Corporate Responsibility - The Key to Corporate Sustainability

Introduction

Thank you for that very kind welcome. I am delighted to be joining you today in this splendid auditorium at this world-renowned university.

I am aware that you are celebrating your 125th anniversary this year, with most of those years having been dedicated to the study of chemical technology. I also appreciate that Rector Sarkisov has been associated with the university for over 50 years. And as the university has grown and given life to new institutes and departments, he has personally pioneered entire new subjects and disciplines in the areas of silicate alloys and ceramics.

I would like to thank the Rector for welcoming us here today and to pay tribute to his vision and leadership. It is a real privilege for BP and TNK-BP to be associated with someone of his distinguished record – and indeed with this university.

Together you have recorded remarkable achievements, especially considering the massive changes that have taken place beyond these walls over 125 years. You could not have achieved this without strong values, high standards and real dedication.

It’s a great place to talk about sustainability – because we are surrounded by a living example of what it means.

Indeed it is an example for any company to aspire to – including BP, which is some 30 years younger than Mendeleev – and will celebrate its centenary in 2008.

Of course, BP, too, has seen its share of change.

And as a result of some of the more recent and exciting changes, I stand here today with two hats on – metaphorically speaking.

First, I am here as the Chief Executive of BP’s Exploration & Production business, representing a long-established company which has already undergone a long journey of learning in the way it approaches issues such as responsibility and sustainability around the world.

Second, I am here as a board member of TNK-BP, a young company at the start of its journey, facing new questions about these issues in the specific context of Russia.

So today I want to take the opportunity to explain how we see corporate responsibility at BP – and how it relates to sustainability. And then I will give you some examples of what that has meant in practice.

I stress that I am here to share experiences. I am not here to claim we have all of the answers. We are very aware that we do not.

BP and Russia

Indeed we are learning as we develop our business here in Russia.

BP has been active here since the early 1990s. In 1997 we purchased a 10% interest in Sidanco and increased our Sidanco stake to 25% in 2002 and then in 2003 we merged our interest with TNK to create TNK-BP, in which we own 50%.

TNK-BP is a large private company by global as well as Russian standards.

As well as being Russia’s second largest oil company, it is one of the top ten largest non-state oil and gas companies in the world.

It operates over 250 producing oil and gas fields and 15,000 producing wells, working in West Siberia, East Siberia, the Volga-Urals and the Far East.

Our current crude oil production is around 1.5 million barrels per day and we also produce nearly 1 billion cubic feet of gas per day.

TNK-BP has six refineries, producing over 27 million tonnes per year or 550,000 barrels per day. And it has over 2000 retail stations across Russia and Ukraine.

Our goal in TNK-BP, with our partners, Alfa, Access and Renova, is to build a world-class Russian company, an industry leader, a company with strong foundations that endures and grows decade after decade. We plan to play a major part as Russia continues to grow and assumes its role as one of the most important global energy suppliers of the 21st century.

1) Responsibility – Our Approach

Corporate responsibility

The theme of sustainability takes me onto the main subject I want to address – which is the nature of corporate responsibility. Today ‘corporate responsibility’ is a fashionable phrase. Type it into the Google internet search engine and you will be offered literally millions of pages to read.

But in my view, being responsible is anything but a passing trend for the private sector. In fact, at its root, responsibility flows from a company’s desire to be sustainable – to outlast fashions and trends and to stay in business over many decades.

If a company is going to be sustainable it must do two things. First it must run a successful business that makes a profit and invests for continued growth – this is fundamental and distinguishes business from other parts of society. Second it must be trusted and supported by those it does business with – customers, suppliers, governments, communities, informed observers and experts such as NGOs.

Trust and support are not earned simply by producing reports, or saying the right things in speeches. Trust and support are earned when a company provides real benefits to those who are affected by its business. The customer gets value for money. Local communities receive benefits from investment, from jobs and from the company’s involvement in local activities. Suppliers benefit through winning business and learning new skills. And employees benefit through training and experience as well as through wages and pensions.

