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Table of Contents “Environmental Quality International in SIWA” by Story, Jonathan 1

“British Petroleum (PLC) and John Browne: A Culture of Risk Beyond Petroleum (A)” by Bryant, Murray J.; Hunter, Trevor 13

“The PCNet Project (B) Dynamically Managing Residual Risk” by Loch,Christoph 27

Bibliography 33

BUS 519: Project Risk Management -

Fall 2018 ii

Environmental Quality International in Siwa

04/2009-5607

This case was written by Professor Jonatha n Story, Emeritus Professor of International Political Economy at INSEAD. It

is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of

an administrative situation.

When Mounir Neamatalla, President of the private Egyptian firm Environmental Quality

International (EQI), first set eyes on the Siwa Oasis in 1995, in the Matrouh region of Egypt

in the Sahara desert, he was enthralled. Neamatalla, a consultant who had studied

environmental management at Columbia University, was visiting the oasis on a project for the

Canadian Development Agency. He was struck by the fact that, with a few anachronisms, the community he was visiting could easily have been the one described by Herodotus 2,500

years earlier. Here was an ideal fit with EQI’s mandate to promote sustainable development

projects wherever the opportunity beckoned. Where others saw poverty and isolation,

Neamatalla saw riches: a culture, tradition and heritage untouched by the passage of time.

Over the years that followed, EQI designed and implemented a number of commercial

ventures aimed at promoting economic development in Siwa—one that would be in harmony

with Siwa’s environment and that would revitalise its unique cultural heritage. EQI's approach

was to draw on the old wisdom, traditional skills and creativity of the local community, and

complement them with modern know-how to develop Siwa into a model of sustainable

development that could serve as a source of inspiration for other communities around the

world. Some of these ventures are currently being replicated by EQI in other parts of the region. Egypt

The past few decades have seen Egypt move from a pan-Arabic, largely socialist state at war

with Israel, to an increasingly market-oriented anchor of stability in a troubled region. As one

of two Arab countries that have forged peace with Israel, Egypt has played an important role

in promoting dialogue between Israel and its Arab neighbours.The North African country is

one of the largest recipients of American aid. In 2008, it was slated to receive $1.3 billion in

military aid and another $415 million in economic assistance. With a population of 80

million, it is home to one in four Arabs.

The population of Egypt is concentrated along the Nile river banks and is urbanizing fast as

rural inhabitants pour into the main cities of Cairo and Alexandria. From 43 million in 1980 to

nearly 80 million in 2005, it is estimated by the UN to reach 100 million by the 2020s. Population density is among the world’s highest. The urban population accounts for 42% of

the total and is growing at a rate of 1.8% per annum. Farming represents 29% of GDP,

industry 22%, and services 49%. Per capita income is $1,200 and the literacy rate is 57%.

Water scarcity is a prime concern. Roughly 96% of Egypt’s land mass is made up of

desert. The only arable regions in Egypt are the green floodplains that line the Nile basin.

Urbanisation is eating into scarce arable land and putting the environment under great stress.

Politically, Egypt is still a highly centralised republican state in the midst of a process of

political and economic liberalisation. It has already transformed from a single party to a multi-

party political system, and from a socialist to a market oriented economy. Extensive powers

are vested in the president, who is nominated by a two-thirds majority of the People's

Assembly and then elected by popular referendum for a six-year term. Since the assassination

of President Muhammad Anwar el-Sadat in 1981, the office has been held by Mohammad

Hosni Mubarak, who has been re-elected five times. Like Sadat, Mubarak had a distinguished

former career in Egypt’s armed forces. The president appoints the government and enjoys the

support of the dominant National Democratic Party (NDP), which has secured a majority in

the directly elected People’s Assembly. The government is reported to be facing demands for

political reform from both secular and liberal opposition parties and from the officially

banned fundamentalist Muslim Brotherhood. President Mubarak’s crackdown on opponents

has led to calls for restraint from the United States.

The Muslim Brotherhood, the strongest of the opposition groups, has spent most of its history

debarred from politics because of the country’s secular constitution

.Elections in 2005 were

marred by allegations of intimidation and ballot rigging. Israel’s Ariel Center for Policy

Research concluded that Cairo had no choice but to engage in a degree of reform in order to

keep resentment at bay. Most international analysts and research institutions agree that Cairo

would benefit from engaging in significant reform.

The threat from militant Islamic groups re-emerged after a lull from the late 1990s until 2004,

when a series of bombings in the southern Sinai peninsula highlighted the exclusion of the

local population from the mass tourism development of their region. Despite sympathy for the

plight of the Bedouins, the attacks were unpopular amongst Egyptians, not least because of

the damage to Egypt’s valuable tourist industry.

The armed forces of Egypt are the largest on the African continent. The military and security-

related budget is not public information but most published sources put Egyptian military

expenditure at 7% to 10% of GNP. In addition to the armed forces, Egypt maintains a large

paramilitary force around 350,000 strong, known as the Central Security Forces, under the

Ministry of the Interior. The National Guard and border security forces come under the

control of the Ministry of Defence and are reported to number 60,000 and 20,000

respectively.

Administratively, Egypt is divided into 28 governorates, each headed by a governor who is

appointed by the president. Within their districts, local government units establish and

manage all public utilities, provide services and designate industrial areas. Local popular

councils are elected bodies that work closely with local government administrative units at various levels.

Economically, the country is in midst of shaking off a socialist past whose heritage owes as

much to the bureaucratic tradition of the Byzantine empire as to any regard for workers’

rights. Fiscal reforms introduced in 2005 have lowered unemployment and attracted record

foreign investment. Customs—once famously corrupt and inefficient—have been streamlined.

Tariffs have been cut and simplified. The Egyptian pound has been floated. In 2007, the

country achieved growth of 7.1%, mostly due to $11.1 billion in foreign direct investment.

Yet the Egyptian economy, while growing, is weak. Although non-oil and gas exports

increased 45% in the 2006-2007 fiscal year and were expected to rise from $14 billion in

2007 to $18 billion in 2008, total exports, at $27 billion, remain small when compared to

similarly-sized countries. Turkish exports, for instance, run at over $120 billion a year. Most

of Egypt’s growth has been constrained to energy-intensive industries—cement, chemicals and fertilizers—that take advantage of high energy subsidies. The country continues to run a

$16 billion trade deficit, importing most of its meat, wood and grain, as well as much needed

capital goods equipment.

That the World Bank ranked Egypt first in a list of countries introducing investor-friendly

reforms in 2007, reflected both the progress achieved and the distance left to travel. Red tape,

a proliferation of regulations and regulatory agencies, bogged-down courts, and a sometimes

whimsical decision-making system, makes operating in the country difficult and

unpredictable. The World Bank placed Egypt 126 out of 178 countries in terms of ease of

doing business. Despite the recent growth, unemployment remains high at 9%. The median

age of the population is 24, compared to 39 in France, with only 43% of the employable labour force aged 16 to 64 in work, against 62% in France.

Growth in manufacturing and industry tends to be capital rather than labour intensive. Labour

productivity in agriculture and services is low. Inflation is around 8% and there is widespread

concern over rising income inequalities—despite improvements recorded by the UN Human

Development Index over the past 30 years. According to the World Bank, one in five

Egyptians can not meet their basic daily needs. Absolute poverty rose from 16.7% in 2000 to 19.6% in 2005.

Tourism provides the country with a major income stream, representing 20% of foreign

currency earnings, despite the bombings in southern Sinai on the Red Sea. In 2007, Tourism

Minister Zuheir Garana announced plans to boost tourist earnings by 26% to $12 billion

dollars by 2011. Egypt aims to welcome some 14 million tourists in 2011, requiring a capacity

of 240,000 hotel rooms, compared with 11 million in 2007. Besides catering to the mass

market coming to visit the country’s famed pyramids and beaches, the minister said Egypt

aimed to attract private investors to develop eco-tourism and medical tourism. Niche, luxury

and eco-projects—such as EQI’s Siwa development—remain rare. Siwa

The oasis of Siwa was first inhabited nearly 12,000 years ago, but only since 1986 has a road

made it accessible to the rest of the world. Siwa is part of an archipelago of oases dotting the

Sahara. From its origins as a Berber village, the green grass and natural spring water of the

desert oasis served as an ancient stopover for caravans travelling from North Africa to the

Arabian peninsula. Herodotus described it as a salt mine whose inhabitants built their homes

from bricks of salt, and home to the powerful oracle of Ammon. When Alexander the Great

entered Egypt in 331 B.C., he was received like a pharaoh. He rode through the blistering heat

of the desert to consult the oracle. The oracle welcomed him in a spectacular procession and it

is said that he blessed his mission to spread his ideas worldwide.

Located in western Egypt, not far from the border with Libya, the oasis is 80 kms long and

roughly 20 kms wide, a swathe of palm and olive trees, natural springs and salt lakes

surrounded by the sands of the Sahara. The abundant water is due to the presence of a large

geological depression; most of the area lies around 20 metres below sea level.

