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Anchorage Daily News
December 29, 2006

http://www.adn.com/money/industries/oil/story/8526277p-8420020c.html

State updates rules to prevent oil from spilling
CONSISTENCY: There hasn't been a regulation change since 1992.
By ALAN BAILEY
Petroleum News
Published: December 29, 2006
Last Modified: December 29, 2006 at 03:23 AM

Alaska Oil Spill Prevention and Contingency Plan Review (CPR)
http://www.dec.state.ak.us/spar/ipp/cpr.htm

State environmental regulators are implementing new and revised regulations for preventing oil spills.

"Our mission is to keep oil in the container," said Lydia Miner, manager of the Department of Environmental Conservation's exploration, production and refineries section.

Miner said the changes come as part of an effort to update the regulations that started around 2001, well before the oil spill issues that have arisen this year with the Prudhoe Bay transit lines.

The changes for facility design and construction apply after Dec. 31, 2008, while regulations for facility operations, maintenance and inspections go into effect at the beginning of 2008.

Miner spoke recently about the changes at a meeting of the Kenai Chapter of the Alaska Support Industry Alliance.

She said the new regulations include a new category of pipeline called a flowline, which are used throughout oil fields.

"We took it upon ourselves to define what a flowline is and we used a definition that it is piping that carries oil between a well pad or offshore platform and a production facility," Miner said.

"Starting in 2009 you will have to be building your flowlines to certain standards," Miner said. The new regulations spell out those standards. Flowlines installed before 2009 are exempt from the new construction standards, Miner said.

But starting in 2008 corrosion control will need to be in place for all flowlines, including flowlines installed before 2009. The regulations spell out different corrosion control for buried or submerged flowlines, as distinct from above-ground flowlines. Flowline operators will also need to have a program such as cleaning pigs or the use of corrosion inhibitors to minimize internal corrosion.

By 2008 every flowline must have a leak detection system or an acceptable preventive maintenance system. And all flowlines must be marked. Operators must keep documentation for corrosion control and preventive maintenance.

Facility oil pipelines -- pipelines that originate or terminate in a regulated oil storage tank or an exploration or production well -- are already regulated, Miner said. But pipelines installed after the end of 2008 will require new standards for construction and cathodic corrosion protection. And facility oil pipelines must be subject to a specific inspection program starting in 2008.

Miner said that DEC is not changing the regulations for oil transmission lines at the moment but will issue changes to those regulations in the future.

The new regulations also address oil-storage tanks and plans for dealing with spills from them.

Further, DEC is placing increased emphasis on training to prevent oil spills and has moved training to its own section in the regulations.

Miner acknowledged that the oil industry seeks consistency in the regulatory environment. But she pointed out that the oil-spill regulations have not changed since 1992.

"We've been pretty consistent for 14 years," Miner said. "We believe that the changes to the regulations make them clearer -- we think you're going to have less surprises in interpretation from DEC regulators in the future."

See regulation changes at www.dec.state.ak.us/spar/ipp .

Financial Times
December 21, 2006

http://www.ft.com/cms/s/7b6d27f8-9093-11db-a4b9-0000779e2340.html

Timing remains the key to BP's succession plans
By Ed Crooks and Kate Burgess
Published: December 21 2006 02:00 |
Last updated: December 21 2006 02:00

Investors have generally welcomed BP's plan to appoint a new chief operating officer who would be expected to take over as chief executive when Lord Browne steps down at the end of 2008.

However, some raised concerns about the protracted transition period, which could last more than 18 months.

Shareholders contacted by the Financial Times yesterday broadly accepted the argument that appointing a COO would help assuage the uncertainty over who would replace Lord Browne and smooth the transition to a new chief executive.

But if the COO is appointed, as expected, in the first half of next year and Lord Browne stands by his intended departure date of December 2008, that could create an uncomfortably long handover period.

One investor said he was concerned that Lord Browne could become a "lame duck", and that while the transition period lasted neither he nor his presumptive successor would have the authority to take tough decisions.

Another investor said: "The trouble with a long handover is that it hamstrings the incumbent".

Of the choice between the various candidates, there were no strong views. One investor said he had met several of the contenders and they had all struck him as impressive.

The second favourite in any betting on who will replace Lord Browne would be the candidate who is the least visible in London: Moscow-based Robert Dudley, chief executive of TNK-BP, BP's 50 per cent-owned Russian joint venture.

In the past few years, TNK-BP has been a great success and the main source of growth for its parentcompany, although it has slowed more recently.

It also faces a potentially tricky future, threatened by the Kremlin's ambition to take a tighter grip on Russia's natural resources. Taking Mr Dudley out of TNK-BP could create a thorny succession problem there at a sensitive time.

So it is Tony Hayward, the current chief executive of BP's exploration and production business, who remains the favourite.

The FT revealed on Monday that in remarks posted on BP's internal website he had criticised the company's leadership style and culture.

In a subsequent letter to the FT, he said his remarks, made to the Houston staff of BP's exploration business, were self-criticism, "aimed at me and my own senior team".

But some investors welcomed the hint of a new management style.

Robert Talbut, chief investment officer of Royal London Mutual, said: "This is not only about an individual. It is about setting the tone for the group for the next five years."

He added: "I think we will be looking at a different BP over the next couple of years as the new chief executive moves in and sets a new agenda for the future. Those moves are likely to address the criticisms levelled at the company in terms of its priorities over the past few years."

Other investors agreed that the succession provided an opportunity to change the group's culture. Other directors are also likely to leave, including Byron Grote, the chief financial officer.

One said: "One of the aims of the succession process is to make the company less dominated by one person. The board is very conscious of this and going forward would like the board to be more collegiate."

Peter Sutherland, the chairman, is also thought likely to go once the succession has been settled.

Disappointed candidates for the chief executive's job may leave to develop their careers elsewhere, which raises the possibility that instead of a healthy shake-up, BP may suffer from too much management instability over the next few years.

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Browne denied final say over BP successor
By Ed Crooks, Energy Editor
Published: December 21 2006 02:00 |
Last updated: December 21 2006 02:00

Lord Browne, BP's chief executive, will have a role but not the final say in choosing the company's new chief operating officer, who will be expected to succeed him as the company's chief executive at the end of 2008.

The appointment process for the new chief executive is already under way, with the five leading contenders being interviewed, setting out their visions of the future of the company, and being assessed by Anna Mann, the headhunter called in to assist with the selection.

Following pressure from Peter Sutherland, BP's chairman, Lord Browne said in the summer that he intended to step down in two years' time.

The COO is expected to be appointed in the first half of next year. It was suggested yesterday that Lord Browne might attempt to impose his choice of COO, leaving the board's decision on the chief executive to be taken closer to the end of 2008.

But as a board-level appointment, the decision on the COO must be made by the full board. The expectation within the company is that the person chosen will then be most likely to take over as chief executive. Earlier in the year, Lord Browne talked in a newspaper interview about "picking" his successor, but he later accepted that the BP board needed to be fully involved in the decision, rather than just rubber-stamping his choice.

Mr Sutherland formed a committee, including BP non-executive directors such as Sir Ian Prosser, former chairman of Bass and InterContinental Hotels, and Sir William Castell, former president of GE Healthcare, to oversee the succession.

Ms Mann will be looking at outside appointments, but an internal appointment is seen as the most likely outcome.

The leading contender is generally seen as being Tony Hayward, 48, who as the chief executive of BP's exploration and production business is already responsible for about 70 per cent of the company.

His strongest challenge is likely to come from Robert Dudley, chief executive of BP's 50 per cent owned Russian joint venture TNK-BP, which has been the company's biggest success story this decade.

The other leading internal candidates are Andrew Inglis, Mr Hayward's deputy, and Iain Conn, a high-flyer aged just 43, who is the board director responsible for functions such as safety and operations and human resources.

John Manzoni, the chief executive of the refining and marketing business, is close to Lord Browne and was at one time seen as the front-runner to succeed him. He is still in contention, but he has been tarnished by the fatal explosion in March 2005 at the Texas City refinery.

Wall Street Journal
December 20, 2006

BP May Create New Post to Ease CEO Succession
By CHIP CUMMINS
December 20, 2006; Page A17

LONDON -- BP PLC's board may create a new, high-level post for the yet-to-be-named heir apparent to Chief Executive John Browne, a job designed to smooth the transition at the oil titan before his 2008 retirement, according to people familiar with the situation.

Lord Browne said this summer that he would retire Dec. 31, 2008. The naming of a top lieutenant and likely successor could clear up uncertainty over succession at BP and allow Lord Browne to preside over a prolonged turnover. The appointment of a chief operating officer, a new role at BP, could come as early as the first quarter of next year, though it could also come much later, according to one person familiar with the situation.

