Strategy & Operations » Governance » BP CFO: Preparing for war

Preparing for War is the title of the book perched on the desk of BP CFO Brian Gilvary that he says he is intending to read next.

It’s an apt title given the war footing he has found himself in over the years and is in keeping with a combative nature that belies his old-school charm.

When an explosion at an oil rig working for BP in the Gulf of Mexico’s Macondo field killed 11 crew members in April 2010, it triggered one of the world’s great environmental disasters as huge amounts of oil poured out of the uncapped well.

For Gilvary, the newly appointed deputy CFO of the British oil giant, the disaster was an important baptism on route to taking the top finance job at one of the world’s biggest companies. The group delivered 2017 revenues of $240.2bn.

He was able to learn quickly from finance chief Byron Grote that he was playing understudy to, learning how to take on one of the world’s most high profile CFO roles, including an epic scramble to refinance the group in the weeks after the explosion.

“In the darkest depths of Macondo, the company was two weeks away from financial oblivion,” says Gilvary. “The issue in June 2010 was that the well wasn’t capped and we’d hired 45,000 people on the Gulf of Mexico to clean up with all the equipment that came with that, so we were burning cash,” he says.

Gilvary says Grote’s master plan that saved BP, which credit default swaps (CDS) spreads revealed a level of market anxiety akin to that faced by Lehman Brothers before the investment bank collapsed, was to tap the knowledge of HSBC’s Douglas Flint.

HSBC’s then chairman Flint, who was also chair of BP’s audit committee, advised Grote that an all-out pursuit to bring in as much cash, as fast as possible, was essential. “We were in a liquidity crisis and Douglas, who had come through the banking crisis in 2008, knew some of the things that you had to do,” says Gilvary. “When you’re trading CDSs like Lehman just before it collapsed you can’t access the markets.”

Shunned by banks that previously would have tripped over themselves to lend to BP, “who weren’t there when needed”, the answer was a rapid-fire asset sale to meet Flint’s recommended $10bn target to ensure the group’s survival.

The first big announcement was the divestment of assets to Apache in June for $7bn – that brought $5bn of cash deposits immediately onto the balance sheet.

“The idea of taking a $5bn cash deposit on a deal that wasn’t going to close for another six months was extraordinary and that’s how we refinanced the balance sheet and the lesson we’ve learned from that stays with us today,” says Gilvary.

Into the maelstrom

Financing the initial response, including a successful capping of the well, was one thing. But coming the way of Gilvary, announced in 2011 as the next group CFO who would take up the role the following year, was the world’s biggest ever compensation demand – which would eventually reach $66bn.

As the world focused on the efforts of CEO Bob Dudley, who replaced Tony Hayward in October 2010, the furore surrounding BP reached new heights. US president Barack Obama and prime minister David Cameron, who Gilvary describes as “hugely supportive”, held urgent talks while Gilvary quietly took over the finance function.

In the meantime, compensation demands for the spill grew massively, reflecting the number of US national and local bodies pursuing recompense- the Department of Justice (DoJ) alone was seeking $17bn.

“Between October 2012 and the end of that year, there were some things that didn’t seem right to us in terms of how claims were being paid and determined. So we challenged it up to the US Court of Appeal,” says Gilvary, who played a critical role in the negotiations, alongside Dudley.

“We started a media campaign to let people know that some compensation was being paid to people that were not being damaged by the spill – and said that we were not prepared to settle on those terms.”

By 2015 BP had cut a deal with all the critical parties – the five states affected, the 500 local parishes impacted, the DoJ and the Environmental Protection Agency, to get one final set of agreements – to effectively draw a line under the issue. “The oil price crash of 2015, enabled a conversation to begin about ultimately seeking a resolution of everything- but it had to be everything,” says Gilvary.

An 18-year payment schedule was agreed, as a shorter time frame might prove too hazardous to the running of the company, and a deal was hammered out over 60 days in the summer of three years ago. It was the final act of a tumultuous five years for the company. “The tail is sufficiently small that Macondo is pretty much determined now,” says Gilvary.

