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The Sunday Times: Focus: Browned off (plan hatched last year for BP to merge with Shell)

EXTRACT: It was not the first time Browne and Sutherland had clashed. They also failed to see eye-to-eye over a tentative plan hatched last year for BP to merge with Shell. The potential mega-merger, which could have created a global energy giant worth more than £250 billion, was discussed between board members, but the idea was dropped. Browne was thought to be in favour but Sutherland argued it would be impossible to execute. BP has also cast its eye over French oil firm Total.

THE ARTICLE

July 30, 2006

Lord Browne has finally announced a date for his retirement after spending his entire working life with BP. The parting will be a wrench not just for him, but for the oil giant as well, reports Tracey Boles 
 
LORD BROWNE, the chief executive of BP, shared a pew with Tony Blair last weekend.
The pair were guests of honour at the wedding of Anji Hunter, the former Blair aide who now runs BP’s PR machine, to Sky political editor Adam Boulton. 
 
It was a happy occasion, and Browne, thrice voted Britain’s most admired businessman and dubbed the “Sun King” of the oil industry, joined in. He was all smiles as he arrived for the celebrations at the elegant Wren church of St James’s on Piccadilly, shaking hands with the assembled members of the cabinet and chatting with Blair.

But only hours earlier Browne had been fighting for his future. At a tense meeting on Friday at BP’s London headquarters, a short stroll from the church, he had locked horns with Peter Sutherland, BP’s redoubtable Irish chairman.

At issue was the date of Browne’s departure from the company he helped build into Britain’s largest. Sutherland was worried that Browne would try to extend his reign beyond 2008, when he would reach the company’s retirement age of 60. After months of rumours, matters had come to a head over the previous week, when reports in favour of Browne staying on had surfaced in the press and become a City cause célèbre.

Sutherland, 60, decided to confront his chief executive. At the meeting in his office, he pressed him to clarify the position publicly.

An insider said: “Sutherland told him you don’t have to go straight after your birthday in February 2008, you can go later in the year. But go.”

Initially reluctant to make a statement, Browne eventually agreed on the grounds that the speculation was spiralling out of control. Last Tuesday he announced he would retire at the end of 2008.

BP’s board now faces what one leading investor has called “the most difficult decision it has ever had to make” — filling Browne’s shoes. In just a decade, Browne has turned BP from the oil industry’s also-ran into a giant whose operations span the globe.

He has made no secret of his scorn for forced retirement, branding it ageism. He is not alone in his views. The issue is prompting a wave of shareholder activism, with investors saying mandatory retirement ages contravene incoming age discrimination legislation.

But Browne’s desire to stay threatened to tip BP into crisis.

The trouble at the top comes as the group faces a difficult period.

Last year its reputation for safety was rocked by an explosion at its Texas City refinery which killed 15 people. There was also an oil spillage in Alaska, and most recently BP has been accused of cornering the propane gas market in America, leading to a criminal investigation by the US authorities, and the threat of billion-dollar class action lawsuits by irate consumers.

BROWNE, a diminutive man with a heavily lined face, has been at BP man and boy. His father, a former Army officer, also worked for the company.

As a child visiting Iran, he witnessed spectacular oilwell blowouts, which left him with a lingering fascination for the industry.

He joined BP at 18 as a university apprentice while studying physics at Cambridge, from where he graduated with a first-class degree.

Later, Browne made his mark with a scheme to sell small interests in the giant Forties field in the North Sea, a plan that acted as a tax cover for the firms investing and cut their exploration costs.

He was elevated to chief executive in 1995 after four years as head of the exploration and production division.

Before his appointment to the top job, the company was widely perceived to be in decline. His predecessor but one, Sir Robert Horton, was forced out after presiding over a slump in performance. Lord Simon, the next chief executive, stabilised the company, but by the mid-1990s BP was still seen as reliant on cash from elderly fields in the North Sea and Alaska.

Fast forward a decade and BP is a leviathan worth £130 billion and producing 4m barrels of oil and gas equivalent a day. With oil prices high, record profits have become routine. Shareholders have feasted on dividends and buybacks.