The board hasn't made a final decision on whether to create the post, however, and may decide against it in the end, these people said. BP hasn't made an announcement on a successor.

A U.S.-style chief operating officer could also provide the oil company -- battered over the past two years by a series of safety, compliance and operational shortfalls in the U.S. -- a measure of breathing room before Lord Browne's departure. That could give BP time to adapt if other senior BP executives decide to go elsewhere after being passed over for the top job.

BP's board has discussed the issue of succession in recent board meetings, according to several people familiar with directors' deliberations. It is unclear whether they have any favorites among internal or external candidates.

According to company observers, strong candidates from inside the company include Tony Hayward, BP's head of exploration and production, and Bob Dudley, chief executive of BP's big Russian joint venture, TNK-BP. Iain Conn, another top executive in Lord Browne's inner circle, is also seen by analysts as a contender. John Manzoni, chief of global refining and marketing and once a strong candidate, may have a harder time now following a rash of accidents at BP's refineries in the U.S.

Lord Browne has been under pressure from regulators, investigators and politicians amid the company's problems in the U.S. Last year, an explosion at BP's refinery at Texas City, Texas, killed 15 workers, triggering big fines and a continuing criminal probe. This year, U.S. officials opened a separate criminal probe into corrosion at the BP-operated Prudhoe Bay oil field. Federal investigators are also probing BP's energy trading, alleging BP traders manipulated propane markets in 2004 and investigating trades in gasoline and crude-oil markets, as well. BP has denied the manipulation charges and says it is cooperating with all probes.

BP also said yesterday a senior refining executive is resigning, the latest executive-suite change after the Texas City blast. BP announced the resignation of Mike Hoffman, a global vice president for refining, based in London. Mr. Hoffman, 49 years old, will leave BP April 30. BP spokesman Neil Chapman denied his exit was caused by Texas City and the ensuing debate surrounding BP's refining business. Mr. Hoffman's office said yesterday he was on vacation and unavailable for comment.

--Jessica Resnick-Ault and John M. Biers in Houston contributed to this article.

Write to Chip Cummins at chip.cummins@wsj.com

Financial Times
December 20, 2006

http://www.ft.com/cms/s/85cac32e-8fce-11db-9ba3-0000779e2340.html

FRONT PAGE - FIRST SECTION:
BP creates post to line up Browne successor
By Ed Crooks, Energy Editor
Published: December 20 2006 02:00 |
Last updated: December 20 2006 02:00

BP is expected to appoint a chief operating officer in the first half of next year, who will be lined up to take over as chief executive when Lord Browne steps down.

Lord Browne made it clear this summer that he would leave at the end of 2008. His departure follows a series of problems in the US, including an explosion at BP's Texas City refinery that killed 15 people in March 2005.

The COO would be a new role, designed to enable the successor to get to grips with leading such a large and complex company.

Peter Sutherland, BP's chairman, has appointed a committee to oversee the succession, including non-executive directors such as Sir Ian Prosser, former chairman of Bass and InterContinental Hotels, Sir Tom McKillop, chairman of Royal Bank of Scotland, and Sir William Castell, ex-president of GE Healthcare.

Anna Mann, the headhunter, has also been hired to assist, and will look at outside candidates, although it is thought unlikely that any will have the required experience and skills.

The leading internal candidates are Tony Hayward, 48, the chief executive of BP's exploration and production business, and Iain Conn, 43, an executive director with responsibility for Asia, Africa and Europe, and functions including safety and operations and human resources.

On Monday the Financial Times reported that Mr Hayward had criticised BP's leadership style and corporate culture in remarks posted on its intranet.

He said: "We have a leadership style that probably is too directive and doesn't listen sufficiently well," adding that BP's practice of trying to get 100 per cent of a task done using 90 per cent of the resources "needs to be deployed with great judgment and wisdom".

John Manzoni, the chief executive of the refining and marketing businesses, had been seen as another contender, but his chances have been damaged by his role as board director with responsibility for refineries at the time of the Texas City blast.

The other likely candidate is Robert Dudley, chief executive of TNK-BP, the 50 per cent-owned Russian joint venture that has been an outstanding success.

The COO plan emerged as it was revealed that BP's head of refining is quitting, making him the first head of one of the company's global businesses to leave following its problems in the US.

BP announced internally yesterday that Mike Hoffman, 49, was to leave the company at the end of April. He has been global vice-president in charge of BP's refining business since 2002, and held that post at the time of the Texas City refinery explosion.

The explosion, the worst industrial accident in the US for more than a decade, has resulted in a series of lawsuits and inquiries. A BP spokesman would say only that Mr Hoffman was leaving to return to the US. Next month, a panel chaired by James Baker, former US secretary of state, will deliver its report on safety management and corporate safety culture at BP's US refineries.

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BP was questioned over refinery budget
By Sheila McNulty in Houston
Published: December 20 2006 02:00 |
Last updated: December 20 2006 02:00

BP has faced questions over whether it cut the budget for its Texas City refinery by 25 per cent, in the year of the fatal explosion in the US city that killed 15 people and injured 500.

Don Parus, then Texas City plant manager, told an inquiry conducted after the blast that Patrick Gower, BP's regional vice-president for refining in the US, had cut his budget by 25 per cent. BP denies the figure, although in response to FT inquiries it has admitted to a reduction in its capital expenditure budget in the year 2004/5.

Neil Chapman, BP spokesman, said: "Between 2004 and 2005, there was a slight reduction in capital expenditure - this could be for a variety of reasons, including the completion of some investments.'' However, he added that it "was not in the region of 25 per cent.''

BP would not explain how Mr Parus arrived at his figure or answer more detailed questions, reiterating its comment that the cut "was not in the region of 25 per cent".

Mr Parus made his comments to an internal interview conducted by the BP Management Accountability Team more than a year after the explosion. His remarks about the 25 per cent budget cut are paraphrased in the review: "Mr Parus pleaded his case as to why they needed the funds, in addition to showing Mr Gower the problem areas and the conditions of the piping. Mr Gower did not give Mr Parus any money." If substantiated, his comments would be damaging for BP because US government investigators concluded there had been a "deterioration of safety'' from cutbacks in the five years the UK oil company had owned the plant.

The interview with Mr Parus, a copy of which was seen by the FT, quotes him saying he then followed up by telling John Manzoni, head of BP global refining, about how "every year Texas City underinvested at the site. There was not a lot of reaction.''

Mr Parus said he made a pitch for more capital with any senior management that visited the refinery, including Mike Hoffman, BP's group vice-president for refining, whose departure from the company was announced yesterday.

"After various meetings with Mr Hoffman and Mr Gower and the Manzoni visit, Mr Parus still received an e-mail to cut the budget by 25 per cent,'' the interview noted. "All of his efforts fell on deaf ears. Mr Parus was livid about the budget cut.''

The issue of budget cuts at Texas City has become central to those investigating BP because of savings made when the company first bought the refinery.

Carolyn Merritt, chairwoman of the US Chemical Safety Board, an independent federal agency charged with investigating industrial chemical accidents, said in October that "stringent budget cuts throughout the BP system caused a progressive deterioration of safety at the Texas City refinery.

"BP implemented a 25 per cent cut on fixed costs from 1998 to 2000 that adversely impacted maintenance expenditures and infrastructure at the refinery."

Financial Times
December 19, 2006

http://www.ft.com/cms/s/510bf8fc-8f05-11db-a7b2-0000779e2340.html

COMMENT AND ANALYSIS:
Blowdown: how faults at BP led to one of America's worst industrial disasters
By Sheila McNulty in Houston
Published: December 19 2006 02:00 |
Last updated: December 19 2006 02:00

Part of William Bradley Bessire's job as project co-ordinator at BP's Texas City refinery was to put on a lavish "safety lunch" to reward the workers in his section for every week without an accident.

At such a lunch on March 23 last year, Mr Bessire finished a big plate of fajitas, rice and beans, congratulated the workers on another good week and headed back to the trailer that served as his office - just as the refinery's nearby isomerisation unit was being restarted.

Some of the operators in the unit, designed to boost the octane rating in petrol, had been working 12-hour days for 30 days in a row, several with two-hour commutes. Alarms and gauges were broken and a key piece of equipment, the blowdown drum, was not only outdated but undersized. A proposal by BP engineers to upgrade to safer technology in 2002 had been turned down because of cost pressures.