The government receives revenues from taxation and has a constructive relationship with the company. Populations benefit from business’s contributions to development or capacity-building. Society as a whole benefits from innovations made through research and development.

Mutual advantage

The test of whether a business builds trust is whether it creates ‘mutual advantage’ in its relationships. If only one side benefits, then the other party becomes disillusioned, but if both sides benefit, then the relationship continues beyond a single transaction. At BP we believe that business should aim to build relationships of mutual advantage with all those who are touched by its activities.

I believe that if a company keeps its eyes on the goal of sustainability then it will find the right balance between self-interest and altruism. If it is too self-interested, if it does not bring benefits to others – or worse if it actually breaks laws or ethical codes – then it will not survive over the long term. But equally, a company will also fail if it neglects its shareholders and makes the mistake of taking over roles that properly belong to governments and social services. Indeed if it goes bankrupt or depends on subsidy, it becomes a social liability rather than a social asset.

Companies are businesses, not charities. Their primary role is to create products and services and create wealth. However, our interest in creating mutual advantage means that we aim to foster stability and prosperity in the countries where we operate, both by running a responsible business and by making some focused contributions to particular activities in the communities that are relevant to our work.

Mutual advantage of course by definition works both ways. Governments and companies work together best when they are mindful of each other’s priorities, when companies understand and support policy goals and when governments create conditions in which businesses can thrive - by setting clear, transparent and prudent rules and by having policies that encourage long-term investment and long-term growth.

Transparency

Another important factor in creating trust is transparency – being open about challenges and shortcomings as well as achievements. We strongly believe that openness is the best approach for business. I think people value a company’s achievements more if they know they can trust that company, and they will trust the company if it is open about its difficulties. In short, cover-ups corrode trust - transparency builds trust.

This is why each year we publish a report called the Sustainability Report, looking at all aspects of how our performance affected our prospects for long term sustainability. Over the years in which we have been reporting on this area we have progressed from producing a relatively limited review giving data on non-financial activities, such as emissions and community investment, to a much fuller account of our achievements and challenges.

It’s an attempt to provide a full, holistic, picture of the company’s activity – from the business achievements and environmental advances that we are proud of - through to difficulties, shortcomings and the problems with which we are still grappling. This year the report has been translated into Russian for the first time. And I am also pleased that one of the research projects we support here at the university is about environmental reporting standards in Russia.

Turning principles into practice

So – in BP or TNK-BP – what do we actually do to put these principles into action and ensure that our business is sustainable?

First, we design our business strategy to deliver benefits and value in the long term as well as the short term, balancing returns to shareholders which deliver value today with investments in assets, plant and people that create value for the future.

Second, we seek to run responsible operations, complying with the law, setting our own benchmarks in areas such as health and safety and governance and taking practical steps to ensure the standards can be implemented.

Third, we seek to take a lead and make a positive difference in respect of major issues that lie beyond our operations but are relevant to our business - and this takes us into areas as diverse as climate change and education.

In short we are aiming to have a responsible and sustainable business strategy, responsible and sustainable operations and a responsible and sustainable role in society.

2. Responsibility - Examples

Let me look at each of these in turn, and give some examples.

2.1 Long-term business strategies

Looking first at business strategy, the recent history of BP has been that of expansion to become a super-major and to achieve a position in which we can make large-scale investments which deliver value for the long-term. Examples include Tangguh, a massive gas-field in Papua, Indonesia, from which we will supply liquefied gas to China, Mexico and South Korea; the BTC pipeline - a 1770 kilometre long pipeline across the Caucasus to bring oil from the Caspian Sea to the Mediterranean; and the deepwater Gulf of Mexico - a cluster of projects where we are drilling into the seabed up to 2000 metres below sea level at unprecedented depths, pressures and temperatures. We have invested heavily to create these projects and now they are delivering growth and returns.

