September 28, 2010 / 7:31 AM / 9 years ago

Dudley faces delicate task in rebuilding BP

LONDON (Reuters) - Bob Dudley faces a delicate task when he becomes chief executive of BP Plc on Friday: convincing investors BP will boost safety, while persuading government and the courts that its safety regime is as good as any in the industry.

BP's outgoing Chief Executive Tony Hayward (R) and newly appointed CEO Bob Dudley attend a meeting with Russia's Deputy Prime Minister Igor Sechin in Moscow in this August 4, 2010 file photo. REUTERS/Sergei Karpukhin

Tens of billions of dollars are at stake.

BP has suffered three major safety accidents in recent years, including the 2005 Texas City blast which killed 15 workers, oil leaks in Alaska in 2006 and the explosion on the Deepwater Horizon rig in April which killed 11 men and caused the United States’ worst ever oil spill.

Investors see a pattern, and are worried.

“Dudley really needs to restore trust in the operational ability ... That’s the absolute top priority,” Adrian Jackson, fund manager at Investec, said.

BP accepted the Alaskan leaks were partly due to cost cutting but denied economies played a role in either Texas City or the April 20 rig blast, instead blaming mistakes which were the result of practices common across the oil industry.

But investors, sore at the loss of $65 billion in BP’s market value due to the oil spill, want evidence of change.

“We will want to see what are they doing to tighten things up,” Jackson added.

ILL ADVISED

When a new CEO takes over an underperforming company, he or she often damns their predecessor’s failings and promises change — as Tony Hayward did when he succeeded John Browne atop BP, saying the latter had lost sight of day-to-day operations.

However, lawyers said American Dudley would be ill advised to adopt this strategy. To admit to shortcomings in BP’s safety practices or even to promise a major overhaul could be seen by regulators or represented by trial lawyers as admissions BP was to blame for the oil spill, inviting huge liabilities.

BP, Europe’s second-largest oil group by market value, capped the leaking well on July 15 after it gushed almost 5 million barrels of crude into the sea.

The most immediate matter on Dudley’s plate is how he will deal with official investigations and lawsuits over the spill. Critically, BP must refute claims it was grossly negligent.

If it is successful, its partners in the blown-out well, including 25 percent owner Anadarko and 10 percent owner Mitsui , will be forced to share up to 35 percent of the cost of plugging the leak, cleaning up and compensating those affected.

Analysts estimate the total cost will exceed $30 billion.

If BP is found grossly negligent, it would have to pay these costs alone and would face fines of over $21 billion, rather than a 65 percent share of a $4.5 billion fine.

Earlier this month, BP published an internal investigation which pinned most of the blame for the accident on its contractors. Pushing this line will reassure some investors BP is not fundamentally unsafe.

Other measures that could ease concerns without offering any legal hostages to fortune could include staff changes. BP sources reported speculation inside the company that head of exploration Andy Inglis, within whose unit the accident occurred, and U.S. Chief Operating Officer Doug Suttles may lose their positions.

BP has already said it did not do as much as it could to oversee its contractors and this could be held against the men.

IMAGE BOLSTERING

BP may restructure its portfolio to emphasize its focus on safe operations in the United States, potentially by taking a leaf out of rival Royal Dutch Shell Plc’s book, and breaking its upstream oil production arm into two units, one for North America and another for the rest of the world.

With 40 percent of its assets in the U.S., BP needs to also focus on rebuilding its tarnished image with lawmakers and regulators there if it wishes to execute the ambitious growth plans it had before the Macondo well disaster.

“The next step in our view will likely be a major brand recovery exercise,” Evgeny Solovyov, oil analyst at Societe Generale, said.

Part of the renewed focus on the BP brand will be a shakeup of BP’s communications effort.

Many public relations experts said BP’s handling of the oil spill was severely flawed, but so far the blame has been laid mainly on Hayward, whose gaffes enraged America.

BP sources said Dudley is expected to reinstate the role of head of communications, into which BP’s heads of internal, external media and investor relations would all report.

Oswald Clint, oil analyst at Bernstein, said BP should also increase its spending on lobbyists after recent cuts.

“This may be saving immediate cost (but) we would be somewhat concerned about this,” Clint said in a research note. “In our view BP needs to work to keep the U.S. government from being too hostile toward it in the future.”

Editing by David Holmes

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