British Petroleum Company plc

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British Petroleum Company plc

1 Finsbury Circus
London EC2M 7BA
United Kingdom
(071) 496-4000
Fax: (071) 496-5656

Public Company
Incorporated: 1909 as Anglo-Persian Oil Company
Employees: 118,050
Sales: £41.71 billion (US$80.51 billion)
Stock Exchanges: London New York Toronto Tokyo Paris Zurich Amsterdam Frankfurt

British Petroleum (BP) is one of the world’s leading oil companies, and one of the United Kingdom’s largest corporations. The company, which was the pioneer of the Middle Eastern oil industry, having discovered oil in Iran before World War I, is now engaged in all aspects of oil exploration, production, refining, transportation, and marketing. It has significant interests in chemicals and plastics, including a range of specialty products—mostly detergents, advanced composite materials, and advanced ceramic engineered materials. In 1990, BP was engaged in a fundamental review of its management structure.

BP has its origins in the activities of William Knox D’Arcy, who had made a fortune in Australian mining, and who in 1901 secured a concession from the shah to explore for petroleum throughout almost all of the Persian empire. The search for oil proved extremely costly and difficult, for Iran was devoid of infrastructure and politically unstable. Within a few years D’Arcy was in need of funds. Eventually, after intercession by members of the British Admiralty, The Burmah Oil Company joined D’Arcy in a Concessionary Oil Syndicate in 1905, and supplied further funds in return for operational control. In May 1908 oil was discovered in the southwest of Persia at Masjid-i-Suleiman. This was the first oil discovery in the Middle East. In the following April the Anglo-Persian Oil Company was formed, with the Burmah Oil Company holding most of the shares.

The dominant figure in the early years of the new company was Charles Greenway. Greenway’s career had begun in the firm of managing agents who handled the marketing of Burmah Oil’s products in India. He was invited by Burmah Oil to help in the formation of Anglo-Persian. He became a founding director, was appointed managing director in 1910 and became chairman in 1914. The first few years of the company’s existence were extremely difficult, and it was largely through Greenway’s skill that it survived as an independent entity. Although Anglo-Persian had located a prolific oil field, there were major problems in refining the crude oil. The company also lacked a tanker fleet and a distribution network to sell its products.

For a time it seemed that Anglo-Persian would be absorbed by one of the larger oil companies, such as the Royal Dutch/ Shell group, with whom it signed a ten-year marketing agreement in 1912, but in 1914 Greenway preserved the independence of Anglo-Persian by a unique agreement with the U.K. government. Under the terms of this agreement negotiated with Winston Churchill, then first lord of the Admiralty, Greenway signed a long-term contract with the British Admiralty for the supply of fuel oil, which the Royal Navy wished to use as a replacement for coal. At the same time, in an unusual departure from the United Kingdom’s laissez-faire traditions, the U.K. government invested £2 million in the company, receiving in return a majority shareholding which it was to retain for many years. The transaction provided the company with funds for further investment in refining equipment and an initial investment in transport and marketing in fulfillment of Greenway’s ambition to create an independent, integrated oil business. In return for its investment, the U.K. government was allowed to appoint two directors to the company’s board with powers of veto, powers that could not, however, be exercised over commercial affairs. In fact, the government directors never used their veto throughout the period of state shareholding in BP, which lasted until the 1980s. Despite the fact that BP was nominally state controlled, in practice it functioned as a purely commercial company.

World War I created considerable opportunities for the fledging enterprise. Although within Persia the authority of the shah had almost disintegrated, and in 1915 Anglo-Persian’s pipeline to the coast was cut by dissident tribesmen and German troops, demand for oil products was soaring. Between 1912 and 1918 there was a tenfold increase in oil production in Iran. The war also created opportunities for Greenway to further his ambition of creating an integrated oil business. In 1915 Greenway created a wholly owned oil tanker subsidiary, and within five years BP had more than 30 oil tankers. In 1917, in his biggest coup, Greenway acquired the British Petroleum Company, the U.K. marketing subsidiary of the European Petroleum Union. The European Petroleum Union, a Continental alliance with significant Deutsche Bank participation, had been expropriated by the U.K. government as an enemy property. In 1917 he also decided to establish a refinery at Swansea, Wales, with improved refining technology that could produce petroleum products for the U.K. and European markets.

