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BP CEO Makes Sweeping Changes

Reuters
Thursday, 11 Oct 2007 | 10:55 AM ET

The chief executive of BP on Thursday outlined a plan to address industry-lagging profitability by slashing management layers, adopting consistent procedures for developing oil and gas fields and reducing "unacceptably high" costs.

Tony Hayward said the plan was the result of a six-month review started when he took over in May, although analysts said it left BP's decentralized "hub and spoke" business model intact.

"BP's performance has materially lagged our peer group in the last three years. It has been poor because we are not consistent and our organization has grown too complex," Hayward said in a statement.

"What we are doing represents a fundamental shift in how BP works."

BP's shares added to earlier gains after the statement, which had been widely flagged in previous days.

"It's a step in the right direction and will help put BP on the front foot again. However, it will obviously take time to feed through to operational performance and financial results," said Neil Morton, oil analyst at MF Global.

BP's image and profits have been battered in the past two years by delayed startups of key fields, technical problems at its refineries, oil pipeline leaks and an explosion at a Texas refinery that killed 15 workers.

Hayward blames the project delays and refinery problems on excessive bureaucracy and BP managers' tendency to try and develop from scratch a cutting-edge solution to every technical challenge.

Safety regulators said the Texas City blast was partly due to cost cuts imposed by former CEO John Browne, while BP itself said cost cuts contributed to the pipeline leaks in Alaska that forced a partial shut-down of the US's largest oil field.

A BP spokesman said the company, the third-largest western oil major by market value behind Exxon Mobil and Royal Dutch Shell, has no cost-saving targets, or a target date for completing the restructuring.

Exxon Example

The adoption of more standardized procedures echoes the culture of industry leader Exxon Mobil, which is famous for operating in the same way everywhere.

BP will also follow Exxon's lead in reducing the number of management layers from 11 to seven, the number Exxon Mobil has, a BP source said.

However, Morton said BP appeared to have retained its "hub and spoke" structure, which forces managers of fields and other assets to compete for capital while also allowing them a greater degree of freedom and flexibility.

One of the shortfalls of such a structure is that each asset tends to build up its own support functions, duplicating efforts across the company, Morton said.

In contrast, Exxon has a more centralized "global business lines" structure whereby managers report principally along functional lines -- lines that reflect their duties – rather than into a country or regional boss.

Shell, meanwhile, traditionally had an even less centralized business model than BP, and analysts said this had fostered the creation of powerful but inefficient independent fiefdoms at the Anglo-Dutch oil company.

However, Shell has adopted a more centralized model since the late 1990s, and especially since the unification of its Dutch and UK holding companies in 2005, a move which was forced by investors after Shell admitted overstating its reserves.

Hayward said he expected the gap between BP's financial performance and its competitors to narrow in the fourth quarter, as major new fields start up and the company's refineries return to full capacity.

BP shares were up 2.1% at 592 pence, outperforming a 1.4% rise in the DJ Stoxx European oil and gas sector index.

BP will reduce the number of operating segments from three to two by folding its gas, power and renewables business into its two larger units -- exploration and production, and refining and marketing.

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