How BP and the Oil Industry Got Into Such a Mess

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As a plume of oil continues to spew into the Gulf of Mexico, creating vast clouds beneath the water and coating the wildlife along the shore with toxic goo, the extent of the ecological fallout from the worst oil spill in U.S. history is only beginning to be revealed. So, too, is the economic fallout for the world's crudest industry. The moratorium on deepwater oil drilling imposed by the Obama administration in late May cuts off the rigs that produce 31 percent of the country's domestic oil, raising fears that oil companies will move their operations even farther offshore, to West Africa, Brazil, and the North Sea. Meanwhile, those companies' business practices are under the microscope, while their ratings in the business world are plummeting.

With the release of Oil: Money, Politics, and Power in the 21st Century, investigative journalist Tom Bower gives us a glimpse of what the debacle must look like from the boardroom. As the London papers tell the story, Bower is famous in British circles for his "forensic eviscerations" of the rich, powerful, and shamelessly corrupt. But here, he digs in on the business itself—and casts doubt upon the notion that its fundamentals are likely to change any time soon. NEWSWEEK's Katie Paul chatted with Bower about how the industry got itself into this mess, and where it might be headed next. Excerpts:

Fortuitously, one of the most colorful characters in the book is John Browne, who made bold moves during his years at the helm of BP. What was your impression of Browne's stewardship of the company?

I think John Browne is a brilliant businessman and inspired visionary who is, ultimately, the source of his own downfall. It's a classic case in which the greatness and the success corrupts the vision. In the end, he is responsible for creating a successful company, but also for causing the problems in which BP now finds itself.

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Which choices would you point to, specifically, that precipitated those problems?

When he became CEO in the mid-'90s, BP was declining fast as a major oil corporation. He launched a radical program to expand, slashing costs and focusing on what he called the "elephants," or the big oilfields. Then through takeovers, he made BP into the largest oil corporation in the world. But in slashing costs, he disregarded safety and maintenance. He fired hundreds of engineers, instead opting for cheaper subcontractors. That led to three major incidents: the oil spill in Alaska, the explosion at Texas City, and the tilting of the Thunder Horse oil platform in the Gulf of Mexico. All three were the results of bad engineering, which went directly to John Browne's leadership.

Browne was also unusual among the executives at the various oil companies you profiled in that he didn't have an engineering background. Do you think that was behind some of the sloppy decisions he ended up making?

Absolutely—he didn't see oil as an engineering business, but as a financial business that employed engineers. That's very different from Exxon. He was dismissive of engineers; he knew he needed them, but he didn't promote them to run the corporation. That's one of the reasons the Texas City accident happened, because he put an accountant in charge instead of a refining engineer. He did the same in Alaska, where he had an accountant running the pipeline, even though he didn't know anything about pipelines besides how to keep their costs down.

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Browne went down in 2007. What about BP since then? Has there been any shift in that approach?

Browne's legacy is a very large and successful company, but a flawed company. He'd removed rivals and critics, so when he was removed abruptly, the only one left standing was Tony Hayward—and he's just not very good. For example, BP lost its toehold in Russia simply because Hayward was outgunned by the oligarchs. He was also so obsessed with keeping the share price up, he didn't make the needed fixes to maintenance and safety standards. Hayward isn't an engineer either; he's a geologist. BP just doesn't have the engineering skill, and that's part of the problem of finding a successor. It'll take years to repair the damage.

As far as image goes, BP was way out ahead of its rivals, latching onto a greenwashing campaign as early as '97. You attribute this heavily to Browne. Looking back, what do you think of the motives behind that strategy, and the wisdom of it?

It was a brilliant coup, and it made the rivals hugely jealous. Shell especially, since they claimed they called it first, but Browne was much faster and better in developing it. But he invested too much money in green energy. In the end, Exxon was right; oil corporations should stick with the business they know, which is finding oil. Browne eventually had to retreat, because he just couldn't make money off it without government subsidies. It also worked against them once Alaska and Texas City happened, since those accidents undermined the propaganda.

So is the consensus among executives that the green moment has passed in the oil business?