World War I and Greenway’s skill led to Anglo-Persian’s emergence as one of the world’s largest oil companies by the late 1920s, matching Royal Dutch/Shell and Standard Oil of New Jersey in stature. During the 1920s the company made a major expansion in marketing, with the establishment of subsidiaries in many European countries and, after the expiration of the agreement with Shell in 1922, in Africa and Asia. New refineries were established in Scotland and France, and the research laboratory established at Sunbury, United Kingdom in 1917 greatly expanded its activities. In the early 1920s there were some criticisms of the management of Anglo-Persian within the U.K. government and some suggestions that the state shareholding should be privatized, but in November 1924 a decision was made to retain the government’s equity stake.

Greenway’s successor was John Cadman, a former mining engineer who had been a professor of mining at Birmingham University before World War I, and who had become a major figure in official U.K. oil policy during the war. In 1923, he became a managing director of Anglo-Persian, and in 1927 chairman. He introduced major administrative reforms and, in the words of the U.S. business historian Alfred Chandler, in Scale and Scope: The Dynamics of Industrial Capitalism, ”was one of the few effective British organizational builders.” He was successful in overcoming the excessive departmentalism and lack of coordination that had formerly characterized the company. Cadman was also a leading figure alongside Henri Deterding of the Shell group and Standard Oil of New Jersey in the attempts to regulate and cartelize the world oil industry in the late 1920s.

In the 1930s one of Cadman’s greatest challenges came from the growth of Iranian nationalism. In 1921 the old dynasty of shahs had been overthrown by an army colonel, Reza Khan, who made himself shah in 1925. Reza Khan was determined to reverse the foreign political and economic domination of his country. Anglo-Persian had a symbolic role as a bastion of British imperialism and, following growing resentment of declining royalty payments from the company due to its falling profits in the Great Depression, the Persian government cancelled its concession in November 1932. The dispute eventually went to the League of Nations, and in 1933 a new 60-year concession agreement was signed with Anglo-Persian, the main effects of which were to reduce the area of the concession to about a quarter of the original, and to introduce a new tonnage basis of assessment for royalty payments. Anglo-Persian had the formidable backing of the U.K. government, and the Persians gained little out of the dispute.

The oil company, which was renamed the Anglo-Iranian Oil Company in 1935, when Persia became Iran, became a renewed target of nationalist discontent after World War II The Iranians complained that their dividends were too small, and the signing of 50-50 profit-sharing agreements between governments and oil companies elsewhere—in Venezuela in 1948 and Saudi Arabia in 1950—fueled criticism of Anglo-Iranian within Iran. There were extensive negotiations between Anglo-Iranian and the Iranian government. Anglo-Iranian eventually offered substantial concessions, but they came too late and were repudiated by the nationalist government of Muhammad Mussadegh. On May 1, 1951, the Iranian oil industry was formally nationalized. Several years of complex negotiations followed and eventually, in 1953, a coup, in which the U.K. government and the U.S. Central Intelligence Agency were implicated, resulted in the overthrow of Mussadegh. After his removal from power an agreement was reached which allowed the return to Iran of Anglo-Iranian—renamed the British Petroleum Company in 1954—but not on such favorable terms as the company had secured after the 1932-1933 dispute. Under the agreement, which was reached in August 1954, British Petroleum held a 40% interest in a newly created consortium of Western oil companies, formed to undertake oil exploration, production, and refining in Iran.

The events of 1951-1954 had encouraged Anglo-Iranian to diversify away from its overdependence on a single source of crude oil supply. The Iranian nationalization deprived the company of two-thirds of its production. It responded by increasing output in Iraq and Kuwait, and by building new refineries in Europe, Australia, and Aden. Oil exploration activities were launched in the Arabian Gulf, Canada, Europe, North Africa, East Africa, and Australia. Meanwhile, BP, which had first moved into petrochemicals in the late 1940s, became the second-largest chemicals business in the United Kingdom in 1967.

