The British Petroleum Company plc History

Company Perspectives:

BP is more than a collection of assets. It is people working together. Our culture, our leadership style and our management processes all endeavour to reflect this belief. If we are to achieve our business objectives, we must focus on some enduring themes: establishing and maintaining a motivating and supportive dialogue between leaders and their teams: this will help to build confidence and stimulate innovation from everyone who works for BP; developing first-class leadership at all times; maintaining consistently high standards in recruitment; continuously developing people's skills at every level and thus enhancing the company's capability and flexibility; striking a balance in our management processes between local empowerment and wider integration across the Group.

Company History:

One of the five largest oil companies in the world, The British Petroleum Company plc (BP) is the United Kingdom's largest corporation. The pioneer of the Middle Eastern oil industry, BP discovered oil in Iran before World War I and eventually became involved in all aspects of the oil industry, from exploration to marketing. By the mid-1990s, it was producing over 1.2 million barrels of oil and 1.5 million cubic feet of natural gas every day. "Downstream" operations--oil refining and marketing--contributed the lion's share (over four-fifths) of BP's revenues in the mid-1990s. BP is familiar to most people by virtue of its more than 16,400 service stations around the world, but it also has significant interests in oil exploration (generating 13 percent of revenues) as well as production of chemicals and plastics (about seven percent of sales).

Early 20th Century Origins

BP originated in the activities of William Knox D'Arcy, an adventurer who had made a fortune in Australian mining. In 1901 D'Arcy secured a concession from the Grand Vizier of Persia (now known as Iran) to explore for petroleum throughout most of his empire. The search for oil proved extremely costly and difficult, since Persia was devoid of infrastructure and politically unstable. Within a few years D'Arcy was in need of capital. 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, the first oil discovery in the Middle East. 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 Anglo-Persian Oil Company was Charles Greenway. Greenway began his career in the firm of managing agents who handled the marketing of Burmah Oil's products in India. Invited by Burmah Oil to help in the formation of Anglo-Persian Oil, he became a founding director, was appointed managing director in 1910, and took the position of chairman in 1914. The first few years of the company's existence were extremely difficult, and it survived as an independent entity largely through Greenway's skill. Although Anglo-Persian Oil had located a prolific oil field, it encountered 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 Anglo-Persian Oil risked being 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 Oil by a unique agreement with the British 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 British government invested £2 million in Anglo-Persian Oil, receiving in return a majority shareholding that it would 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 British government was allowed to appoint two directors to the company's board with powers of veto, which could not, however, be exercised over commercial affairs. In fact, the government directors never used their veto throughout the period of state shareholding in the company. On paper Anglo-Persian Oil was state controlled until the 1980s; in practice it functioned as a purely commercial company.

Growth to Global Prominence During World War I

World War I created considerable opportunities for the fledgling enterprise. Although within Persia the authority of the shah had almost disintegrated, and in 1915 Anglo-Persian Oil'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 establishing an integrated oil business. In 1915 Greenway founded a wholly owned oil tanker subsidiary, and within five years Anglo-Persian Oil had more than 30 oil tankers. In 1917, in his biggest coup, Greenway acquired British Petroleum Company, the British marketing subsidiary of the European Petroleum Union. The European Petroleum Union, a Continental alliance with significant Deutsche Bank participation, had been expropriated by the British government as an enemy property. In 1917 Greenway also decided to establish a refinery at Swansea, Wales, with improved refining technology that could produce petroleum products for British and European markets.

World War I, coupled with Greenway's skill, led to Anglo Persian Oil's emergence by the late 1920s as one of the world's largest oil companies, matching Royal Dutch/Shell and Standard Oil of New Jersey in stature. During the 1920s the company made a major expansion in marketing, establishing 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 a research laboratory erected in Sunbury, Great Britain, in 1917 greatly expanded the company's activities. In the early 1920s there were some criticisms of the management of Anglo-Persian Oil within the British government and some suggestions that the state shareholding 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 British oil policy during the war. In 1923 he became a managing director of Anglo-Persian Oil, and in 1927, chairman. He introduced major administrative reforms and, in the words of business historian Alfred Chandler, as quoted in Scale and Scope: The Dynamics of Industrial Capitalism, "was one of the few effective British organizational builders." Cadman was successful in overcoming the excessive departmentalism and lack of coordination that had formerly characterized the company. In 1928, he also joined forces with other leading oil companies in a clandestine price fixing agreement among the world's largest oil companies.

Depression, Iranian Nationalism Threaten: 1930s

In the 1930s one of Cadman's greatest challenges came from the growth of Persian nationalism. Previously, 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 Oil 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 during the Great Depression, the government of Persia canceled its concession in November of 1932. The dispute eventually went to the League of Nations, and in 1933 Persia signed a new 60-year concession agreement with Anglo-Persian Oil that reduced the area of the concession to about a quarter of the original and introduced a new tonnage basis of assessment for royalty payments. Anglo-Persian Oil had the formidable backing of the British government, and Persia gained little out of the dispute.

