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BP to Keep it Simple, Focus on Upstream, Downstream

BP plc decided last week to ditch its dense business organization to zero in on its main businesses: the upstream and the downstream.

Following a six-month review that began when he took over in May, CEO Tony Hayward said that going forward the London-based major will be defined by its Exploration and Production (E&P) and Refining and Marketing units. The Gas, Power and Renewables division will be split between these two entities.

The E&P and refining units will be made up of a series of "strategic performance units" and become BP's main operating entities, each effectively a profit center, with closely defined goals and "rigorous business objectives." Alternative Energy, a new, separate division, will handle BP's low-carbon business and future growth options outside oil and natural gas.

"What we are doing represents a fundamental shift in how BP works," Hayward said. "Managers will be listening more acutely, particularly to front-line staff. We will make sure individuals are fully accountable for things they control. We will respect professionalism and excellence as key to the success of our businesses -- something we have not always done. Continuous improvement is what will drive performance, as opposed to short-term, unsustainable initiatives."

BP's "corporate infrastructure will be rigorously reviewed with some previously centralized functions slimmed down and redeployed into the business segments. In parts of BP up to four layers of management will be shed. Greater standardization of process, including safety, has already been introduced and will be applied consistently across the group."

Hayward said the company needed to simplify its management with resources "increasingly shifted to the front line with operating managers freed from corporate bureaucracy and the burden of unnecessary overheads." He said it was "clear that BP's overall strategy remains robust. We have great positions in many of the major hydrocarbon basins of the world as well as in the markets of key economies and we are preparing for the longer term by building a new, low-carbon energy business.

"Our problem is not about the strategy itself but about our execution of it. BP's performance has materially lagged our peer group in the last three years. It has been poor because we are not consistent and our organization has grown too complex. At the root of all this is a need to change our behaviors." Most of the competitive shortfall, he said, represented revenues lost from impaired U.S. refining capacity and delays to new production in the Gulf of Mexico (GOM). The remainder arose from BP's higher cost base relative to its rivals.

In September Hayward was reported to have called the company's recent operational performance "dreadful," and the company was said to be shifting resources to complete its long-delayed Thunder Horse and Atlantis subsea structures in the GOM, where BP is the biggest leaseholder (see NGI, Sept. 17).

"We expect the revenue gap to narrow as major new production comes on stream in the fourth quarter and refinery throughputs rise [in the United States] over the coming months," Hayward said. "The changes we are setting out today will reduce our unacceptably high overhead costs. But it is their effect on operational efficiency over the longer term that I believe will ultimately yield the most significant benefits."

BP's three priorities will be "safety, people and performance," he said. The company is making "good progress "on safety, including refinery and process upgrades in the United States. The focus on people is to ensure the company deploys the "right skills in the right places" and allows staff to exercise professional judgment without "unnecessary interference."

BP did not disclose any costs or staff cut numbers in its statement, and Hayward said he did not expect BP to sell any major assets, but he did not rule out some property sales.

Hayward appointed Andy Inglis earlier this year to run BP's E&P. Iain Conn took charge of BP's refining and marketing in May, replacing John Manzoni who resigned to become CEO of Calgary-based Talisman Inc. Vivienne Cox, who has headed the Gas, Power and Renewables unit, will head the smaller Alternative Energy unit.

"In our view the changes are about better efficiency, and the upside should come from better revenue growth as a result of delivery on major projects and on operational efficiency," energy analysts at J.P. Morgan said in a note. Oppenheimer & Co. said in a note that BP was taking the "first steps in the right direction."

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