Two years ago, at the apex of the worst moment in the history of BP—one of the worst for any company ever, actually—I sat with then CEO Tony Hayward at his emergency command centre in Houston. Eleven workers had died on the Deepwater Horizon. Screens throughout the centre showed oil billowing into the murky depths of the Gulf of Mexico. Hayward was calm but also a bit flip—his comment to me that he was sleeping fine at night roared around the world as soon as I reported it.
In that same corporate bunker I met Bob Dudley, who before the spill had been running BP’s operations in Asia and the Americas. He too was disarmingly calm, but unlike Hayward he exuded a humble, disciplined confidence (learned in part from his father, a Navy officer).
Dudley already had a reputation as cool under fire, having previously run BP’s Russian joint venture, and he recounted for me how he had fled from Kremlin goons, who sought to detain him and coerce him into signing oil and gas rights back to the government. Yeah, Deepwater Horizon was bad, but he’d handled big challenges before.
Within four months, as BP shares halved and talk swirled about it seeking bankruptcy protection, the axe fell on Hayward, the only public culprit of this mess. Dudley was tabbed with saving the ship. And he has done so.
Last November the Coast Guard approved BP’s plan to switch most of its coastline efforts from cleanup to monitoring. The same month BP started drilling its first new post-spill well, in 6,000 feet of water at the Kaskida field. In March, BP reached a tentative $7.8 billion settlement with roughly 100,000 fishermen, hoteliers and other plaintiffs, avoiding months of courtroom wrangling. That’s on top of $14 billion already spent on cleanup and $8.3 billion on damage payouts. Tourists are again returning to Gulf beaches, as drill bits turn offshore.
The scope of this turnaround ranks among the more incredible corporate comeback stories in business history. Since last year BP has risen a remarkable 379 spots to 11th place in The Forbes Global 2000 survey. Key to the climb is a return to profitability in a big way. In 2010 BP took a $41 billion charge against earnings, giving shareholders their financial whipping all at once rather than dribbling it out over years. In 2011 BP reversed the previous year’s $3.3 billion net loss, posting $26 billion in income, with promises of a further profit surge in the years ahead, thanks to high gasoline prices and a new slate of projects coming online.
BP has reinvigorated its exploration efforts with a series of strong deals in places like India and Brazil and the Utica Shale of Ohio. And despite setbacks last year in Russia and a serious 13 percent decline in oil and gas volumes since the spill, things are looking up.
But if you’re expecting to hear Bob Dudley crowing or taking a victory lap, think again. Despite a record any fellow chieftain would be unable to keep silent about, neither Dudley nor US chief Lamar McKay or even the new safety guru, Mark Bly—whose efforts are key to rebuilding trust in the company— would agree to an interview.
What gives? Simple. BP has no interest in discussing its success, a spokesman tells me. Rather than drawing attention to itself, BP needs to remain as humble as possible. Otherwise there will be no end to the lineup of aggrieved parties with open palms and dollar signs in their eyes. Chief among those is the US Department of Justice. BP is still on the hook to pay federal fines under the Clean Water Act, anywhere from $1,100 to $4,300 per barrel, and some workers remain in the shadow of criminal prosecution.
It’s been quite a ride for Dudley, 56, who in April 2010 had left his base in London for a business development expedition to India (happy to no longer be looking over his shoulder on Moscow street corners). As he explained in a speech last year, one morning he turned on the TV to catch up on news, only to find footage of the Deepwater Horizon inferno. Within days he was in Houston leading the cleanup and recovery efforts. By October he was CEO.
“He was a safe pair of hands,” says analyst Oswald Clint of Bernstein Research. “He was perceived as that before, and that's still the case today.”
Among its $23 billion in divestitures since the spill: BP has dished some mature US oilfields to Apache Corp and is still seeking a buyer for two refineries, including one in Texas City, Texas, the site of the 2005 explosion that killed 15 workers.
