Browne out

Jan 18th 2007
From The Economist print edition

An oilman's career encapsulates both the industry's past successes and its new worries

AFP

IT IS hard to summon much sympathy for the bosses of big oil firms. Their companies are among the most profitable on earth, and many of them have egos to match. They are at their richest and most powerful when oil prices rise, emptying the pockets of humbler folk and slowing whole economies. Despite all this, however, there is something poignant in the imminent retirement of John Browne, BP's boss since 1995.

Lord Browne has set the tone for the oil industry for much of the past decade. He was the first oil boss to champion, or at least not try to squash, greenery. There was a degree of public relations in this—BP is certainly not “Beyond Petroleum”, as its slogan claims, although it does have investments in alternative energy. But merely by breaking ranks on the subject, he helped bully his peers into a debate about global warming.

Lord Browne also created the industry's first “super-major” by merging BP with Amoco in 1998. The deal vaulted BP into the top ranks, and forced rival oil firms, including Exxon, Total and Chevron, into mergers of their own to keep pace. In 2003 he persuaded Vladimir Putin, Russia's president, that BP should buy half of a Russian oil firm—a feat no other foreigner has matched. Throughout this expansion, he kept costs down and profits up, to shareholders' delight. Since he took charge, BP's share price has more than doubled, its market capitalisation has risen fourfold and its earnings per share fivefold.

But over the past two years BP's star has dimmed. In March 2005 a fire at an American refinery killed 15 people and injured 170 more. Since then, BP has suffered corrosion and spills on its pipelines in Alaska, delays in developing new oilfields and two investigations of its trading arm for price-rigging. American officials and politicians have pilloried the firm for these failings. Last week, just days before the publication of the latest critical report, when Lord Browne said that he was bringing his retirement forward by 17 months to July, observers assumed that the announcement was intended to draw a line under BP's recent woes, and give his successor a fresh start.

With the benefit of hindsight, critics now claim to see a connection between BP's setbacks and Lord Browne's management style. Several reports prompted by the refinery fire—including one released this week by a panel headed by James Baker, a grand old oilman of American politics—have found that budgets and staff were stretched thin (see article). Tony Hayward, Lord Browne's successor, recently conceded that BP's “more-for-less” mantra could be taken only so far.

Whether BP's managers were negligent or simply unlucky will be difficult to judge—although lawyers will doubtless devote lots of time and money to the question. But BP is hardly the only firm that has ruthlessly cut costs. If there is a clear lesson to be learned from BP's troubles, it is that the strategies that have propelled the oil industry for the past decade, and that Lord Browne epitomised, are reaching their natural limits.

Big-oil nostalgia

BP will clearly have trouble cutting costs much further. In fact, a shortage of skilled workers and equipment is already pushing its bills up. Its biggest fields are maturing, as are those of other Western oil firms, yet access to new reserves is getting harder. Most of the world's most promising acreage lies in the Middle East, where nationalistic regimes restrict foreigners' access. Even countries like Russia, until recently the industry's great hope, are rolling up the welcome mat.

Nowadays, “Big Oil” reigns supreme in only a relatively small niche: the most technologically challenging and expensive projects, such as drilling in deep water, or turning tarry sand into something more useful. Unfortunately, these investments bring higher risks and lower rewards. Such trends should be worrying all oil bosses.