10 July 2009 • 7:00 am

Beyond Petroleum? No, BP is Back to Petroleum

In retrospect, the news this week that British Petroleum is backing away from its highly-visible efforts to lead development of alternative energy sources is hardly surprising. BP is shutting down its separate office for the Alternative Energy division, substantially cutting its investment, and its chief executive has taken early retirement. In his in-depth analysis, Financial Times reporter Ed Crooks identifies some of the key factors that led to the apparent course correction.

First, a leadership change. The Beyond Petroleum campaign was the brainchild of Lord Browne, BP’s chief executive until about two years ago. Under Lord Browne, says Crooks, “BP positioned itself as a pioneer of the revolution expected to change the energy business. It was a standard-bearer for hopes that companies that dominated the old world of energy would also lead the transition to the new one.” Under Browne’s successor, Tony Hayward, BP is now pinning its hopes for the future more firmly than before on oil and gas.

Second, the scale of the commitment. Despite the visibility and success of the Beyond Petroleum advertising campaign, alternative energy provides less than 1{7d517eca6fa2b1f37358396ef304f8a78637162298d2da9398058e81473e3d6a} of BP’s revenues and is not yet profitable. Only about 5{7d517eca6fa2b1f37358396ef304f8a78637162298d2da9398058e81473e3d6a} of BP’s capital spending this year has been devoted to alternative energy. So our impression of BP had been moved much further along than the company itself.

BP's rebranding was more successful than its strategy. From the BP Alternative Energy web site.

BP's rebranding was more successful than its strategy. From the BP Alternative Energy web site.

Third, culture. According to Crooks, critics argued that the Beyond Petroleum campaign sent a message to the majority of the company’s workforce that theirs was an outdated part of the business. It also set BP up for attacks from green campaigners, who could never be persuaded that the company had done enough to live up to its promise. But in May, Tony Hayward described the company when he took over in 2007 as having “too many people that were working to save the world.” Ouch!

Forth, profits. During much of the decade, the oil and gas industry had been making record profits, and last summer’s spike in world oil prices led to historic windfall profits. With lavish profits, BP could afford to be seen as the vanguard of a new era, but with the falling prices and demand arising from the global economic crisis, BP has focused on cutting costs to remain competitive with such rivals as Royal Dutch Shell and ExxonMobil.

There is much to parse in trying to extract a succinct take-away from this. Big companies are often slow to react to or anticipate changes in their environments, but Lord Browne was exercising uniquely bold leadership with his vision of changing BP from a petroleum company to an energy company. Such a transition was certainly likely to outlast his tenure – so did he and BP insufficiently bolster its strategy to survive a leadership change, or was the company simply under-invested and under-committed to the evolution that Browne envisioned? If so, skeptics would argue that it never should have pursued the strategy in the first place.

Crooks points out that alternative energy isn’t going away, but that BP (or any oil company) won’t be leading the transition. This opens the door to newer, more nimble competitors. Just as IBM failed to realize the potential of the personal computer, established energy companies may be superseded by new ones able to exploit the new forms of energy.

Is this the generic fate of large companies? Are they so encumbered by shareholder expectations and cultural resistance to change that their leadership must be ceded to new generations of companies (e.g. IBM, then Microsoft, now Google). Or will the science and practice of strategic management better provide future visionaries like Lord Browne to drive durable change? In this era of ‘Yes we can’ are company leaders still constrained by ‘No you can’t?’ Please share your thoughts below. 

(disclosure: BP was a client of mine from 2003 to 2005)

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