Big problems for oil giant BP

BP's reputation as one of Britain's biggest corporate success stories took a fresh battering today, after the oil giant confirmed that it is being investigated in the US for possible manipulation of the crude oil and petrol markets.

The latest inquiries follow hard on the heels of US grand jury investigations into oil spills in Alaska and last year's Texas City refinery explosion, in which 15 workers died, and a separate inquiry by the US authorities into claims that BP attempted to rig the propane market.

Senior BP executives are due to be summoned before Congress the week after next to be questioned over the oil leaks from rusting pipes at the company's Prudhoe Bay field.

But the company's chief executive himself, Lord Browne of Madingley, has been ordered by a Texas judge to testify in a civil action being brought against BP in connection with the refinery explosion.

John Manzoni, BP's head of refining and marketing and a fellow board member, has also been ordered to testify.

BP is appealing against the court's decision on the grounds that neither man has "unique knowledge" of the incident.

The seemingly endless series of setbacks for BP have called into question its self-styled image as one of the world's most environmentally conscious oil companies - an image the company has sought to burnish through its much-vaunted "Beyond Petroleum" campaign.

With almost daily revelations emerging that suggest BP ignored warnings about the condition of its corroding pipelines in Alaska, the joke among observers is that its initials now stand, more appropriately, for "big problems".

If the company has a big problem, then so too does its leader.

For more than a decade, Lord Browne has been feted as the outstanding oilman of his generation - a reputation that earned him the sobriquet of the "Sun King".

Of late, that reputation has been overshadowed, not just by BP's regulatory and environmental tangles but by the unseemly public row over his failed attempt to remain at the helm of the business beyond his 60th birthday in 2008.

Lord Browne lost that battle to BP's chairman, Peter Sutherland, but not before serious damage had been done to his standing in the City and to BP's reputation as a well-oiled publicity machine.

The string of problems at BP - all of which have taken place on Lord Browne's watch - have even moved some observers to question whether he will choose to remain as chief executive until the end of 2008 to see the company through its centenary year.

BP said yesterday that it was "co-operating fully" with the two latest investigations.

One of these is being conducted by the US Commodity Futures Trading Commission and concerns possible manipulation of crude oil prices in the over-the-counter market in 2003 and 2004.

The other, into petrol trades, is being handled by the US Justice Department and is understood to relate to a particular day's trading on the New York Mercantile Exchange (NYME) in 2002.

BP is no stranger to regulatory investigations.

In 2003, it was fined US$2.5m by the NYME for alleged violations of crude oil trading rules in 2001 and 2002.

In the same year, it agreed to pay US$3m to settle charges brought by the Federal Energy Regulatory Commission that it had profited from phoney trades during the Californian energy crisis two years earlier.

Privately, BP executives point out that US federal regulators regularly launch investigations, not all of which result in action, and that these latest inquiries may not be confined to BP.

Investors seem to take a similarly sanguine view, although BP shares have performed far worse in the past month than those of its rival Royal Dutch Shell since the decision was taken to close down Prudhoe Bay.

"There seems to be almost a witch-hunt going on with investigations into BP," said Bruce Evers, an oil analyst at Investec Henderson Crosthwaite.

"I'm sure similar charges could be levelled at other companies. Investors should keep an eye on it, but it shouldn't cause too much concern."

Rather harder to shake off could be BP's reputation for slipshod safety and environmental standards which threaten not only to result in criminal prosecution but also to undermine its public standing in the US - a market which now accounts for a third of BP's revenues and employees.

Lord Browne is alert to this, which is why he drafted in a new head of BP's US operations, Bob Malone, earlier this year with a mission to get to grips with its safety and environmental troubles.

Mr Malone, an affable and well-travelled Texan, is under no illusions about the task he faces.

"I am not going to say it was a string of bad luck. If we have to further enhance our safety value system we will," he said in a recent newspaper interview, pointing out that his own pay cheque had fallen 10 per cent last year because of a change in BP's safety compliance regime which encouraged contractors to report more incidents and which therefore affected the group's safety rating.

He, and Lord Browne, will have a hard job persuading campaigners that BP's purported commitment to environmentalism is genuine and not just another example of "greenwash".

BP stands accused of ignoring warnings about the state of the 800-mile pipeline on Alaska's North Slope which transports oil from the fields of Prudhoe Bay to the Gulf of Alaska, at the port of Valdez.

In March, a ruptured pipeline resulted in a 200,000-gallon spill, the largest ever on the North Slope.

This month, the company suffered a second, smaller spill and has shut down half of its production after tests found that in places the pipe has lost 70 per cent of its mass.

The Republican chairman of the House Energy Committee, Joe Barton, has written to Lord Browne, saying revelations about the corrosion "contradicts everything the Congress has been told.

The fact that BP's consistent assurances were not well grounded is troubling and requires further examination".

The company will also be investigated as to whether there was a "market strategy component" to the closure, given that the price of oil surged by more than US$2.2 a barrel.

Privately, BP executives believe that the extraordinary focus on its activities in the US at present may not be unconnected with the mid-term elections - big oil companies are always an easy target for headline-seeking politicians.

It is also the case that US public sentiment was at least as much affected by the rise in petrol prices which followed the Prudhoe Bay shutdown as the pollution threat to one of America's most important Arctic wildlife regions.