Yet there was never a question of BP pulling out of the Gulf of Mexico, one of its biggest operating areas, where it remains the leading producer, sucking in 261,000 barrels per day. And the company has promised growth here from finds like Kaskida, Gila and especially Tiber, which was discovered in 2009 at a depth of 35,000 feet and is thought to hold more than 3 billion barrels. As BP brings 15 big new projects online by 2015, it predicts a 50 percent increase in free cash flow (assuming $100 oil).
Far from shying away from exploration, BP has gone all-in to find more oil and gas, planning on 12 wildcat exploration wells this year, up from eight. In 2011 it signed 55 exploration licences in nine countries, more than any year in its history. These include a $7 billion venture with Indian billionaire Mukesh Ambani’s Reliance Industries, as well as blocks in Angola, Australia, Brazil, Namibia and even the Gulf of Mexico. In Iraq it’s rehabbing the giant Rumaila field. It’s planning to invest $6 billion in the North Sea.
Dudley’s exploration-focussed strategy differs greatly from its supermajor peers Exxon, Shell and Chevron, which are more focussed on massive feats of engineering (think oil sands mining and liquefied natural gas processing) to spur growth. “Exploration is the cheapest way to get new reserves,” but it’s risky, says Bernstein’s Oswald Clint. “If it works, if they can find a lot of reserves, they will outperform. If it doesn’t work, they’ll have to become more of an engineer.”
There are other challenges—and distractions, too. A $7 billion sale of acreage in Argentina fell through. Revelations emerged that BP in 2007 lobbied the UK government to normalise relations with Libya in order to grease its $900 million exploration deal. The British press thus tried to tie BP to Scotland’s 2009 release of Lockerbie bomber Abdelbaset al-Megrahi. Then there’s a budding scandal over a whistleblower’s claims that a senior executive in BP’s tanker chartering division has been receiving bribes.
But these are minor compared with BP’s problems in Russia. In early 2011, BP announced a sweeping deal with Kremlin-controlled Rosneft that involved a $16 billion share swap and a partnership on exploratory drilling in the icy Kara Sea. At the time Dudley said the deal was “critical to BP’s future”. But the oligarchs that control the TNK side of TNK-BP (billionaires Mikhail Fridman, German Khan, Victor Vekselberg and Len Blavatnik) balked at the deal, insisting that any Russian ventures had to go through them. To remove the conflict BP tried to buy out the oligarchs’ half of TNK-BP, offering $32 billion. They wanted more like $40 billion. The two sides are now engulfed in arbitration after a legal fight that led to more raids of BP’s Russian offices.
As the deal collapsed, Exxon Mobil embarrassed BP by swooping in to fill BP’s shoes with Rosneft. It was a sweet moment for Exxon Chief Rex Tillerson, who in early 2011 took issue with Dudley’s assertion that the Macondo spill could have happened to any operator. “I do not agree that this is an industrywide problem,” said Tillerson at the time. The comment stung, especially since Dudley has made a big deal about forging an overhaul of BP’s safety culture.
After the 2005 explosion at BP’s Texas City, a commission led by former Treasury secretary James Baker determined that BP had done a better job ensuring occupational safety (like banning cell phones while driving and forcing people to hold the railing on stairs) while falling short on critical process safety (maintenance, designing safe systems and learning from accidents).
Dudley has sought to create what he has called a “standardisation of process and consistency of implementation”. He created a new safety division whose director, Mark Bly, reports directly to Dudley. Bly oversees hundreds of specialists who have the authority to stop any operation at any time. And they have. In Trinidad, BP took a rig out of service when it determined it didn’t have a good enough blowout preventer (BOP).
In Egypt, BP sent away a rig for an overhaul of BOP controls. In Alaska, it temporarily shut down two rigs. They’ve run maintenance programmes at 48 sites worldwide.
Today all of BP’s wells are drilled by a single Global Wells Organization. New standards ensure that BP will only drill from a floating rig if it has a BOP with two sets of blind shear rams and a casing shear ram—to slice and seal the pipe. Such redundancies would have stopped the Macondo blowout as soon as it began. And to remove any potential conflict from within the company, BP now uses third-party inspectors to verify that these BOPs will work.