Of course one of the most important of our large-scale investments is the one we have made here in Russia to create TNK-BP. And now putting on my TNK-BP hat, I am delighted that this Russian company is now also delivering growth, value, benefits and potential for the future. TNK-BP grew oil production by 13% last year. It employed around 100,000 people and contributed more than $6.5bn in taxes and excise duties to Russian budgets at all levels. This improvement is partly due to the application in TNK-BP of the best available international technology and processes – in areas such as waterflood optimization and hydraulic fracturing. For example at the Samotlor field, a decline in production of 85% from the 1980 peak was reversed and turned into growth of more than 14% in 2004.

Capital expenditure in TNK-BP, which continues to be self-funding, grew from around $1bn in 2003 to $1.5bn last year. It is forecast to increase to around $1.8 billion this year as new prospects are developed for the future.

The oil and gas business is a long-term business and TNK-BP is looking to become a truly world-class Russian company that makes a positive and significant contribution to Russia.

2.2 Responsible operations

BP and TNK-BP are businesses designed to succeed in the long term. But day-by-day, hour-by-hour, we also need to run our operations responsibly if we are to deliver mutual advantage to those around us. In the case of TNK-BP, like BP, the company is committed to managing responsible operations. Along with our partners, Alfa Access Renova, we have agreed a set of policies and processes that the company will adhere to.

TNK-BP corporate governance plans

One important aspect of responsible operations is corporate governance. The way a business is run needs to be clear and comprehensible. Management needs to be monitored and challenged through non-executive scrutiny. Policies and standards need to be established and adhered to.

In TNK-BP several specific steps have been taken in this regard. Accounts are now prepared to US GAAP standards and reported quarterly. The external audit function has been strengthened and given direct accountability to the Board’s Audit Committee. The company has a new management information system in place that includes consolidated forecasting, annual plans and a planning and performance management process.

Steps are also being taken towards creating a simpler, more transparent structure for TNK-BP in the long term, reducing the number of legal entities, improving transparency and facilitating fair treatment of all shareholders. In an important move earlier this year, a voluntary exchange offer was made to minority shareholders in 14 large operating subsidiaries based on an independent valuation.

HSE in TNK-BP

A fundamental part of operating responsibly is creating a safe, clean working environment. We work in a potentially hazardous business, and to address the risks we face, we invest both in the training of our people and in measures to maintain the integrity of plant and pipelines. TNK-BP is committed to being a Russian industry leader in health, safety and the environment – HSE – and it is backing that commitment with investment of $1.7bn over five years to improve HSE performance and move towards international best practice. This includes cleaning up sites where there have been leaks in the past and carrying out a multi-year programme to improve the integrity of pipelines, replacing them where necessary.

Last year this initiative began where it most matters - with personal safety. The company adopted an HSE policy as well as 10 safety standards, covering issues from working at heights to lifting operations and transport. A company-wide reporting process has been set up with the objective of making sure that all incidents, including near-misses, are reported and subjected to root cause analysis so that the company learns how to prevent recurrences. In 2005, the company is moving on to define standards for environmental protection, health and plant integrity. This year is also seeing an accelerated clean-up operation in fields such as Samotlor, where hundreds of hectares are undergoing remediation. A further environmental advance is the upgrading of the Ryazan refinery to produce lower sulphur fuel and gasoline to meet EU standards.

We have also adopted strict international vetting standards for all ocean-going tankers carrying our cargoes. In 2004, we took a lead by introducing standards for shipments on the Volga River. These standards will become progressively more stringent, as shipping companies which work with our cargoes make the investments required to improve the safety of their vessels. Since 2004 we have been working to introduce standard protective clothes and equipment for all workers across TNK-BP.

As we go forward, green-field developments will be engineered according to internationally accepted standards. I believe TNK-BP will be the first Russian oil company to do that.

People

None of these programmes can work without skilled and dedicated people and this is why both BP and TNK-BP have a commitment to invest in training and professional growth for our people. We have been able to recruit some exceptionally talented people in Russia and we are committed to recruit more. We recruit and advance people on the single criterion of merit and we aim to create an inclusive culture so that everyone can reach their full potential. This maximises competitiveness as well as being right for the individuals. Our commitment includes secondment schemes whereby BP professionals share knowledge with TNK-BP staff and Russian specialists spend time with BP businesses overseas on long-term training assignments.