Browne turned BP into Britain’s biggest company and the second-largest listed oil company in the world with canny acquisitions in the late 1990s, when the oil price was low. He bought two US firms, Amoco and Arco, in rapid succession. In 2003, he completed the transformation of BP by spearheading what was then regarded as a risky push into Russia through a joint venture with local firm TNK. The partnership was hailed as the oil deal of the decade.

Jason Kenney, analyst at ING, said: “It was a testament to his vision and strategic thinking. He deserves all the credit he gets.”

Browne, who is single, is wedded to his job. He has a wide variety of interests, ranging from antique furniture to the arts, particularly early Italian prints, but the cigar-loving executive lacks close family ties. He is an only child and his mother, Paula, a Hungarian Auschwitz survivor to whom he was very close, died six years ago.

He has admitted he is hooked on business, and made it clear he has no intention of slowing down as he approaches 60. In April, he made a passionate speech about mandatory retirement ages. 
 
He said: “When did you last see the word ‘old’ used as a positive attribute for anything other than works of art or bottles of alcohol? This is an issue of prejudice against individual men and women whose active, useful lives are brought to a premature and wholly unnecessary end. The waste is shocking and the prejudice is intolerable.” 
 
In public, Browne has been careful not to connect his strong personal views about age discrimination to his own situation. In a recent appearance on Desert Island Discs, he made it clear that he thinks there comes a time to hand over to a younger generation.

But sources close to BP say they believe Browne has waged a private campaign to stay on. They point to “overt” signals such as his public statements on ageism, and more “covert” ones.

A source said: “A bizarre collection of business people who have nothing to do with BP have rung newspapers and BP non-executives saying that Browne should be allowed to stay on.”

Others remain sceptical that Browne, known for his mastery of public relations, would adopt such tactics, but his failure to set a firm retirement date earlier put him on a collision course with his chairman.

Sutherland, a former Irish attorney-general and EU competition commissioner, is also a City grandee. He joined the BP board in 1990 and has been non-executive chairman since 1997. He is also chairman of Goldman Sachs International, the European arm of the heavyweight investment bank.

Last year, a special committee decided to keep him on at BP for a further three years because they didn’t want a new chairman appointing a new chief executive. Ironically, when Sutherland leaves in 2009, he will be 63, but BP’s retirement rules can be waived for non-executives.

Browne said last week: “Peter is no pushover.”

The pair are friends as well as colleagues. Browne attended the wedding of Sutherland’s daughter last year, one of just a clutch of old friends to be invited. They have been on holiday together at Sutherland’s house in Spain. Browne, who has a house in Venice, still intends to visit Sutherland there this year.

However, last week reports began emerging that big differences had developed at the top of BP over succession.

It was not the first time Browne and Sutherland had clashed. They also failed to see eye-to-eye over a tentative plan hatched last year for BP to merge with Shell. The potential mega-merger, which could have created a global energy giant worth more than £250 billion, was discussed between board members, but the idea was dropped. Browne was thought to be in favour but Sutherland argued it would be impossible to execute. BP has also cast its eye over French oil firm Total.

Last Friday Sutherland decided enough was enough when Merrill Lynch published a note calling for BP to reassess its executive director retirement policy so it could retain a man of Browne’s “calibre”. The note described Browne’s retirement as “a potential medium-term risk”.

On Friday evening, Browne and Sutherland had a private meeting in the chairman’s top-floor office in St James’s, where the Irishman implored Browne to make it clear once and for all that he was going — and when.

Sutherland could afford to speak forcefully. Sources close to him said last week that he had received the backing of the entire BP board, who believed that 12 years was long enough for any chief executive.

By Sunday, Browne had agreed to speak, as leading investors started calling for the compulsory retirement age to be lifted. At BP’s half-year results on Tuesday, he said: “I want to be completely clear. As I have said many times, I will be retiring in 2008. Peter Sutherland and I have discussed this and agreed between ourselves and the board that I will be leaving BP at the end of 2008. Even if I was asked to stay I would decline.”

Browne has said he does “not intend to spend his life on the golf course”. The controversial Merrill Lynch note suggested he might like to be chairman of BP, but sources say the board would never sanction it, and that non-executive director Sir Bill Castell is potentially in line for the role.

