JAD MOUAWAD
New York Times
July 13, 2006

Last week, just days after he officially took on a new assignment to run BP’s business in the United States, Robert A. Malone took off for the Alaskan tundra to visit one of the hottest of the several hot spots in the global oil company’s increasingly troubled North American portfolio.

And that’s only the beginning of the traveling across the country he will have to do.

Brett Coomer/Agence France-Presse - Getty Images
Among BP's recent troubles was an explosion
at its largest refinery, which killed 15 workers
in Texas City, Tex.

A native of Texas and a 32-year company veteran who until recently oversaw BP’s worldwide fleet of tankers, Mr. Malone was tapped to run BP America Inc., the nation’s largest oil and gas producer. The subsidiary, built around acquisitions like Amoco, has been rocked by a series of lapses and accidents over the last 15 months that have tarnished the company’s reputation.
The troubles include the worst oil spill on the North Slope of Alaska; an explosion at BP’s largest refinery, which killed 15 workers in Texas City, Tex.; the near loss of a $1 billion offshore platform; and most recently, accusations that BP traders manipulated the propane market.

While he was not responsible for the problems, Mr. Malone will have to answer criticism that BP neglected basic safety rules, fostered a culture of excessive risk-taking and failed to invest enough in critical infrastructure. He also faces the challenge of restoring BP’s credibility not just with the public but also with regulators from the Justice Department and the Labor Department, among others.

The misfortunes already have led to lengthy delays in production, hundreds of millions of dollars in repairs and settlements, and civil and criminal investigations by state and federal agencies. The paradox is that BP — known for navigating successfully in much more challenging places like Siberia, the Caspian and Africa — has faltered in the most open of economic environments.

United States Coast Guard, via Bloomberg News
BP nearly lost a $1 billion offshore platform in
the Gulf of Mexico after it was damaged by
Hurricane Dennis.

Fadel Gheit, an analyst with Oppenheimer & Company in New York, said BP had a “streak of bad luck” but the company still enjoyed a solid reputation around the world. In the United States, though, “BP has this black cat that just keeps crossing its path — back and forth.”

To be sure, BP is logging record profits these days, posting net income last year of $22.34 billion, up 31 percent from 2004. It returned more than half — $12 billion — to shareholders in the first half of 2006 in dividends and stock buybacks. Shares of BP rose 10 percent in 2005, and are up another 10 percent this year.

Mr. Malone, a 54-year-old self-described extrovert, needs to bring a great deal of tact and urgency to his new job. The company’s slip in the United States is a setback for his boss, Lord Browne, BP’s chief executive, who once managed the business in America.

If not dealt with, the missteps threaten to undermine Lord Browne’s long efforts to give BP an environmentally friendly face and to deflect from BP some of the public’s hostile attitude toward the oil industry. Analysts say the recent events have chipped away at this carefully crafted image, at least in the United States.

“I am concerned that there are people questioning in various areas those values,” Mr. Malone said in a phone interview yesterday. “Part of what I want to do is address these issues. They are real and they are serious to BP America.”

Earlier this month, the company said that its second-quarter production had fallen 2.5 percent from the period last year, to four million barrels a day of oil equivalent, its fourth consecutive quarterly decline. Also, BP said it would take a further $500 million charge for compensation claims for the Texas City blast, in addition to the $700 million it set aside last year.

The United States accounts for nearly half the company’s global sales, half the company’s total assets and, with 40,000 workers, about half its employees. In turn, BP is a big player in America, accounting for 10 percent of this country’s oil output; its operations in the United States are bigger than those of Exxon Mobil, which is still much larger worldwide.

In many ways, BP’s changing of the guard in the United States is a public admission of its problems here. Mr. Malone’s predecessor in the United States, Ross Pillari, a 55-year-old executive for both North and South America, retired on July 1 after 34 years at BP.

“The United States has been BP’s weak spot, both in terms of its safety record and on poor maintenance issues,” said Lanny Pendill, an analyst at Edward Jones in St. Louis. “There’s also been a lack of oversight.”

The company, however, denied that Mr. Pillari’s retirement was related to the recent misfortunes. Mr. Malone’s strong safety record may have played a role in his appointment. In London, he oversaw BP’s oil and natural gas tanker shipments, a high-risk business that cannot afford accidents. During his tenure, BP shifted away from relying on chartered vessels and bought 48 double-hulled tankers. After the near collapse of the Thunder Horse offshore platform, he took over responsibility for all of BP’s floating structures in the Gulf of Mexico.

