What BP Can Learn from Shell and Groenink

America is the champion of free market capitalism. But alas, when you cross the line … The energy giant that is fighting the oil spill in the Gulf of Mexico, British Petroleum (BP), can learn a lot from previous crises faced by Shell and ABN Amro Bank.

At last, BP has had a small victory, after weeks of fruitless attempts to stop the disastrous oil spill in the Gulf of Mexico. A large hat seems to be absorbing a large part of the leaking oil.

It will probably be several weeks before the leak, which began April 20 after a fatal accident on the Deepwater Horizon platform, can be closed. The real test for BP’s Chief Executive Tony Hayward is still to come.

The biggest risk to the survival of the British energy giant lies not in the costs of cleaning up the spill or the handling of claims. Even if BP loses as much as $37 billion USD — a relatively high estimate from the investment bank Credit Suisse — and that is spread over a number of years, there is no problem. Certainly, a multinational company that recorded $14 billion USD in profits in 2009 and a balance of $236 billion USD has enough assets to pay the bill for its drilling accident.

U.S. Veto

Much more dangerous for BP are U.S. government regulations; for example, in the form of restrictions on oil and gas drilling in U.S. waters.

Whether that will happen is uncertain, but there is no doubt that the U.S. government can act harshly against companies and executives who play games with the rules and regulations. American icons such as Enron have encountered this in the past. But the Dutch companies Shell and ABN Amro also know all too well that you had better not play with the U.S. authorities.

The key issue for BP is the extent to which the disaster at Deepwater Horizon was caused by technical and human failures of the British company and its subcontractors. If it appears that BP operated with relatively slack safety precautions in comparison to other oil companies, the group can expect legal action against individual managers and sanctions that affect the whole company.

The most devastating result would be a restriction of mining operations in the U.S. that would affect the earning capacity of BP. A quarter of BP’s current production of around four million barrels of oil and gas per day originates in the U.S. Approximately 15 percent of BP’s oil comes from the Gulf of Mexico.

Lessons from Shell and ABN Amro

If BP is strategically muzzled, extreme scenarios like a break-up or a takeover by Exxon, Shell, or Chinese energy companies could come into focus. How can this be prevented? Shell’s crisis with exaggerated oil and gas supplies in 2004 and ABN Amro’s clash with justice in the United States on payments to Iran and Libya offer valuable clues.

The actions of Shell’s former CEO, Jeroen van der Veer, in the reserve crisis and ABN Amro’s Rijkman Groenink in the so called Dubai affair, made two things clear. If you are under investigation by the Department of Justice or the American stock market watchdog SEC, then: 1) fully cooperate; and 2) sacrifice senior managers without mercy.

Cooperate

When, in early 2004, it was revealed that Shell had presented rates that were too high for so-called proven oil and gas reserves according to the standards of the SEC U.S. regulation agency, van der Veer was given the ungrateful task of becoming the new chief executive to put things right.

One of the first internal dictates that van der Veer promulgated to Shell managers concerned attitudes in response to information requests from the SEC. Comply, comply, comply. Cooperate fully; hold nothing back. This cooperative approach ultimately resulted in a relatively mild penalty of $120,000,000.

Another crucial aspect of the handling of the reserves crisis was that Shell’s board did not hesitate to dismiss CEO Phil Watts and his Dutch right-hand, Walter van de Vijver, nor to put van der Veer in charge once it was revealed that Watts bore direct responsibility for carelessness with the stock figures.

Shell resolutely opted for continuity of the company and did not protect individual managers.

Tackle the Top Leaders

ABN Amro Bank ran things differently in 2004 and 2005, when the bank was addressed by the American Department of Justice because of transfers from one branch of ABN Amro in Dubai to customers in Iran and Libya. Information was withheld from the ABN Amro branch in New York.

According the U.S. authorities, the management of ABN Amro did not take the matter seriously enough, eventually resulting in a crippling ban on ABN Amro so it could no longer make new acquisitions in the U.S. The board of ABN Amro cut Groenink’s and financial director Tom de Swaan’s bonuses in 2005, but left the executives in their seats. As a result, ABN Amro’s ambition to become a top global bank was derailed.

If BP wants to survive, a humble attitude toward U.S. investigating authorities is a prerequisite. For now, it is tactically useful to let Chief Executive Tony Hayward meet the wave of negative publicity. And certainly as long as the fact findings from the drilling disaster in the Gulf of Mexico are not public.

If it turns out to be a question of mismanagement, then there is only one way out for BP’s Swedish president-commissioner, Carl-Henric Svanberg: clean up quickly.