Hayward to slash jobs and costs in shake-up at BP

Tony Hayward, BP's new chief executive, has vowed to cut jobs and slash bureaucracy at the oil giant in a radical shake-up that will further tarnish the reputation of his predecessor Lord Browne.

Mr Hayward issued a blunt message to BP's 100,000-strong worldwide workforce yesterday, warning that the company's performance had "materially lagged our peer group in the past three years". He said while some of the underperformance could be blamed on refining and production problems, a significant chunk of the shortfall was a result of "our unacceptably high overhead costs".

BP will embark on a review of staffing that could take up to two years to complete, but the oil company warned yesterday that "redundancies would be inevitable". Mr Hayward refused to speculate on how many staff would lose their jobs, but since taking over from Lord Browne in May, he has become increasingly frustrated at the layers of middle management built into BP, especially since he believes many jobs are duplicated across different business units.

In some areas, Mr Hayward's review has identified up to 11 levels of decision making between senior management and frontline staff. BP believes it can reduce this to seven in many cases.

"Our problem is not about the strategy itself but our execution of it," Mr Hayward told staff. "BP's performance has materially lagged our peer group in the last three years. It has been poor because we are not consistent and our organisation is too complex."

Mr Hayward's first proposal is to streamline BP into just two business units, Exploration & Production and Refining & Marketing. The corporate infrastructure of the businesses will then be "rigorously reviewed". Mr Hayward added: "The changes we are setting out today will reduce our unacceptably high overhead costs."

The chief executive's damning assessment of the way BP has been run is, in effect, an indictment of the management regime of Lord Browne, who was forced to step down from the company ahead of schedule this year when it emerged he had perjured himself during legal hearings aimed at preventing a Sunday newspaper publishing revelations about his sexuality. Lord Browne's spectacular fall from grace initially prompted sympathy in many quarters, but BP's operational performance during the final years of his leadership has been increasingly criticised.

The company suffered a series of major safety failures, including an explosion at its Texas City refinery, which killed 15 workers. The company's revenues this year have been dented by production problems that have prevented its biggest refineries in the US, Whiting and Texas City, from operating at capacity during a period of record margins for the oil business.

In addition, the company has faced delays in bringing new production on-stream at Atlantis and Thunder Horse, its flagship Gulf of Mexico projects. The company has only managed to get a long-awaited facility in Angola up and running in recent weeks.

While the company published no details of its assessment of the scale of its underperformance yesterday, the combination of excess costs and production failures has put it some way behind rivals on measures such as return on capital employed.

The picture on redundancies at BP will be complicated by the fact that Mr Hayward has also vowed to continue recruiting frontline staff with technical and engineering works. He believes a major factor in BP's production problems has been its over-reliance on external contractors.

The reorganisation is the biggest shake-up at BP since the early 1990s, when thousands of jobs were lost during a major cost-cutting exercise implemented by Lord Simon, then chief executive. It comes two weeks before the company is due to announce third-quarter results that are expected to be disappointing.

Analysts at Citigroup warned on Tuesday that they were cutting forecasts for BP's full-year profit by nearly 5 per cent. The bank said the group's third-quarter profits could fall below £2bn, a fall of almost one fifth compared to a year ago.

In the longer term, however, many analysts believe the outlook for BP is much more healthy than its recent problems suggest, with production and refining capacity set to improve markedly in the fourth quarter of the year. "We know they have had an awful 18 months but I think there is a real buying opportunity at the current price, said Jason Kenny, an oil specialist at ING.