BP needs to emulate ExxonMobil’s model

by Raju Patel
Published: Financial Times
September 12, 2010

Raju Patel of Fulcrium writes in the FT.

The Deepwater Horizon accident in the Gulf of Mexico is undoubtedly a watershed event for BP, for regulators and for the industry.

Under new chief executive, Bob Dudley, BP needs to change.

Having inherited a disparate collection of upstream assets from the 1998 merger with Amoco, Bob Dudley’s predecessor Tony Hayward embarked upon a journey of standardisation and simplification.

Safety was a focus area but his approach was incremental. Bob Dudley does not have that option – the scale and volume of issues dictates that radical change is inevitable.
In shaping BP, Mr Dudley should compare the integration with Amoco to Exxon’s integration with Mobil.

Rex Tillerson, chief executive of ExxonMobil, says his company’s structure is a source of competitive advantage that other supermajors cannot imitate easily.

BP needs to find a way to do just that.

In 2008, one senior joiner said he was surprised by BP’s complexity and lack of standardisation – in his own words, BP-Amoco was reinventing the wheel time and time again.

If Mr Dudley is to improve the safety and performance of BP’s upstream assets, he needs to address the balance between mandatory and discretionary central guidance.

However, an ExxonMobil-style centralised model can work only if BP strengthens its leadership with people experienced in running a centralised organisation.

Mr Tillerson has good reason to feel confident about ExxonMobil’s model, which has consistently provided return on capital employed (ROCE) more than 50 per cent higher than any other supermajor.

In addition, the accountability of service companies such as Transocean and Halliburton needs to be addressed. The current balance leaves BP vulnerable to supplier relationship management headaches.

It is now neither acceptable nor desirable to manage service companies on an arms-length subcontractor basis.

BP’s internal investigation into the causes of the Gulf of Mexico accident involving the Macondo exploratory well suggests team paralysis between BP and the service providers was a key contributory factor. For example, the joint BP-Halliburton team should have challenged the cementing proposals.

Also, the abnormal pressure build-up in the well was incorrectly dismissed by the joint BP-Transocean team as low significance.

Going forward, BP needs to improve radically the governance for operator-service company partnerships. BP must decide whether the service companies become full technical advisory partners (which BP may not override) or remain junior contractors with few decision rights.

Whether or not accusations by US politicians that BP has put profits ahead of safety are true, it is clear that BP and its competitors are now limited in the extent they can drive efficiency because key operational areas with high safety risks will require expensive oversight. This will pose problems, especially if Mr Dudley wishes to continue to pursue Mr Hayward’s strategy of trying to attain cost-leadership.

ExxonMobil, however, is ahead of the game.

Greater regulation and a more conservative approach means other supermajors are likely to remain less efficient than ExxonMobil for some time.

BP may have retained many high-performing employees from both Amoco and BP but Mr Dudley needs to revisit aspects of the merger integration once he has determined how much centralisation is feasible.

Under Lord Browne and Tony Hayward, merger synergies were being realised at a steady pace. ExxonMobil, by contrast, declared its merger integration a success within 18 months of the deal, thanks to a more centralised organisation and operating model underpinned by the rapid adoption of best practices.

Whether BP can transform itself following the Deepwater Horizon accident will ultimately depend on Bob Dudley’s ability to bring about change at the world’s fourth largest company by revenue.

As Mr Dudley ponders the outcome of the various independent investigations into the causes of the accident in the Gulf of Mexico, he will be acutely aware that a slow pace of business reform will stall BP’s transformation to the different company he wants it to be.

Raju Patel is chief executive of Fulcrium (a specialist performance management consultancy)