Cooking the Books 1: Underlying cause
On 23 March 2005 an explosion and fire occurred at the BP-owned oil refinery in Texas City. Fifteen workers were killed and 170 injured. The US Chemical and Safety Hazard Investigation Board decided that, on this occasion, it would investigate not just the technical causes of the explosion – which valve was left open, who left it open, which alarm wasn’t working, and the like – but also “the underlying and significant cultural, human factors and organizational causes of the disaster that have a greater impact”.
The result was a report two years later which the Times (21 March) headlined “Watchdog points finger at cost cuts in damning verdict on BP. Budget pressures behind refinery fire. Top management knew of problems”.
BP had acquired the refinery when it took over Amoco in 1998. Following this, BP’s chief executive, Sir John Browne, set a target for all its plants of reducing fixed costs in the year 1999-2000 by 25 percent. These are costs other than labour and materials and consist mainly of buildings and equipment including the costs of maintaining them. “In 2002”, the report discovered, “BP engineers proposed connecting the Isom blowdown drum system to a flare but BP chose a less expensive option”. The refinery manager “ruled against the investment and stated in an e-mail: ‘Bank the savings in 99.999 per cent of the cases’”.
The Chemical Safety Board’s report concluded: “Cost-cutting and budget pressures from BP Group executive managers impaired process safety performance at Texas City”.
To go beyond the technical reasons for the explosion and investigate other factors was a step in the right direction. But not far enough. The Board only looked for “the underlying and significant cultural, human factors and organizational causes” within BP. But why stop there? Why not ask what pressures BP’s top executives were under to behave in the way they did?
If the Board had done this, they would have to have taken into account the declaration issued on the occasion of the BP take-over of Amoco in 1998:
“The managements of BP and Amoco already have a shared financial philosophy. The targets our companies have previously set are very similar – powerful annual earnings growth, a strongly-competitive return on capital, and dividends in line with underlying earnings” (see http://www.gasandoil.com/goc/features/fex84248.htm).
And also that, at the time, the price of oil was low, meaning that the main way to keep up profits would be by cutting costs rather than increasing sales. And that in fact it was to face what Sir John called in the same statement the “fierce” competition on the energy market that was behind the take-over. And, further, that takeovers involve an expenditure of money which has to be raised one way or another. And that raising this added further pressure to save money and – “in 99.999 per cent of the cases” – bank it.
The cost-cutting exercise was successful – in the middle of it Sir John was elevated to be Lord Browne of Madingley for services to industry – as recorded by the Times financial columnist Carl Mortished:
“In 2000 BP boasted that it had generated $2 billion in cost-savings, and then, in 2001, Lord Browne of Madingley announced a further $2 billion in ‘performance improvements’. By the end of 2002 a further billion dollars was pulled out of the hat and the BP chief executive announced a programme of $2 billion stock repurchases. The cashflows were being delivered in places such as Texas City”.