In its centre, the crumbling Fortress of Shali dominates the village. Most of the local

population used to live within its walls until 1926, when three days of continuous rainstorms

washed the walls away, forcing the inhabitants to abandon their homes. Until recently, the

fortress had not been restored. Rather, it has been ravaged by the dismantling of its buildings

as residents abandoned them, taking with them doors, windows, and even supporting wooden

beams and cladding as they resettled on the plains around Siwa. The remains of the fortress

continue nonetheless to serve as an example of Siwa’s traditional construction techniques.

The buildings were made of a mixture of salt and mud called kershef bricks, and rock salt

blocks, supported by palm logs. Some of the medieval structures stood up to five storeys high. After 1926 the town was rebuilt around the fortress, but further rains in 1985 marked the

general abandoning of traditional building techniques. For the reconstruction effort, mud and

palm gave way to cement blocks.

The oasis is home to between 20,000 and 30,000 residents, up from 5,000 in the 1970s. The

local population is divided into 11 tribes, whose sheikhs provide their people with a

traditional approach to resolving disputes. The

tribal judicial system is deeply respected by

the inhabitants. “We are all family,” says Abdallah Baghi, head of education in Siwa. Cairo is

happy to keep this arrangement. The sheiks receive a government salary, and the mayor—who

is a government appointee—heads the elected town council. The mayor is nominated by the

provincial governor, to whom he reports. Mayors tend to be retired military officers. While

the land officially belongs to the state, Cairo recognises the mosaic of historic ownership

patterns administered by the tribes. Residents retain their own language, Siwi, related to the

Berber dialects which span the Sahara through to Morocco. The land surrounding the villages

is given over to agriculture, 300,000 date palms and 70,000 olive trees.

For much of its history, Siwa’s location isolated it from mainstream history. From the fall of

the Roman Empire, its independence went largely unchallenged until the 19 th

century.

Arabian conquerors of Egypt regarded its oases as rough, impoverished desert settlements.

Armies that might have made it through the desert were repelled by the central fortress or by

the paucity of riches. The first European arrived in 1792 but the oasis was not brought into the

fold of modern states until 1840, when the Ottomans shelled its citadel and massacred its

chieftains. The first Egyptian ruler to visit Siwa was the Khedive Abbas Helmy II in the early years of the 20 th

century. The Khedive laid the foundations for the Great Mosque, the first

public edifice built by the state. His grandson, Prince Abbas Helmy III, has returned from the

UK to build himself a house in Siwa. He makes a point of praying in his grandfather’s mosque.

Even then, contact with the rest of the world was limited mostly to the taxes it paid and,

briefly, to the passing armies of the World Wars. It wasn’t until 1977, when President Sadat took an interest in the oasis, that modernity began to intrude. As part of the Camp David

accords with Israel, the Egyptian army evacuated the Sinai—which was later opened up to

modern mass tourism—and was re-deployed to the western Egyptian desert, guarding the

frontier with Libya. In 1983, a military cantonment was set up in Siwa, providing the villages

with access to a helicopter for medical needs. Soon afterwards, the Egyptian state built the

asphalt road that reached 300 kms through the desert to link the oasis with the provincial

capital on the coast.

With that connection came increased attention from the state: schools, health services and a

smattering of investment—enough to begin to wear away centuries of traditional culture.

Motorbikes, cars, television, internet and mobile phones began rapidly widening the Siwis’

horizons to the rest of the world. Along with a growth in western tourist traffic, a strong

reform current of Islamic practices undermined the softer traditions of Siwan practice. The

proliferation of wells lowered the water table; ironically the pumped water flooded the lakes,

pulling the salt towards the surface, endanger ing cultivation and killing swathes of palm

groves. Traditional craftsmen found that fewer students were interested in learning their art.

The older generation feared that ancient Siwi values were eroding as the young generation turned its gaze to the world beyond the oasis. Environmental Quality International

Among the new arrivals since the road was built was EQI, which first came to Siwa with a consulting capacity in the 1980s and began investing in the region in 1996. EQI’s plan was to

create a suite of projects that capitalised on the oasis’ resources. By nurturing and polishing

those aspects of Siwa that it identified as marketable, the company would target the high-end

of the value chain in global tourism. Because it would rely on the undisturbed nature of the

oasis it would have to minimize its impact on the community. Materials and labour, wherever possible, would be local.

Practices would be sustainable with the aim of preserving the local culture, heritage and

landscape. By valuing what was local, development would not come at the expense of

traditional life. The oasis would present the world with an example of how poverty could be

reduced by capitalising on local culture and safeguarding the environment. If all worked well, the road to the oasis’s future would run through the riches of its past. Siwa would once again

become an oracle, this time for sustainable development. EQI’s component projects, described below, attracted the attention of the International Finance Corporation, which provided $880,000 in loans and $486,000 in technical support.

They comprise three hotels, a line of embroidered products and traditional jewellery, and the

export of organic agriculture. The company provides direct and indirect employment to more

than 600 Siwans as suppliers, staff, craftsmen and women and builders. The projects at Siwa

were the consulting company’s first real investment: “a foray” in the words of Neamatalla,

“away from the world of advice and into the world of execution.”

Adrère Amellal Oasis

EQI’s Siwa centrepiece (and the only investment that did not benefit from the IFC loan) is the

Adrère Amellal Oasis, a desert lodge built at the foot of a mountainous outcrop overlooking

Siwa’s largest lake, some distance from the main settlement. The company wanted to build a

luxury lodge in the traditional style, using palm logs and blocks made from rock salt and mud.

But when it began to enquire, it found that the knowledge of traditional building techniques

was confined to a small group of old men. The ancient style was seen as archaic and

expensive. New construction employed modern materials like concrete and cement, cooled

(for those who could afford it) by air conditioning.

If EQI wanted to build in the Siwan style—and it did—the company would have to rescue a

skill that was slipping away. They began with a team of three builders, with mixed results.

After the first 20 rooms were built, the company discovered that the untreated palm logs they

had used were infested with mites; the insects were dropping from the ceiling onto the beds,

hardly acceptable in what was to be a high-end resort. Fumigation, besides being a departure

from their vision, proved ineffective, so the company consulted the village elders, who

provided the solution: if the logs were soaked in the salt lake for several days then baked in

the sun for several days, the mites would be gone. The method worked, but the initial roofing

had to be torn off the first 20 rooms so that construction could begin afresh.

The construction was ultimately successful. Not only did it provide the lodge with the

elegance and authenticity of tradition, it also revived a craft at risk of being lost. The oasis now has 150 enterprises trained in traditional building techniques. Their revival reawakened a

pride in the oasis’ cultural heritage. Increasingly Siwan builders choose to use palm logs and

rock salt blocks instead of more modern materials, and the state governor has decreed that all

new constructions are to be built in the traditional style. This has encouraged outsiders to

build tourist facilities along traditional lines.

The hotel, which took eight years to build, began small with eight units, but quickly expanded

through word-of-mouth publicity to 24 rooms, with a maximum occupancy of 70 guests. Priced at a range of US$ 350-450 per night, it has achieved a level of appreciation, attracting

interesting travellers from all over the world and from all walks of life – including scholars,

politicians, artists, fashion designers and even young students. In addition, the lodge is

environmentally efficient. Kept cool during the day by the thick walls, it uses no electricity.

Beeswax candles are used for lighting. Coal braziers provide heating when needed. The

ceilings are made from palm and the fixtures are made from olive wood. The swimming pool

is fed by natural springs. Dinner consists of organic food, mainly grown locally.

The lodge’s staff is also predominantly local, providing employment and advancement to 60

members of the Siwan community. Keeping salaries at local levels are key to the lodge’s

financial success. Partly because it kept expensive international staff to a minimum—

primarily in a consulting capacity for the kitchen—the hotel was profitable after just five years. In 2005, the eco-lodge was ranked second by

Condé Nast Traveler on the magazine’s list of

“Green Resorts”. In 2007, Travel & Leisure listed it among its top 20 “Favorite Green

Hotels”. It has also received the magazine’s 2006 “Global Vision” award. Most importantly perhaps, the lodge serves as the flagship for EQI’s business model, proudly displaying Siwa’s

past and culture like roughened gemstones that, properly cut and set, provide an experience that can be found nowhere else. Shali Lodge and Albabenshal

The company’s second project, which was built concurrently, was another hotel, Shali Lodge,

set in a palm grove near the village of Siwa. Built once again in the traditional mud and salt

brick fashion, the hotel offers eight rooms furnished in the company’s simple, plush style to

travellers who may not have the budget for the luxury lodge in the desert. The hotel provides

employment to 20 Siwans. The IFC loan allowed EQI to add a plan for its extension that

would double that number.

Shali Lodge is a five-minute walk from the oasis’ prime archaeological attraction, the Fortress

of Shali, and the surrounding, largely crumbling traditional village. Albabenshal, another

more recently built 11-room heritage hotel, is located at the foot of the Shali Fortress, raised

from the restored ruins of derelict houses abandoned during the rains of the 1920s.