The company’s future was secured at the turn of the 1960s and 1970s by major oil discoveries in Alaska and the North Sea. In 1965 BP found gas in British waters of the North Sea. In October 1970 it discovered the Forties field, the first major commercial oil find in British waters. Throughout the 1960s BP had also been looking for oil in Alaska, and in 1969 this effort was rewarded by a major discovery at Prudhoe Bay on the North Slope. In the previous year BP had acquired the U.S. east coast refining and marketing operations from Atlantic Richfield, and the stage was now set for a surge of expansion in the United States. Through its large share in Prudhoe Bay, BP owned over 50% of the biggest oil field in the United States, and it needed outlets for this oil. The solution was found in an agreement with the Standard Oil Company of Ohio signed in August 1969. This company, the original Standard Oil founded by John D. Rockefeller, was the market leader in Ohio, and in several neighboring states. Under the agreement, Standard took over BP’s Prudhoe Bay leases and also the downstream facilities acquired from Atlantic Richfield. In return, BP acquired 25% of Standard’s equity. BP and Standard engaged in a seven-year struggle—from 1970 to 1977—to develop the Prudhoe Bay oil field and construct the 800-mile Trans Alaska Pipeline system. The pipeline was finally completed in 1977. By the following year BP had taken a majority holding in Standard. In 1987 it was acquired outright and merged with BP’s other interests in the United States to form a new company: BP America.

The oil price shocks and the transformation of the balance of power between oil companies and host governments that occurred in the 1970s caused many problems for BP, as for other western oil companies. BP lost most of its direct access to crude oil supplies produced in OPEC countries. Its oil assets were nationalized in Libya in 1971 and Nigeria in 1979. BP and Shell clashed with the U.K. government in 1973 over the allocation of scarce oil supplies. BP’s chairman, Sir Eric Drake, refused to give priority to supplying the United Kingdom, despite forceful reminders from Prime Minister Edward Heath that the government owned half the company.

Problems in the oil industry prompted BP to diversify away from its traditional role as an integrated oil company heavily dependent on Middle Eastern oil production. Retrospectively it can be seen that this strategy was not always a wise one, and by the late 1980s BP was actively divesting its noncore businesses. BP’s chemicals interests grew, especially after 1978 when it acquired major European assets from Union Carbide and Monsanto. The major world recession after 1979 led to considerable overcapacity, and BP was forced to close down or sell off parts of its chemicals business in the early 1980s. From the mid-1970s BP built up a large coal business, especially in the United States, Australia, and South Africa. In 1989 and 1990, however, many of these coal interests were sold. In the mid-1970s BP became active in mineral mining. In 1980 BP acquired Selection Trust, a U.K.-based mining finance house, in what was at the time the London stock market’s largest-ever takeover bid, and in 1981 Standard Oil acquired Kennecott, the largest U.S. copper producer. In 1989, however, most of the minerals assets were sold to the U.K. mining company, Rio Tinto Zinc, for £2.38 billion. As a result of its divestments, BP came to be focused on its four core businesses of oil exploration and production, oil refining and marketing, chemicals and nutrition.

The years since the late 1980s have seen considerable changes at BP. In October 1987 the U.K. Thatcher government sold its remaining shareholding in the company as part of the privatization program. The timing of the share issue was particularly unfortunate, as the world’s stock markets collapsed between the opening and closing of the offer. One result of the sale was that by March 1988 the Kuwait Investment Office had built up a 21.6% stake in the company; subsequently the U.K. regulatory authorities reported that this share was reduced to less than 10%. A second major development in 1987 was the launch of a successful bid to acquire Britoil, a company established by the U.K. government in the 1970s to participate in North Sea oil exploration. It had become one of the largest independent oil exploration and production companies and through its acquisition BP almost doubled its exploration acreage in the North Sea.

In 1990 BP announced a fundamental change of its corporate structure, known as Project 1990. The main aims were to reduce organizational complexity, re-shape the central organization and reduce its cost, and reposition BP for the 1990s. Project 1990 was the brainchild of BP’s chairman, Robert Horton. At the heart of the scheme was a conviction that BP had become over-bureaucratic, and that strategic flexibility was handicapped as a result. Under Project 1990, some 90% of corporate center committees—a total of 70—were abolished, with individuals taking responsibility instead. Hierarchically structured departments were to be replaced by small flexible teams with more open and less formal lines of communication.

BP represents, alongside ICI, one of the U.K. success stories of the 20th century. Its achievement in penetrating the international oil oligopoly of the early 20th century was impressive, as was the survival of the loss of the Iranian oil fields in the early 1950s. Project 1990 represents a major imaginative attempt to position the company for the opportunities of the 1990s and the company, under the forceful leadership of Horton, is engaged in a sustained drive to implant the culture changes which are necessary to secure the successful and harmonious operation of its flexible and decentralized management system.