The oil company, which was renamed Anglo-Iranian Oil in 1935--the year 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 Oil within Iran. Extensive negotiations ensued between the company and the Iranian government. Anglo-Iranian Oil 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, a 1953 coup--in which the British government and the United States Central Intelligence Agency (CIA) were implicated--resulted in the overthrow of Mussadegh. After his removal from power, an agreement was reached that allowed the return to Iran of Anglo-Iranian Oil--renamed the British Petroleum Company in 1954--but not on such favorable terms as the company had secured after the early 1930s dispute. Under the accord, which was reached in August 1954, British Petroleum held a 40 percent interest in a newly created consortium of Western oil companies, formed to undertake oil exploration, production, and refining in Iran.

Diversification in 1950s--60s

The events of 1951--54 had encouraged BP to diversify away from its overdependence on a single source of crude oil. The Iranian nationalization deprived the company of two-thirds of its production. The company 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 company in the United Kingdom in 1967.

The company's future was secured at the end of the 1960s 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 Company, and the stage was now set for a surge of expansion in the United States. Through its large share in Prudhoe Bay, BP owned more than 50 percent of the biggest oil field in the United States, and it needed outlets for this oil.

The solution was a 1969 agreement with the Standard Oil Company of Ohio (SOHIO), the market leader in Ohio and several neighboring states. Under the agreement, SOHIO took over BP's Prudhoe Bay leases as well as the downstream facilities acquired from Atlantic Richfield. In return, BP acquired 25 percent of SOHIO's equity. In 1970 BP and SOHIO engaged in a seven-year struggle to develop the Prudhoe Bay oil field and construct the 800-mile Trans Alaska Pipeline system, which was finally completed in 1977. By the following year BP had taken a majority holding in SOHIO. Later, in 1987, BP would acquire SOHIO outright and merge it with BP's other interests in the United States to form a new company: BP America.

Oil Crisis of 1970s

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 countries that belonged to the Organization of Petroleum Exporting Countries (OPEC). The company's oil assets were nationalized in Libya in 1971 and Nigeria in 1979. BP and Shell clashed with the British 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 of 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. Beginning in the mid-1970s, BP built up a large coal business, especially in the United States, Australia, and South Africa. BP's chemical interests also expanded during this period, especially after 1978, when it acquired major European assets from Union Carbide and Monsanto. Also in the mid-1970s, BP became active in mineral mining, acquiring Selection Trust, a mining finance house based in Great Britain, in what was then the London stock market's largest-ever takeover bid.

CEO Sir Peter Walters, who took BP's helm in 1981, guided a five-year acquisitions binge costing approximately £10 billion. It included the purchase of the Purina Mills animal feed company in 1986 as well as the purchase of the remaining shares in SOHIO. In 1981 SOHIO acquired Keiecott, the largest U.S. copper producer.

Seen retrospectively, this diversification strategy was not always a wise one. A major world recession after 1979 led to considerable overcapacity, forcing BP to close down or sell off parts of its chemicals business in the early 1980s. Late in the decade, the energy conglomerate sold off its coal and minerals interests in the United States, Canada, Indonesia, Australia, and South Africa, netting £428 million in the process. BP started to consolidate its upstream business through divestment in the late 1980s. Another sale of selected worldwide oil and gas interests and assets brought in $1.3 billion. In 1990 and 1991 sales of exploration interests and assets in New Zealand, France, the Netherlands, and from the BP Exploration division in particular totaled £830 million.

One notably successful acquisition was Britoil, a company established by the British government in the 1970s to participate in North Sea oil exploration. Britoil had become one of the largest independent oil exploration and production companies, and in acquiring it, BP almost doubled its exploration acreage in the North Sea.

The late 1980s saw considerable changes at BP. In October 1987 the government under Prime Minister Margaret Thatcher sold its remaining shares in the company as part of a 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 percent stake in the company; government regulatory authorities subsequently reported that this share was reduced to less than ten percent.

In the early 1990s British Petroleum sought to consolidate its activities to focus on its traditional areas of strength in "upstream" areas--oil and gas exploration, field development, production, pipeline transportation, and gas marketing--and "downstream" areas--oil supply trading, refining, and marketing&mdash well as in chemicals manufacturing. As a result of its corporate shuffling, BP now focused on its three core businesses: oil exploration and production, oil refining and marketing, and chemicals.

Project 1990 Under CEO Horton

In 1990 BP announced Project 1990, a fundamental change of its corporate structure. The primary aims were to reduce organizational complexity, reshape the central organization and reduce its cost, and reposition BP for the 1990s. Project 1990 was the brainchild of BP's chairman, Robert Horton. Horton earned a reputation for saving money and rose to prominence at BP by cutting costs first at the company's tanker division, then progressing to BP's chemicals subsidiary. Eventually becoming chairman and chief executive officer of BP Oil in 1990, he set out to cut $750 million from BP's annual bottom line by revamping the corporate culture.

At the heart of the scheme was a conviction that BP had become overly bureaucratic and that strategic flexibility was handicapped as a result. In 1990, Horton said, "What I'm trying to do is simply, refocus, and make it clear we don't need to have hierarchies. We don't need to have baronial head office departments. This is a fundamentally different way of looking at the way you run the center of the corporation." Under Project 1990, nearly 90 percent of corporate center committees 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.