In addition to offering the company’s services to a different category of traveller, both lodges

provide the company with a presence in central Siwan life, and serve as reminders that EQI is

not an aloof proprietor of an hotel set apart from the rest of the oasis. The company also hopes

that its restoration efforts will serve as an example for Siwans looking to rebuild their old town. Siwa Creations

In 2001, soon after EQI had built its first two lodges, the company realised that all its

employees and partners were men. Siwan culture is very conservative and there is a strict

separation of men and women; women refused to work in the hotels or anywhere adult males

were present. Seeking to expand the company’s impact, Mounir Neamatalla turned to his

sister, Laila, a jewellery designer, who after some research, decided she would tap into Siwa’s

tradition of embroidering. Again, EQI was faced with reviving and adapting a craft that was

fading from local memory. Siwan’s fine stitching was unique, but few members of the younger generation knew how to do it.

Laila Neamatalla began an initiative whereby grandmothers were asked to train young women

artisans in the ancient tradition, and the eco-lodge began offering local products embroidered

in the traditional style to its discerning clientele. As the work flourished, she realised that quality control would be easier if she moved her workers from their homes into a workshop.

The project took off quickly. Beginning with 50 trainees funded through a grant from the

British Embassy, within a year Neamatalla had 300 women stitching for her. Girls work in the

workshop learning the basics of quality control until they get married, after which they

continue to work from home. Traditional motifs are embroidered onto blouses, gowns,

shawls, sarongs, towels, sheets and tablecloths. Necklaces are made from buttons and semi-

precious stones. Embroidered leather is set in silver to make rings and bracelets. The products are sold not only in the lodge but in high-end outlets in Egypt, Italy, France and England. In

2004, the Florentine haute-couture fashion house Ermanno Scervino began incorporating

Siwan embroidery into its collection. Material is sent from Florence to Cairo, shipped to Siwa,

where it is stitched and sent back to be assembled in Italy.

In addition to reviving a fading art, the project has been an economic success for the Siwan

artisans. Fearing that if she paid her workers too much she would upset the male-dominated

economic order and trigger resentment—Laila set her initial piece rate at a level slightly less

than what a man could earn in a day. Nonetheless, payment is based on production and a

productive embroiderer can easily out-earn the men in her household. Siwa Organic

The success with the women led to demand for something similar for the men, more than 70%

of whom worked in agriculture. EQI responded with an effort to boost local attempts at

organic production. The biggest obstacle facing the farmers, the company found, was a lack of

liquidity. Farmers would finance their agricultural inputs by selling their crops before they

were planted, sometimes with disastrous results:

if the harvest fell short they might be forced

to sell their land to pay their debts. To hedge against these risks, Siwan farmers had begun to

use chemical fertilizers to maximise their yields.

Recognising this as a problem, and using funds provided by the IFC, EQI began offering to

pre-buy the crops for 40% to 50% more than the market price, provided the harvest was

grown organically. The company also started a cattle financing project to supply a source of

alternative fertilizer, as well as milk: it would buy cows for farmers to raise, after which the

two parties would split the profits. The schemes were expected to benefit 200 to 300 farmers and preserve the region’s production of organic produce.

The company also began processing and marketing the region’s products with a line that

included olives, dates and local produce such as olive tapenade, sycamore jam, and hibiscus

syrup. This helped to add value to traditional practices and also served the global market.

Siwans traditionally harvested their olives by stripping them directly from the branch, leaving

the fruit scratched, bruised and unsuitable for sale in Europe. So EQI asked the farmers to

begin hand-picking the olives. A local recipe for brining the olives involved much more salt

than is customarily used elsewhere, the result of the mineral’s abundance as well as a means

to preserve supplies for lean years. EQI’s recipes use a more conventional amount of salt, designed to last one season and please the

international palate.

The project reflects the premium the company puts on its image. Its benefits aren’t only

economic and don’t only accrue to the farmer – they are critical to burnishing and preserving

Siwa’s image as a place of tradition, purity and environmental awareness. Challenges Going Forward

The biggest challenge EQI faces is helping the community in which it is located to balance

tradition against modernity. The company has tied its brand as much to the locale in which it

operates as to the enterprises it has launched. With its business model designed to introduce

guests to the ancient culture and heritage, it can’t afford to let the elements that make Siwa unique slip away.

With its natural heritage, its geographic remoteness and historical uniqueness, Siwa has

attracted low impact tourism and a certain profile of visitor, from backpackers to jetsetters,

the latter being EQI’s target market. They tend to form an emotional connection with its

Saharan charm and make repeated trips to the oasis.

But while the company’s founders would very much like to see the oasis preserved as it has

been for millennia (to offer clients “an opportunity to travel back in time”), they also

recognise the impact of the modern world on local customs and mores. Motorcycles have

begun to muscle out donkeys on the village roads. For villagers looking to expand their

homes, modern construction is cheaper and faster to put up; only foreigners building vacation

homes can be relied upon to use exclusively local materials and traditions, as the price of local

expertise and materials is beyond the reach of the local population.

EQI has been very careful not to engage in practices that are unsustainable—it rejected

introducing an espresso machine after it discovered that it would consume as much electricity

as the rest of the lodge. But its influence is limited, not least because it is but one amongst

many outsiders operating in the oasis. Just as tourism has raised living standards, television has raised awareness of the rest of the world, and along with it people’s expectations. The

introduction of indoor bathrooms in many homes has put a stress on the water supply, literally

the lifespring of the oasis. Protecting the wa

y of life may mean preserving the absence of

electricity and street lighting in Siwa as an asset—a chance to see the stars and connect with the universe—but there is little indication that residents agree.

Nor is it clear that Siwa’s traditional lifestyle can be scaled up to handle the area’s booming

population. An oasis is like an island; its natural resources are limited. There are only so many

palm trees that can be cut for roofing—importing them from outside is forbidden for fear of

introducing new pests. A debate is raging about the sustainability of Siwa’s water resources.

Even before the introduction of bathrooms, the water table was dropping; the growing number

of farmers had simply dug too many wells. Four plants have been built to bottle the oasis’

mineral water (some operated by the Egyptian armed forces) and sell it nationwide.

“Siwa is now literally at a crossroads,” says Nea matalla. “It can evolve to become just another

village, where the measures of progress are strictly financial, very much related to whether you have paved streets, sidewalks and the like. Or Siwa can literally be nourished by its past, nourished by its unique nature.”

EQI helped to put the oasis on the tourism map and others are beginning to connect the dots.

There has been a proliferation of hotels and re staurants in the last year. Children have started

running after tourists, begging for pens, candy or money. The oasis has a small landing strip,

allowing those who can hire a plane to land, and there is talk of expanding it into a full-scale

airport to facilitate the introduction of package tours. Egyptian businessmen talk of building

400-room hotels catering to the mass market.

With only 600 families, in a community of 23,000, working with or for the company, EQI

doesn’t have the leverage to decide the path the oasis will take. EQI may be able to restructure

a hotel or two in the old town, but only the state can choose whether to set up a system of

incentives to ensure the rest of Siwa develops along those lines. Government policy is set

largely in the Matrouh provincial capital, 300 kms away, where the tourism perspective is

focused less on sustainability than on volume. In the battle between tradition and modernity

on which the future of the company’s business model depends, EQI’s needs allies. Organising

them to help shape Siwa’s future is a further challenge. Questions:

1. What are the key components of EQI’s business model as applied to Siwa?

2. Evaluate the impact of EQI’s activities on Siwa.

3. What are the local, national and global forces driving change in Siwa?

4. Going forward, what advice would you give Mounir Neamatalla?

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BRITISH PETROLEUM (PLC) AND JOHN BROWNE: A CULTURE OF

RISK BEYOND PETROLEUM (A) 1

Trevor Hunter wrote this case under the supervision of Professor Murray Bryant solely to provide material for clas s discussion. The

authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors m ay have disguised

certain names and other identifying information to protect c onfidentiality.

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In April 2007, the board of British Petroleum (BP) faced a difficult decision. A month earlier, two

independent reports (the first commissioned by BP and chaired by former American Secretary of State

James Baker; the second commissioned by the U.S. Chemical Safety and Hazard Investigation Board)

were released investigating an explosion in 2005 at a refinery in Texas City in the United States that killed

15 people and injured more than 180. After exhaustive investigations , the reports identified a history of

poor ly regulated safety measures in the plant and risk management, the b lame for which seemed to focus

o n t h e f i r m ‘ s g r o u p c h i e f e x e c u t i v e , L o r d J o h n B r o w n e .

After the Baker report was released, the company attempted to mit igate the damage in its 2006 annual

review :

Importantly, the panel did not conclude that BP intentionally w ithheld resources on any

safety-related assets or projects for budgetary or cost rea sons. The panel interviewed

hundreds of employees in the course of its work and observed that it had seen no

information to suggest that anyone – f r o m B P ‘ s b o a r d m e m b e r s t o i t s h o u r l y paid workers

– acted in anything other than good faith. 2

In fact, there had been other independent reports, one in 2004 and then again three months after the 2007

B a k e r r e p o r t , t h a t w e r e l e s s f o r g i v i n g o f B P ‘ s ― c u l t u r e o f s a f e t y. ‖ The 2007 report from the U.S. Chemical

Safety and Hazard Investigation Board suggested that safety in t h e c o m p a n y ‘ s facilities had been

compromised in favour of profits, cost savings or lack of management s upervision.

1 This case has been written on the basis of publish ed sources only. Consequently, the interpretation and perspectives

presented in this case are not necessarily those of British Petroleum or any of its employees.