Code of Conduct

With operations taking place in 100 countries, with many different prevailing laws and regulations, it is important for BP to set clear global standards of ethics and behaviour so that our actions are consistent around the world. We have taken a new step forward in this regard this month with the publication to all employees of a Code of Conduct setting out expectations in more detail than ever before. The Code covers a range of areas. It contains rules on safety. It explains how to offer equal opportunities in recruitment. It defines what a conflict of interest is. It describes the different forms bribery can take and makes clear that they are all unacceptable. It explains how BP does not participate in party politics although it seeks constructive relationships with governments and takes part in relevant debate. The Code’s value does not lie in producing it, but implementing it. The prize is for BP to be recognised as a company with clear and consistent standards, and therefore a company you can trust to do the same thing wherever you encounter it in the world.

2.3 Taking a lead

So far I have been discussing our business and our operations and how we can try to show responsibility in these. These areas lie in what we call our ‘sphere of control’, where we control the inputs and are accountable for the outcomes. Outside our operations, beyond the perimeter fence, there lies a ‘sphere of influence’ where we are one among many players and have a shared accountability with others.

We have thought hard about what our proper role is in this external sphere, so that we can be clear when we communicate on our wider role in society. We are a part of society and we have an obligation to work towards the progress of society as well as the progress of our own business. However if we are to make such a contribution, it must be business-like. We must be selective about those areas we take a lead in and make choices as rigorously as we would when it comes to our business investments. And essentially our choices fall within a group of issues which have three things in common. They are issues that affect our business. They are issues where we have relevant skills to bring to bear. And they are issues which represent major challenges for society. In other words if we are going to invest in the community it is not a publicity stunt. It is a serious investment designed to resolve a major problem or meet a real need.

Climate change

The most high-profile example of such an issue for BP is climate change, an area that we have been seeking to address now for some years in various ways. In our own operations we have reduced our greenhouse gas emissions by around 10% over six years through energy efficiency and reduction of flaring. We have gone on to find and explore ways to provide lower carbon energy to customers, whether through encouraging use of natural gas as an alternative to coal or oil, or through our solar business. We are also taking part in trials and tests on carbon dioxide capture and storage and hydrogen power.

In TNK-BP we are seeking to improve energy efficiency and looking to develop our growing natural gas business, particularly through the Kovykta project in East Siberia. When burned to generate power, gas releases only around half of the carbon dioxide emitted by coal. And our reading of the science suggests that one of the most effective steps in combating climate change would be to replace thousands of coal-fired power stations with gas-fired ones over the first half of this century. Russia, with by far the world’s largest reserves of natural gas, therefore has a potentially very significant role in providing this lower carbon fuel, as well as acting as a force for security and stability in the global market. I’m also delighted to see that some of the students whom we are supporting at this university are studying topics connected with energy efficiency and the environment.

Revenue management

Another issue which we have become involved in because of its importance for our business is what we term ‘revenue management’ – in other words, ensuring that the proceeds of our activity bring the benefits that they should to the populations of the countries where we work. Many economies are now receiving major inflows of revenue from energy projects, perhaps for the first time, and managing these in a way that does not destabilize economies is a real challenge. In the past such inflows have been associated with various problems – including overvalued currencies, corruption and the decline of traditional industries. At BP we are involved in several initiatives to address these issues. We are participants in the Extractive Industries Transparency Initiative which promotes transparency by providing guidelines of the disclosure of payments to governments. In Azerbaijan last year we, along with other energy companies, NGOs and the government, signed an agreement to implement the EITI. We are also supporting a centre at Oxford University dedicated to the study of resource revenue management. The centre will be led by a BP-endowed chair and will undertake research and aim to be a centre of excellence in the study of this subject.

Education

This takes me to another subject in which we have become increasingly involved because of its many links to our business – and that is education.

We see the value of world-class education every day in our work as our own people apply what they have learned in their education to take on new challenges. We also see the value of education to the communities in which we work as education enables people and societies to become independent and sustainable.

