BP and the Gulf of Mexico Oil Spill

8 August 2016

Do you agree with Tony Hayward’s quote at the end of the case? I would not agree in entirety with Tony Hayward’s claim that “This is not BP. It is an industry accident. ” There are a number of weaknesses in the industry that allowed this incident to happen, but as numerous studies into this incident, including the National Commission set-up by President Obama to look into this incident – shows that the incident was caused mainly because of BP and in some instances by its partners on this rig – Transocean and Halliburton.

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Was this disaster strictly a BP failure or an industry accident? To understand responsibilities in this incident, we can study the actions of the players of the offshore drilling sub-industry into three – government policies by the regulatory bodies such as the MMS (Mineral Management Service) and other government agencies, industry practices as a whole and actions by specific companies, in this case, BP, Transocean and Halliburton.

The regulatory body MMS had a clear conflict in overseeing the offshore drilling, as not only was it the body that ensured regulatory compliance, it was also financed by leases that it provided the oil companies for tracts in the Gulf of Mexico, and more importantly, MMS received royalties based on the amount of oil produced at various wells. It was in the interest of MMS to ensure oil extraction to start soonest, for royalties to pour in. In this role, it also became an industry partner, not only a regulator.

MMS’s policies did not keep in pace with the rapid advancement of deepwater drilling, nor did it have in place enough resources, especially in terms of petroleum engineering talent to monitor these practices efficiently. Overall, the industry had a penchant for resisting federal monitoring. The statistics showing over 900 fires and explosions on rigs only in the Gulf of Mexico with 60 dead and more than 1,500 injured since 2001, shows how dangerous Gulf drilling was, across all companies in the Gulf, not only BP, making accidents in general an industry issue, not strictly a BP one.

The Deepwater Horizon rig explosion, from the extensive evidence of correspondence and accounts of involved persons, puts the fault primarily on the decisions made by BP and its partners on the deepwater rig. While loose regulatory policies and widely-accepted industry practices allowed for this accident to happen, the decisions made by BP and to some extent by Transocean and Halliburton, were the main reason for the explosion.

As the National Commission report put it: “The immediate causes of the Macondo well blowout can be traced to a series of identifiable mistakes made by BP, Halliburton, and Transocean” and “The decisions made by these companies reveal systemic failures in risk management raising questions about the safety culture of the industry. ” (“Deep Water Summary To President,” n. d. ) What factors affect the competitive environment of the oil industry? To understand the factors that affect the competitive environment of the oil industry, a useful framework would be a PESTLE analysis.

The factors that affect the competitive environment of the oil industry are outlined in the table below: Page 2 of 9 Table 1: PESTLE Analysis PESTLE Analysis (“Top 20 Risk Factors Facing the Oil & Gas Industry – Energy Digital,” n. d. ) Political Increased regulation following the Deepwater Horizon spill has not only increased cost of compliance, it has made Oil companies look like the bad person on the block. The accident has also made the process of obtaining leases for drilling cumbersome, and has re-initiated the debate on whether offshore drilling is worth the cost in environmental terms.

Economic Fluctuating oil and gas prices are the most significant factor facing the oil industry, with increased taxation globally and turmoil in oil-producing countries contribute to volatility. Reserves are getting more difficult to find, and the available reserves are in high-danger areas such as deepwater deposits. With reserves further out at sea and set much deeper, the estimates of size of deposits can greatly surprise as companies move into production, greatly affecting the projected economic benefit.

While most top oil companies have vastly improved financials, the same cannot be said of all partners, vendors and suppliers, increasing the financial risk to oil-producing companies. General economic concerns weigh in on consumption and prices, as consumers in tough economies look to consume less and look for cheaper alternatives. Shortage of rigs, equipment and personnel, as more companies compete for the same resources. Social Technological Competition within the industry, especially the top companies is fierce, especially with major companies globally, being monopolistic in nature and owned by governments of oil-producing nations.

With the negativity surfacing out of the Deepwater Horizon accident, the oil industry is facing increasing scrutiny and resistance from all king of groups and sections of the population. Public opinion that was starting to favour offshore drilling is now against the same. There is a general trend to “go green”. While companies can have greener sources as part of their overall production portfolio, which even companies like BP have tried to do, the core crude oil will always be seen as a non-green resource and will be challenged by consumers with their support for renewable energy.

The technology, especially for offshore drilling, has advanced to a point where companies can now drill more than 20,000 feet below the sea-bed. However, the exercise is wrought with extreme danger due to high-pressure environments and other challenges. Companies in the oil industry will need to keep up research and development to ensure safer, faster, and more reliable technology is used in extraction of oil and gas. Page 3 of 9 Legal

The legal fallout from the Deepwater Horizon has been tremendous, with the overall oil industry being punished by high future costs due to actions of BP and the high cost that BP had to undertake for clean-up and compensation costs. Environmental The total cost of producing and consuming oil has been conclusively proven to be very high on the environment. Whether through spills or through emission of carbon-dioxide into the environment and the oft-repeated phenomena of global warming. Question 2 What were the most significant flawed decisions made by BP and its partners in this case?