2 Gro u p E x e c u t i v e ’ s L e t t e r t o S h a r e h o l d e r s , B P A n n u a l R e v i e w 2 0 0 6 .

13 Page 2 9B08M002

The Texas City disaster was caused by organizational and safety de ficiencies at all levels

of the BP Corporation. Warning signs of a possible disaster were presen t for several years,

but company officials did not intervene effectively to prevent it.3

These reports were just the most recent of many concerns hurting the reputation and performance of the

w o r l d ‘ s s e c o n d -largest super major oil company and leading to a drop in share pric e from US$70.41 on

January 17, 2006, to US$63.28 on January 16, 2007. 4

As well, the public release of this information had

destroyed nearly US$39 billion of market capitalization since August 2006. 5

(Exhibit 1 presents a

comparison of the stock performance of the world ‘s super-major oil companies). During this period, the

price of crude oil had risen nearly 20 per cent. 6

In January 12, 2007, Browne announced that he would retire from BP. This was somewhat of a shock to

the board and the investment community because his retirement date w as roughly 18 months before his

mandatory retirement date 7

, and, in the past, he had campaigned to remain in his post past the retiremen t

date. Others were concerned that his successor may not yet be fully prepared to ste p into the top job. What

was also a shock was the announcement of the over US$50 million severa nce package Browne was set to

receive upon retiring. Many wondered how the board could award him such a large package after such

poor performance over recent years.

Browne had been credited with saving and taking BP to new heights and was o ne of the most respected

business leaders in the United Kingdom. At the same time, however, it was clear that in recent months the

f i r m ‘ s p e r f o r m a n c e h a d s u f f e r e d s i g n i f i c a n t l y . M o r e a n d m o r e e v i d e n c e p o i n t e d t o s y s t e m i c p r o b l e m s

within BP that had been allowed to grow during his tenure, creating the culture of risk in which the BP

board now found itself reducing shareholder co n f i d e n c e a n d r i s k i n g l i v e s a n d t h e f i r m ‘ s r e p u t a t i o n . I t w a s

up to the board to decide what to do next.

BRITISH PETROLEUM

British Petroleum plc, (BP) was founded in 1908 as the Anglo-Persian Oi l Company and was started with a

single well in a remote area of Persia after nearly eight years of se arching. From this humble beginning, in

less than half a century, the firm grew to be the largest in the United Kingd om and one of the largest in the

world, employing over 100,000 people in over 100 countries. 8

(E xhibit 2 presents selected financial

information for the year ending 2006, and Exhibit 3 presents the b iographies of the BP board, as published

in the 2006 Annual Report.)

The petroleum industry, while lucrative due to insatiable global demand, was also one that involved

enormous risks. The days of cheap, easily accessed oil appeared to be over a nd what remained was often

located in areas that were politically and socially unstable. Huge amounts of capital were required to find

oil, refine it and then deliver it to the many end users. Risk a lso stemmed from the fact that although the

timing was up for debate, no one doubted that, eventually, eith er through the development of new

technology to replace petroleum or through a simple lack of produc t, a company that was focused only on

3 U.S. Chemical Safety and Hazard Investigation Boar d: Investigation Report, Report No. 2005-04-I-TX,

Refinery Explosion and Fire, March 20, 2007, p. 18. 4 Yahoo Finance interactive stock charts.

5 H e a t h e r T i m m o n s , “ B P C h i e f W i l l R e t i r e A h e a d o f S c h e d u l e , ” I n t e r n a t i o n a l H e r a l d T r i b u n e , J a n u a r y 1 2 , 2 0 0 7 .

6 http://www.opec.org/home/basket.aspx, accessed Dece mber, 2007.

7 BP required its senior managers to retire upon reac hing the age 60.

8 BP Corporate website: http://www.bp.com/sectiongen ericarticle.do?categoryId=14&contentId=2002063, acc essed

September 2007.

14 Page 3 9B08M002

oil would go out of business. To that end, BP tried to protect itself by attempting to stave off the loss of

product by spending billions on exploration for new reserves and on the downstream technology of

refining and distribution to control the entire value chain. At the same time, BP also tried to diversify into

new energy generation technologies.

B P ‘ s b u s i n e s s was divided into three segments 9

: oil exploration and production; oil refining and marketing;

and gas, power and renewables.

Oil Exploration and Production

In 2007, BP was actively exploring for oil in 26 countries aroun d the world, which over the years had

provided the firm with proven reserves of 18.5 billion barrels of oil and gas equivalents leading to daily

production of roughly four million barrels per day. BP had plan s to start 24 more major projects by 2009,

which would provide additional reserves of over 3.7 billion b arrels with an additional production of

850,000 barrels per day.

Oil Refining and Marketing

Oil refining and marketing took the crude oil BP pumped from the g round and turned it into various

products like gasoline, kerosene and motor oil, products which wer e then sold to consumers either through

t h e f i r m ‘ s o w n d i s t r i b u t i o n n e t w o r k o f o v e r 25,000 gas stations or to other sellers. Oil refining was a

technically complex and highly capital-intensive activity. In 2006, BP owned outright or was part owner

of 18 refineries processing the equivalent of 2.8 million barrels a day.

Petroleum could also be refined into chemicals known as acetyls tha t were used in numerous consumer

products. A statement from the firm indicated t h e a c e t y l s ‘ p e r v a s i v e n e s s :

Our acetic acid can be found in jars of pickles. Our acetyls feedst ock is used to make

Viagra. We invented the purified teraphthalate acid (PTA), used in bo th clothes and

polyethylene terephthalate (PET) bottles for water and soft drink s (and we recycle many of

those bottles into fleece pullovers). We are proud to have a world- class PTA business. We

also make paraxylene (PX), the raw material for PTA. 10

Gas, Power and Renewables

As one of the leading oil producers for most of the 20th century, BP, in mo re recent years, had attempted to

reposition itself. T h e s l o g a n ― B P : B e y o n d p e t r o l e u m ‖ h a d b e e n coined to present BP as a company that

was preparing for a world that was past its dependence on petroleum. In 20 05, BP Alternative Energy was

launched to consolidate t h e c o m p a n y ‘ s low-carbon energy initiatives. By 2006, BP claimed to be a world

leader in power generation from solar, wind and gas-fired power pl ants, with plans for additional

investment and research into hydrogen power generation.

9 I n f o r m a t i o n f o r t h i s s e c t i o n c o m e s f r o m t h e “ A b o u t U s ” s e c t i o n o f t h e B P c o r p o r a t e w e b s i t e , a c c e s s e d S e p t e m b e r 2 0 0 7 .

10 http://www.bp.com/sectiongenericarticle.do?categor yId=9008810&contentId=7016413, accessed September 2 007.

15 Page 4 9B08M002

JOHN BROWNE

John Browne, The Lord Browne of Madingley, became chief executive offi cer of BP in 1995 at the age of

45. He was knighted in 1998 and was made a life peer in the Briti sh House of Lords in 2001. By all

accounts, B r o w n e w a s o n e o f t h e m o s t s u c c e s s f u l C E O s i n t h e f i r m ‘ s h i s t o r y , c r e d i t e d w i t h t u r n i n g B P i n t o

one of the largest and most successful energy companies in the wo rld. Browne became known for his

willingness to take risks and to pursue big deals and, under his leadership, in 1998, the acquisition of

American oil company Amoco was engineered. The deal was worth more tha n US $60 billion, an amou nt

that literally doubled t h e f i r m ‘ s s a l e s a n d r e s e r v e s . I n 2 0 0 3 , BP created a joint venture with Russian oil

giant Yukos, providing the firm with 50 per cent access to re serves of over 44 billion barrels of oil or oil

equivalent and additional production of about 1.2 million barre ls a day, at a cost of US$6.8 billion and the

associated risk of operating in the Russian business environment. 11

By many accounts, Browne was a well-respected business person who, w hile being one of the most

powerful business executives in the United Kingdom, was also very private; little wa s known about his

personal life. He was reputed to be a close friend of then British P rime Minister Tony Blair.

Along with turning the firm around, Browne was credited with sett ing the vision for BP as one that would

focus on life beyond petroleum. That slogan meant more than merely p la nning to become an energy

company rather than a petroleum company; it meant BP was a firm tha t cared about the environment and

the safety of its employees more than it cared about oil and pr ofits. Blair had appointed him to the U.K. ‘ s

Sustainable Development Commission. The commission described itself as:

The Government ‘s independent watchdog on sustainable development, reporting to the

Prime Minister, the First Ministers of Scotland and Wales and the F irst Minister and

Deputy First Minister of Northern Ireland. Through advocacy, advic e and appraisal, we

help put sustainable development at the heart of Government policy. 12

The firm took great pains to provide evidence of its focus on the envir onment and safety in numerous

reports and websites, and it undertook investments and made contribu tions to environmental groups.

