washingtonpost.com
Oil spill crisis a setback for BP and its chief executive

By Steven Mufson
Washington Post Staff Writer
Monday, May 3, 2010; A06

On the day he got news that the Deepwater Horizon drilling rig caught fire in the Gulf of Mexico, BP chief executive Tony Hayward received a series of crisis updates in his London offices. The rig belonged to Transocean, but BP had leased it to drill an exploration well and BP bore legal responsibility for any consequences.

The grim updates were interspersed with long silences. One person there said that on several occasions, Hayward asked, "What did we do to deserve this?"

Twelve days later, Hayward is grappling with the widening oil slick from the damaged well -- an environmental crisis for the Gulf Coast states, a political crisis for U.S. offshore drilling and a corporate crisis for one of the world's biggest oil giants.

"This accident not only sets back BP, but could hurt it for years," said Fadel Gheit, an oil analyst at Oppenheimer.

On Sunday, the third anniversary of his becoming BP's chief executive, Hayward began his day in Houma, La., flew to a convention center in Mobile, Ala., where a new oil spill command center has been set up, and then went on to Venice, La. There, he planned to meet with local officials and others worried about the slick menacing the shore.

On Monday, he will be in Washington, running the gantlet of federal officials and members of Congress, many of whom are eager to tar BP with blame for the incident. Before the accident, he had expected to be in the United States giving a speech and promoting a climate change bill. Now, he will face questions about whether BP underestimated the risk and consequences of a well failure.

"Whatever else this is, it's a massive blow to confidence," said a senior BP insider who spoke on the condition of anonymity because he wasn't authorized to talk publicly.

The price tag for the disaster increases day by day. The company says it is spending $6 million a day on response efforts. Drilling a relief well will probably cost more than $100 million. The Defense Department says it will hand BP the bill for paying Louisiana National Guard troops, and the Environmental Protection Agency says it will charge BP for air monitoring. Covering damages to coastal fishermen, tourism businesses and residents could cost billions more. BP will pay 65 percent of these costs; its lease partners Anadarko Petroleum and Mitsui will pay 25 and 10 percent.

BP's share will come straight from its own pocket. "We are self-insured as a matter of policy -- you cannot insure these kinds of risks," a BP spokesman said.

Alabama Attorney General Troy King said Sunday night that he told BP representatives to stop circulating agreements offering coastal Alabamians $5,000 if they give up the right to sue the company. A BP official said the offer was part of a "standard waiver" to fishermen that was "inappropriate" and was "swiftly discontinued."

The oil spill crisis is just the sort of thing Hayward had hoped to leave behind when he became BP chief executive.

His predecessor, Lord John Browne, had been a brilliant deal maker and a friend of British Prime Minister Tony Blair's, but BP was often accused of neglecting safety precautions and adding to risks through deep cost cutting. Under Browne, who resigned after revelations about his personal life in Britain's tabloid news media, a fatal explosion took place at BP's Texas City refinery, leaks sprang onto the tundra from a company pipeline in northern Alaska, and a BP production platform in the Gulf of Mexico suffered structural problems that delayed its start date.

In 1990 and 1991, Hayward had been one of Browne's "turtles," company slang for the executive assistants Browne plucked from the ranks of BP's most promising young executives.

But when Hayward became chief executive, he wanted to make changes. A geologist who made his career on the oil exploration and production side of the business, Hayward didn't seem to share Browne's passion for greening the company image. Browne spruced up BP's logo and said that it stood for "beyond petroleum" not "British Petroleum." Hayward, who recently closed a BP Solar manufacturing facility in Frederick, said alternative energy projects had to make economic sense.

"The bit about 'beyond petroleum' being dead and buried is nonsense," he said. But, he added, "it's a business as opposed to an advertising slogan."

He wanted to change the corporate culture, in part by cleaning house. Hayward inherited 650 senior executives, but he pared that to 490, half of whom are new to their jobs and one third of whom are new to the company.

He showed an ability to strike deals, too. He resolved a dispute with BP's partners in its highly profitable joint venture in Russia. He won a contract to boost output from a supergiant oil field in Iraq, where BP had worked decades before. And recently, BP paid $7 billion to Devon Energy to buy deepwater oil and gas assets and leases in the Gulf of Mexico and off the coast of Brazil.

In an interview in Washington five weeks ago, Hayward called it "a natural fit with our deepwater portfolio." As oil and natural gas fields closer to shore have aged, the oil industry has been pushing out to deeper waters worldwide, and the Gulf of Mexico is typical.

Last year, a BP well was drilled in 4,130 feet of water to a record depth of more than 35,000 feet by the same Deepwater Horizon rig that caught fire April 20 and sank. At a London meeting five days before the accident, Hayward had noted that the giant reservoir it discovered "lies further below the Earth's surface than the summit of Mount Everest does above it."

Hayward's initiatives were starting to yield results. Last week, BP's earnings far surpassed analysts' expectations.

But the good news was blotted out by the oil slick. Over five days, the price of BP shares tumbled about 13 percent, erasing about $20 billion in market value.

In a video filmed in the company's crisis center in Houston and broadcast to employees, Hayward praised the company's strong earnings. "But," he said, "of course they're irrelevant in the context of what has occurred in the Gulf of Mexico over the past week." He said he had felt a range of emotions: "shock and indeed anger when I first heard about it, how could it happen. Tremendous sorrow when it became evident that the 11 people missing had probably died in the initial explosion."

Some of that anger has been directed at Transocean, owner and operator of the rig and the blowout preventer system, which Hayward has called "the fail-safe mechanism" that failed.

But Hayward hasn't tried to deny BP's obligations. In his video, he vowed "steely determination" to control the well, clean up and "do everything we can to understand how this has occured and to ensure that it never occurs again."

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