Restarting the unit was a fairly routine event: it had been shut for maintenance and fired up again 19 times in the previous five years. But the use of the blowdown drum meant it vented directly to the atmosphere instead of to a flare, which would have burnt off fumes. During the start-up that Wednesday, the drum became overfilled with highly flammable liquid hydrocarbons. The accompanying fumes spread out over the refinery - until they found a spark.

Some 500ft away in his trailer,Mr Bessire felt a shock wave and knew the isomerisation unit was going to blow. He rushed out just as an explosion ripped through the plant, forcing a door and window out of their frames and into him, knocking him down.

As the flames spread, hundreds of workers ran to the barbed wire fence surrounding the refinery trying to get out, but they could not climb over it without shredding their hands. Mr Bessire backed a truck up to the fence so that people could clamber on it to jump over. He ripped off his coverall and laid it over the barbed wire as protection for those fleeing, then he ran back to find something else to wear. He spent four hours helping people out of the refinery. By then, 15 people were dead and 500 injured in and around the facility. He ruptured two discs that would have to be replaced with metal plates, limiting mobility in his neck, and damaged nerves would leave him with chronic pain on his right side.

It was the worst US industrial accident in more than a decade. Lord Browne, BP's chief executive, flew in the next day to take responsibility, setting the tone for talks with what would eventually become 1,000 claimants seeking the $1.6bn (£820m, €1.2bn) that BP allotted for compensation.

Not all BP executives displayed great contrition, however. A friend e-mailed John Manzoni, head of BP's refining and marketing, suggesting that he should travel to the refinery. Mr Manzoni's reply was terse and he appeared perturbed when Lord Browne ordered him to interrupt his vacation to go to Texas City: "I arrived in Texas City at 3am - along with Lord Browne and we spent the day there - at the cost of a precious day of my leave." BP declined to comment on this e-mail.

The US Department of Labor's Occupational Safety and Health Administration (Osha) uncovered more than 300 "egregious, wilful violations" in Texas City - BP's biggest refinery. BP did not admit guilt but agreed to a maximum allowable $21m fine and said it would spend $1bn improving and maintaining the refinery over the next five years.

Many of the problems at the 70-year-old plant had, no doubt, been inherited by BP when it acquired the refinery in 1998 as part of its purchase of Amoco. Before the blast, the Texas City site had in 30 years suffered 23 fatalities - four since BP took over. But instead of making the investments needed to improve safety, BP in 1999 ordered a 25 per cent cut in fixed costs.

Federal investigators would later conclude that these budget cuts caused a progressive deterioration in safety: "At an ageing facility like Texas City, it is not responsible to cut budgets related to safety and maintenance without thoroughly examining the impact on the risk of a catastrophic accident," said Carolyn Merritt, chairwoman of the US Chemical Safety Board (CSB), an independent federal agency that investigates industrial chemical accidents. "They had all the symptoms of a failed safety culture."

Ronnie Chappell, a BP spokesman, responded that the cuts were not a "directive" but rather a "challenge" to achieve the target without compromising safety or the long-term viability of the business unit. Nor did the cuts cause the blast, he added: "Our investigation team found no evidence that previous budget decisions were a critical factor in the terrible tragedy." Indeed, he said, spending at the facility had increased significantly in the years prior to the explosion and was by some measures higher than the industry average. Nonetheless, workers said they were certain BP was underspending and that this had put the refinery at risk of the type of explosion that took place that day.

Mr Bessire said: "I always worried about the safety of being in that refinery. Every time you drove up to the gate and 'badged in', you worried; there is not a person who works in that place that does not worry." It was hard not to: near the refinery entrance, workers for a time passed a billboard commemorating two colleagues scalded to death by boiling water after a pipe ruptured on September 2 2004.

John McLemore, fire chief at the site, estimated in a deposition for one of the many civil lawsuits against BP that the refinery had suffered an average of a fire a week over the past 10 years. The isomerisation unit had recorded eight other releases of vapour from the same blowdown drum from 1994 to 2004 - two of them under BP's watch. Of the total, six had included vapour clouds thatMs Merritt concluded could have had "catastrophic consequences, but for the absence of an ignition source" and two resulted in fires.

Ms Merritt said she doubted that the poor safety culture existed solely within the confines of the barbed wire fence at Texas City: "It's rare that you are going to have one facility that is so far off the mark in having a good culture in an organisation. An errant facility would not be able to continue on a bad path."

Indeed, an investigation by the Financial Times has shown BP allowed the refinery to deteriorate, in spite of all the red flags. Moreover, it was not the only BP operation in the US that was permitted to do so. BP Alaska has suffered a string of damaging safety lapses over the past five years and there have been smaller incidents in other states - all hinting at a broader problem with BP's safety approach in the US. Yet Texas City was in particularly bad shape - and, according to US regulators, senior executives in London knew that.

"BP's global management was aware of problems with maintenance, spending, and infrastructure well before March 2005," the CSB's report said. "BP did respond with a variety of measures aimed at improving safety. However, the focus of many of these initiatives was on improving procedural compliance and reducing occupational injury rates, while catastrophic safety risks remained."

Prior to the blast, a BP safety presentation on Texas City had opened with the statement: "Texas City is not a safe place to work." Texas City's safety business plan for 2005 said the death of a worker within 12 to 18 months was a "key risk". Even further back, BP executives had been aware of problems. On August 16 2002, James Hay, BP business unit leader for chemicals, e-mailed David Pierpoline, the group's director of health, safety, security and environmental compliance for the western hemisphere, to note that Mike Hoffman, vice-president for refining, had asked him to follow up on how Texas City had fallen into "such a poor state" and expressed concern that other sites should not be allowed to deteriorate to that extent.

But not much changed and, by late 2004, Texas City workers had grown so fearful of a massive accident that the local union contacted colleagues in Alaska for help in engaging the services of Chuck Hamel, a longtime campaigner for oil workers, to publicise their plight.

Around the same time, Don Parus, the refinery's site manager, tried to get a handle on the depths of the problems by commissioning an independent safety audit. Telos Group, a Texas-based consultancy, surveyed more than 1,100, or 60 per cent, of Texas City employees. Mr Parus said in a deposition he was unsurprised by the findings. Employees in the 338-page report, completed on January 21 last year, tell of broken alarms, thinned pipe, chunks of concrete falling, bolts dropping 60ft and staff being overcome with fumes. Staff rated "making money" BP's number one priority and "people" its lowest, at number nine.

"The history of investment neglect, coupled with the BP culture of lack of leadership accountability from frequent management changes, is setting BP Texas City up for a series of catastrophic events" was one of many ominous warnings. Geoffrey Gioja, co-author of the Telos report, said he was astounded: "We have never seen a site where the notion 'I could die today' was so real . . . This had a profound impact on us all. It also causes asolidarity, especially amongst the hourly employees, that seemedakin to being in a war together."

The Telos report contained something even more disturbing, however: evidence that the numbers of reported safety incidents were being kept low by pressure being brought to bear on the victims. While BP pointed out that the Texas City refinery in 2004 had the lowest injury rate in its history - and nearly one-third the average for the oil refining sector - BP's internal 2005 safety business plan, a copy of which has been obtained by the FT, listed under key risks a "site not reporting all incidents in fear of consequences".

Telos quoted numerous workers at the plant complaining of pressure not to report injuries and safety violations. "I have been hurt and had management punish me and make a fool of me. Need I say more?" asked one worker cited in the report. A second said: "The employee is always at fault - and required to sign [a] statement that he committed an unsafe act."

"They made fun of me," said a third. And a fourth: "Now when we get hurt, you drag yourself out the gate, if you're able, and say it happened at home."

"There are senior managers here who have allowed the site to accept a completely inappropriate amount and level of risk, who have allowed criminal levels of non-compliance," concluded a fifth.

Mr Chappell countered that the Telos report "does not report the 'objective' truth about safety performance or conditions" but rather "is an accurate representation of the attitudes, perceptions and statements made by survey participants". Nonetheless, he said, BP had been moving to address the concerns expressed in the report when the refinery exploded. "There had been a comprehensive effort by Texas City refinery leadership to drive continued safety improvement, encourage the reporting of injuries and near-misses and ensure the thorough and complete investigation of injuries and incidents at the refinery."

In spite of a heightened sense of urgency about the state of Texas City in internal e-mails after the report, then confidential, was circulated among management, BP kept the plant open. "When they got the Telos report, BP had a choice: embrace safety and do it the right way, or just keep profits and production going," said John Eddie Williams Jr, managing partner at Williams Bailey, a law firm that handled 145 of the civil cases arising from the blast. "They made the conscious decision to keep running this plant instead of doing a safety stand-down."