Unfortunately, Project 1990 quickly came to represent wholesale job cuts and low morale. Between 1990 and 1992, over 19,000 positions--over 16 percent of the total workforce--were cut. The intended result of the job cuts was to shorten the lines of command and promote individual responsibility, but workloads were not redistributed in the process. Project 1990 earned a poor reputation among employees, because some of the most basic measures to promote good communication and efficiency were eschewed for job elimination. Horton also insisted on maintaining BP's dividend--despite cuts in other vital areas.

As a result of Project 1990's shortcomings, many employees lost faith in it, according to a 1991 internal survey. Horton's personal abrasiveness and tendency to dictate, rather than cultivate, change earned him an unflattering nickname: "The Hatchet." He was forced to resign on June 25, 1992, after BP sustained its first-ever quarterly losses. Sales had slid from $66.4 billion in 1990 to $51.9 billion in 1992, and profits declined from $3.2 billion to an annual loss of £458 million ($811 million).

Restructuring Under New Management Team in Mid-1990s

Horton's role was split between Lord Ashburton, the nonexecutive director who had led the mutiny, and Sir David Simon, who advanced from chief operating officer to chief executive officer. Ironically, however, Simon and Ashburton soon found that they needed to accelerate, not reverse, Horton's plan. First, they organized the company's interests into three primary divisions: BP Exploration, BP Oil, and BP Chemicals. The new organizational scheme allowed the parent to better analyze and pinpoint underperforming and noncore assets with a view to improvement or elimination. Of the $4 billion in assets targeted for divestment were BP Nutrition and the company's controlling stake in BP Canada. The company also planned to reduce debt by $1 billion annually and invest $5 billion per year on capital projects.

From 1993 to 1995, BP cut another 9,000 people from the payroll, reducing employment to less than 54,000 by the end of 1996. The ongoing cuts (which were expected to bring employment down to 50,000) brought home a stern reality; as an unnamed source told Oil & Gas Journal in 1996, "There is no doubt among staff that BP is a lean and mean machine these days, and not the Rolls-Royce among oil companies it once thought itself." Ashburton and Simon also halved BP's "fat-cat" dividend, a measure Horton had been reluctant to take.

Reorganization efforts also focused on the troubled American subsidiary, BP Oil, which contributed more than $20 million of the parent company's 1992 loss. Cost-cutting measures at the subsidiary ran the gamut from selling 300 California and Florida gas stations to employee buyouts eliminating 600 to 700 jobs, to the close scrutinization of travel vouchers.

BP also used strategic partnerships to cut the cost of doing business around the world. In 1996, for example, the company merged its European refining and marketing operations with those of Mobil Corporation. A joint venture with China's Shanghai Petrochemical Company expanded BP's chemical interests in Asia while limiting the company's liabilities. The company hoped to target Southeast Asia and Eastern Europe for new downstream operations. In 1997, BP announced that it would build its first service stations in Japan.

Though some employees continued to suffer low morale, analysts and investors alike praised the "dramatic strides" made by BP in the early 1990s. Analysts at Morgan Stanley & Co. International Ltd.'s London office called BP a "big green cash machine" in their fall 1995 report on the oil company. Aided in part by oil price increases, sales grew from £33.3 billion ($51.9 billion) in 1992 to a record £44.7 billion ($76.6 billion) in 1996, while the latter year's net, at £2.6 billion ($4 billion), also set a new benchmark.

Having achieved the goals set out in the early 1990s, BP chief executive officer E.J.P. Browne (who advanced to that office in 1996) established new targets for the waning years of the twentieth century. He pledged to add another $1.5 billion to the bottom line, to continue to increase the dividend through earnings growth, to reign in debt to less than $8 billion, and to pursue ongoing productivity increases.

Principal Divisions: BP Oil; BP Chemicals; BP Exploration.

Further Reading:

• Beck, Robert J. "State Companies Lead OGJ 100 World Reserves, Production List," The Oil and Gas Journal, September 28, 1992.
• "Big Problems: British Petroleum," The Economist, February 8, 1992.
• "BP After Horton," The Economist, July 4, 1992.
• Ferrier, R. W., The History of the British Petroleum Company, vol. 1, Cambridge: Cambridge University Press, 1982.
• Jones, Geoffrey, The State and the Emergence of the British Oil Industry, London: Macmillan, 1981.
• Knott, David, "BP Sharpening Focus on Improved Shareholder Value, Efficiency," The Oil and Gas Journal, July 8, 1996, pp. 22--26.
• ------, "British Petroleum Maps Strategy for Continued Gains," The Oil and Gas Journal, March 22, 1993, pp. 25--29.
• "The Road from Persia: A Brief History of BP," London: BP Briefing Paper, April 1989.
• Yerak, Rebecca, "Plugging the Drain at BP Oil," Plain Dealer (Cleveland), January 26, 1993.

Source: International Directory of Company Histories, Vol. 21. St. James Press, 1998.