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Why BP's Tony Hayward must go Add to ...

"I think I will be judged by the response. I don't feel my job is on the line, but of course that might change."- Tony Hayward in mid-May on his potential longevity as BP's CEO

In the immediate aftermath of the April 20 explosion that sent the Deepwater Horizon drilling rig to the bottom of the Gulf of Mexico, BP boss Tony Hayward was doing everything right.

He set up shop in a Ramada Inn in Louisiana to oversee the effort to prevent BP's broken Macondo well from turning the Gulf into a gooey black stew. He vowed to stay in the United States until the clean-up effort was finished. He accepted "full responsibility" for the leak and delivered an army of technicians and engineers to the disaster area. He kept the Obama administration fully informed about the progress, or lack thereof. In early May, the Economist magazine declared him "the right man to lead BP out of the oil slick."

Today, Mr. Hayward is dead man walking.

Read all about it in Jeff Rubin's Smaller World blog

Several ambitious attempts to stop the subsea gusher have failed. As much as 19,000 barrels a day of oil are leaking from Macondo, up from the initial estimates of 5,000 barrels. On Tuesday, Barack Obama declared the spill "the greatest environmental disaster of its kind in our history." The same day, the U.S. Justice Department opened criminal and civil investigations into the spill.

And BP, the industry's top commercial oil producer (by volume produced), has lost more than a third of its stock market value since the Deepwater Horizon went down, more than $60-billion (U.S.) has vanished. The company that until recently was Britain's biggest industrial player, flagship enterprise and corporate ambassador is now being touted as a takeover target.

Mr. Hayward will be lucky to make it to Christmas. Ousting him before the leak is fixed would be a distraction too far. But the knives are out for him and he has hinted as much. To be sure, he is unloved by the Obama administration, every environmentalist on the planet and anyone - resort owners, fishermen, wildlife guides - who depends on clean Gulf water for their livelihoods. Probably the only guy who adores him is Goldman Sachs's Lloyd Blankfein, who was the America's most hated man until Mr. Hayward graciously stepped into the role.



Is it fair to send Mr. Hayward packing even though the precise cause of the leak - and hence the company or contractor at fault - is not yet known?

The answer is yes. While Mr. Hayward's response to the spill was swift, he made a bad situation worse. Shortly after the leak started, he blamed Transocean, the operator of the rig, for the mess. Never mind that it's still an open question what went wrong; BP or Halliburton, the contractor responsible for the well cementing, could equally be the baddies.

Then, in an interview with The Guardian newspaper, he made a comment that suggested he thought the dangers of the spill were exaggerated: "The Gulf of Mexico is a very big ocean. The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume."

Things got worse when he said there was no evidence of underwater slicks, because oil is lighter than water and rises to the surface. Scientists determined otherwise. They found huge plumes of oil, drifting like ghost submarines through the depths. He capped off a bad run of gaffes the other day by saying he wants the disaster over because "I'd like my life back." So would the families of the 11 men killed on the Deepwater Horizon.

Mr. Hayward's main mistake, though, was believing his own PR about the safety of offshore drilling.

As land-bound and shallow-water offshore reserves dwindle, BP has been sending its drilling flotilla into ever deeper waters, particularly in the prolific Gulf of Mexico, the area responsible for about a third of total U.S. oil production. Offshore is where the action is and where BP's growth comes from.

When Mr. Hayward became CEO in 2007, he vowed "to set a new benchmark in industrial safety" (the year before, an explosion at BP's Texas City refinery had killed 15). More recently, BP has been lobbying the Obama administration to open up the deepwater areas to oil and gas drilling. Last November, BP lobbyist Daivd Rainey told Congress that offshore drilling, an industry practice for some 50 years, is "both safe and protective of the environment."

Spoken too soon, to say the least.

The other main reason Mr. Hayward will be encouraged to take gardening leave is that BP's board of directors is under enormous pressure from shareholders to do the right thing. BP is not just another British investment. For years, it has been one of the London Stock Exchange's greatest value creators. It is the most important name in the FTSE-100 index, meaning the shares are owned by virtually every pension, investment and insurance fund in the land. In 2009, a bad year for both BP and the wider markets, the company paid out an astonishing £6.6-billion in dividends. That was equivalent to one-seventh of all the dividends paid out by FTSE-100 companies.

As clean-up costs mount by the minute, as the Justice Department heavies look for criminal behaviour and as the contingency fee lawyers circle BP like a school of tiger sharks, BP's share price could easily keep falling. Its dividend is not safe. BP's survival as an independent company is far from assured. Someone has to take the blame. The directors really have no choice but to find a new CEO

It's worth remembering how Mr. Hayward's predecessor, John Browne, lost his job. During his reign, Lord Browne was a superstar. He boosted the company's value nine-fold. But he lied during a legal battle to keep the details of his homosexual personal life secret and was forced to resign.

His lies, while embarrassing to him and to BP, in no way affected the value of the company. Mr. Hayward has overseen one of the biggest cases of rapid value destruction in stock exchange history. As far as sins go, there is no comparison.

 

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