The Next Competitive Edge

Published December 19th, 2000 - 02:00 GMT

It is a great pleasure to be here. I never had the privilege of knowing Robert Maxon, but I know many people who did, and I know his reputation, and that's why it is a real honor for me to be asked to give this lecture tonight.  

 

The pace of change in our industry has been so rapid in the last few years that it is good to have the chance to step back for a moment to assess what is happening and think about what is really important.  

 

We are in the middle of a revolution - a world turned upside down. It is a revolution on five or six different fronts with change occurring simultaneously and beyond all prediction.  

 

Let's consider the different dimensions on which change is occurring. Perhaps the most obvious is the recent restructuring of the industry, which historians might trace back to the first step which Mobil and BP took three years ago, when we combined our downstream operations in Europe.  

 

It's great to see so many old friends from Mobil here. They deserve a great deal of the credit for taking that first step but I think it's fair to say that none of us imagined then just what we were starting.  

 

After 70 years with an almost unchanged corporate structure among the major companies, the last two years have seen four major transactions here and in Europe, and a host of smaller link-ups. Companies have grown in scope and scale but they haven't done that to achieve monopoly or control the market.  

 

Oil prices are still largely determined by the decisions of OPEC. When all these transactions are completed the four largest companies together will account for no more than 12 percent of world oil supply every day and 13 percent of gas supplies. These transactions are born of competition and will themselves make the industry more competitive.  

 

The map of the industry has already been redrawn but it is impossible to say if the process is yet complete. It is important to stress that these mergers and acquisitions don't constitute an end-game.  

 

The industry is not shrinking. Demand for oil is 12 percent higher than it was a decade ago. Gas demand is 30 percent higher and with nuclear developments again in question it seems certain that hydrocarbons will meet the bulk of the world's new energy demand for the foreseeable future. In the context of growth, the corporate map of the industry is changing and so is the geography.  

 

The incremental demand for energy is predominantly in Asia, driven by population growth and rising living standards. That momentum is now being renewed by economic recovery. Our best estimate is that total energy demand in Asia this year will be more than 150 percent above its level in 1975.  

 

We publish a statistical review of the world energy scene every year. That review always includes a map with arrows indicating the direction and volume of trade.  

 

Twenty-five, even ten years ago, the largest arrows always pointed from the south to the north - from the energy producers to Europe and the United States. Now there are comparable arrows pointing to the south and the east, and within the growing total the balance of fuels is changing as well.  

 

The demand for natural gas has doubled since the early 1970s and is set to double again by 2020. That growth is driven by the dramatic improvements in turbine efficiency which are making gas the natural choice as the source of power generation. Growth is also being driven by the fact that gas is more environmentally friendly.  

 

For equivalent electricity output, gas generates less than half the emissions produced by coal. You may have seen that last month the Chinese authorities were celebrating the 50th anniversary of their revolution.  

 

As part of those celebrations they adjusted the use of some of the coal-fired industrial plants around Beijing, so that in a city which is often covered by a blanket of smog people could see what they were celebrating.  

 

People say that the Chinese aren't interested in the environment. I don't agree. I think they are, and that is one of the main reasons why they are now looking very seriously at switching from coal to gas in Beijing, Shanghai, Fujian and elsewhere. What's happening there is just one example of a much bigger challenge for all of us - a revolution of expectations.  

 

People want energy because there can't be any development or progress without it. Energy means mobility and growth. It means freedom, liberty and the chance to improve living standards.  

 

But people want a clean environment as well, and at the moment consumers and government seem to be living in denial, refusing to accept their own responsibility for the increasing costs to the quality of life which are imposed when we all demand more, and deflecting that responsibility on to the oil and gas sector with increasing criticism and punitive measures.  

 

There are no simple and easy answers to the problems of global warming, traffic congestion, air quality and waste disposal which are all becoming more important every day.  

 

No one wants to limit growth, and therefore there's a retreat into a culture of blame which attacks oil companies but does nothing to improve the reality of the situation.  

 

Oil companies can't solve these issues on their own but we can make a contribution and we can help as part of a common effort. That effort must begin with an acceptance that there appears to be a trade-off between improving living standards and pollution, that such a trade-off is unacceptable, and that the challenge for all of us - consumers, governments and companies together - is to find answers which transcend that trade-off. I believe we can.  

 

Let's take the issue of climate change. I disagree with those in the industry who say the only answer on issues such as climate change and global warming is to question the science, to deny responsibility and try to ignore the reality.  