Codes of conduct for employees covering numerous activities — including safety and the environment,

policies on corporate governance and statements about social r esponsibility — were all crafted under

B r o w n e ‘ s w a t c h . T h e w e b p a g e o n t h e B P c o r p o r a t e w e b s i t e e n t i t l e d ― R e s p o n s i b l e O p e r a t i o n s ‖ h a d l i n k s t o

t o p i c s l i k e ― H e a l t h a n d S a f e t y , ‖ ― M a n a g e m e n t a n d C o m p l i a n c e , ‖ ― E n v i r o n m e n t , ‖ ― C o m p l i a n c e a n d

E t h i c s ‖ a n d ― O u r P e o p l e . ‖

A CULTURE OF RISK: THE TEXAS CITY REFINERY EXPLOSION

Having been involved in the process of refining crude oil for ove r 70 years, the Texas City Oil Refinery,

the third largest refinery in the United States, had long s ince paid for its initial investment. The facility

came to be a BP asset with the 1999 acquisition of Amoco, and although the expl osion on March 23, 2005,

which killed 15 people and injured more than 180, was the worst i n company history, it was by no means

the first accident at the facility.

11 TNK-BP joint venture announcement webcast, accesse d from BP website: http://www.bp.com/sectiongenericarticle.do?

categoryId=2010203&contentId=2014547, accessed Sept ember 2007.

12 The Sustainable Development Commission website: htt p://www.sd-commission.org.uk/pages/aboutus.html – accessed

September 2007.

16 Page 5 9B08M002

D e s c r i b e d a s ― b e i n g h e l d t o g e t h e r b y l i t t l e m o r e t h a n B a n d -A i d s a n d s u p e r g l u e ‖ b y D o n Parus, the

r e f i n e r y ‘ s d i r e c t o r , 13

there had been 23 fatalities in the previous 30 years. Since 2002, when Parus took

over operations at the plant, there had also been an average of one f ire a week, ranging from 50 to 80 a

year. 14

P a r u s i s q u o t e d a s w o n d e r i n g w h y h i s s t a f f a c t u a l l y c a m e t o w o r k : ― k i l l i n g s o m e b o d y e v e r y 1 8

months seems to be acceptable at this site . . . why would people take t he risk, based on the risk of not

g o i n g h o m e ? ‖ 15

In 2004, an independent Texas consulting firm called Telos Group was cont racted by the Texas City

refinery director to assess the safety culture of the plant. In its report, Telos exposed numerous pieces of

evidence to suggest that safety at the refinery was being comprom ised as repairs or servicing were not

effectively completed in attempts to save money or when workers si mply were unable to follow the safety

p r o c e d u r e s . A r e p o r t i n t h e F i n a n c i a l T i m e s m e n t i o n s ― b r o k e n a l a r m s , t h i n n e d p i p e , c h u n k s o f c o n c r e t e

falling, bolts dropping 60 feet, and staff being over c o m e w i t h f u m e s ‖16

a s w e l l a s ― n u m e r o u s w o r k e r s a t

the plant complaining of pressure not to report i n j u r i e s a n d s a f e t y v i o l a t i o n s . ‖17

The Telos report suggested that although there seemed to be a willingness on the part of the refinery ‘ s

management team to maintain a safe working environment, desire and re ality may have been two different

things. Exhibit 4 provides excerpts from the Telos Report. The consult ants concluded that there seemed to

be an ingrained culture of risk at the refinery, which would requ ire a great deal of effort to change, and

that, in the past, after an accident, efforts to make changes start ed out strong but faded as management ‘ s

attention drifted back to profits and efficiency. M a n y s t i l l t o o e a s i l y s e e a f u t u r e w h e r e i t a l l s l i d e s b a c k t o ‗ t h e w a y i t w a s b e f o r e t h e

i n c i d e n t s , ‘ a n d s o p e o p l e ‗ p r a y a n d h o p e t h a t t h i s w i l l n o t p a s s ‘ . . . we were told many

stories about times that left the distinct impression that margins could beat out safety as

l o n g a s t h e y w e r e g o o d e n o u g h . . . ‗ h e r e w e a r e t o d a y a n d t h e y s t i l l h a v e n ‘ t k e p t p r o m i s e s

that make our people out there feel saf e ‘ . . . ‗ S o o n b e c o m e s n e v e r a r o u n d h e r e ‘ m e n t i o n e d

one person in the refinery, pointing to successive postponements; s tarting with fixing it

‗ s o o n ( m e a n w h i l e w e p u t a c l a m p o n i t ) , w h i c h t h e n b e c o m e s n e x t w e e k , w h i c h b e c o m e s

next month, which becomes next t u r n a r o u n d , w h i c h b e c o m e s n e v e r . ‘ 18

In apparent support of this statement, a few months after the March 2 005 explosion, there were two

additional explosions causing over US$ 32 million in property damage, and then, in 2006, another worker

was killed on the job.

The 2007 U.S. Chemical Safety and Hazard Investigation Board (CSHIB) r eport, which examined the

e x p l o s i o n a n d B P ‘ s s a f e t y c u l t u r e i n g e n e r a l , revealed that after the 1999 acquisition of Amoco, rather than

making much-needed safety improvements, BP ordered a 25 per cent cu t in fixed costs at all its refineries.

The report went on to condemn the firm by suggesting:

The combination of cost-cutting, production pressures and failure to invest caused a

progressive deterioration of safety at the refinery. Beginning in 2002, BP commissioned a

series of audits and studies that revealed serious safety problem s at the Texas City

refinery, including a lack of necessary preventative maintenan ce and training. These

13 Andrew Clark and Terry Macalister, Guardian News an d Media Limited, December 8, 2006.

14 Ibid.

15 Ibid.

16 Sheila McNult y , “ F a u l t s a t B P l e d t o o n e o f t h e w o r s t U S i n d u s t r i a l d i s a s t e r s , ” F i n a n c i a l T i m e s , D e c e m b e r 1 8 , 2 0 0 6 .

17 Ibid.

18 Telos Perspective and Recommendations, The Telos Gr oup, 2004, p. 10.

17 Page 6 9B08M002

audits and studies were shared with BP executives in London and were provided to at least

o n e m e m b e r o f t h e e x e c u t i v e b o a r d . B P ‘ s r e s p o n s e w a s t o o l i t t l e a n d t o o late. Some

additional investments were made, but they did not address th e core problems in Texas

City. In 2004, BP executives challenged their refineries to cut ye t another 25 per cent

from their budgets for the following year. 19

These comments echoed the findings of the Baker report. This report, which BP had stated was very

supportive of their safety culture, could be interpreted dif ferently than BP ‘ s o w n i n t e r p r e t a t i o n . Exhibit 5

p r e s e n t s e x c e r p t s f r o m t h e r e p o r t ‘ s E x e c u t i v e S u m m a r y e n t i t l e d ― C o r p o r a t e S a f e t y C u l t u r e . ‖ C l e a r l y t h e r e

were differences of opinion between the firm and the independen t observers with respect to the depth of

B P ‘ s c u l t u r e o f s a f e t y . Despite the difference of opinion, since the explosion, BP had paid out about US$2

billion in terms of compensation payouts and lawsuits. 20

CONCLUSION

W i t h B r o w n e ‘ s i m p e n d i n g r e s i g n a t i o n , t h e r e was undeniable evidence of big problems throughout the

o r g a n i z a t i o n w i t h r e g a r d t o s a f e t y a n d t h e f i r m ‘ s r e p u t a t i o n. As a result, B P ‘ s lack of public credibility

affected the already-stated strategy and goals of the firm. The boar d knew that changes needed to take

place from the top down. The obvious question: Where to begin?

19 U.S. Chemical Safety and Hazard Investigation Boar d Press Release, March 20, 2007.

20 Porretto, washingtonpost.com, Jan. 16, 2007.

18 Page 7 9B08M002

Exhibit 1

S U P E R M A J O R O I L C O M P A N Y ’ S S T O C K P E R F O R M A N C E C O M P A R I S O N – 1 YEAR RETURN

Source: Bloomberg, accessed January 23, 2008

19 Page 8 9B08M002

Exhibit 2

GROUP INCOME STATEMENT – 2006

For the year ended 31 December ($ million)

2006 2005 2004

Sales and other operating revenues 265,906 239,792 192,024

Earnings from jointly controlled entities - after interest and tax 3,553 3,083 1,818

Earnings from associates - after interest and tax 442 460 462

Interest and other revenue 701 613 615

Total revenues 270,602 243,948 194,919

Gains on sale of businesses and fixed assets 3,714 1,538 1,685

Total revenues and other income 274,316 245,486 196,604

Purchases 187,183 163,026 128,055

Production and manufacturing expenses 23,793 21,092 17,330

Production and similar taxes 3,621 3,010 2,149

Depreciation, depletion and amortization 9,128 8,771 8,529

Impairment and loses on sale of businesses and fixed assets 549 468 1,390

Exploration expenses 1,045 684 637

Distribution and administration expenses 14,447 13,706 12,768

Fair value (gain) loss on embedded derivatives -608 2,047 --

Profit before interest and taxation from continuing operations 35,158 32,682 25,746

Finance costs 718 616 440

Other finance (income) costs -202 145 340

Profit before taxation from continuing operations 34,642 31,921 24,966

Taxation 12,331 9,473 7,082

Profit from continuing operations 22,311 22,448 17,884

Profit (loss) from Innovene operations

-25 184 -622

Profit for the year 22,286 22,632 17,262

Attributable to

BP shareholders 22,000 22,341 17,075

Minority interests 286 291 187

22,286 22,632 17,262

Earnings per share - cents

Profit for the year attributable to BP shareholders

Basic 109.84 105.74 78.24

Diluted 109 104.52 76.87

Source: BP Annual Review 2006

20 Page 9 9B08M002

Exhibit 3

BP BOARD OF DIRECTORS PRIOR AT THE PUBLICATION OF THE 2006 ANNUAL REVIEW

1. The Lord Browne of Madingley, FRS, FREng

Group Chief Executive

John Browne (59) joined BP in 1966 and subsequently held a var iety of exploration and production and finance

posts in the US, UK and Canada. He was appointed an executive director in 1991 and group chief executive in 1995.