Nevertheless, this does not alter the fact that the company now faces a three-way federal investigation by the Department of Justice, the Environmental Protection Agency (EPA) and the Department of Transport.

In Alaska, the state Attorney General has issued subpoenas to the company, ordering it to preserve all records that "relate in any way" to the March spill and its maintenance schedule.

Almost every day there are new accusations that BP ignored warnings about the pipeline.

Most recently it was alleged in the Wall Street Journal that BP had manipulated a report that was commissioned by state authorities to make it appear more positive.

Most of these revelations originate from Chuck Hamel, a long-time critic of the oil industry's operations in Alaska, who has built up a network of whistle-blowers and informants among oil company employees.

From his home in Alexandria, outside of Washington, Mr Hamel has continued to feed the media a steady stream of revelations about BP.

The company is said to have made efforts to discredit him.

"It has almost been two decades,"

Mr Hamel said of his campaign to expose what he believes is BP's failure to properly maintain its infrastructure.

"BP has a hang-up. They operate to failure. It's like having a car and not doing anything for it. And it's 40 below up there. They play Russian roulette like you wouldn't believe."

However, Fadel Gheit, an oil analyst with the investment company Oppenheimer and Co, says: "These are big problems, though they are not bigger than BP. The number one thing is for them to fix the problem and make sure they have a system in place whereby the problem is not going to reappear. BP has not done anything that is not common practice. Unfortunately [or luckily], they have got caught. It's absolutely not uncommon."

To those who do not closely follow the oil industry, BP's recent woes may come as something of a surprise.

Indeed, in recent years the company has worked hard to build its reputation as a company that is concerned about climate change and is committed to developing alternative sources of energy.

Part of this effort was its "On the Street" advertising campaign which sought to highlight its concern about the environment and promoted the slogan "beyond petroleum".

To support its green credentials, the company points out that it intends to invest US$8bn over the next 10 years to produce electricity from solar, wind, hydrogen and natural gas.

It claims it is currently one of the top three solar manufacturers in the world.

Last week when the company helped to launch a website for drivers to donate money to "carbon offset" their C02 production", the company head of UK operations, Peter Mather, said: "[This] is a practical and straightforward step that BP is taking to enable drivers to help the environment."Critics are not convinced.

Campaigners have seized on BP as a prime example of a company that invests in "greenwash", an environmentally-friendly image makeover, but does little to change its routine operation.

GreenLife, a Boston-based group, last year named BP on its list of top-10 greenwash companies and said that, through a "disingenuous dialogue with average Americans, BP artificially aligns itself with the public's view of an ideal energy company".

It said that while BP increased its solar energy production between 1999-2003 by 110 per cent this was "not a trivial change, but not exceptional either considering that global output shot up by 270 per cent during the same period".

Pratap Chatterjee, a director of Corpwatch, a US-based watchdog group, said: "It's all image until they do something to reduce the production of oil and the consumption of oil ... They are a for-profit company that makes its money selling petroleum. That is the bottom line. If they really were beyond petroleum, they would stop producing petroleum."

The reality of BP's "beyond petroleum" campaign has even been questioned by the people involved in developing it.

John Kenney worked for the Ogilvy & Mather advertising agency that helped BP rebrand.

While he was not personally responsible for the "beyond petroleum" tagline, he worked on the campaign.

Mr Kenney, who recently wrote an op-ed article for a US newspaper in which he said BP "didn't go beyond petroleum - they are petroleum", believes BP's purported concerns about the environment were, and remain, genuine.

He believes however, that they were unrealistic.

He said: "I think 'Beyond Petroleum' is simply absurd because they are an oil company and that is not beyond petroleum ... I think those words go too far."

Of Lord Browne, he said: "This man has the power for an extraordinary legacy. What was disappointing to me was that those words were not true and will not be true for a long time to come."

Melanie Duchin, an Anchorage-based campaigner for Greenpeace, said BP had sought to buy an environmentally friendly image that the company did not deserve.

"The bottom line is that oil is a dirty business - from the exploration, to the drilling, to the transportation to the refining and the burning. There is no part of it that is good for the environment or benign. BP is involved in an inherently dirty business."

BP has said it will now replace 16 miles of sections on the pipeline, of which it is operator and a part-owner along with four other oil companies.

The company has rejected suggestions that it has not spent enough to maintain the pipeline, saying US$71m has been spent on anti-corrosion measures this year alone.

BP spokesman Ronnie Chappell defended its green initiative, saying: "If you look at our actions, we are making very significant investments in alternative energy.

"We are the second largest solar producer in the world. We have announced plans to invest in wind generation and carbon-free power generators in southern California and Scotland - US$8bn over the next 10 years.

"While that is a small amount compared to our base, compared to anyone, and I mean anyone, we are a big player in the world of alternative energy.

"In terms of what occurred in Alaska, we spent US$70m last year on monitoring and preventing corrosion inside the oil fields on the North Slope. The recent spills have exposed a gap in our programme.

"We shut down the pipeline to prevent further [spills]. We took the decision to shut the oil field and I think that [shows we are] a green company.

"We have received general concerns about the pipeline but never anything specific which identified the specific piece of pipeline.

"Recently we have reviewed the [monitoring] programme and expanded it significantly."

- INDEPENDENT