With limited other employment chances for the largely low-skilled workers at the plant, they in general hung on - even after the disaster. "A lot of people are stuck here because there is no place else they can get money to pay for their families," said the wife of one man who stayed on. Though the explosion had shaken their nearby house and thrown their toddler a foot into the air, they had agreed to risk the husband's continuing at the refinery for another year, at $25 an hour, to save up enough to move away. "This is a working man's town. Those without education can always get a job in the plants because of the dangers of the chemicals," said the woman.

Ms Merritt of the CSB urged BP to set up an independent review of its other US operations for lapses. The company agreed, appointing a panel led by James Baker, former secretary of state. The results of that probe were originally due last month but Mr Baker has pushed that deadline back twice, citing the scale of the review, and has set a new release time of early January. In the meantime, according toBP's Mr Chappell, the company has done its own assessment and identified problems at each of its refineries that, while not as broad or deep as those found at Texas City, are being addressed.

In the months following the disaster, BP's various operations in Texas suffered another explosion, a fire and a spill. On July 20 this year a contract worker was crushed to death at Texas City when, in operating a motorised hoist, he became wedged between a beam and the control panel. BP's safety record elsewhere in the US has also been troubled. Last month two contract drillers were killed in separate accidents in Alaska and Oklahoma, suffering head injuries in what BP called "the course of normal activities".

The deaths followed regulatory and legal battles elsewhere in the US. In April, Osha fined BP $2.4m for unsafe operations at its Ohio refinery. In May, BP ended a legal battle by agreeing to increase oil-spill prevention efforts and fund a $1m study of spill risks at its refinery in Washington state. In Illinois, BP is embroiled in a lawsuit arising from the sale of a chemical plant in 2004 that Flint Hills Resources, the buyer, says "required tens of millions to comply with environmental laws and permits" - charges BP denies.

The state of California has sued BP in recent years both over air pollution violations and a failure to make required upgrades to safeguard water supplies from unseen leaks. The company has settled the suits with agreements to spend millions of dollars in penalties and improvements. Amid all this, the US federal government this summer accused BP's traders of having tried to manipulate the propane market in 2004. Last week, regulators told BP the company was under investigation for manipulating the unleaded petrol futures market, a charge it denies.

Mr Chappell insists the incidents are one-offs, denying Ms Merritt's charge of a problem with BP's safety culture: "While it is natural for people to look for patterns, recent events in the US are not linked. They are each very different from each other in terms of immediate cause, location, business unit. There are lots of BP businesses in the US doing a world-class job of managing their operations."

But Mr Hamel, the campaigner for oil workers, disagrees, noting the striking similarity of complaints about BP processes coming out of Texas and Alaska, its two biggest trouble spots: "They are both identical - defer, defer, defer maintenance - and operate systems and facilities to failure as a money-saving programme." These similarities became public on August 6 when BP Alaska admitted discovering such "severe corrosion" in pipelines, following government-mandated checks after a big spill, that it shut half its oilfield.

Five years earlier, BP had received what it considered an "extremely negative" assessment of its anti-corrosion programme by an independent consultant. Its response was to press the consultant to revise the criticism. Documents obtained from Mr Hamel show the company persuaded Coffman Engineers to change the report, with the final version being shorter and softer on BP.Mr Chappell says the "first generation of the report contained errors, and we pointed them out as part of the normal review process. Simple as that."

But this year, BP was forced to admit it had failed to perform "pigging" corrosion checks for up to 14 years on oil transit lines, relying on cheaper, less reliable checks from the exterior, slotting in metal "coupons" and using ultrasonic equipment, instead of sending a probe through the line itself.

BP said it did not suspect microbial bacteria in its transit lines - which turned out to be the cause of the corrosion and which "pigging" would have cleaned out. But experts say this is not credible. "Any prudent operator is going to be sure it does not have MIC [microbial bacteria] and is going to periodically run cleaning pigs to sweep out colonies if they do form," says Rick Kuprewicz, president of Accufact, a pipeline energy consulting firm. "MIC is not something that space science invented last year."

The company's reputation took another hit when, during the BP Congressional hearings this year, Richard Woollam, former head of corrosion monitoring for BP Alaska, refused to testify, citing his constitutional right to avoid self-incrimination. Steve Marshall, at the time BP Alaska president, said BP had transferred Mr Woollam after finding evidence that his inspection team had felt intimidated.

Following the hearings, John Dingell, a senior member of the House of Representatives committee on energy and commerce, told the FT: "What is most troubling is that, to this day, it is not clear if BP truly understands what went wrong with either Texas City or Alaska . . . It will be far too easy to repeat these failures if BP does not first understand the problems that led to them." Since then both Mr Marshall, the former BP Alaska head, and Maureen Johnson, who managed the Prudhoe Bay oil field, have been reassigned.

The Department of Justice has grand juries in both Alaska and Texas exploring whether to bring criminal charges against the company and/or its officers. Mr Bessire has meanwhile been left to fend for himself. BP gave him a settlement he is not allowed to reveal but, at age 53, he readily admits he could have earned twice what he received had he been able to work another 10 years.

Now the pain from his injuries keeps him up at night, leaving him exhausted and, with his limited mobility, too much of a risk to hire. Worse, he cannot get health insurance. "Medical bills eat up everything that everybody's got. Now I worry every day, 'Can I spend a dollar? What if I need it down the road?'" He wants Lord Browne to provide the victims with health insurance. "He can't wash his hands . . he owes that to us."

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Accident-prone BP
Published: December 19 2006 02:00 |
Last updated: December 19 2006 02:00

Today the Financial Times publishes the second part of a long investigation into the environmental and safety record of BP, one of the largest companies in the world. The investigation highlights a worrying series of accidents in the US. For oil companies, faced with the challenge of increasing profits in a world where new reserves are hard to come by, it shows that there are limits to how far costs can be cut.

In March 2005 an explosion at BP's Texas City refinery killed 15 workers; a March 2006 oil spill at BP's operations in Prudhoe Bay, Alaska, led to a complete shutdown of the field in August. But as the FT investigation reveals, doubts over BP's safety performance were being voiced long before the most recent problems.

Those doubts need to be seen in the context of the wider issues that face BP and other integrated oil giants such as ExxonMobil and Shell. They are struggling to find oil: in the Middle East, in Russia and in South America new reserves are often monopolised by national operators. The oil industry also suffers from its cycle, with long periods of depressed prices, most recently in the 1980s and 1990s.

In such an environment, one of the best ways to increase profit is not to produce more, but to cut costs. That can be done via acquisitions. BP doubled in size by buying the US oil companies Amoco in 1998 and Arco in 2000. Whenever a company grows so much so quickly, especially when it absorbs large competitors with different corporate cultures, management will feel the strain.

The other way to cut costs is to try to run existing operations more efficiently. BP seems to have taken that principle to heart. Tony Hayward, BP's chief executive for exploration and production, told staff that management had made a "virtue out of doing more for less". The question is whether cost cutting distracted BP from its focus on safety.

It is a question that remains hard to answer, for all we have learnt about BP's operations in the US. BP has suffered a number of serious accidents in close succession. But until regulators and independent investigators publish their findings next year we will not know whether the accidents were caused by bad management.

Either way, the accidents are a reminder that producing oil is a dangerous business, and safety must be the first priority. Oil companies need to review their procedures. Regulators, meanwhile, should scrutinise declining oilfields, where incentives to invest are lowest, with special rigour.

The loss of life in accidents at BP is tragic. It is encouraging, therefore, that BP seems determined to improve its safety levels. While the oil companies have to invest in finding new oilfields and must do what they can to maintain and increase profitability, that should never be at the expense of safety.

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Criticisms did not target Browne and BP leadership
By Tony Hayward
Published: December 19 2006 02:00 |
Last updated: December 19 2006 02:00

From Mr Tony Hayward.

Sir, I was disappointed by the FT's interpretation of remarks I made to BP staff last week ("BP internal memo criticises group's leadership strategy", December 18). Your reporter Sheila McNulty suggested I had been critical of the BP Group's leadership for its handling of safety, in particular of Lord Browne. In fact, my comments were made to the Houston staff of BP's Exploration business, of which I am chief executive.

Had Ms McNulty checked the context of what I said, she would have discovered that the criticisms were aimed at me and my own senior team. As director of a company engaged in a rigorous and transparent appraisal of its safety standards, am I over-optimistic in expecting the FT not to make mischief of our readiness to be openly self-critical? For the sake of balanced business journalism, I hope not.