He will retire as group chief executive at the end of July 2007. He is a non -executive director of Goldman Sachs

Group Inc. He was knighted in 1998 and made a life peer in 2001. 2. Dr A B Hayward

Group Chief Executive designate

Tony Hayward (49) joined BP in 1982. He held a series of roles in exploration and production, becoming a director

of exploration and production in 1997. In 2000, he was made gr oup treasurer, and an executive vice president in

2002. He was chief executive officer of exploration and production between 2002 and 1 February 2007, becoming

an executive director in 2003. He has been appointed to succeed Lord Brow ne as group chief executive following

L o r d B r o w n e ‘ s r e t i r e m e n t i n J u l y . D r H a y w a r d i s a n o n-executive director of Corus Group plc.

3. Dr D C Allen

Group Chief of Staff

David Allen (52) joined BP in 1978 and subsequently undertook a number of corporate and exploration and

p r o d u c t i o n r o l e s i n L o n d o n a n d N e w Y o r k . H e m o v e d t o B P ‘ s c o r p o r a t e p l a n n i n g f u n c t i o n i n 1 9 8 6 , b e c o m i n g g r o u p

vice president in 1999. He was appointed executive vice president and group chief of staff in 2000 a nd an executive

director of BP in 2003. He is a director of BP Pension Trustees Lim ited.

4. I C Conn

Group Executive Officer, Strategic Resources

Iain Conn (44) joined BP in 1986. Following a variety of roles in oil trading , commercial refining, retail and

c o m m e r c i a l m a r k e t i n g o p e r a t i o n s , a n d e x p l o r a t i o n a n d p r o d u c t i o n , i n 2 0 0 0 h e b e c a m e g r o u p v i c e p r e s i d e n t o f B P ‘ s

refining and marketing business. From 2002 to 2004, he was chief executive of petrochemicals. He was appointed

group executive officer with a range of regional and functional responsib ilities and an executive director in 2004. He

is a non-executive director of Rolls-Royce Group plc. 5. Dr B E Grote

Chief Financial Officer

Byron Grote (58) joined BP in 1987 following the acquisition of The Standard Oil Company of Ohio, where he had

worked since 1979. He became group treasurer in 1992 and in 1994 regional chief executive in Latin America. In

1999, he was appointed an executive vice president of exploration and production , and chief executive of chemica ls

in 2000. He was appointed an executive director of BP in 2000 and chief financial officer in 2002. He is a non -

executive director of Unilever NV and Unilever PLC. 6. A G Inglis

Chief Executive, Exploration and Production

Andy Inglis (47) joined BP in 1980, working on various North Sea projects. Following a series of commercial roles

in exploration, in 1996 he became chief of staff, exploration and pr oduction. From 1997 until 1999, he was

r e s p o n s i b l e f o r l e a d i n g B P ‘ s a c t i v i t i e s i n t h e d e e p w a t e r G u l f o f M e xico. In 1999, he was appointed vice president of

B P ‘ s U S w e s t e r n g a s b u s i n e s s u n i t . I n 2 0 0 4 , h e b e c a m e e x e c u t i v e v i c e p r e s i d e n t a n d d e p u t y c h i e f e x e c u t i v e o f

e x p l o r a t i o n a n d p r o d u c t i o n . H e w a s a p p o i n t e d c h i e f e x e c u t i v e o f B P ‘ s e x p l o r a t i o n a n d p r o d u c t i o n b usiness and an

executive director on 1 February 2007.

21 Page 10 9B08M002

Exhibit 3 (continued)

7. J A Manzoni

Chief Executive, Refining and Marketing

John Manzoni (47) joined BP in 1983. He became group vice president for European marketing in 1999 and BP

regional president for the eastern US in 2000. In 2001, he became an ex ecutive vice president and chief executive

for gas and power. He was appointed chief executive of refining and mar keting in 2002 and an executive director of

BP in 2003. He is a non-executive director of SABMiller plc. 8. P D Sutherland

KCMG Chairman

P e t e r S u t h e r l a n d ( 6 0 ) r e j o i n e d B P ‘ s b o a r d i n 1 9 9 5 , h a v i n g b e e n a n o n-executive director from 1990 to 1993, and

was appointed chairman in 1997. He is non-executive chairman of Goldma n Sachs International and a non-executive

director of Investor AB and The Royal Bank of Scotland Group.

C h a i r m a n o f t h e c h a i r m a n ‘ s a n d t h e n o m i n a t i o n c o m m i t t e e s

9. Sir Ian Prosser

Deputy Chairman

S i r I a n ( 6 3 ) j o i n e d B P ‘ s b o a r d i n 1 9 9 7 a n d w a s a p p o i n t e d n o n-executive deputy chairman in 1999. He is the senior

non-executive director. He retired as chairman of InterContinental Hotels Group P LC, previously Bass PLC, in

2003. He is the senior independent non-executive director of GlaxoSmithKline plc and a non-executive director of

the Sara Lee Corporation. He was previously on the boards of The Bo ots Company PLC and Lloyds TSB PLC.

M e m b e r o f t h e c h a i r m a n ‘ s , t h e n o m i n a t i o n a n d t h e r e m u n e r a t i o n c o m m i t t e e s a n d c h a i r m a n o f t h e a u d i t c o m m i t t e e

10. J H Bryan

J o h n B r y a n ( 7 0 ) j o i n e d B P ‘ s b o a r d i n 1 9 9 8 , h aving previously been a director of Amoco. He serves on the boards of

General Motors Corporation and Goldman Sachs Group Inc. He retired as the chairman o f Sara Lee Corporation in

2001. He is chairman of Millennium Park Inc. in Chicago.

Member of the chair m a n ‘ s , t h e a u d i t a n d t h e r e m u n e r a t i o n c o m m i t t e e s

11. A Burgmans

A n t o n y B u r g m a n s ( 6 0 ) j o i n e d B P ‘ s b o a r d i n 2 0 0 4 . H e w a s a p p o i n t e d t o t h e b o a r d o f U n i l e v e r i n 1 9 9 1 . I n 1 9 9 9 , h e

became chairman of Unilever NV and vice chairman of Unilever PLC. He was appo inted chairman of Unilever NV

and Unilever PLC in 2005. He is also a member of the supervisory b oard of Akzo Nobel NV.

M e m b e r o f t h e c h a i r m a n ‘ s a n d t h e s a f e t y , e t h i c s a n d e n v i r o n m e n t a s s u r a n c e c o m m i t t e e s

12. Sir William Castell, LVO

S i r W i l l i a m ( 5 9 ) j o i n e d B P ‘ s b o a rd in July 2006. From 1990 to 2004, he was chief executive of Amersham plc and

subsequently president and chief executive officer of GE Healthcare. He was appoin ted as a vice chairman of the

board of GE in 2004, stepping down from this post in 2006 wh en he became chairman of the Wellcome Trust. He

remains a non- e x e c u t i v e d i r e c t o r o f G E a n d i s a t r u s t e e o f L o n d o n ‘ s N a t u r a l H i s t o r y M u s e u m .

M e m b e r o f t h e c h a i r m a n ‘ s , t h e a u d i t a n d t h e s a f e t y , e t h i c s a n d e n v i r o n m e n t a s s u r a n c e c o m m i t t e e s

13. 13 E B Davis, Jr

Erroll B D a v i s , J r ( 6 2 ) j o i n e d B P ‘ s b o a r d i n 1 9 9 8 , h a v i n g p r e v i o u s l y b e e n a d i r e c t o r o f A m o c o . H e w a s c h a i r m a n

and chief executive officer of Alliant Energy, relinquishing this dual app ointment in 2005. He continued as

chairman of Alliant Energy until February 2006, leaving to become chancellor of the University System of Georgia.

He is a non-executive director of PPG Industries, Union Pacific Corporation and the US Olympic Committee.

M e m b e r o f t h e c h a i r m a n ‘ s , t h e a u d i t a n d t h e r e m u n e r a t i o n c o m m i t t e e s

22 Page 11 9B08M002

Exhibit 3 (continued)

14. D J Flint, CBE

D o u g l a s F l i n t ( 5 1 ) j o i n e d B P ‘ s b o a r d i n 2 0 0 5 . H e t r a i n e d a s a c h a r t e r e d a c c o u n t a n t a n d b e c a m e a p a r t n e r a t K P M G

in 1988. In 1995, he was appointed group finance director of HSB C Holdings plc. He was chairman of the Financial

R e p o r t i n g C o u n c i l ‘ s r e v i e w o f t h e T u r n b u l l G u i d a n c e o n I n t e r n a l C o n t r o l . B e t w e e n 2 0 0 1 a n d 2 0 0 4 , h e s e r v e d o n t h e

Accounting Standards Board and the Standards Advisory Council of t he International Accounting Standards Board.