They're sticking to the green propaganda, because the public now expects it, but they're spending much less on it. They've all sharply reduced the amounts of money they spend on alternative energy: (a) they were shocked because they couldn't make it work financially; (b) after oil prices spiked in 2008, they realized they just couldn't afford it, because they needed to find cheaper sources of oil. I think they'll go back to exploring. But on that, they're all being affected by what's now happening in the gulf.

Let's talk about the gulf. Some have speculated that the damage affects the entire industry, not just BP. To what extent are their fates linked?

President Obama keeps blaming BP, but there were three subcontractors that at some point will be made to share part or all of the blame. This is not uniquely a BP problem. The rest of the oil industry uses the same subcontractors. So, on the one hand, there is some gloating, since there's really no love between these corporations. On the other, they will all suffer, and will all have to pay the price of increased safety and maintenance regulations in the gulf.

If all the major oil corporations use the same subcontractors, are they all equally at risk for accidents?

That's the difference. Because Exxon and Shell have much more emphasis on engineering, they would have second-guessed what the subcontractors were doing. They would demand that every action be monitored and reported back to Houston for approval. BP would do the opposite: rely on subcontractors, not expect to monitor them from Houston. I don't think this would have happened as easily to Shell or Exxon.

Given that, how can liability be established? Is there a need to regulate who's responsible for checking up on these engineering details?

The Minerals Management Service has proved itself to be inadequate. The trouble is that MMS is very much like the SEC on Wall Street. Just like regulators failed to pick up on the subprime mess because they were inadequately trained…so it was with MMS. If you're a good engineer, you're going to be working for the oil company, not the regulator, and at a much higher salary. There will be various rules put in place, but the next disaster will be unforeseen.

How big a hit do you expect the major corporations to take from this disaster?

Big Oil has overcome its share of disasters before. The fact of the matter is that Americans are hugely wasteful—they use 25 percent of daily [global] oil production. America keeps on believing in cheap oil. Well, cheap oil comes at a bigger risk than more expensive oil. The oil corporations will keep on delivering, because they're the only ones who can. And only the big ones have the money and infrastructure to get it offshore. There are four major oil corporations, and that's the way it's going to stay until one of the non-Anglo-American companies challenges them.

Where might that challenge come from?

The Brazilians have an amazing oil reservoir off their coast and amazing expertise, but the question is whether they can sustain it. The Malaysians are very good, too. The Norwegians have great expertise in deep water. The great tragedy for all these corporations is that there are huge amounts of untapped oil in Mexico, Venezuela, and Russia, but the companies aren't given access. The rulers of these countries are terribly greedy. They want to manipulate the price, producing less oil for more money. It would be unnecessary to go to deep water if those rulers weren't preventing access.

The deep waters of the Gulf of Mexico had been the hot site for oil exploration. Now people seem to be eyeing the Arctic. Is that the next frontier?

I think Brazil is the next frontier, actually. The Arctic will be a frontier, but it'll take time to develop because the conditions there are much deeper and colder. No oil company can afford it at this point. But for the next 20 years, it'll be Brazil and the eastern shelf along South America. There are 200 billion barrels of oil there. But it's deeper than the gulf. Geologically, it's more difficult because the rock is soft, so it can break. But there's always Iraq, or someone could persuade the Russians to open up. There's no such thing as the end of oil. This idea that we're reaching "peak oil" is nonsense. They're charlatans, the people who talk about peak oil. There's ample oil.

You're known as a destroyer of reputations, yet you've actually been impressed by a number of people you find in the oil industry. When you started working on the book, what did you expect to write about, and how did that change throughout your reporting?

When I started, I was thinking about BP's fight with the oligarchs and disaster at Texas City. I saw it as a corporation in trouble. But what I discovered when I met the oilmen is that, aside from some dubious characters among the traders, they are mostly decent, intelligent, and committed. Even at BP, the vast majority of people are not evil. It was quite refreshing to write about people who are not out to lie, cheat, and defraud. The BP people are impressive; it's just that the culture went wrong.

John Browne responded to Bower's characterization of his leadership at BP. Newsweek has published the full text of his letter here.

How BP and the Oil Industry Got Into Such a Mess | Business