Stress-tested

Coming from a humble background, one of five children brought up by his father who worked as a boilerman in Liverpool’s docks and mother employed by a biscuit factory in what he describes a pre-fabricated shed and then council house, life was tough.

Having failed his 11-plus grammar school entrance exam, Gilvary then excelled after a teacher recognised his school performance was hindered by poor eyesight and he was prescribed glasses.

He stayed on at school to pass ‘A’ levels, not taking the intended path into the Royal Navy his father had joined at 15 in World War II, and progressed to Sheffield University to study Maths and then a Masters and PhD in the subject at Manchester University before joining BP.

Arriving as a mathematician in the drilling and completions branch- working on projects such as modelling blow-outs on oil rigs, “what we had to do with Macondo many years later”, he began a lifelong career with BP that at the time was a third UK government-owned.

Gilvary says his ability to solve big problems saw him working on multiple issues. A project for predicting blowouts – one of which stopped all drilling in the North Sea for six months in 1988, got him noticed across the group. How he fitted into teams also helped. “I suppose I came across as somebody who slotted in and worked well with others from different backgrounds,” says Gilvary. “I was a good listener and communicator,” he adds.

Those qualities saw him moved from research into planning in the retail section of the group’s downstream business, where Gilvary – who like many BP finance executives didn’t undertake any formal accountancy training – mastered P&Ls and balance sheets.

The modelling work there saw Gilvary rise fast through BP Oil Europe, which ran downstream operations for 18 European countries, before a move into trading – a key business responsible for the group’s flows of oil and gas and derivatives. By 1998 under the aggressive deal-making of CEO John Browne, BP became one of the world’s biggest companies – and Gilvary moved to the US and then to the UK as downstream chief of staff working with future CEO Dudley.

There he was seconded to the Cabinet Office during the summer fuel crisis that rocked the early government of Tony Blair, when lorry drivers and farmers blockaded refineries. Blair and Home Secretary Jack Straw sought advice from Gilvary, who was sent in to bring expertise to the government’s COBRA emergency room, where he slept for six nights. “They asked: ‘why can’t you get these trucks moving?’ I said:  ‘Can you just get the guys to stop throwing bricks at them?’”

Having overseen a $5.5bn acquisition of German downstream group Veba in 2001, the latest in a succession of big BP acquisitions including Amaco, Arco and Castrol, Gilvary became “bag carrier” for Browne who eventually left the group over personal issues. He describes now Lord Browne as “one of the most extraordinary individuals I have come across” with “a supercomputer between his ears”.

Becoming CFO downstream was Gilvary’s first big finance job, that preceded a return to trading which he became chief executive of in 2005, a role he held for the next five years- having to address three big American issues – the Texas City explosion that killed 15 refinery workers, a massive Alaskan oil spill and a propane investigation by the DoJ that were all resolved on the same day. Along the way, Gilvary worked on a farming-related project with Prince Charles, who he describes as being very informed on the plight of hill farmers.

Dancing with the bear

In 2003, Gilvary joined the board of a joint venture with Russian oligarchs called TNK-BP, which he describes as the “best investment BP has ever made”, having delivered $19bn to the group over its lifetime – but one that was mired in controversy.

Reflecting on the rough and tumble nature of dealing with the oligarchs, he describes TNK-BP as having “a slightly different approach to governance” to that at BP, because “the private equity side was trying to leverage their position.” He says: “things would sometime come to a head and there’d be an explosion in the newspapers. But it wasn’t personal, it was just business.”

He’s keen to scotch reports that Dudley was poisoned as part of the robust approach taken by the TNK side, describing the rumour as “one of the urban myths of our time”.

When the joint venture was wound down, BP maintained business ties with Russia with a 19.75% stake in state-controlled Rosneft, which Gilvary describes as “the world’s largest oil and gas company in terms of listing”. It’s also highly controversial, as Rosneft has been subject to EU sanctions in response to Russia seizing the Crimea from Ukraine in 2014.

Gilvary defends BP’s relationship with Rosneft, where it has two board members and a team of over 100 staff on the ground, saying: “We absolutely operate within the sanctions framework, and navigate our way through that, especially when tensions have been slightly heightened”, referring to the suggestion of a Russian attempt to assassinate ex-spy Sergei Skripal and his daughter on British soil in March.