M e m b e r o f t h e c h a i r m a n ‘ s a n d t h e audit committees

15. Dr D S Julius, CBE

D e A n n e J u l i u s ( 5 7 ) j o i n e d B P ‘ s b o a r d i n 2 0 0 1 . S h e b e g a n h e r c a r e e r a s a p r o j e c t e c o n o m i s t w i t h t h e W o r l d B a n k i n

Washington. From 1986 until 1997, she held a succession of posts, incl uding chief economist at British A irways and

Royal Dutch Shell Group. From 1997 to 2001, she was an independent m ember of the Monetary Policy Committee

of the Bank of England. She is chairman of the Royal Institute of International Affairs and a non -executive director

of Lloyds TSB Group PLC, Roche Holdings SA and Serco Group plc.

M e m b e r o f t h e c h a i r m a n ‘ s a n d t h e n o m i n a t i o n c o m m i t t e e s a n d c h a i r m a n o f t h e r e m u n e r a t i o n c o m m i t t e e

16. Sir Tom McKillop

S i r T o m ( 6 3 ) j o i n e d B P ‘ s b o a r d i n 2 0 0 4 . S i r T o m w a s c h i e f e x e c u t i v e o f A s t r a Z e n e c a P L C f r o m t h e merger of Astra

AB and Zeneca Group PLC in 1999 until December 2005. He was a non-ex ecutive director of Lloyds TSB Group

PLC until 2004 and is chairman of the Royal Bank of Scotland Group.

M e m b e r o f t h e c h a i r m a n ‘ s , t h e r e m u n e r a t i o n a n d t h e s a f e t y , e t h i c s and environment assurance committees

17. Dr W E Massey

W a l t e r M a s s e y ( 6 8 ) j o i n e d B P ‘ s b o a r d i n 1 9 9 8 , h a v i n g p r e v i o u s l y b e e n a d i r e c t o r o f A m o c o . H e i s p r e s i d e n t o f

Morehouse College, a non- e x e c u t i v e d i r e c t o r o f B a n k o f A m e r i c a a n d M c D o n a l d ‘ s C o r p o r a t i o n a n d a member of

P r e s i d e n t B u s h ‘ s C o u n c i l o f A d v i s o r s o n S c i e n c e a n d T e c h n o l o g y .

M e m b e r o f t h e c h a i r m a n ‘ s a n d t h e n o m i n a t i o n c o m m i t t e e s a n d c h a i r m a n o f t h e s a f e t y , e t h i c s a n d e n v i r o n m e n t

assurance committee

Changes to the board

Michael Wilson resigned as a director on 28 February 2006 and Michael Miles retir ed as a director on 20 April

2006. Sir William Castell was appointed a non-executive director on 20 July 2006 and Andy Inglis was appointed an

executive director on 1 February 2007.

Source: BP Annual Review 2006.

23 Page 12 9B08M002

Exhibit 4

EXCERPTS FROM THE TELOS REPORT, 2004

Don Parus is mentioned by the overwhelming majority of those interviewed and surveyed as

genuine in his commitment to people and safety, while oftentimes, in the same breath, they

question if everyone on the leadership team is on board with Don.

T h e l a c k o f l e a d e r s h i p a n d m a n a g e m e n t v i s i b i l i t y , ( ― e x c e p t w h e n s o m e t h i n g g o e s w r o n g ‖ )

communication, and conversation around protection coupled with site history and a natural focus

on production causes a significant priority for production over protection at Texas City.

Maintenance underinvestment over the years has significantly altered the listening for

m a n a g e m e n t ‘ s s a f e t y c o m m i t m e n t a n d d i m i n i s h e s p r o d u c t i o n ‘ s r e l a t i o n s h i p t o s a f e p r a c t i c e s f o r

routing assignments (thinning pipe, inconsistent asbestos abatement practices, corrosion under

insulation). In addition, when asked what area concerned people the most in terms of safety

performance — or where the next injury was likely to occur — turnaround maintenance was at

the top of the list. Many added that this was likely due to the requirement of clustering them all

together and thus not being able to select contractors by their safety performance.

F e w l e v e l s o f t h e o r g a n i z a t i o n a r e e x e m p t f r o m t h e ― s c a r c i t y o f t i m e ‖ s y n d r o m e t h a t t e n d s t o

reinforce a culture of acting on priorities versus a culture of acting from values and strategies.

From a protection perspective, the quantity and competence of managers and supervisors is

questionable given the cultural work needed at Texas City. The prevalent view of procedures as

― u n w o r k a b l e ‖ a t t h e p r o d u c t i o n l e v e l c o n t r i b u t e s t o t h e c u l t u r e o f i n d i v i d u a l i n t e r p r e t a t i o n o f

protection requirements and tolerance for variation from accepted safe practices. Many, many

people pointed out to us that in several cases they knew personally, these were good people who

could not make sense of the procedure as written, and were trying to the best of their ability to

understand the intent of the procedure and comply with that.

Source: Telos Perspective and Recommendations, The Telos Group, 2004.

24 Page 13 9B08M002

Exhibit 5

EXCERPTS FROM THE BAKER REPORT

Process safety leadership. The Panel believes that leadership from the top of the company,

starting with the Board and going down , i s e s s e n t i a l . I n t h e P a n e l ‘ s o p i n i o n , i t i s i m p e r a t i v e t h a t

B P ‘ s l e a d e r s h i p s e t t h e p r o c e s s s a f e t y ― t o n e a t t h e t o p ‖ o f t h e o r g a n i z a t i o n a n d e s t a b l i s h

appropriate expectations regarding process safety performance. Based on its review, the Panel

believes that BP has not provided effective process safety leadership and has not adequately

established process safety as a core value across all its five U.S. refineries. While BP has an

a s p i r a t i o n a l g o a l o f ― n o a c c i d e n t s , n o h a r m t o p e o p l e , ‖ B P h a s n o t p r o v i d e d effective leadership

in making certain its management and U.S. refining workforce understand what is expected of

them regarding process safety performance. BP has emphasized personal safety in recent years

and has achieved significant improvement in personal safety performance, but BP did not

emphasize process safety. BP mistakenly interpreted improving personal injury rates as an

i n d i c a t i o n o f a c c e p t a b l e p r o c e s s s a f e t y p e r f o r m a n c e a t i t s U . S . r e f i n e r i e s . B P ‘ s reliance on this

data, combined with an inadequate process safety understanding, created a false sense of

confidence that BP was properly addressing process safety risks.

Incorporation of process safety into management decision-making. The Panel also found that

BP did not effectively incorporate process safety into management decision-making. BP tended

to have a short-term focus, and its decentralized management system and entrepreneurial culture

have delegated substantial discretion to U.S. refinery plant managers without clearly defining

process safety expectations, responsibilities, or accountabilities. In addition, while accountability

i s a c o r e c o n c e p t i n B P ‘ s M a n a g e m e n t F r a m e w o r k f o r d r i v i n g d e s i r e d c o n d u c t , B P h a s n o t

demonstrated that it has effectively held executive management and refining line managers and

supervisors, both at the corporate level and at the refinery level, accountable for process safety

performance at its five U.S. refineries. It appears to the Panel that BP now recognizes the need to

provide clearer process safety expectation s.

P r o c e s s s a f e t y c u l t u r e s a t B P ’ s U . S . r e f i n e r i e s . BP has not instilled a common, unifying

process safety culture among its U.S. refineries. Each refinery has its own separate and distinct

process safety culture. While some refineries are far more effective than others in promoting

process safety, significant process safety culture issues exist at all five U.S. refineries, not just

Texas City. Although the five refineries do not share a unified process safety culture, each

exhibits some similar weaknesses. The Panel found instances of a lack of operating discipline,

toleration of serious deviations from safe operating practices, and apparent complacency toward

serious process safety risks at each refinery.

Source: The Report of the BP U.S. Refineries Indepe ndent Safety Review Panel, 2007.

25 26 The PCNet Project (B)

Dynamically Managing Residual

Risk

04/2005-5272

This case was written by Christoph H. Loch, Professor of Technolo gy and Operations Management at

INSEAD. It is based on real events, but the names of all compan ies and participants have been disguised.

Any similarity with existing companie s is accidental. The case is intended to be used as a basis for class

discussion rather than to illustrate the effective or ineffective h andling of an administrative situation.

N.B. P LEASE NOTE THAT DETAILS OF ORDERING INSEADCASES ARE FOUND ON THE BACK COVER . COPIES MAY NOT BE MADE WITHOUT

PERMISSION .

27 INSEAD 52721

The unexpected events that worried Jack Muller represented “residual risk”. In a project of

such complexity, no amount of planning can ever anticipate all events, no matter how

thorough; there will always be some events that are not planned for. Therefore, it is key to

build the capability of dealing with residual risk as it comes along.