Of course, the science is provisional.  

 

Of course, there are many things we do not know. But it is an undeniable truth that people link energy to pollution, that they fear for the environmental future for themselves and their children, and that they believe companies should raise their heads and their aspirations.  

 

We did some polling. We found that, when asked whether they associate energy with progress or with pollution, almost 40 percent say the first association is with pollution. But it is worth noting that 80 percent believe business has the ability - and the responsibility - to find answers.  

 

People believe that is true for all business, but they think it is particularly true for big companies. That seems to be one of the reasons why they support the mergers and acquisitions which are taking place.  

 

They believe bigger companies are better able to meet their needs, and we can't afford to disappoint them.  

 

I believe, if as a society, we can get away from the blame and denial and debate the issue in a spirit of radical openness, we will find the answers to challenges such as global warming.  

 

Through simple precautionary action through the spread of best practice and through advances in technology, because that is the other revolution which is taking place.  

 

Almost every technical frontier which existed when I joined the industry 30 years ago this autumn as a young engineer has been broken. I joined BP in Alaska, working on the development of Prudhoe Bay, the largest field outside OPEC control. In those days we thought we could only produce around a third of the oil in Prudhoe. We thought production would be finished by 1990.  

 

In reality, Prudhoe is still producing 580,000 barrels a day, and it will go on producing for many years yet. The recovery factor has gone up to 54 percent today and it will go up even further.  

 

We can break another frontier in Alaska. We now have within our grasp the ability to develop Alaska's gas. There are some 26 trillion cubic feet of gas in place but so far development has been uneconomic.  

 

However, there's a revolution in that technology too, and you will soon see some forward steps which will allow us to write a new chapter in the history of the industry, and in the history of Alaska, with the establishment of a project to take the existing technology which converts methane into liquids at room temperature and find ways of making that an economic proposition.  

 

The technical revolution is happening inside the industry and it is happening outside as well. E-commerce has moved from being a fringe activity to real business, and it is going to change many of the established ways of working and the relationships within and around the industry.  

 

That activity is still in its infancy but for a company such as BP, which lives by buying and selling not just products but also our services and skills, it has the potential to transform the whole competitive landscape.  

 

The first steps are in the area of procurement, where e-commerce gives us the ability to see prices transparently, to unbundled services, to expand the number of players involved and to reduce transaction costs.  

 

By the end of this year, half of our individual items of procurement will be handled electronically. That is some $3 billion- worth of business.  

 

But that's just the start and, of course, the real opportunity. The threat of e-commerce comes when the whole nature of the business you're doing starts to change. Then it really will be a revolutionary force.  

 

So the structures, the expectations, the relationships and the technology to which we've grown accustomed within the industry are all in flux, and that is compounded by political, economic and social change in many of the areas where we work. A world turned upside down, and still moving.  

 

For a company in the middle of that revolution, what is the key factor that will determine competitive success?  

Is it the right set of assets - a carefully balanced portfolio which establishes the right mixture of risk and return?  

Is it technology - the ability to access and apply the latest advances from a host of different sources?  

 

Is it the right balance sheet - disciplined by performance management and flexible enough to allow rapid and creative responses to changing opportunities?  

 

Is it the right standards of care and business ethics which allow you to operate in difficult and sensitive areas under the fiercest scrutiny?  

 

Of course, it's all those things, but behind them lies the real source of competitive excellence - people. Not just a few leaders but hundreds and thousands of people at all levels.  

 

That isn't a new discovery. It isn't something we've just recognized. The industry has always depended on the quality of its people. I think the context has changed. We need people with different sets of skills, all of exceptional quality, and we face some real competitive challenges in attracting those people.  

 

The industry as a whole has been very fortunate in the quality and range of the people it has attracted in the past. We've had some obvious advantages in doing that.  

 

We've provided great, and in many cases unique, jobs for scientists and engineers allowing them to apply their skills and knowledge on the edge of technical progress.  

 

We've employed more scientists here in the United States, for instance, than in any other sector of the economy except information technology.  

 

We've been one of the few industries able to offer really international careers, and we've been successful enough to offer people high rewards for high achievement.  

 

But the context has changed, partly because of all the revolutionary factors I mentioned:  

The geography of our activity is changing, and we have to respond by embracing a new spirit of diversity, both here in our home base and internationally.  