We have therefore decided to seek out ways in which we can make focused contributions to the cause of education. In particular, we see value in being associated with world-class universities around the world because it is a way to support new developments in science and technology, usually related to energy and the environment. There is a benefit for us because we gain access to emerging technologies and come into contact with able students who may be encouraged to apply to work with us.

This university provides a good example. It is a privilege to work with you in various ways, for example, in providing stipends for 20 outstanding students and postgraduates, rewarding them for their achievements and encouraging them to continue in their studies.

Mendeleev is also one of three leading universities in Moscow where we are supporting research projects this year. We are working on this research with your experts, exchanging ideas, establishing networks and looking to create, protect and commercialize inventions that emerge from the work. Here, for example, we are supporting a project to develop software to select the best technological solutions for water treatment in industrial sites. This is one example of working to encourage a project that could have great value to our industry, both in Russia and the world as a whole.

Meanwhile, at the Moscow State Institute of International Relations, we are supporting work on the future development of the oil and gas industry and at Gubkin we are supporting research in geology, reservoir modelling and oil field equipment, such as submersible pumps.

We also send members of our Russian staff to leading business schools and institutions such as this to train a new generation of Russia leaders.

One of the aspects of working in Russia that gives us most satisfaction is the opportunity to make a contribution to world-class educational institutions and to share the deep commitment that exists here to knowledge and education as the foundation of national strength.

For myself, as a scientist, it is fascinating to come to a place named after the chemist who created the periodic table – a breakthrough made 150 years ago that is still so central to chemistry.

Besides education, in which we support work in schools as well as universities, other focus areas for our community investment and social activity are support for enterprise, for example helping local suppliers to acquire new skills, and providing access to energy, typically supplying solar power to remote areas in developing countries. In BP, we plan to spend around $500m over the next five years supporting projects in these three fields. TNK-BP also plans to spend close to $70m this year on targeted social programmes in areas such as youth activities, healthcare and cultural projects.

Humanitarian aid

We also make some community investments purely as a response to humanitarian needs.

For example, after the tragedy in Beslan last year, we set up a grant-making fund of $250,000, using an expert panel to select suitable projects. Among the projects supported have been psychological assistance for victims, training for local psychologists, a youth club and a programme to bring together young people from Ossetian and Ingush communities.

Also last year we pledged a donation of $1 million to fund a programme to vaccinate 80,000 young adolescents against viral hepatitis B in the Irkutsk, Yaroslavl and Kaluga regions. This is a programme being carried out by the Vishnevskaya-Rostropovich Foundation in consultation with the Russian Federation Ministry of health and Social Development.

Conclusion

I hope that my remarks have made it clear that we regard responsibility not simply as one part of business life but as something which runs through everything that a business does.

Responsibility is more than community investment. And we do not see our community investment as something separate from our core business. Our business investment benefits communities – for example through wages, through taxes and through generating economic activity. And our community investment benefits the business – for example through encouraging recruits or improving our reputation.

Ultimately I believe the route to sustainability is simple to describe, if challenging to live up to. It is about running a business that is successful, responsible and plays a beneficial role in society.

Can I ask you to think of a company that you regard as a great company? I wonder what you could tell me about that company? How much its earnings per share were last year? How much profit it made? What its production metrics were? I expect you might find such questions difficult to answer – unless you are an analyst! I expect easier questions to answer would be about its leaders, the nature of its products or the impact it has had on ordinary people’s lives. Every company that wants to survive has to make a profit. But a company that wants to be great also has to make a significant contribution to human progress.

That is what we are seeking to do here in Russia. We are proud to be working with Russian colleagues in this great country which has made so many of its own outstanding contributions to human progress. We have made a good start, but it is only a start. We are committed to Russia and we look forward to achieving great things with our partners here. Working together, I believe that we can build a sustainable future for our business, a sustainable future for Russia and a sustainable future for the world. Thank you.

source:http://www.bp.com/genericarticle.do?categoryId=98&contentId=7006995