Seal gave the speech, though he had never believed the dollars 25 dogma, muttered something about this being Hamlet without the prince, and rushed off. At 5.20 that afternoon, BP announced that the prince had been deposed and that Simon had taken over.
Five weeks later, Simon announced that after a pounds 1bn write-off, BP had lost pounds 812m in the first six months of the year, that the dividend would be halved and that 11,500 jobs were to go. To the general public, this was the first sign that BP, one of the great pillars of British industry, was cracking dangerously.
Investors, who had become alarmed about the group the previous year, saw it rather differently. This, despite the dividend cut, was a sign that the worst was over. They started to buy, and the share price rebounded vigorously. As BP's results came in through the rest of last year and this, their confidence proved well-founded. In the first three months of this year, BP made pounds 249m profit: the share price jumped another 10p.
A simple conclusion would be that Simon, the new prince, is also a wizard. Needless to say, the story is more complex. The turnaround at BP is genuine - though there are some worries over its long-term future - and David Simon has undoubtedly accelerated it. But the groundwork was laid long ago, much of it by the excoriated Horton.
AT 4am on 26 May, 1908, a gusher of oil shot out of the ground at Masjid-i-Sulaiman in south-west Persia. The company formed to exploit it was the Anglo-Persian Oil Company, which was soon bought by the government and grew mighty on its Persian concession.
In 1954, when it became British Petroleum, it was still reliant on the Middle East. By now it was a giant, with a sclerotic bureaucracy to match. Former military gents stalked the heavily manned headquarters while abroad, one manager says, 'BP people regarded themselves as quasi-ambassadors'. Profit was seen as inevitable, and not a subject for polite conversation.
In the Sixties, BP attempted to change both its strategy and its culture. It successfully diversified away from the Middle East, finding oil in Prudhoe Bay field in Alaska; later it developed the giant Forties field in the North Sea.
It also injected new blood with a graduate recruitment scheme. BP's prestige meant it could attract the best - early entrants included Peter Walters, David Simon and Bob Horton. Most of these bright young men sat together in the supply department, then the heart of the company. They were groomed to cut their way through the middle ranks to reach the top quickly. Many were intensely political, though not of a uniform hue: Bob Horton was an active Tory, while Bryan Sanderson, now head of BP Chemicals, was a Labour man. By the time Peter Walters became chairman, in 1981, the upper echelons of BP were packed with this elite.
Sir Peter joined in the Eighties game of shuffling assets with gusto, making use of his new freedom as the Government sold off its shareholding. Two giant acquisitions were made: the 45 per cent of the US company Sohio that BP did not already own - for dollars 7.5bn - the exploration company Britoil, for pounds 2.5bn. Another pounds 2.5bn slipped out by mistake, when in the aftermath of Black Monday the group had to buy a 13 per cent stake in itself from the Kuwait Investment Office.
Despite the new sharpness at the top, much of BP's old and expensive style remained unshaken. Bob Drummond, managing director of the North Sea supply company Wood Group Engineering in Aberdeen, says that until recently BP was 'bureaucratic, closed and committee-driven, with very inflexible procedures'.
Two men who understood this arrived at the top of BP at the end of the Eighties. Bob Horton and John Browne had launched a full-scale assault on Sohio, after a disastrous plunge into exploration by the previous management. In 1989 Horton was told that he would succeed Walters, while Browne was put in charge of BP Exploration.
That year, with only the faintest whiff of recession in the air, BP looked healthy. It made a record operating profit of pounds 2.9bn, and Sir Peter Walters' valedictory message to the shareholders said that the group 'enters the 1990s well placed to continue delivering growing returns to shareholders'.
But senior managers could see pressures were growing. BP Exploration continued to generate the majority of profits, but Browne knew it was heading for trouble. Forties and Prudhoe Bay were in decline, and reserves were not being replaced, despite heavy capital spending.
'Our costs were going up, and prices were going down,' he says. The dreams of a dollars 30 or dollars 40 a barrel oil price had vanished, he said, and 'we realised that the Nineties would be different from the early Eighties: we had to live within our means'.
The acquisition of Britoil had given BPX a vast spread of licences in the North Sea, but its high costs meant that many would never be exploited. In 1988 and 1989, BP's finding and development costs were dollars 10 and dollars 11 per barrel, compared with a dollars 5 average for the other majors. Add to this the expenditure on safety following the Piper Alpha disaster and, most important, the realisation that oil prices were unlikely to rise much above dollars 20, and the squeeze became more acute.
