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BP on the mend, but recuperation will take time

BP is working hard to rebuild its shattered reputation and has a big new Caspian gasfield on its books, but it will take more than that to comfort investors, writes Miles Lang

BOB DUDLEY has his work cut out for him and he is wasting no time. In the first 48 hours of his leadership of BP, he fired head of exploration and production (E&P) Andy Inglis, split the upstream division into three new units and announced the creation of a new safety division, with "sweeping powers", to be embedded in all of the company's operations.

All of that should give some relief to BP's investors, for whom the past six months have, at times, been eye-wateringly painful. But Dudley's job to restore faith has just begun. It has three elements: to complete the Macondo spill's clean-up operation, and steer his company through the protracted legal battles yet to come; to freshen up the company's strategic road-map – finding new reserves worldwide; and to make real, demonstrable changes to how the company operates, as proof of his promise to refocus on safety.

The last of these tasks will be greeted with scepticism, which Dudley must dispel. Tony Hayward, on taking the top job at BP last time famously vowed that BP would focus "like a laser" on safety. Then came the Deepwater Horizon tragedy – which killed 11 workers and is on record as the worst offshore environmental disaster in US history (PE 6/10 p4).

A break with the past

Hayward's failure will hang over Dudley, so it was crucial that he make quick steps in his first few days to announce a break with the past. One of them came with the removal of Inglis from the head of BP's upstream business, which includes the Gulf of Mexico operations.

That division, sometimes called "fortress E&P" inside the company because it seemed to run as a semi-autonomous unit, will be split into three – exploration, development and production, run by Mike Daly, Bernard Looney and Bob Fryar, respectively. They, with Andy Hopwood, who will be executive vice-president for strategy and integration, will join the expanded top executive team and report directly to Dudley. Now that the position occupied by Inglis has been made redundant, Dudley will represent BP's upstream departments at board level.

The new safety division will be headed by Mark Bly, BP's existing head of safety, who wrote the company's 193-page report explaining why the Macondo well blow-out happened (PE 10/10 p36). The unit will have its own staff embedded in all of BP's operations and will report directly to Dudley. Only time will tell if this fundamentally changes how BP manages safety and risk. The group head-of-safety position was created in the wake of 2005's Texas City refinery accident, which killed 15 workers, but failed to prevent the most recent disaster.

In the third week of his tenure, Dudley announced that fourth-quarter bonuses for all BP staff will be based solely on employees' safety and risk management performance. In a message to the company's employees, Dudley said the move would help make "absolutely clear that safety, compliance and operational-risk management is BP's number one priority, well ahead of all others".

Patching up the company's operational reputation is one thing. But Dudley has also been out looking for new reserves, a metric at least as important to a supermajor's share price as its safety record.

A week into his new job, Dudley flew to Azerbaijan to sign a production-sharing agreement (PSA) with state-owned oil company Socar to explore and develop the Shafaq-Asiman deep-water structure, 125 km southeast of Baku. Socar says the field could hold 300bn-0.5 trillion cubic metres of natural gas. Shafaq-Asiman lies in water depths of around 700 metres, with a reservoir depth of around 7,000 metres.

That deal, as well as further strengthening BP's presence in Azerbaijan, where it holds stakes in the Shah Deniz gasfield and the ACG oil development, and operates the Baku-Tblisi-Ceyhan pipeline (see p41), will encourage shareholders, and suggests BP still has some clout as a deal-maker. Intense competition for Caspian gas from both Russia and the Nabucco pipeline consortium (PE 10/10 p40) makes the asset a prize. BP will own half of the Shafaq-Asiman PSA.

Yet much remains to be done if BP is to regain the kind of stock premium it enjoyed before Deepwater Horizon. The company's shares have risen gradually since the summer, but remain more than 30% lower than before the accident (see Figure 1). Some BP-watchers fear that not even the corporate restructuring, renewed focus on safety and the booking of fresh reserves will restore the market's faith.

Fadel Gheit, an analyst at Oppenheimer, says investors are concentrating chiefly on the financial liabilities BP will incur once investigations into the Macondo accident are done. Investors don't care about BP's earnings or reserves, Gheit says. "What they care about is how BP will come out of this mess, as well as when dividends will be resumed, and what level".

Indeed, having survived the Deepwater Horizon accident, the company's liabilities could still leave it hamstrung. BP estimates that the bill will be around $30bn, but this figure could be far higher. If the company is found guilty of gross negligence under the US Clean Water Act, the penalties could rise by another $13bn.

Already, this has forced BP to sell a range of non-core assets to raise financing. So far this has yielded $10bn from the sale of operations in Canada, Colombia, Egypt, the US, Venezuela and Vietnam. The last two businesses were the most recent sales, going to TNK-BP, the company's Russia joint venture, for $1.8bn in mid-October.

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