Whatever Britain’s most admired businessman does next, it is unlikely he will be short of offers. Friends say he favours making as much money as possible in finance before giving it all away through a philanthropic trust. BP’s board, which began thinking about his succession two years ago, will now start vetting Browne’s potential replacements in earnest. They will be benchmarked against external candidates. Anna Mann, the executive headhunter, has been hired to find them.

THAT the disagreement was allowed to become public is unusual for BP. Its slick PR machine normally prevents outsiders from getting an accurate view of life inside the company. Another rare — and unflattering — insight into the firm’s inner workings came a month ago, when BP was hit with a civil lawsuit alleging it had cornered the US market in propane fuel to boost prices artificially. The suit was filed by the Commodity Futures Trading Commission (CFTC). It charged that in 2004 BP traders — with the consent of senior management — “purchased enormous quantities of propane to establish a dominant position” in the market and force up prices.

Among its evidence are taped transcripts of conversations between BP traders which allegedly show how the British energy giant attempted to profit from rigging the price of a fuel. Along with the CFTC suit, BP faces a criminal investigation by the US Justice Department and class-action lawsuits brought by lawyers representing consumers. BP denied any wrongdoing and said it was prepared to fight the case in court. “It makes you wonder what the oversight is like at BP. Maybe the company is just too big,” said Phil Flynn, energy analyst at Chicago-based Alaron Trading. It was the latest incident to put BP’s American operations under the spotlight.
 
Last year a fire at BP’s Texas City refinery killed 15 people and injured 500 more. US safety regulators subsequently found problems at another BP facility, in Toledo, Ohio. The company has already set aside more than $1 billion to settle compensation claims. In April, US officials lumped BP in with companies that “ignore their obligations under the law and continually place their employees at risk”. 
 
In March 270,000, gallons of crude oil poured out of a BP pipeline in Prudhoe Bay, Alaska, the biggest oilfield in North America. BP was accused of having neglected long-standing problems. BP has entrusted Robert Malone with getting the US operations back on track. The company’s woes are likely to have been consigned to the past by the time the new chief executive is in place, analysts say. The new BP boss will have a hard act to follow but, as Sutherland said recently, BP is about more than just one man.

A leading oil analyst said: “It is such a well-run company that the wheels are going to keep going a long time. It will take a lot for it to go off the tracks.” BP’s strategy runs until 2010. The main task facing the new BP chief will be a perennial one — finding new reserves of oil and gas. As most of the easy oil around the world has gone, it is a quest that is likely to push BP into new frontiers.

“BP will have to try to get growth back into focus and keep on top of costs,” said ING’s Kenney — a task it will have to tackle without the talismanic Browne.

A tough act to follow

FIVE people inside BP are vying to be the next chief executive of Britain’s premier oil company, but they are struggling to step out of the shadow of the man labelled the Sun King of the oil industry.

They are Tony Hayward, the energetic head of exploration and production; John Manzoni, head of refining and marketing; Iain Conn, who manages BP’s internal functions; Robert Dudley, the chief executive of TNK-BP, and Andrew Inglis, deputy to Hayward.

Praise for the contenders is solid rather than ecstatic. ‘All bring a sound strategic and credible presence,’ according to Jason Kenney, oil analyst at ING.

Hayward is routinely cited as the frontrunner because the exploration and production division is the traditional breeding ground for BP’s chief executive.

‘He is at the coalface,’ said Kenney. ‘He has had to negotiate with the Alaskan authorities and tip his hat when mistakes are made.

‘Other people are more charismatic but it is not all about that. He would be Ronseal for the business as far as we are concerned.’

But industry views on him are mixed. An analyst who listened to BP’s results presentation last week said: ‘Manzoni sounded like a chief executive but Hayward did not. Conn didn’t say anything at all because he wasn’t asked.’

Hayward’s star could also fall due to events in Alaska, where BP has suffered a serious oil spillage.

And Manzoni could have been tainted by last year’s refinery explosion in Texas.

The problem could be that, because Browne has dominated the company for so long, it is hard to shine under him.

‘BP has to do some good PR on the internal candidates,’ said an industry source.

BP is taking no chances on Browne’s succession, however. It recently admitted that while it still favoured an internal appointment, it would be ‘benchmarking’ the candidates against external contenders. Executive headhunter Anna Mann has been hired to find suitable external candidates.
 

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