BPX was in turmoil after the full buyout of Sohio and the Britoil purchase: now it had not one culture but three, and no attempt had yet been made to knock them together. Browne decided to turn the organisation up and down, and looked for ideas he could borrow: he talked not to Shell and Exxon, but to the likes of General Electric, Volkswagen and Ford.
Six months after Browne had arrived, he announced that 10 per cent of the staff would be cut, that a range of oil assets would be sold off, and that henceforth BPX would go all out for big new finds. That meant concentrating on so-called frontier provinces, where the geology was right but for technological or political reasons no big fields had yet been found.
Browne used every trick he could to cut costs. One of these was to contract activities out: BPX's finance department is now run by Arthur Andersen. The campaign worked: the Forth field in the North Sea was given a negative value when BP found it; now, thanks to lower costs, it is worth dollars 400m.
BPX's upheaval was under way by the time Horton moved into the chairman's office in March 1990. Horton was arrogant. When he was 24 he announced that he would either be chairman or have a heart attack by the time he was 45. But he was also clever, which was why his prediction came true. Horton had spent the previous 10 years cutting costs, first at BP Chemicals, then at Sohio. He was much taken with the brisk American style, and was determined to be the first chairman to attack the culture of BP as a whole.
He set up Project 1990 - its aim was to create what he called 'the corporate equivalent of perestroika and glasnost' by cutting out layers of bureaucracy, abolishing committees (there were 86 in the head office alone), and trying to get decisions made at the lowest possible level - standard management textbook stuff, but difficult to introduce in a company the size of BP.
He also chopped 900 jobs in BP's tower block headquarters in the City of London, and decided to move it out of the skyscraper and back into the elegant Finsbury Circus headquarters the group had abandoned in 1967.
Russell Seal says that in some areas Project 1990 had a huge effect, as a new openness was encouraged. 'The main thing was to persuade them we care about what they say,' he says. Barriers were dismantled wherever possible: BP Oil's 16 national divisions were merged in an attempt to destroy the power of regional barons.
Its influence spread to BPX, where it merged with Browne's own efforts. Suppliers in Aberdeen were surprised to find themselves being treated quite differently.
'In the last two years there's been an unbelievable degree of willingness to cut paperwork out and to talk face to face,' Bob Drummond says. He has reason to be grateful to BP: last October Wood Group was given a pounds 150m five-year contract to provide all services to three fields - a style of contract that BP had learned about from the motor industry.
Despite the head office contraction, Project 1990 was not aimed primarily at cutting costs. Indeed, as the recession bit, BP said it intended to spend its way through it: Horton felt there was no reason to modify his aim of pushing BP from the top of the second division into the first division of the oil world. 'We felt that if you define strategy and have the funds to invest, the returns you envisage will happen,' says Steve Ahearne, BP's finance director. 'The consequence is that we didn't concentrate on how to sweat assets.'
Horton certainly did not save money on himself. As well as a pounds 700,000 salary, he bought a corporate jet ('not just any jet, it was a Gulfstream, for God's sake]' one manager says), designed his own office and had more than adequate back-up. 'It's very much like a senior Cabinet minister's staff,' he explained. 'He treated his office like a toy,' a manager says. An internal spoof in which Horton explains his chair 'is modelled on Napoleon's throne' still causes giggles in Finsbury Circus.
One former colleague said Horton appeared to suffer a character shift when he became chairman. 'Once he got the top job, his worst quality was magnified and his arrogance took over,' he said. 'He started to think he could walk across the Thames, and lost the ability to communicate.' The result, inevitably, was that his efforts to make the rest of his staff more open lost some of their force.
As Horton progressed regally above them, the heads of BP's divisions were becoming worried, and started to cut back on their own. Bryan Sanderson took over the chemicals division at the same time as Horton became chairman: 1988 and 1989 had been exceptional years and it had built new capacity frantically, but like Browne he could see trouble ahead. 'What I came into was a solid second-division company with some very good assets, but which had overextended itself,' he says. He could see the group was heading one way, and the market for chemicals in the other.
In early 1991 he decided to act, and declared that productivity must be increased by 50 per cent in five years. A third of the BP Chemicals head office staff was cut in 1991, and continuous squeezing stopped the cash outflow. This was the best he could do: chronic overcapacity meant that profitability was not an option.
BP Oil, the refining and marketing division, had a record year in 1991, but in the last quarter it was clear things were going badly wrong. The recession had cause margins to plunge, especially in Europe and the eastern United States, where BP had most of its refineries.