Tony Hayward,
Chief Executive,
Exploration and Production,

Financial Times
December 18, 2006

http://www.ft.com/cms/s/27881cee-8e07-11db-ae0e-0000779e2340.html

BP memo criticizes company leadership
By Sheila McNulty in Houston
Published: December 17 2006 22:03 |
Last updated: December 17 2006 22:03

A stark indictment of BP’s leadership style, corporate culture and cost-cutting has been delivered by one of the front-runners to succeed Lord Browne as the company’s chief executive.

The comments by Tony Hayward, BP’s chief executive for exploration and production, appeared on the company’s internal website under the heading “Hayward shares candid views on 2006”. His analysis of BP’s shortcomings could be seen almost as a manifesto for how he would lead the company out of its present troubles should he land the top job.

In comments which pulled few punches, Mr Hayward said: “We have a leadership style that probably is too directive and doesn’t listen sufficiently well. The top of the organization doesn’t listen hard enough to what the bottom of the organization is saying.’’

The posting, a copy of which was seen by the FT, also said BP’s management has made a “virtue out of doing more for less”. Mr Hayward told colleagues: “The mantra of ‘more for less’ says that we can get 100 per cent of the task completed with 90 per cent of the resources; which in some cases is okay and might work but it needs to be deployed with great judgement and wisdom.

“When it isn’t, you run into trouble,’’ he added.

The strong criticism, posted on December 11 as a feature article for employees on BP’s intranet, places some distance between Mr Hayward and Lord Browne as BP looks for a successor to the current chief executive in the run-up to his retirement in 2008.

Lord Browne has regularly been voted Britain’s most admired business leader, but the string of high-profile problems with BP’s US operations in the past two years including a fatal explosion at the company’s Texas City refinery and the enforced closure of half its Alaskan oilfield due to severe pipeline corrosion has clouded his reputation.

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A corroded culture? How accidents in Alaska
forced BP on to the defensive
By Sheila McNulty in Houston
Published: December 17 2006 22:01 |
Last updated: December 17 2006 22:01

It was 2am on August 16 2002 and Don Shugak was making his rounds as a field production operator for British Petroleum in Alaska. He had the radio tuned to public station KBRW and watched for caribou as he drove his pick-up truck across the desolate Arctic tundra of the Prudhoe Bay oilfield. Part of his job was to monitor the restarting of wells shut for maintenance; every so often he would jump out to “check the vitals” on wells spread 25ft to 50ft apart.

After 12 years with BP, the Alaska native knew the routine, checking up to 100 wells, on clusters miles apart, during a 12-hour shift on America’s biggest oilfield. But he was never complacent: “There is always that risk factor when you are dealing with pressure and hydrocarbons.”

Getting out of his truck, the midnight sun slanting long shadows across the snowy plain, he approached well A-22, which had just been restarted after maintenance. But as he opened the door to the steel well house to “bleed” off the excess well pressure the well’s casing ruptured, allowing gas up and out. There it found a spark from the electricity in the shed and exploded.

Mr Shugak was engulfed in a fireball that threw him against his truck, smashing both femurs and compressing two vertebrae. The fire scorched his face and everything outside his fire-retardant coveralls; his hair was burnt off, and the skin on his right hand was “de-gloved” up to the elbow. The heat left third-degree scars on his legs and rear. “I remember waking up and being against the side of the truck,” Mr Shugak said.

His legs broken, he managed to crawl on his elbows away from the inferno. A security guard heard the blast and reported it to the control centre, which summoned other production operators. Mr Shugak was airlifted out but remembers nothing else; he spent the next two months in a coma. As soon as he was well enough to discuss his future, BP began work on a settlement that bars Mr Shugak from “criticising” the company.

Because of this, the Financial Times has had to piece together what happened from his colleagues. In the hours after Mr? Shugak flew off into the night, Nicholas Morson, the field production operator who had preceded Mr Shugak on duty, provided a written statement to BP’s management.

It said that a BP engineer had issued a “temporary waiver” to enable the leaking well to be returned to production. “[The engineer] thought that once the well had heated up from the warm fluids running through the tubing that the leak would probably seal itself off,” according to Mr? Morson. BP documents show it often granted waivers to run potentially problematic wells.

As Mr Morson filed his report, Robert Brian, a 10-year veteran of BP Alaska, was working all night to depressurise the well and extinguish the flames. That took six hours and 3,000 gallons of sea water. By the time his colleague Marc Kovac got there in the morning, all that was left of Mr? Shugak’s truck was the frame and a melted radiator. “It looked like the devil himself climbed out of that well house,” said Mr Kovac.

Before a settlement with BP that required his silence on this matter, Mr Brian told the FT that an investigator with the US Department of Labor’s Occupational Safety & Health Administration (Osha) came to interview him after the accident. When he told Mr Brian that others had claimed BP had done a mechanical integrity test to ensure the safety of the well before returning it to service, Mr Brian was dumbfounded. “They’re lying,” he said. After the oil worker raised the possibility that BP might take action against him for disagreeing, the investigator suggested Mr Brian file a written complaint with Osha for his own protection.

“At that point I had to make a decision: am I going to be a part of this?” Mr Brian said. “I wasn’t willing to let my personal integrity be subverted.” He filed the complaint, saying the accident was preventable. Mr Brian had long felt regulators needed to tighten oversight of BP; now he believed it imperative. “Because there is no regulation from the state, BP [officials] feel comfortable in giving themselves ‘safety variances’ or ‘waivers’ whenever they don’t have enough people or time to do something right,” he said at the time. “That is exactly what happened with A-22.”

Initially, BP denied Mr Brian’s charges. Ronnie Chappell, BP’s US spokesman, insisted BP had completed a mechanical integrity test on well A-22. But when Mr? Brian persisted in challenging that claim, the company recanted, admitting it had been wrong, and cited “some miscommunication or misinformation”.

This accident and a decision by Mr Brian and Mr Kovac to put their names to their accusations to add more weight touched off a four-year investigation by the FT into BP’s US operations. The outcome raises serious questions about BP’s safety culture and its efforts to silence a steadily growing group of whistleblowers. It tarnishes the reputation of a multinational that this year ranked fourth in the Fortune Global 500, with revenues of $268bn (£137bn, €205bn) and operations in more than 100 countries.

Several BP workers expressed concerns that their management was letting them down by skimping on safety, covering up violations and putting pressure on anyone who spoke out about it. To publicise their plight, a few, such as Mr Brian and Mr Kovac, began to talk to regulators and to the press.

This two-part series is the first time this story has been told from beginning to end an investigation involving dozens of interviews with BP and government officials in five US states as well as the review of thousands of documents.

This year, BP’s questionable safety and environmental record in the US finally caught up with the company and threatens serious consequences. Following a string of disasters in 2005 and 2006, including Alaska’s largest ever land oil spill in March, the shutdown of half of the US’s biggest oilfield in August and a refinery explosion in Texas City last year that killed 15 the worst industrial accident in the US in more than a decade BP was plunged into crisis.

In June. it emerged that two grand juries, one in Texas and one in Alaska, were investigating the company for possible criminal action. In September, the US House of Representatives energy committee subpoenaed BP’s top US management for hearings on how their US assets could have deteriorated to such an extent that BP had to shut half of Prudhoe Bay because of “severe corrosion”.

In July, Lord Browne, a man regularly voted Britain’s most admired business leader, was forced by Peter Sutherland, BP’s chairman, into announcing that he will retire as group chief executive in 2008, when he reaches BP’s mandatory retirement age of 60. There had previously been speculation that Lord Browne would seek to stay on. In October, Steve Marshall, who headed BP Alaska, was transferred.

Bob Malone, appointed this year as head of BP US to clean up its operations, admitted in testimony to Congress in September that the company had serious institutional problems. He said BP’s operations had experienced “a series of troubling problems that are unacceptable to us and contrary to our values” and criticised their response to workers’ concerns.

Despite the mea culpa, the crisis for BP is not over. In early January, James Baker, former US secretary of state, is to report on an independent investigation into BP’s other US operations, while the Chemical Safety Board, the US federal agency most aggressively investigating the refinery explosion, will provide its findings in March.

Given that the oil industry as a whole was engaged in widespread cost-cutting in the 1980s and 1990s, as oil prices fell as low as $10 a barrel, BP has often been cast as a victim of hard times. It is hard to prove the allegation that BP’s safety record was much worse than its peers, as oil operations are difficult to compare with each other due to radically different operating conditions. BP says it stands by its overall safety record.

“Our safety performance, as measured by Osha recordable rate, and day away from work case frequency, is on par with others in the oil and gas industry and better than the overall US industry average,” said Mr Chappell, adding: “The data show significant improvement in recent years.”

He also said that spending decisions by BP did not compromise safety: “BP business unit leaders know, in making decisions, that they must be effected without compromising safety or the long-term viability of their businesses.”