Before that, Mr. Malone was BP’s man running the Trans-Alaska Oil Pipeline. Mr. Malone brings “a proven record of success in the companies he has led,” Lord Browne said in a statement issued by the company.

BP Exploration via Associated Press
In worst oil spill on the North Slope of
Alaska, 267,000 gallons of crude leaked
from a pipe on an oilfield.

Mr. Malone, who says “my priority is around safety,” will visit BP’s five refineries, starting with Texas City, in the next few weeks. He plans to return to the site of the oil spill in Alaska in two weeks and expects to drop in on all the company’s major plants within three months.

“I like to get out with employees,” he said. “I need to see things for myself.”

In his new job, Mr. Malone will have to manage the company’s latest stumble — federal authorities charged late last month that BP manipulated the price of propane two years ago by cornering the market through its dominant position.

The scam was short-lived, and the traders lost $10 million. But the allegations hit at the heart of the company’s sizable and very lucrative trading business. BP disputes the charges.

In Texas City, BP faces criminal charges after an explosion in March 2005 at its refinery, the third-biggest in the United States, killed 15 workers and injured 180. A preliminary investigation found “systemic lapses in safety culture” at the refinery, which had a long history of accidents and management slip-ups.

BP swiftly accepted responsibility for the accident. Lord Browne visited the site the morning after the blast, replaced the plant’s manager and approved about $1 billion in new investments in repairs and safety improvements. BP said it also quickly settled with the families of the dead and injured workers. Still, the company was fined $21.3 million.

A federal agency investigating the blast has not ruled out interviewing Lord Browne before releasing a final report by the end of the year. Earlier this year, the company was fined $2.4 million for “unsafe operations” at another refinery in Toledo, Ohio. BP is contesting that fine.

“It is difficult to say if this is a BP-wide issue,” said Craig Pennington, the director of the global energy group at Schroders in London. “But they appear to cut corners for the sake of short-term profit maximization. If you are a serial underspender in a refinery, it will come back to haunt you.”

Just three months after the refinery accident, after Hurricane Dennis swept through the Gulf of Mexico, Thunder Horse — a huge new offshore platform that was about to start production — began tilting into the waters, listing at a 20-degree angle. The company blames a failure in the platform’s hydraulic system.

One year later, Thunder Horse remains hobbled with problems. The company, which spent $250 million in repairs, expects production to restart by the end of the year. But analysts suspect that a recent admission that two subsea manifolds were found to be leaking might further delay the start of production.

Mr. Malone also must contend with criminal charges against BP in connection with the large oil slick that spread across the Alaskan tundra in March, after a corroded pipeline operated by BP broke and spilled about 4,800 barrels, or about 200,000 gallons, of crude oil. Its local subsidiary, BP Exploration Alaska, had been fined several times in earlier cases, most recently $1.2 million in 2004. Now, the federal Department of Transportation, responsible for pipeline safety, is looking into the company’s maintenance practices.

The company strongly denies it has skimped on maintenance and said it increased the number of inspections in recent years.

Yet the pipeline problem in Alaska echoes a chorus of complaints lodged against BP in recent years over the construction of a major pipeline linking the Caspian Sea to the Mediterranean port of Ceyhan in Turkey.

BP is being investigated by the Environmental Protection Agency for violations of air pollution rules, by the Labor Department for unsafe work practices, and by the federal Chemical Safety and Hazard Investigation Board for its industrial safety practices. The F.B.I. and the Justice Department are looking into the trading allegations.

While BP is cooperating with all these investigations, it strongly rejects any suggestion that it has a companywide problem. “These are unrelated incidents,” said Ronnie Chappell, a BP spokesman.

BP has had a large presence in North America since the 1970’s. But the company’s big push came with Lord Browne’s purchase of Amoco in 1998 for $52 billion, at the time the largest-ever merger in the oil industry. In 2000, BP bought another American company, Atlantic Richfield, for $26.8 billion.

But along with the assets, BP also inherited the problems. “There is a lot on their plate that they need to sort out,” Mr. Pennington said. Meanwhile, he added, “it’s all incredibly embarrassing for them.”

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