By the beginning of 1992, the company had to face up to the prospect of margins at dollars 3 instead of dollars 4. This, according to chief executive Russell Seal, was a change on a par with Browne's acceptance that he would have to live with the dollars 18 barrel. But it came three years later, and at a time when the group as a whole was running into the mire.
Seal started to prune last April, and was in the middle of his second wave of cuts when he was called to Simon's office.
Horton had been finding himself increasingly out of step with his colleagues in a number of areas. Most obvious was the oil price. He clung to the view that crude oil would push up towards dollars 25 (even though it had been drifting steadily downwards since the brief excitement of the Gulf crisis). Sanderson disagreed with him publicly, and told him in mid-1991 that he was heading for a fall if he refused to change his mind. John Browne at BPX had been assuming an dollars 18 oil price for three years which, he admits 'caused some confusion in the market'.
Horton was also publicly declaring his intention to hold the dividend - a stance many observers thought foolhardy. But when he was ousted, on 25 June, there was one over-riding issue. 'It was not do with the dividend, capital expenditure or strategy,' a top manager says. 'It was entirely to do with style.'
'It had become a very tense organisation,' another manager says. The atmosphere at board meetings had changed subtly as it had become clear that things were going very wrong indeed.
By mid-summer last year, it was obvious that BP's results for the half-year were going to be disastrous. This was a bad time for the whole industry: for the first time in memory, oil prices, refining margins and chemical margins were all depressed at the same time. The previous recessions, 1974 and 1981, had both been caused by high oil prices - upstream's earnings had boomed as the others had slumped; when the oil price crashed in 1986, the economic boom buoyed up the downstream.
But BP was hit harder than other companies. It was overburdened with debt from its spending spree - above pounds 8bn and rising - and cash was gushing out of the company.
When the first-half results were published, they showed a net outflow of pounds 763m. 'We were shocked by our performance,' Ahearne says. 'We said we had to get ourselves into a position where we could survive.'
It was lucky for the non-execs that the company's No 2, David Simon, was a polar opposite of Horton - and therefore a natural to repair the damage he had caused. To emphasise the change even further, he was joined by a part- time chairman, Lord Ashburton.
It looked at the time as though Simon was taking on a poisoned chalice. It could be argued, though, that in reality he was offered success on a plate. All he had to do was to make a few sensible and obvious moves and to be as unlike Bob Horton as possible. All the changes that were already under way would then feed through into rapid recovery.
And that is what happened. Simon, a calm and studious man, first announced that he would be staying in his office, that the Gulfstream was up for sale and that the directors' dining-room would be closed. Then he announced a strategy called PRT. This was not the Petroleum Revenue Tax (of which more later) but 'Profit, Reputation, Teamwork'. He explained that the first task was to bring back profit, which would then restore BP's reputation, and that the main driver for this would be teamwork. It is ironic that his emphasis should be teamwork, for teams were supposed to flourish under Horton's Project 1990. Everyone knew, though, that Horton was no creator of teams, and Simon was. 'He makes everybody feel a bit more motivated and valued,' says Sanderson. When Horton walked into a BP building without a pass and was stopped by a guard, he exploded with rage; when Simon did it, he apologised.
The sensible and obvious moves were not necessarily easy. Simon had said the previous autumn that the dividend would not be cut 'except for force majeure'; now he had to swallow his words. The decision to make deep and brutal cuts in the workforce - 11,500 announced in August, another 9,000 in December - also needed courage.
As a former head of finance, he knew he had to give investors a promise if the share price was not to continue its slide. The first stage was to deliver the P of PRT, and to do this he conjured up another tag, 1-2-5. Debt would be reduced by dollars 1bn a year, net profit would reach dollars 2bn a year by 1995, and capital expenditure would be cut from dollars 6.5bn to dollars 5bn a year. There are still divisions among those within BP about how hard it was to meet these targets. Steve Ahearne insists that the cost-cutting goal was tough. Others disagree. 'He hit exactly the right target,' one senior manager says. '1-2-5 was demonstrably attainable.' Certainly, many of the redundancies would have taken place anyway, because the downstream and chemicals division were already contracting.
'It was difficult to put more pressure on us,' says Sanderson. For Seal, the target meant he had to accelerate cuts that were already under way. 'There was an extra push,' he says. BP Oil accounted for a big chunk of the reduction: the workforce was reduced by 7,000 in 1992, and pounds 1bn of assets were sold off.
One of the reasons costs could be cut rapidly was, ironically, because of the Project 1990 shake-up. Much of BP was now organised in teams whose members had been taught to make their own decisions. Now they were told to reduce overheads by thinking of better ways of doing their jobs. 'It has been impressive the way they have grasped the nettle,' Ahearne says. 'There have even been cases of people voting themselves out of a job.' He cites insurance, where BP's specialists decided the group had many policies it did not need.
