Oil and Gas

BP Faces Long Road to Restoring Confidence in US

Julia Werdiger HKSCKPVIamp; Jad Mouawad

Robert Dudley, who is expected to be appointed the chief executive of BP on Monday night at a board meeting here, faces a long road to restore confidence in the embattled company — particularly in the United States, the biggest part of BP’s business.

Bob Dudley, the Executive Director of BP, arrives at their headquarters in St James's Square on July 26, 2010 in London, England.
Getty Images

Mr. Dudley, an American who has been with BP since it bought Amoco in 1998, faces myriad challenges: dealing with the costs and legal consequences of the spill in the Gulf of Mexico, repairing damaged relations with federal and state authorities, bolstering morale among BP employees and, perhaps critically, winning back investors. His job can be summed up simply as ensuring that BP survives its latest crisis and finds a way to move beyond it.

“I can’t think of any new chief executive of an oil company stepping into a more complicated situation,” said Daniel Yergin, the chairman of IHS Cambridge Energy Research Associates. “BP is going to be in a rebuilding mode, and the aftermath of the spill will go on for a long time.”

Mr. Dudley, whose ascension is expected to be announced on Tuesday, will succeed Tony Hayward, who is resigning from the job he has held since 2007. In recent weeks, Mr. Hayward, in conjunction with top executives and directors, had concluded he could no longer effectively lead the company after he came under criticism in the United States for his handling of the Deepwater Horizon disaster in the gulf.

Few seemed surprised that BP, which was once partly owned by the British government and is based in London, would pick an American leader for the first time in its history. It was a recognition that addressing the effects of the spill would be the executive’s top job for the foreseeable future. It also signaled the importance of BP’s operations in the United States, especially its deepwater wells in the Gulf of Mexico, to the company’s overall business.

BP is the largest oil and gas producer in the United States, and its global exploration and production business is run from Houston. Americans account for about 40 percent of its employees and shareholders.

BP’s operations in the United States grew out of its initial partnership with Sohio, or Standard Oil of Ohio, when it discovered oil in Alaska in the 1960s. BP eventually acquired Sohio in 1987 and greatly expanded its American presence after it bought Amoco in 1998 and Atlantic Richfield, also known as Arco, in 2000.

BP operates Alaska’s biggest oil field, Prudhoe Bay, and is the largest shareholder in Alyeska, the company that operates the 800-mile Trans Alaska Pipeline System. It owns five refineries in the United States, and it is the biggest producer of oil and natural gas in the Gulf of Mexico, where it accounts for about a third of production. The company has also been expanding its shale gas production in the United States through acquisitions and partnerships.

“It’s quite depressing to think that you need an American chief executive to resurrect BP in the U.S., but the sentiment there has just gone too far in one direction,” said Will Riley, a fund manager at Guinness Asset Management in London, which owns BP shares. “The announcement of the sale of non-U.S. assets showed that they seem to believe that they have a future in the United States.”

However, that future is imperiled by a flurry of possible legislation and regulation aimed at BP or the oil industry generally after the April 20 explosion of the Deepwater Horizon.

In the last three months, Congress has held more than 50 hearings and examined more than 80 bills related to the spill, including some that would limit BP’s future business opportunities.

Several measures have been approved at the committee level, including provisions that would bar operators with serious safety problems from obtaining new offshore leases, a measure seen as singling out BP. The full Senate is due to vote later this week on a slimmed-down energy bill that would increase regulatory oversight of offshore drilling and abolish the current $75 million cap on a company’s liability for an oil spill.

It’s unclear what new restrictions might become law, but the pressure is on to do something.

“If Congress wants to make sure bad actors don’t continue to get leases, then it is important it passes legislation to ensure that,” said Marilyn Heiman, director of the Offshore Energy Reform Project at the Pew Environment Group. “And it would help provide an incentive to industry to not cut corners.”

Mr. Dudley will also have to deal with numerous federal investigations into BP’s responsibility in the explosion of the drilling rig, which killed 11 people.

There are half a dozen official inquiries, including a blue-ribbon commission appointed by the president, a joint investigation by the Coast Guard and the agency regulating offshore drilling and several Congressional investigations. In addition, legions of plaintiff lawyers have swarmed the Gulf Coast filing lawsuits against BP, while gulf residents and businesses affected by the spill have filed thousands of claims.

Meanwhile, BP is also preparing to unveil its second-quarter financial results on Tuesday, including how much it will set aside to cover the costs of the spill. Analysts estimate that the final bill for BP could be $30 billion to $60 billion.

Shareholders welcomed the impending change in management Monday, a sign that perhaps they, too, considered Mr. Hayward to be damaged goods. BP’s shares rose 4.9 percent on Monday in New York, closing at $38.65. The company has lost 35 percent of its market value since April 20, although shares have rebounded from their lows a few weeks ago.

Some investors said the departure of Mr. Hayward would do little to solve the company’s immediate problems: shutting the gulf well permanently and limiting the related liabilities. No oil has been gushing into the gulf since BP installed a cap 10 days ago, but the company is still drilling a relief well to entomb the doomed well, a permanent fix that is still weeks away.

So far, BP has spent about $4 billion on the spill, mainly to cap the gushing well, which the government estimates has spilled 2.3 million to 4.1 million barrels of oil. Under pressure from the White House, BP agreed to set up a $20 billion fund to compensate victims of the oil spill. But its liabilities could mount if it were found to be negligent.

“The underlying challenges remain and the big unknown is how long the litigation drags on for,” said Richard Hunter, head of British equities at Hargreaves Lansdown. “Hayward’s departure might be helpful from a press relations and political perspective, but there is no doubt that the new chief will have his work cut out for him.”

Mr. Hayward’s departure was seen as inevitable when he stepped back from the spotlight last month after a series of embarrassing public missteps. BP appointed Mr. Dudley, who grew up in Mississippi, to deal with its spill response operations and serve as the company’s public face in the United States.

Mr. Dudley, who was born in Queens, N.Y., grew up in Hattiesburg, Miss., about 80 miles north of the gulf coast, and he spent summers in Gulfport and Biloxi.

Still, Mr. Hayward was well liked by many investors until the explosion in the gulf. He cut costs at the company and significantly improved its profitability.

Mr. Hayward, who is negotiating his severance package, was reportedly offered a seat on the board of TNK-BP, the company’s joint venture in Russia, which Mr. Dudley once ran until the Russian partners wrested control in 2008.

Andrew Lynch, a fund manager at Schroders in London, said one priority should be to conduct a “thorough review of procedures within BP to make sure that the message of safety is clear among the people who are out on the drilling rigs.”

“Once all that is done, I don’t see why BP can’t be growing again,” Mr. Lynch said. “Deepwater is definitely the right place for them to be. The future lies in the more complex and technically difficult challenges offshore.”

- Julia Werdigier reported from London and Jad Mouawad from New York.