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THE AUSTRALIAN: Spotlight on BP investment, culture

Matthew Dalton, Dow Jones Newswires | January 01, 2008

AFTER several years of crippling disasters, oil giant BP is hoping to achieve operational health in 2008.

But questions remain about whether lingering problems within the company’s sprawling US operations could undermine its turnaround.

This year will be the first since 2004 that BP’s two largest US refineries and its giant oil field at Prudhoe Bay in Alaska are expected to operate at full capacity for most of the year. The deadly explosion in March 2005 at its refinery in Texas City, Texas, was the first and most serious in a string of disasters that have cost BP billions of dollars in profits.

It’s unclear whether London-based BP has already fixed the problems – underinvestment and a poor safety culture – that several investigations said caused the Texas City blast and the oil spills from BP’s pipelines on Alaska’s North Slope. Companies engaged in the exploration, production and processing of hydrocarbons always face the risk of these catastrophic events. The question is whether this risk is heightened at BP.

The financial incentive for BP to act is clear. The company’s shares are up since the Texas City explosion, as oil prices have repeatedly hit record highs and refining margins have at times expanded dramatically.

But BP’s shares have lagged those of its main competitors, Royal Dutch Shell, Exxon Mobil, Chevron and ConocoPhillips. After the Alaska oil spills in 2006, Royal Dutch Shell replaced BP as the world’s second-largest oil company by market capitalisation after Exxonmobil.

Wall Street analysts are largely optimistic that BP won’t see its performance in 2008 marred by explosions, corroded pipelines and government investigations. BP and Alaska have resolved a tax dispute that will result in a $US379 million ($434 million) payment to the state, authorities said.

BP Chief Executive, Tony Hayward, who took the reins in May, has refocused the company on operational integrity while avoiding the more high-profile role adopted by his predecessor, Lord John Browne, said Fadel Gheit, oil industry analyst at Oppenheimer.

“Browne was a hero for investors,” said Mr Gheit. “For a while, he was the industry’s global ambassador, but that took its toll. There was basically a lack of focus.

“I’m betting the ranch on them in 2008. They better perform, or I’m putting them back in the penalty box.”

BP appears devoted to improving safety at its US refineries, said Gary Beevers, international vice president at the United Steelworkers, the union that represents refinery workers.

“I’m certainly encouraged with BP,” Mr Beevers said. “Their attitude has changed.”

The company has replaced the devices that were responsible for the Texas City explosion and is eliminating their use in refining units that process “heavier than air, light hydrocarbons,” said BP spokesman Ronnie Chappell. The company also plans to spend an average of $US1.7 billion annually between 2007 and 2010 on the integrity and reliability of its refineries, up from $US1.2 billion in 2005.

“This represents an increase in, and an acceleration of, planned spending,” Mr Chappell said.

BP has removed personnel trailers from sites near processing units where hazardous chemicals are located. It has hired more workers and limited overtime to reduce worker fatigue, a contributing factor to the Texas City blast. And last week, BP agreed to test a key USW workplace safety program at the Texas City refinery, with the goal of expanding it to BP’s four other US refineries.

“We are becoming a better, safer operator as a result of the steps we’ve taken since since the accident at Texas City,” said Mr Chappell.

Despite these efforts, others say years of cost-cutting and poor compliance with environmental and safety regulations may have left BP vulnerable to operational failures and government investigations.

These issues came back to haunt BP last month, when the Environmental Protection Agency alleged widespread violations dating back more than twenty years at the company’s oil refinery in Whiting. Also, the target date for getting the Texas City refinery to full capacity slipped from end-2007 to early 2008, people familiar with the plant’s operations said.

Cost-cutting and a lax safety culture were to blame for the explosion at Texas City, according to a report issued in March by the Chemical Safety and Hazard Investigation Board, a federal agency.

“I don’t think I’ve ever seen anything that bad,” said Carolyn Merritt, former chairwoman of the board, of conditions at the Texas City refinery. The explosion, which killed 15 and injured more than 170, was one of the worst US industrial accidents in years.

“To turn that around is a monumental task,” said Mr Merritt, who left the board in August after her five-year term expired. “During that process, there is a risk that you’ve got other situations in other facilities that could erupt into some kind of tragedy.”

An investigation headed by former Secretary of State James Baker into safety at all of BP’s US refineries found similar problems with the company’s safety culture, though it didn’t focus on the issue of cost-cutting. Changing this culture will be difficult, said Paul Tebo, a former executive at DuPont and a member of the Baker panel.

“It is not a simple task,” Mr Tebo said. “I can’t tell you whether it takes one year, three years or five years.”

Mark Gilman, with Benchmark, a brokerage in New York, is one of the few analysts who has a “sell” rating on BP. He says investors have boosted the company’s stock to a price – $US74 per share – that implies the company won’t have major operational problems in the US in 2008.

“The stock’s way ahead of itself on this set of issues,” Mr Gilman said.

In October, BP and the federal government announced a wide-ranging settlement of ongoing investigations, with BP agreeing to pay $US373 million in restitution and civil and criminal penalties. For the Texas City blast, BP agreed to plead guilty to criminal violations of the Clean Air Act and pay a $US50 million fine.

But victims of the blast have objected to the size of the fine, saying it should be closer to $US1 billion, which was the refinery’s profit in the 14 months preceding the explosion. They also contend the plea agreement could be interpreted to give BP as a corporation immunity from prosecution for future catastrophes caused by the same conditions that caused the refinery explosion.

The question of culpability at the highest levels of BP is still unresolved, and it’s relevant for investors trying to understand how widespread problems at the corporation might be. The Chemical Safety and Hazard Investigation Board, in its March report, said “the Texas City disaster was caused by organisational and safety deficiencies at all levels of the BP Corporation.”

BP has denied that the problems at Texas City extend to other parts of the company.

“We do disagree with many of the chemical safety board’s findings,” said Mr Chappell, the BP spokesman. “In our view, it was a pretty flawed report.”

But the issues of cost-cutting and poor environmental law compliance keep emerging.

The company in October pleaded guilty to a criminal violation of the Clean Water Act for failing to maintain its pipelines on the North Slope of Alaska properly, causing several large oil spills in 2006. The company took the costly step of shutting half of Prudhoe Bay, the largest US oil field, to replace the pipelines.

At the Whiting refinery, BP must confront the new EPA allegations as it attempts to bring production back to full capacity. Production has been reduced for much of the year due to a fire, maintenance and repairs. That contributed to a 17 per cent drop in processing capacity at BP’s US refining operations in the second quarter, compared with the same period in 2006.

If BP can operate its Texas City and Whiting refineries without major problems, while also bringing on new production from its Atlantis project in the Gulf of Mexico, the company should be one of Big Oil’s top performers in 2008, said Mr Gheit, the Oppenheimer analyst.

http://www.theaustralian.news.com.au/story/0,25197,22993917-5005200,00.html

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