The group that was affected least was BPX, because it was already so thoroughly shaken. By early 1992, John Browne says, 'we'd done a good deal of ground clearing'. The target of increasing the margin per barrel had been achieved in two years instead of three, the workforce had been halved to 7,000, and frontier exploration was more successful than he had hoped, with big finds in Colombia and the Mexican Gulf.
'We said it would be five years before it showed any fruit,' he says. 'We've been at it for four years, and it has already yielded some.'
Browne did agree to cut his capital spending from dollars 3.5bn to dollars 3bn a year, a level he claims he is quite happy with, but was absolved from further staff cuts. On 6 August, he wrote a reassuring letter to his employees, pointing out that every other person had already left, and that three years of rationalisation was now over.
At first many in the City believed the 1-2-5 target was unattainable - especially the promise to reduce debt. 'A lot of people were completely wrongfooted by the comeback,' says Lars Reierson, oil analyst for Morgan Stanley in London. 'No one thought they could sell dollars 2bn of assets. They're doing it on a pretty regular basis.' Almost dollars 1bn was raised in the first quarter of this year alone.
Steve Ahearne says this is simply because BP has so much experience of buying and selling businesses that it is very good at it.
He agrees with analysts who say profits should be running at an annual rate of dollars 2bn some time during 1994. But he also says he is agreeably surprised by the speed of the turnround. 'We have begun to deliver usefully, earlier than we had banked on.'
No one would claim that BP is a happy company, but it is much happier than it was last summer. 'It is difficult to sustain morale when you are downsizing at this rate,' says Sanderson.
'I don't think it's wonderful now, but it's not too bad,' he adds.
Given that BP's recovery has come so quickly, would it have happened under Horton? Most managers agree that he could have made the same changes as Simon, but that he would not have done. 'His option was to make a great mea culpa,' one senior manager says. 'But he wouldn't have seen the need to.'
The creeping optimism has been helped by a series of announcements about oil finds. BPX announced that the Cusiana field in Colombia, in which it has a 19 per cent stake, had at least 2 billion barrels. In March it said it had made an exciting discovery west of Shetlands - in water too turbulent to explore before. Some analyst believe it may contain a billion barrels.
Also in March, BP received a late Christmas present, when the Chancellor abolished the Petroleum Revenue Tax in the Budget. This made new exploration more expensive, because costs could not now be set off against PRT, but made production and expansion of existing wells much more profitable.
There was an outcry from the smaller exploring companies, but Browne was delighted, beause he reckoned it would add up to pounds 150m a year to BP's profits. 'We were producing 20 per cent of the North Sea's output and paying 70 per cent of the taxes,' he says. 'It was an odd balance, you must admit.' He denies vigorously either that BP pushed the Government into making the change, or that it signals the group's departure from British waters, even though it will increase the cost of exploring west of Shetland. 'We are not turning our back on it,' he says. 'We will be producing half a million barrels a day in the North Sea well into the next century.'
If Simon's achievement is judged by the share price, he is indeed a wizard. The way it took off surprised London analysts, for almost all the heavy buying has been by American investors, who now own a quarter of the company. The reason is that while UK funds were still using traditional valuation methods, looking at a mix of yield comparisons and oil price prospects, the Americans were looking purely at BP's cash performance. On US calculators at least, its shares looked cheap.
Lars Reierson said he could not make any sense of the surge, using British principles, until the abolition of the PRT. Most analysts now believe shares will continue to rise as UK investors start to buy.
No one doubts that it is back on an even keel; the question is, will it be able to start moving again? Gearing is almost 100 per cent, against 40 to 50 per cent for most of the other big oil companies, and one experienced analyst believes this will hamper, if not cripple, its longer- term efforts. John Toalster, of Societe Generale Strauss Turnbull, believes it will find it difficult to spread into Asia, as it must, and is not convinced that BP's finds have been as impressive as all that.
'Nineteen per cent of Cusiana is really not particularly material,' he says. 'To have an impact, they need to have a big slice of a field in a low-cost area.' He feels that it will be difficult for BP to get this. 'Within their debt restraints, they are doing a superb job - but they are huge restraints.'
Steve Ahearne agrees that the 1-2-5 plan is only a first step. 'It gets us to a position where we can sustain the dividend level without divestment, but I would be horrified if I were to find people saying that the rest is easy. We've turned the corner, but the new road has quite a few miles on it.'-
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