BP & the Carbon Game

BP & the Carbon Game

Its recent difficulties notwithstanding, many people see BP as an example of a company trying to do the right thing on issues of public interest, particularly in connection with climate change.

Our intention in this case study is to show the level of sophistication that can be applied by companies in issues management, to go beyond reacting to events and rather taking an issue, making it your own and delivering measurable commercial advantage.

In the mid 1990′s, it was becoming increasingly clear that we were all facing a real problem in the shape of climate change. (This study focuses on the issue in the 1990′s – for a current view, click here, but read this first!)

Although no-one was suggesting that the hydrocarbon economy could be altered immediately, there was pressure on the oil majors by association with the issue.

The first instinct of the industry was a common one – denial. The major companies got together and the Global Climate Coalition was born. Notwithstanding its name (a red rag to a bull for pressure groups who are more likely to attack an obfuscating or unduly positive name in order to attack dissimulation), its mission was clear to anyone who examined it. To fund science questioning the emerging orthodoxy on climate change. Climate change was not happening; it was not happening as quickly as some stated; its potential consequences were being overstated; or the contribution of man-made carbon emissions was overstated.

In early 1997, BP pulled out of the Global Climate Coalition. It was the only company to do so, and it risked the ire of all of its competitors. This is an industry where competitor cooperation is key. Yet BP did not do this quietly – it shouted it from the rooftops. Its recently installed CEO, John (now Lord) Browne, announced BP’s change in position standing on very public platforms and the company communicated widely to the media, politicians and pressure groups. This was just before the intergovernmental meeting in Kyoto, which if it agreed carbon restrictions, would effectively set limits on hydrocarbon growth. If seen as a ‘PR move’, this was dangerous since short-term PR gains would be more than offset by later action to curb the oil industry’s licence to operate. And at a time when many corporate initiatives were being dismissed as ‘greenwash’, BP’s words would have to be backed up by meaningful, and expensive, action (which they were).

So what was BP’s thinking? Was this opportunistic PR, seeing the future and acting at five to midnight? On the contrary, we argue this was one of the most sophisticated pieces of issues management undertaken to date.

As with any corporate decision, there is a mix of motivations for action. We examine below the possible motivations and benefits that accrued to BP out of its action.

1) Doing the right thing.

Browne and other senior figures in BP believed strongly in what they were saying: the balance of accumulating evidence on climate change had reached a point which they believed required precautionary action, particularly where that action was intrinsically desirable in any case.

2) ‘A participant in the debate, not a victim of it’.

This is a key element of issues management. As a corporation, whatever one’s belief in the validity or otherwise of a particular issue, there is a point in the emergence of an issue after which it will only move one way (what many would now term ‘the tipping point’.) At this point, the battle is no longer a bipolar battle of principles, but rather a battle for range of outcomes at one pole. The position on climate change in early 1997 had reached this point – action on climate change would be taken. For the oil industry to continue with a position of denial of the principle would be pointless, but also damaging to future commercial interests, both with regard to loss of reputation, and a diminished ability to affect the precise set of outcomes – i.e. the future legal framework for the business.

By publicly communicating its position when it did, BP became a participant in the debate rather than a victim of it. There was much still to fight for: the future contribution of hydrocarbons versus other energy sources; the timescale for action; the role of hydrocarbons in the ‘hydrogen economy’; the mechanisms for carbon capping (‘cap and trade’ permits versus taxation); the allocation of permits (grandfathering versus auctioning). By moving from denial to acceptance of the principle, BP was able to participate in the debate and offer a view on the specifics. Its point of view was listened to because its position was sufficiently surprising and progressive for the time.

3) First mover advantage.

As with any business move, the first mover reaps the greatest advantage. Where companies and industries in similar situations have gone on to be attacked again and again, BP and Browne were praised. President Clinton publicly praised the company and invited Browne onto his ‘group of wise men’ on climate change. The company was congratulated by Prime Minister Blair on the floor of the House of Commons. BP’s move was widely and positively discussed in the media around the world, and the company was publicly congratulated by Greenpeace.

It is arguable that Shell has invested more than BP on issues communications in recent years, including on climate change. However BP remains the leader to many because it was first, and also because it has received such fulsome praise. Politicians and pressure groups were delighted by such a signal from industry in the run-up to Kyoto – the first mover was always going to receive the praise, not only for the action but also for the precedent.

4) A player in the global oil industry.

In the mid-90′s, by far the two largest oil companies were Exxon and Shell. BP was one of several others with market capitalization and reserves significantly less than these two. Furthermore, less than ten years earlier, BP had been the British state oil company, and was still thought of by many as ‘British Petroleum’. If one sees PR as free advertising, then because of the widespread media coverage of the issue, many around the world began to think of ‘BP’ as a serious global company with serious things to say about the serious global energy issue of the day.

Oil industry commentators at the time were predicting consolidation. A number of possibilities existed, with the line fine between predator and prey. Soon after BP’s announcement on climate change came the announcement of its bid for Amoco. The timing was excellent – Browne’s first speech on the climate change issue was at Stanford University and received significant positive media coverage in the US. This, plus the Presidential congratulation, could only have helped the SEC consideration soon to follow.

5) A thoughtful leadership team.

Then there was the financial community. One often underrated element of issues management is the reputation of the company’s management. If a company can demonstrate creative thinking ahead of its competitors on an issue of public interest, this implicitly implies an ability to think ahead of its competitors on operational issues. Much of the discussion in the financial press during BP’s proposed ‘merge-over’ with Amoco mentioned BP’s and Browne’s position on climate change. It can only have been helpful that Browne was voted the 2nd most admired global businessperson by the Financial Times.

6) Not all hydrocarbons are equal.

Most ‘oil’ companies are in fact hydrocarbon companies, in that they also extract and sell gas, and in some cases coal. Coal has significantly greater carbon content than oil, and likewise oil contains more carbon than gas. All other conditions being equal, in a carbon-restricted market the price of coal goes down relative to oil, and the price of gas goes up. Just before BP’s communications on climate change, effectively accepting a carbon-restricted future, it had acquired Arco, a company with one of the highest gas-to-oil ratios in the industry. And as discussed above, it was already planning a merger with Amoco. Amoco had the highest gas-to-oil ratio in the industry; i.e. ahead of time BP was investing in a carbon-restricted future.

7)The war for talent.

A scientist by training, John Browne was concerned by the decline in numbers of students studying science. He addressed this issue more than once, and BP has invested in partnerships with academic institutions to address the situation. Under these conditions, attracting the most talented graduates had become an increasingly competitive issue for oil companies. As a result of BP’s positioning on climate change, there is no question that its ability to recruit and retain ‘best people’ was enhanced. An interesting piece of evidence for this comes from Shell, which was the first company to follow in BP?s footsteps on this issue. There is a view held in the oil industry that all of the factors described above, the issue that convinced Shell to change position was that many of the graduates and MBAs to whom Shell was making offers, were turning the company down in order to go to work for BP.

This is issues management

June 2009