 

Technology is changing the nature of business and so we have to attract people of exceptional skill in the conception and execution of activities such as electronic commerce - people who can adapt to a complete change in the way their job is done as technical advance changes processes and products.  

 

Society's expectations of us are growing, and we need people who share those expectations and are ready and willing to work as part of civil society - people who understand and can live within the complex set of relationships we have with local communities, non-governmental organizations and democratic institutions.  

 

We need people who can work in areas where the rule of law is incomplete and can live with both the imperative of delivery in a performance-driven culture and with the ambiguity of real life.  

 

Above all, we need people who can put their own contribution in full perspective, who can see the detail and also the whole, who can take their skill and add to that skill, at the very least, an understanding of the skills of others. 

 

So this is another aspect of the revolution we're going through - a revolution in the breadth of the human resource base we need. Let me stress again that this is not about half a dozen at the top of the company. Let me give you a real example.  

 

We have a great refinery in Scotland which I visited two weeks ago. It is one of the world's finest integrated sites, linking North Sea production of oil and gas not just to a refinery but to one of Europe's biggest chemicals complexes. 

 

Like those in many other refineries and chemicals complexes, the people employed at Grangemouth are skilled individuals. Grangemouth works and makes money because it has a very sophisticated integrated control system.  

 

The people who run it are already very highly skilled and the skill level required is going up all the time.  

 

Within a very few years, the majority of people on the professional staff at that complex will be trained specialists. A majority could well have college degrees or the equivalent training.  

 

Then let me take another example. We work in South Africa, where we supply gasoline and other products. We're the largest supplier to the townships, to Soweto and the other areas around the major cities.  

 

Our stations in those areas are not just commercial properties, but are centers of activity for the whole of the local community. There, our people need all the technical skills you would expect, but they also have to be able to work as part of a complex society going through dramatic changes.  

 

Our aspiration is to be part of the renewal of South Africa. To do that our people there need a breadth of understanding and a degree of empathy with people outside the business which is quite exceptional.  

 

I could quote a dozen similar examples. I'm sure other companies could do the same. The question is whether we are equipped to meet the challenge. There are certainly problems to overcome.  

 

I'm not sure that a new graduate - a graduate at the top of the class of 2000 - would automatically think of applying to the oil industry for a job:  

Aren't we just huge bureaucracies made larger by mergers and takeovers?  

Aren't we closed to women and minorities?  

Aren't we dirty - a source of pollution rather than of progress?  

Aren't we crippled by downsizing - with well over 100,000 jobs lost in the oil sector in the USA alone since 1990?  

Do we really offer a glittering prize to someone who thinks they can make a fortune by the time they're 25 or 30 if they just put '.com' behind their name? 

You've probably seen the television commercials for a company called Monster.com.  

 

Against a background of open fields a child is saying in a monotonous voice: "When I grow up I want to file all day. I want to climb my way up to middle management, to be replaced on a whim. I want to be under-appreciated. I want to be forced into early retirement."  

 

That's a very powerful advertisement because it strikes to the heart of the challenge. Those impressions may be wrong but they certainly color people's view of the industry. We want and need the best but perhaps the desire is not reciprocated. We have to change that and I think we can.  

 

A great company is created and sustained, first and foremost, by great people, working together to make things better. Assets, markets, resources and finance all come second, because the value you create from all of them depends on the quality of the people you have.  

 

You just need to look at the difference between the market value and the book value of a company and ask where that difference comes from.  

 

That difference is often several times the book value and it must come from the intellectual capital of the company, which is all about people. It is people who make a company distinctive.  

 

People like Peter Kent, who persisted against the odds and against the early evidence in believing that there was oil in Alaska and that we should carrying on drilling until it was found.  

 

People like Fred Phaswana, now the head of BP in South Africa who confronted and won through against all the odds in a country where the law said we were not formally allowed to appoint a black manager.  

 

People like Robert Maxon.  

To keep attracting people of that quality, we have to remember that people like to work, and they will choose to work where they can achieve the greatest fulfillment and enjoyment.  

 

Great people will come to a company and stay there if they have great jobs. To me a great job is one which allows the individual some measure of choice and the space to deliver and to get something done. A great job is one which exists within both formal and informal structures, and within a working environment which is harmonious in all its relationships.  

 

That's what we have to create. We can't afford to treat people as the marginal factor of production, with demands on their time and energy which leave no space for families or friends or for proper involvement in other parts of society.  