Yet, statistics aside, the anecdotal evidence is compelling. No other oil company has suffered such a string of high-profile accidents and been subsequently fined as BP has over the past five years. No other oil company has had to shut one of its oilfields for preventable “severe corrosion” and no other oil company has been summoned by Congress in recent years to explain how it let its operations deteriorate to such an extent.

Looking back over some 20 years with BP, Mr Kovac gave his perspective. “Fifteen years ago, we were replacing valves and patching wells,” Mr Kovac said. “Over the years, oil production has gone down, so BP has responded by cutting back, deferring maintenance, changing policies or not following policies. The issue has always been on production.”

Tony Hayward, BP’s chief executive for exploration and production worldwide, criticised the penny-pinching in a December 11 2006 report on BP’s closed intranet, where he noted: “We have a management style that has made a virtue out of doing more for less. The mantra of more-for-less says that we can get 100 per cent of the task completed with 90 per cent of the resources which in some senses is OK and might work, but it needs to be deployed with great judgment and wisdom. When it isn’t, you run into trouble.”

When the present story began in 2002, however, BP was not speaking so frankly about its problems, instead presenting itself as an environmentally friendly company leading the industry beyond its oil and gas roots. Its “Beyond Petroleum” marketing campaign had just been created to highlight BP’s investment in hydrogen and a willingness to talk about global warming. Yet the core of BP’s business was and is dirty and dangerous petroleum.

The roughnecks in Alaska could not understand why nobody else could see that BP was not only not “Beyond Petroleum” but rather risked being mired in it if it did not clean up its act.

For six years, Mr Brian had been at the forefront of this push for change by oilfield workers in Prudhoe Bay, as the union representative on BP’s health, safety and environment committee. In 2002, he resigned from that position, having realised management was ignoring his suggestions and that even many of his own colleagues wanted him to let up, fearing the repercussions of his campaign.

But soon after filing his statement with Osha on Mr Shugak’s accident, Mr Brian was plunged back into his uncomfortable role as advocate for workers’ grievances. Things started to go badly for him on the job. He had trouble with his supervisors. He was ejected from safety meetings and said management called him “troublemaker” and “shit-stirrer” in front of others, also accusing him of being mentally ill in what he called a “bogus letter of reprimand”.

During an informal grievance procedure, management agreed to destroy the letter, said Mr Brian. But instead they made it available as a public record to the state and BP staff, he added.

BP denied harassing Mr Brian, saying it welcomed constructive criticism but was not willing to comment on individual personnel issues. Mr Marshall told congressional hearings this year: “Harassment, intimidation, retaliation and discrimination against workers who raise concerns are not tolerated within BP.”

In the same testimony, Mr Marshall admitted that he did transfer one employee, Richard Woollham, in 2005 after finding evidence of an “atmosphere of intimidation” in his pipeline inspection operations team.

Mr Brian filed a complaint with Osha in November 2002, alleging “unlawful retaliation”. BP asked him not to return to work and then offered him a settlement requiring his silence. For a time, it seemed BP Alaska had won the war against the whistleblowers and things returned to the status quo.

But only four months after Mr? Shugak’s accident and just days before Christmas 2002, Rodney Rost, a 55-year-old contract welder in a BP Alaska facility, was killed when a metal plug on a pipe shot out during a job and struck him. Mr Kovac, who considered it a duty as a union leader from 2002-04 to speak out on behalf of “the men”, was incensed and accused BP of putting Mr Rost at risk charges with which regulators eventually agreed.

State regulators fined BP more than $1m for inadequate oversight in both the Shugak and Rost cases. It was not long, however, before Mr Kovac, too, felt it prudent to retreat and declined further interviews. But, by then, BP’s record was forcing regulators to take up the whistleblowers’ cause.

“BP did not provide a safe and healthy workplace for its employees, contractors and subcontractors,” said John Stallone, acting chief of the safety office of the Alaska Occupational Safety and Health division of the Department of Labor, on May 27 2003, in fining BP for Mr Rost’s death. Paul Laird, a BP spokesman, at the time called the incident “deeply regrettable” and BP did not contest the fine.

BP Alaska itself admitted on December 23 2002, in a confidential final report to BP management on Mr Shugak’s accident, that it had restarted production on the well “without taking adequate safeguards”. The year 2002 also brought more than 11 recordable injuries and one day-away-from-work case a month. BP had been on probation since 2000, after pleading guilty to one felony count of knowingly failing to report immediately the release of a hazardous substance into the Alaskan environment.

On January 10 2003, Mr Marshall sent a memo to his staff: “Beginning now, we will focus on safety as we have never focused on it before...as if our lives and our future in Alaska depend on it. Because they do.” He set a goal of “no injuries and no incidents”, adding: “We’ll achieve these targets legitimately, not by failing to report incidents or hiding them”. That he cautioned against hiding accidents underlined the pressure felt by workers to keep BP’s safety record clean.

Yet even his dire warning was not enough to change old habits. Regulators said BP reported 263 spills in Alaska that year, compared with 62 suffered by Conoco Phillips, its closest competitor, whose operation was roughly half the size.

By then, the regulators were closing in on the company. On a federal level, a US judge at the end of 2002 required BP to provide unrestricted access for probation officers to its Alaska operations to verify compliance with federal, state and local environmental health and safety laws. The state toughened its laws in 2003 to increase regulatory oversight of BP. Yet the problems continued.

In early 2004, Chuck Hamel, a longtime campaigner for Alaska oil workers’ rights, says he started getting numerous calls from BP whistleblowers asking for his help. The 76-year-old one-time oil broker had made a name for himself pressing regulators and Congress for 15 years to force industry improvements. He took on the BP cause for free.

On February 23 that year he e-mailed Greg Coleman, BP group vice-president for health, safety and environment, and Mr? Malone, who had then just left as head of BP Alaska to head BP’s shipping operations. “A dirty mess at your doorstep had been dumped on me,” Mr Hamel wrote. “Incomprehensible, improper procedures at Prudhoe operations began occurring under your watch, Bob, and continue, Greg, since you came on scene.”

He said nearly a dozen past and present workers had reported that BP was “orchestrating inspection procedures” on Prudhoe Bay’s 1,300 miles of pipelines, a charge that would come back to haunt BP when severe corrosion in the pipelines was found this year. “BP Alaska management must resort to some other legitimate and safe means to cut costs,” Mr Hamel said.

BP denies orchestrating inspections and says the company did not get enough specifics from Mr? Hamel to assess his charges adequately. “I know there have been concerns about an adequate corrosion inspection programme raised by Hamel over time,” Mr? Chappell said this year. “We have looked into those.”

But Mr Hamel charges that Mr? Coleman and BP lawyers flew to Washington to get him to reveal the whistleblowers not investigate their allegations. Mr? Hamel refused, noting the harassment claimed by Mr Brian following his statements in the press.

Mr Coleman has since left BP and could not be located for comment. Mr Malone said he forwarded the information to the relevant official in Alaska.

On May 22 2004, Mr Hamel appealed to Walter Massey, a BP non-executive director who chairs the board’s environment committee, saying: “Intimidation and harassment at Prudhoe has effectively prevented the truth from reaching London upper management and your committee.” In a response that July 27, Mr Massey urged Mr Hamel to provide “specificity” to BP management, without offering the workers protection. Mr Massey had a BP spokesman return a call to him from the FT.

By that point, Mr Hamel said he had exhausted efforts to effect change from within BP and contacted federal criminal investigators. They began what would eventually become two grand-jury inquiries to determine whether to bring charges against BP in Alaska and also in Texas.

For as 2004 drew to a close, BP Alaska workers became aware they were not alone. Colleagues at the company’s Texas City refinery asked for urgent help in exposing a safety culture that made many fear going into work.

On Tuesday 18: disaster at Texas City

Wall Street Journal
December 18, 2006

BP Execs Admit No Culture Of Criticism On Safety-Magazine
DOW JONES NEWSWIRES
December 18, 2006 8:14 a.m.

LONDON (Dow Jones)--Executives at BP PLC (BP) admitted the company hadn't developed the right culture of criticism and has discovered a number of safety issues at its U.K. and shipping operations in addition to its U.S. businesses, according to interviews published in BP's in-house magazine.

Company executives said the U.K. oil major is addressing the issues raised in an audit after a blast at its Texas City refinery killed 15 workers, but warned that it still faces the prospect of a major incident once every 10 to 15 years.

In separate statements in the magazine, Cinzia De Santis, director of safety culture and leadership, said that although "sharing bad news is encouraged" in some industries, it is "not always the case in BP, where it is rare to hear a manager saying, 'Tell me something you know I don't want to hear about safety!'"