“I think business provides an opportunity as a conduit between geopolitical powerhouses to at least ensure there’s some line of communication between geographies. We understand the importance of Russia. For example, gas supply into Europe is a very important strategic requirement, so I think it’s important that businesses stay connected with Russia,” says Gilvary.

Climate change conundrum

If he is somewhat touchy on the issue of Anglo-Russian relations, Gilvary becomes testy on the subject of climate change, in response to references to last year’s Carbon Majors Report. It said as a major fossil fuel group, BP was near the top of the list of companies identified as being most responsible for greenhouse gas emissions.

Gilvary responds by saying that BP under Browne was one of the first companies to say in probability that global warming is real and that a reaction is required, with BP committing to “cut emissions by 10% over the next 10 years. We actually did it within 4 years,” he adds.

He references the launch of alternative energy as a division within the company, which was given its own office in London, but which he concedes was then closed down. He insists the group has continued along the same path from the days when Browne rebranded BP as ‘Beyond Petroleum’.

Gilvary points to the fact that a carbon tax of $40 a tonne was self-imposed on all BP investments “on the assumption that governments and society would move to pricing carbon”, which then didn’t happen.

He also says that by 2010, the onus on survival of BP after the Macondo disaster slowed down impetus in renewables, with significant investment into solar being written off and “a lack of economic return for shareholders” also playing a part.

But he insists that post-Macondo, BP has sought to tap into the “DNA of the company as one of the more environmentally tuned in of the sector” with projects such as biofuels in Brazil, a wind business in the US and $200m a year investment in ventures into creating low carbon businesses.

The 2015 Paris Climate Agreement was a catalyst for BP to commit with peers to reduce Co2 emissions, says Gilvary. The group launched a framework for zero net emissions, effectively a 7% reduction, says Gilvary for 2015–2025.

“We will take out 3.5m tonnes of sustainable CO2 emissions, we’ve already taken out 0.7m tonnes and you will see more in the public domain what we’re doing,” Gilvary enthuses. Following this interview, BP revealed it is buying the UK’s largest electric charging network, Chargemaster, for £130m.

When asked if a total commitment of $500m in renewables last year, out of capex of $16bn, is on the relatively small side, Gilvary insists that there is no like-for-like comparison, and that there is scope for increasing spend on renewables, pending opportunities.

But pressed on whether business is commited to saving the planet from reaching a point of no return if emissions breach the 2 degrees Celsius temperature threshold, as defined by the Intergovernmental Panel on Climate Change (IPCC), Gilvary hits the attack button. “We’re not going to save the planet – get real. Save the planet from what?” he snarls.

Although he claims to agree with the science of the IPCC , he rejects the idea of the planet being seriously imperilled as “scare tactics”.

“It frustrates me when I hear the argument that 97% of scientists say we’re on the way to the point of no return, says Gilvary, who owns an off-grid farm, with wind turbine solar on it and 20 acres of woodland absorbing CO2.

On ‘stranded assets’, the term for reserves underground valued on oil companies’ balance sheets that scientists say would produce five times more greenhouse emissions than the safe limit if they were extracted, Gilvary offers his view.

He says the concept of what he calls “unburnable reserves” does not trouble BP as the group has reserves for only 14 years, which he insists sits comfortably with most interpretations of peak oil theory.

“Our view is that because we have 14 years’ worth of production reserves, it’s not going to be a cliff edge, unless some kind of government policy comes in,” he says.

In focusing solely on the expected life of oil reserves, rather than addressing the likely impact of intergovernmental action, that many argue is essential to prevent a breach of the 2-degree ceiling, he is ducking the main thrust of the question.

He also says BP and the other oil majors cannot be solely responsible for meaningful leadership on climate change, despite several references during the interview to how well connected the group is to the world’s most powerful political and corporate leaders.

He admits he has even attended a recent meeting of the secretive Bilderberg conference of global elite leaders- a powerful demonstration of how far he has travelled in an extraordinary career.