 

I think reality dawns with the recognition that there are two different dynamics in play, two imperatives which are not always aligned - the needs of the company as an organization and the needs of the individual as a human being, as a mother or father and as a citizen.  

 

I said earlier that the job of companies was to transcend trade-offs on the environment. I think it's also our job to transcend this trade-off, to question every action and every request.  

 

Why are we doing it this way? Why are we imposing answers or boundaries?  

Is there a better way of working which gives people choices and allows them to find ways of delivering at the lowest personal cost? It's about using technology and it's also about good management, and to reinforce that we have to ensure that the management of people is taken seriously.  

 

For us it means integrating the management of people into the way we assess the performance of each and every leader, making sure managers at all levels know what is expected of them and they are working in a spirit of harmony, because that is what creates an environment where work is a pleasure. 

 

Of course that can't be done by assertion alone. We have to use the best technology to make sure the aspirations are being delivered. That might sound mechanistic but we have to go beyond words to measured delivery if we're going to achieve a fundamental change.  

 

As we now create a new company, a step change in the quality of our relationship with the people who make up that company is one of our greatest performance challenges and one we are absolutely determined to meet.  

 

The issue of how we manage people is one side of the coin. The other side is about what people do. Some people work only for money, and that will always be the case.  

 

Of course people want to earn a competitive salary, and want to feel they share in the success of the companies they work for. But for the best people in all fields, and certainly in business, we are talking about something more.  

 

People want to make progress as individuals, and I think they want to feel they are contributing to the progress of society more generally. Great jobs should give them the sense they are doing both.  

 

Individual progress comes back to the individual care which is part of management, helping each person to define and fulfill their next aspiration whatever it might be.  

 

It's about opening horizons, creating opportunities and giving people the disciplined support and encouragement, the sense of boundaries and space which can allow them to turn aspirations into reality within a climate of harmony and common endeavor.  

 

The progress of society is a wider issue, but I believe it is at the heart of the aspirations of many of our current employees and of the people we now want to recruit as the new generation, the class of 2000 and beyond.  

 

The best illustration of the reality of those aspirations comes from the issue of climate change which I mentioned earlier.  

 

When we first expressed our support for precautionary action and accepted that, on the evidence, there was a problem, we did so in part because a large section of our own staff were telling us that we couldn't go on living in denial.  

 

Their families, and their children in particular, believed we were part of the problem, and staff found it intolerable that we seemed to be on the wrong side of a fundamental issue. I have never had so many personal e-mails in support of any action as I did after making that announcement.  

 

A few weeks later we asked all our teams for their direct support so that we could identify ways of reducing our own emissions. I expected a few constructive responses.  

 

I got hundreds and hundreds of pages of e-mails from people all around the world with detailed practical suggestions. They helped us set a target to reduce our own emissions by at least 10 percent by 2010.  

 

They've put us in a position where we are now making great progress towards that target. But most important of all they demonstrated that the people who care are the people who will deliver.  

 

The source of creativity, commitment and progress is the people who believe that they and the company they work for are doing something worthwhile. It can't be achieved cynically, or through manipulation. It can't be achieved by pretending to believe in something or by treating these issues as matters of public relations.  

 

If we can demonstrate that the work of this industry - what we do, and how we do it, how we are organized and how we deal with people - is delivering progress individually and for society as a whole, then we have the chance to continue to attract people of the very finest quality - people who want a career not just a job; people who want a vocation, not just a means of earning money.  

 

The energy industry is fundamental to the process of development. Some of the areas of the world which offer the greatest promise for us are extremely poor and in desperate need of a sustained improvement in living standards. Our industry is unique in having the opportunity and the ability to facilitate massive progress in the social and economic conditions of those countries.  

 

Great people with a desire to create a better world would be hard pressed to find another place than our industry in which to apply their skills to deliver real progress.  

 

In these revolutionary times the only certainty is that the organizations which thrive will be those that attract, retain and inspire the brightest and best. We need those people to accomplish our mission. We can offer them a challenging and rewarding career aligned with their own need to do something worthwhile, something of which they can be genuinely proud.  

 

As one of this country's greatest leaders said: "The most revolutionary and irresistible force on earth is a group of individuals united in the conviction that what they are doing is right; a group of individuals who willingly put their unique talents to the service of a common cause."  

Sir John Browne, Chief Executive Officer, BP Amoco plc, talks at George Washington University 

20th October, 1999 

source: BP-AMOCO. 

© 2000 Mena Report (www.menareport.com)

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