But don’t believe for a second that Big Oil has learned enough from BP’s blowout to ensure spills won’t happen again. In the past year we’ve seen ConocoPhillips leak 700 barrels into China’s Bohai Bay and Chevron a couple thousand barrels of oil-tainted drilling mud off Brazil. As I write this, Total is fighting a natural gas blowout in the North Sea and may need months to drill a relief well. None of these is even in the same league, let alone the same ballpark, as BP’s blowout, yet Conoco has agreed to pay more than $100 million in damages while Chevron has been threatened with fines of more than $10 billion. As Dudley said in a December 2011 speech, “Exploring for oil and gas has always been difficult, expensive and full of risk.”
“We fuel rising living standards,” Dudley said. “So refusing to explore is not an option. That would condemn humanity to a future of shortages, poverty and conflict.”
That risk of future shortages is a good reason to invest in oil, but what are investors to think about BP in particular? Deutsche Bank analysts figure BP is trading at a 29 percent discount to net asset value. Investors buying BP are getting proven oil and gas reserves at the equivalent of $11 a barrel, compared with $19 a barrel when buying Royal Dutch Shell. BP trades at around five times earnings versus seven for Shell and 10 for Exxon Mobil. JPMorgan analysts say that to justify its low valuation BP would need to get hit with $20 billion more in fines and penalties, to bring the total Macondo bill to $50 billion.
A hit that big could only come were a court to find that BP was grossly negligent in causing the spill (i.e., the company willfully neglected the use of reasonable care required to avoid grave injury). A gross negligence finding would enable the feds to levy fines of up to $4,300 per barrel spilled, or upwards of $17 billion. Otherwise the maximum is just $1,100 per barrel.
Dudley naturally thinks a finding of gross negligence is unlikely. In October 2010, in his first speech as CEO (given to the annual conference of the Confederation of British Industry), Dudley insisted that “no single factor caused the tragedy and that the well design itself, despite what you have heard, does not appear to have contributed to the accident.” The primary causes, according to BP: First, the cement at the bottom of the well was faulty and did not seal off the flow of hydrocarbons. Second, a well pressure test was misinterpreted. Third, the blowout preventer sitting on the seafloor didn’t work right. Fourth: Transocean workers failed to monitor and control the well. No mention of BP’s questionable engineering or cut corners.
As such, BP has just $3.5 billion reserved on its books to pay federal fines under the Clean Water Act. BP’s assumption is that it will be able to negotiate lenience from prosecutors for its vigorous cleanup response, its eagerness to set aside $20 billion to pay claims and its efforts to clean up its act.
We’ll see. Maybe Dudley will get lucky. Yet as oil prices rise, so does the public’s thirst for cash and the spectacle of seeing BP execs taken on perp walks.
“Nobody went to prison for BP’s Texas City explosion,” says a Houston attorney involved in Deepwater Horizon litigation. “So the government may be taking a harder look at indictments in this incident.” The likeliest targets: Donald Vidrine and Robert Kaluza, the two highest-ranking BP men on board at the time of the explosion.
Dudley wants to avoid a criminal trial as much as he did the civil trial. Before the February deal with plaintiffs Dudley declared, “As I’ve said before, we’re ready to settle if we can do so on fair and reasonable terms. But we are preparing vigorously for trial.”
BP has spent $159 million in the past two years to spur tourism to the Gulf Coast; business was reportedly up 50 percent in 2011 over 2010, while this year’s shrimp harvests are bigger than before the spill. Yet, don’t think that the spill’s effects are not still being felt in the Gulf. Louisiana officials continue to discover more oil bubbling up to dirty marshland previously declared clean. While nearly all fisheries are open again, sick dolphins have been turning up, and oyster beds remain decimated with little sign of recovery. You can’t blame Dudley for trying to put a good spin on it. “The beaches are clean; the water is open; the seafood is as good as ever,” he said in a February presentation. “I would encourage all of you to visit.” If he does, I hope he finds time to drop by for a chat.
(This story appears in the 08 June, 2012 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)