"This is something we feel must change," De Santis added. The article said that "for the first time, BP is using the answers to questions such as 'Do you feel your supervisor listens to you?' as benchmarks to determine opportunities to improve safety performance."

BP has faced a series of safety and operational lapses in the past 18 months, including the Texas City blast in March 2005 and the shutdown of an Alaskan pipeline in August 2006 after severe corrosion and a small leak were uncovered.

A major audit after the Texas City explosion called the "major accident review" uncovered badly-located staff facilities similar to ones that resulted in the deaths of the 15 workers.

Ellis Armstrong, vice-president of technology and decentralized functions at BP's exploration and production, or E&P, unit, said the review examined buildings near potentially explosive facilities in the U.K., since a similar situation was a key factor behind the deaths of workers in the Texas explosion.

Armstrong cited the U.K.'s Wytch Farm oilfield as an example of E&P operations being moved or upgraded as a direct result of Texas City.

"At the Kinneil processing terminal near Grangemouth in Scotland, where the Forties pipeline terminates, we have relocated office workers away from the hazardous area by moving them to the town," he added.

In another interview in the magazine, Steve Westwell, who heads up the Alternative Energy business, said: "We have two areas of higher risk, our natural gas liquids business and our shipping fleet."

The article added that the inspection of shipping vessels showed some of them "had not been inspected within the appropriate timeframe."

John Mogford, global head of safety, conceded that BP's "scale is such that if we perform at industry average we will have a major incident once every 10 or 15 years, simply due to the number of refineries at oil and gas fields we have."

The magazine said the review, which is conducted every five years, will be complete at the end of the year. In the long term, the company is also implementing an Operating Management System, a set of measures aimed at ensuring the consistent application of minimum standards of performance across the organization.

The interviews were published in an article in the latest issue of BP Magazine which was posted on the company's Web site.

Company Web site: http://www.bp.com

By Benoit Faucon, Dow Jones Newswires; +44-20-7842-9266; benoit.faucon@dowjones.com

Wall Street Journal
December 16, 2006

U.S. Moves to Fix Oil-Royalty Flaw
BP, Conoco, Marathon, Shell
Agree to Amend Lease Terms
For Gulf Deepwater Drilling
By JOHN J. FIALKA and RUSSELL GOLD
December 15, 2006; Page A18

Moving to settle a costly contracting error before possible congressional action, Interior Department officials said four major oil companies will begin paying royalties on oil and gas produced in the Gulf of Mexico under faulty government leases signed in the late 1990s.

C. Stephen Allred, an assistant secretary of the interior, said BP PLC, ConocoPhillips, Marathon Oil Corp. and Royal Dutch Shell PLC, will be making royalty payments under the leases starting from Oct. 1, 2006, onward. The leases, signed in 1998 and 1999, temporarily waived royalty payments to the government to encourage drilling in deeper Gulf waters. But the Clinton administration Interior Department failed to include a clause that said that the payments would be made if oil prices rose, as they later id.

According to Interior Department, the overall loss to the government has been about $900 million, which should have been paid by 49 companies holding the leases. Mr. Allred called the agreement "a step in the right direction" and said his department will continue to work with Congress on the issue of lost payments.

Gary Strasburg, a spokesman for the Interior Department, said it hadn't estimated the value of the agreement to pay by the four companies. A fifth producer, Walter Oil & Gas Corp., signed a similar agreement.

"We appreciate and commend these companies for voluntarily signing these lease amendments. We encourage the remaining companies that have not yet agreed to sign to join us in resolving this issue," Mr. Allred said.

Both Democrats and Republicans have threatened to bar companies from future Gulf of Mexico drilling leases unless they agree to renegotiate the flawed leases. Incoming House Speaker Nancy Pelosi (D., Calif.) said resolving the matter will be one of the first things she takes up after Democrats take control in January.

BP issued a statement saying that it had agreed to a change in the lease terms after negotiations with the Interior Department and that although it signed 49 leases during the two years, it is producing from only one of the areas. "BP does not publicly discuss royalty payments," said Neil A. Chapman, a company spokesman.

Destin Singleton, a spokeswoman for Shell, said that its agreement with the government "is the best way to correct the government's error." She said that the company currently doesn't need royalty relief to support drilling in deepwater areas, where drilling is more expensive. "However," she added, "if prices fell back significantly, the economics of deepwater projects would change, and deepwater royalty relief might be justified to continue development necessary to meet the nation's energy needs."

Write to John J. Fialka at john.fialka@wsj.com and Russell Gold at russell.gold@wsj.com

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MMS: Signed Agreement With Oil Cos On 1998-1999 Leases
DOW JONES NEWSWIRES
December 15, 2006 7:30 a.m.
(This article was originally published Thursday)

WASHINGTON (Dow Jones)--The U.S. Minerals Management Service Thursday said it had signed agreements with several oil and gas companies on controversial 1998-1999 leases that omitted royalty price thresholds.

The MMS - which has come under harsh criticism from Congress for its mishandling of the leases - said it had signed agreements with BP PLC (BP), ConocoPhillips (COP), Marathon Oil Company (MRO), Royal Dutch Shell (RDSA), and Walter Oil and Gas Corporation.

The agency said the companies would pay royalties for production from Oct. 1, 2006, instead of from when the leases were signed as many lawmakers had urged.

MMS spokesman Gary Strasburg said the lost royalties from the leases totaled around $900 million, but a recent Interior Department Inspector General's report said the royalty collection compliance program was so inefficient, the agency couldn't know how much was actually owed the government for all oil and gas royalties.

Strasburg said his department hadn't yet reached a deal with Chevron Corp. (CVX), which earlier this year announced a massive discovery part of which lies under one of the 1998-1999 leases.

Earlier Thursday, the House Government Reform Committee said it was seeking an Attorney General's opinion on whether the government has the authority to recover billions of dollars in lost oil and gas royalties. Also Thursday, House leader-elect Nancy Pelosi, D-Calif., said one of her top priorities would be to seek the unpaid royalties.

Several Democrats have been pushing to force the companies to re-negotiate or forfeit their ability to sign new leases. Such an amendment only marginally failed to be tacked on the the Offshore Continental Shelf drilling bill that passed Congress last week.

The Government Reform Committee said in its release, however, that according to legal advice from law firm Lowey Dannenberg Bemporad & Selinger, "MMS exceeded its authority in issuing the leases."

The legal analysis "concludes that the administration has the legal recourse to seek recovery of the lost taxpayer revenues."

Assistant Secretary of Land and Minerals Management C. Stephen Allred said in the MMS press release, "I am pleased at the progress we are making on resolving this issue.

"We are continuing to work to resolve this difficult problem in a manner that ensures the American taxpayer receives a fair rate of return," said Allred.

The assistant secretary said the agreements signed Thursday "are a step in the right direction," adding, "we look forward to continuing to work with Congress on this issue."

But Rep. Ed Markey, D-Mass., who has been one of the leaders of the call to force the companies to renegotiate, said, "Their too little, too late efforts to recoup only a small percentage of the billions of dollars of oil and gas royalties that the American people are rightfully owed is pitiful."

A Government Accountability Office said the royalty omission represented an estimated $10 billion in lost revenues for taxpayers.

"When the new Democratic Congress takes office in January, there will be a new cop on the beat to force every big oil company that is currently lining its pockets with taxpayer dollars come back to the negotiating table."

Strasburg said the MMS had not yet calculated how much revenue the deals would garner for taxpayers.

The companies that agreed to a deal are a fraction of the 54 companies that signed the 1998-1999 leases, representing only 17% of the total leases in question.

Other companies that signed the leases include ExxonMobil (XOM), Statoil ASA (STO), Total SA (TOT), Anadarko Petroleum Corp. (APC), Eni SPA (E), Norsk Hydro ASA (NHY) and Murphy Oil Co. (MUR).

-By Ian Talley, Dow Jones Newswires; (202) 862 9285; ian.talley@dowjones.com ;

Anchorage Daily News
December 16, 2006

http://www.adn.com/money/industries/oil/prudhoe/story/8496246p-8389559c.html

BP has 2 weeks to provide feds with info about replacing pipes
PRUDHOE: Equipment list, inspection data and work schedule are called for.
By WESLEY LOY
Anchorage Daily News
Published: December 16, 2006
Last Modified: December 16, 2006 at 12:21 AM

Federal regulators are demanding more information from BP about its plans for replacing miles of corroded pipelines in the Prudhoe Bay oil field.

In a Dec. 7 letter to Sandy Stash, BP Alaska's vice president for regulatory compliance and ethics, the regulators cite a "continuing investigation" into this year's Prudhoe pipeline leaks and say the information they seek from BP will "determine the need for additional corrective action."