The direct outcome of the 18 September meeting was a strengthening of the aggregate

oversight body (for the entire merger), not in the sense of it exerting more pressure, but in

terms of adding experience and enhancing its problem-solving and advice-giving capacity.

First, the Integration Management Committee Meeting became the Performance Monitoring

Meeting, with a dedicated manager (who followed up issues), expanded membership to add

relevant areas of expertise, and a more systematic synergy follow up.

The Risk Management Office

At the level of the IT integration, Max Schmeling had already begun to build a structure for

managing residual, unforeseen contingencies during execution

. The Risk Management

Office (RMO) was put in place as a complement to the Project Management Office (PMO).

Whereas the PMO followed up on actions and on reporting, the RMO focused on responding

to deviations. It was a central control point to which all teams were required to call in at least

once a day to report on progress and problems that arose.

The RMO achieved two things. First, it represented a problem-solving resource – Metal

Resources Co. had its own technical experts present in this center, plus experts on call from

all technical areas at the main syst ems vendors (such as HP and IBM for PCs, Cisco for

routers, Microsoft for operating systems, SAP for R3, EDS for the network operation, etc),

and experts in culture and change management were also on call. Thus, when an unforeseen

problem occurred, the center diagnosed it with the team in question and then helped to

mobilize the expertise to bring about, or plan, a solution as quickly as possible. Second, the

rapid information exchange helped to set off alarm bells (early warnings) as well as solution

approaches , across the many parallel teams. As they were working on very similar issues at

multiple sites, a problem occurring at one site might well subsequently occur at one of the

others, and thus the transfer of solutions was efficient. The rapid communication of relevant

warnings from one team to another was dubbed “the hotwire”.

Thus, at each local deployment, a representative of the next local deployment team (in another

state or country) was present so that they could become familiar with the logistical as wel l as

technical issues. The Latin American deployment went very smoothly as a result of this

approach. Similarly, problems that arose in the application migration to the new platform in

Singapore were subsequently avoided throughout the Southeast Asian region.

Both the PMO and the RMO also attempted to prevent certain risks by enforcing strict

standards (thus reducing the complexity and number of things that could go wrong), such as

all of North America having to move to a single SAP system configuration (there was a

separate central control center for that project alone, which worked with all the organizational

units to produce a common standard that satisfied most of the needs). Many technical and

business software applications were standardized (such as statistical analysis pac kages,

28 INSEAD 52722

geological expert systems etc.), which, in turn, reduced the number of different problems that

could occur and facilitated the sharing of solutions across teams.

The activities of the RMO enabled the organization to work with budget and schedule

variances (deviations) in a more sophisticated way, for example, by performing variance

analysis. There was significant overspending in Phase 3, because some work originally

foreseen for Phase 4 was in fact carried out at this point due to small “design changes” or

improvements in protocols and processes as the organization learned during the project. The

activities of the RMO involved providing explanations and documentation for residual risk

and the respective actions required. Thus the organization had a ‘trace’ that offered a

thorough explanation of deviations and an institutionalized effort to learn from such changes.

The following example illustrates the effect of such learning: the early PC deployments took

several man days per person as the migration team was learning and stabilizing the

components of the network, whereas later deployments required only a few hours (a reduction

of 75%) and were much more stable. Overall, the project remained slightly under budget,

although it took 6 months longer than originally planned.

Dealing With Individual Residual Risks

The problem of lost e-mails and corrupted e-mail capabilities had to be attacked at two levels

The first level was technical: when the lost file incidents were examined, the root problem

turned out to be that Microsoft XP did not have a translator to automatically modify files. In

response, the Microsoft developers made their own in-house translator software available

which systematically eliminated the problems and improved the overall robustness of the

network. Several similar fixes contributed to overall network stabilization. The second

solution level concerned change management processes: over time, the merger team put such

processes in place (“who can change what system features, after discussing it with whom”),

and convinced employees to comply with them, which eliminated incompatibilities introduce d

by local changes.

The Sri Lankan government partner eventually came on board, although at its own pace. This

contributed to a six-month delay but did not “stop the show”.

The refining manager who refused the deployment was won over with a combination of carrot

and stick. On the one hand, the IT organization conducted a security audit at his site, which

exposed serious vulnerability to external attacks and other breakdowns. This allowed the

team to show him how badly it might get for hi m locally (carrot) and make it clear that he

could not be permitted to pose a risk for the rest of the organization (stick).

The cajoling and convincing of the refining plant manager was then generalized to a

standardized, prepared, compelling argument that was used with operating managers who

thought they had no time for off-line activities like IT migration (Exhibit 1). The argument

again combined carrot and stick – on the one hand it explained the benefits to the operating

units themselves and emphasized that they could get help; on the other it threatened them that

their network would no longer be supported if they did not migrate. This standard argument

was, of course, complemented by personal visits and face-to-face explanations.

29 INSEAD 52723

Overall Project Success

“You guys will have to learn how to walk, whistle and chew gum, all at the same

time.” Martin Folz, CEO

The ITC organization did learn to “walk, whistle and chew gum at the same time”, as the

CEO demanded. They took the metaphor seriously enough to define it: walking meant to not

disrupt ongoing operations, whistling to lead the project with state-of-the-art methods, and

chewing gum stood for status reviews and dealing with residual risks. At the end, no

unexpected event was serious enough to break the project. The thorough planning, combined

with the flexibility of the RMO and the hotwire, was so powerful that the huge IT merger

became a convincing success. The total IT merger project beat its target by $20 million,

producing $230 million of synergies in the first year, and the PCNet project made a

significant contribution to this overfulfillment (partially driven by an extra $10 million in PC

discounts that came out of the proactive negotiations).

Critical to this success was the support and constancy of purpose of top management: the

CEO listened to the business case and stayed the course. No IT migration budgets were cut,

in spite of the lean economic times, and the project was able to maintain priority and focus.

30 INSEAD 52724

Communication Document for Operating Company Compliance

The PCNet Deployment Consultant team presents ……..

The Top Ten List of “Reasons why you should quickly and carefully

decommission your legacy IT environment”

10. Dual environments will make it more difficult to maintai n IP compliance, particularly once Microsoft

ceases support of NT 4.0.

9. Dual environments are impacting our networks due to unnecessa ry traffic from the legacy

infrastructures such as file replication, Exchange Global Catalog replication, SMS inventory and

package traffic, as well as WINS and DNS traffic.

8. Increased vulnerability to security attacks and viruses as vendors st art dropping maintenance

support for Win9x, NT4 and W2K, and our internal centralized efforts are no longer funded for

these environments.

7. Increased cost for support as troubleshooting by support staff becomes a lot more complex due to

having to follow separate processes and using different tools in order to support two environments.

Cost also increases due to reduced reliability and increased brea k/fix calls as hardware has lived

long past its planned life-cycle.

6. Legacy Master Account NT4 and AD domains will be decommissioned , leaving resource domains

with no trusts. The old PC and workstation environments will lose connectivity. There will also be

performance issues as Master Account domain controllers are removed one b y one.

5. The decommissioning effort is part of Metal Resources and RBD synergy cost-savings and the

realization of these savings now becomes our responsibility.

4. The business case for the synergies will be compromised by havin g to support dual

infrastructures.

3. Manpower can be redirected towards strategic projects once dep loyment and decommissioning

efforts are completed (and we can take our vacations now!).

2. Old computing standards monthly costs will be increased by x2, x4 and x6 the longer you keep

your old hardware. Costs to maintain old infrastructure will b e divided by the number of remaining

old standard users.

And the #1 Reason is …

1. The old desktop has been declared “non-standard”. Yes, it is true. The sun has se t on the old

standard, with the IT design team only providing Anti-Virus upd ates and major security patches.

Having old standard machines at your site makes your s ite “Non-Standard”.

--------------------------------------------------------------------------------- -------------------------------------------------------

Here are three documents to help you in your efforts to decommissio n:

Decommission Legacy Systems Guide

Decommissioning Server Assets

Decommissioning Workstation Assets

*** If the thought of pulling the plug on your favorite C ompaq Proliant server is giving you nightmares

and sleepless nights, then please email me back about gettin g the PCNet Deployment Consultant

team to offer decommissioning consulting services at your site.

31 To order INSEAD case studies please contact one of the three distributors below: ecch, UK and USA Centrale des Cas et de Médias Pédagogiques

ecch UK Registered Office: ecch USA Registered Office: www.ecch.com www.ecch.com www.ccip.fr/ccmp/ Tel: +44 (0)1234 750903 Tel: +1 781 239 5884 Tel: 33 (0) 1.55.65.65.97

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32 Bibliography

"Environmental Quality International in SIWA." Story, Jonathan. Case No. 5607. Published 4/30/2009, INSEAD, 2008. (11 pages).

"British Petroleum (PLC) and John Browne: A Culture of Risk Beyond Petroleum (A)." Bryant,Murray J.; Hunter, Trevor. Case No. 9B08M002. Published 07/29/2008, Richard Ivey

School of Business, (13 pages).

"The PCNet Project (B) Dynamically Managing Residual Risk." Loch, Christoph. Case No.5272b. Published 04/2005, INSEAD, (6 pages).

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