Since March, when a major pipeline leaked an estimated 201,000 gallons of crude oil, BP has been under orders from the U.S. Pipeline and Hazardous Materials Safety Administration to better maintain key lines inside Prudhoe, the nation's largest oil field.

Subsequent leaks in August forced BP to partially shut down the field, an event that rattled world oil and gasoline markets. This month, Congress passed legislation to toughen regulation of low-pressure oil transmission pipelines -- the type that leaked in Prudhoe.

Federal criminal investigators also are looking into the Prudhoe problems and have subpoenaed massive quantities of documents from BP.

Pipeline regulators gave BP two weeks to provide information including:

• Detailed plans and a schedule for starting and finishing the pipeline replacement.

• A list of the steel pipe, valves and other equipment needed for the job, plus an explanation for why any of the items haven't yet been ordered.

• Details on how BP is inspecting "jumper" pipelines for corrosion. These are short connectors BP installed to reroute oil that normally went through the transmission lines, some of which are now shut down.

BP runs Prudhoe on behalf of itself and other owner companies including Exxon Mobil and Conoco Phillips. Production in recent weeks has approached 450,000 barrels a day, about the same level the field was producing before the shutdown.

BP spokesman Daren Beaudo said Friday the company has been working closely with federal regulators and will turn over the requested information.

The company plans to replace 16 miles of transmission pipelines, which are major trunk lines that drain crude oil out of Prudhoe and feed it into the 800-mile trans-Alaska pipeline.

Replacement will cost $150 million to $200 million. Some of the new pipe already is in Fairbanks and elsewhere for the start of the North Slope winter construction season, he said.

The jumper pipes are made of "brand-new steel," and the company believes they and all other pipes used at Prudhoe are safe, Beaudo said.

The pipes to be replaced are original equipment, installed for the start of Prudhoe oil production in 1977. They are large pipes up to 34 inches in diameter.

One theory for the leaks is that oil was moving too slowly through pipes designed for much larger and faster flows of oil when Prudhoe production was at its peak in the late 1980s. Slower oil flow might have allowed sediments to settle inside the pipes, fostering corrosion, Beaudo said.

The replacement pipes will be smaller and oil will move through faster, helping sweep out sediments, he said.

Also, the company won't repeat its mistake with the older lines and will regularly clean and test the new pipes, Beaudo said.

Daily News reporter Wesley Loy can be reached at wloy@adn.com or 257-4590.

Houston Chronicle
December 14, 2006

http://www.chron.com/disp/story.mpl/business/energy/4400865.html

BP says inquiry reviews trading
Filing indicates civil penalties are possible
By TOM FOWLER
Copyright 2006 Houston Chronicle

Federal regulators are investigating BP's oil and gasoline trading operations and may levy civil penalties, the company disclosed Wednesday.

The oil giant said in a government filing that Commodity Futures Trading Commission officials are examining its U.S. crude trading and storage activities since 2003 as well as gasoline futures trades it made on Oct. 31, 2002.

Commission officials told the company in November they planned to take civil action that could include fines against the firm related to the gasoline trading. That trading involved transactions going through the New York harbor market hub.

BP said it is cooperating with the investigations.

Scott Dean, a BP spokesman in Chicago, said the company does not believe its gasoline traders broke the law.

"We have reviewed the facts related to that single day and we're confident manipulation was not attempted and no laws were broken," Dean said. "We believe the free market forces of supply and demand were at work that day."

No BP traders were disciplined because the company does not believe they acted improperly, Dean said.

CFTC officials would not elaborate on BP's filing.

"BP's SEC filing speaks for itself," commission spokesman Dennis Holden said.

BP also said the U.S. Attorney for the Northern District of Illinois is investigating the gasoline trading.

The cases do not appear to be tied to BP's Houston-based trading operations, which focus on power and natural gas. Most of the oil and gasoline trading operations are based in the Chicago area.

In June, investigators said Houston-based traders for BP illegally cornered part of the propane market in February 2004, creating a sharp jump in prices for the popular heating fuel. One of the traders, Dennis Abbott, pleaded guilty to related charges.

BP denied any wrongdoing related to the propane investigation and said it intends to fight the charges in court.

The commission's investigation of BP's oil trading business is likely related to its dominant position in oil storage at Cushing, Okla.

In previous news reports, competitors have alleged the company can improperly influence the light, sweet crude contract on the New York Mercantile Exchange.

In 2003, the company agreed to pay the exchange $2.5 million to settle claims it engaged in deceptive trading practices in 2001 and 2002. The company didn't admit or deny breaking the rules of the exchange in that case.

The filing Wednesday also said KPMG has started an independent review of the "trading compliance culture" at BP's U.S. trading unit, which will be made available to regulators.

tom.fowler@chron.com

Houston Chronicle
December 12, 2006

http://www.chron.com/disp/story.mpl/business/4395323.html

Agency scores win in BP case
High court says service can charge royalties as far back as necessary
By DAVID IVANOVICH
Copyright 2006 Houston Chronicle Washington Bureau

WASHINGTON In a rare bright moment for the embattled Interior Department, the U.S. Supreme Court sided with federal regulators Monday in a royalty dispute with Houston's BP America.

The high court, in a 7-0 decision, ruled Interior's Minerals Management Service could reach back as far it deemed necessary to retrieve unpaid oil and gas royalties. And that means BP America Production Co. must pay more than $32 million in back natural gas royalties, penalties and interest.

The court ruled that a six-year statute of limitations laid out in federal law applies to court cases, but not to administrative proceedings at the agency, as the subsidiary of London-based BP had argued.

"BP is disappointed with the outcome of this case, but we will nevertheless comply with the Supreme Court's decision," BP spokeswoman Sarah Howell said.

Officials at the Minerals Management Service would not comment on the decision, except to note they are now reviewing other cases to see how many the decision might affect.

The dispute began a decade ago over calculating royalties for natural gas produced on federal lands in the San Juan Basin in New Mexico and Colorado.

BP predecessor companies Amoco Production Co., Vastar Resources and the Atlantic Richfield Co. produced natural gas in the coal bed methane fields there.

But some of the carbon dioxide from that gas had to be stripped out before the hydrocarbons could be shipped through the pipeline system.

In 1996, the Minerals Management Service sent out letters to producers notifying them that royalties should be based on the value of the gas after processing.

The agency then sought royalty payments dating back to 1989 from BP's predecessor companies, totaling $4.9 million.

With interest and penalties, the amount in dispute has grown to more than $32 million.

The producers challenged the agency's orders. And eventually, the case was narrowed to this legal question: How many years back could the government reach to retrieve royalty payments?

The companies argued a law limiting the statute of limitations in court cases should apply. The companies filed suit in U.S. District Court in Washington but lost. The producers appealed, but the court in an opinion authored by the future Supreme Court Chief Justice John Roberts sided with regulators again.

That ruling, however, conflicted with the decision in a similar case involving Occidental Petroleum Corp. So the high court agreed to hear the case.

But on Monday, the Supreme Court ruled the federal law in question referred only to court cases. Writing for the court, Justice Samuel Alito, noted: "In the final analysis, while we appreciate petitioners' arguments, they are insufficient to overcome the plain meaning of the statutory text."

Limited reach
While the ruling could have broad implications for companies holding contracts with the federal government, the case is expected to have only limited reach in the oil and gas sector.

That's because Congress passed the Federal Oil and Gas Royalty Simplification and Fairness Act known in acronym-crazy D.C. as FOGRSFA which set a seven-year limit for any "judicial proceeding or demand" for royalties on oil and gas produced after Sept. 1, 1996.

As a result, this issue will be of "steadily diminishing importance" for the oil and gas industry, noted Richard Seamon, a law professor at the University of Idaho who has followed the case.

"It's going to eat a little bit of a hole in their pockets, but probably not all that much in the final analysis," Seamon said.

Catching a break
For the Minerals Management Service, the high court's ruling was a piece of good news for an agency so often thrown on the defensive for its handling of royalty issues.

Earlier this year, the nation learned that the agency had botched numerous leases signed with producers operating in the Gulf of Mexico's deep waters. Despite reviews by many agency officials up and down the chain of command, the Minerals Management Service failed to include a provision requiring producers to pay royalties once oil and gas prices rose above certain levels. That oversight has already cost federal coffers more than $1 billion.

Last week, the Interior Department's inspector general chastised the agency for being lax about the collection of royalty payments. Inspector General Earl Devaney complained the agency relied too heavily on information regulators could not verify when trying to ensure producers paid their fair share of royalties.