The flawed decisions by BP and its partners were numerous in this case, beginning right from its application to drill, when it downplayed the environmental risks, claiming that a spill was unlikely, and were it to occur, it would not exceed 4,600 barrels and with minimal adverse impact (“10 Disastrous Mistakes BP Made Before The Deepwater Horizon Exploded,” n. d. ). Among the many operational flawed decisions that were made, many as a result to save further “lost circulation events”, time, and costs, the following were the most significant:

Using untrained personnel: BP’s Bob Kaluza was made the well site leader, yet was inexperienced and untrained for deepwater drilling. Using high-risk, cheaper methods: BP used a “long-string” system, which was riskier, but less expensive. This was a practice that BP employed more than the other oil companies in the industry. Sacrificing safety of process for cost saving: The centralizers that ensured the casing remained at the centre of the wellbore weren’t sufficient, and the supplied ones were not to specification. However, to save valuable time, BP went ahead with installation.

Not adhering to procedure: The lab results by Halliburton were not reported completely in the first instance to BP. However, the final studies suggesting instability of the cement was never seen, or ignored, by both Halliburton and BP. Skipping independent checks/balance: To save costs and time, BP declined the contractor Schlumberger from testing the completed cement job as an independent verifier of quality of work undertaken. Extreme Cost-cutting: Using leftover fluids as the “spacer”, partly because BP did not want to deal with hazardous waste regulations were they to send the used fluids back to the mainland.

Falsifying results to start extraction: Even when in the final tests, there was the suggestion of a potential leak; the conclusion made was that the testing was successful. Avoiding necessary warning systems: Keeping the alarm system to inhibited mode to avoid false alarms and using a blow-out preventer that was known to be faulty (“10 Disastrous Mistakes BP Made Before The Deepwater Horizon Exploded,” n. d. ). There seemed to be a general overlap of decision-making and no formal process for procedural changes.

There also seemed to be a pervasive attitude of “we own it, we call the shots” from BP. Page 4 of 9 Was this a case of poor strategic choices that were made over time or of a highrisk taking culture? Strategy is influenced greatly by culture and history which can be seen in this case. This was a case of poor strategic choices made by BP, partly because of its history and mostly because of its high-risk taking culture (to be covered in detail in Q3). Evidence of its high-risk taking culture is evident from both the case and from other studies like the report from the National Commission.

It consistently points to BP, in its quest to be bigger and faster, choosing profits over safety. There had been other major accidents just a few years earlier to this accident, more notably the Texas refinery accident in 2005, the Thunder Horse rig nearly sinking in 2005, and the major leak in the Prudhoe Bay pipeline in Alaska in 2006. In all these cases, independent studies showed that the incidents were avoidable, had the safety culture at BP been higher. Interestingly, BP had in place extensive personal safety procedures and rules, but not sufficient processbased safety procedures.

Question 3 How did BP’s history and culture shape decision-making on the Deepwater Horizon rig? British Petroleum, as it was formally known, had always operated as an arm of the British Empire, complete with government hierarchy and life employees, with most of its oil coming from middle-eastern countries. Bureaucracy was the word of the day and operating costs were very high, resulting at the time to a profit per employee half that of Exxon (“BP: ‘An accident waiting to happen’ – Fortune Features,” n. d. ).

With increasing trade and technological liberalization, the middle-eastern countries set-up their own companies and BP was forced to leave. To make up a fraction of what it had lost, BP found two new sources of oil, albeit much in much riskier environments: Alaska’s Prudhoe Bay and the North Sea. Competitors used to refer to BP as the “two-pipeline” company. BP needed “elephants”- fields that increased profits substantially. The only places this could be found were in places where none had gone before – Caspian Sea, West Africa, and Gulf of Mexico (“BP: ‘An accident waiting to happen’ – Fortune Features,” n.d. ). After taking over in 1995, John Browne pursued ever-cutting costs to increase profitability.

He merged with a number of smaller companies; doubling the company’s revenues and becoming the largest oil producer in the U. S. BP’s rivals were now playing catch-up. Some directors worried that with the extreme cost-cutting and digesting of competing companies into BP, “There was a general feeling that they may be running a bit faster than they should have” (“BP: ‘An accident waiting to happen’ – Fortune Features,”n. d. ). After the Texas explosion, a panel to study this incident reported “a lack of operating discipline, toleration of serious deviations from safe operating practices, and apparent complacency toward serious process-safety risks. ” It concluded that BP’s “decentralized management system and entrepreneurial culture” had “delegated” safety issues. For example it reported, BP’s global safety chief, reported to a deputy to the CEO (“BP: ‘An accident waiting to happen’ – Fortune Features,” n. d. ). Page 5 of 9

When Tony Hayward took over in 2007, he promised more cost-savings and a “virtue of doing more for less”, and wanting to close the gap of USD 8bn with its rival Shell. By 2010, the cost-savings had taken hold, and BP was more profitable than Shell (“BP: ‘An accident waiting to happen’ – Fortune Features,” n. d. ). All this was found to be too much, too fast, as BP failed. As said by Nancy Leveson of MIT who taught safety classes to BP’s executives, “They just did safety wrong. ” “They were producing a lot of standards. But many were not very good, and many were irrelevant. ” (“BP: ‘An accident waiting to happen’ – Fortune Features,” n.d. ) This pattern of excessive cost-cutting, fast-results culture was seen over the entire saga of the Deepwater Horizon leading to the explosion. Even with observers and some partners alerting BP on the problems facing the rig, BP decides to ignore and ensure it got the rig to full operation and production, with little regard for the potential consequences of these actions. How did the political and regulatory environment affect decision-making by BP and its partners? There are three significant aspects of the political/regulatory environment in the case-study that affected decision-making by BP and its partners.

One was the fact that the Mineral Management Service was both a regulator and a partner of sorts in the oil rig (it received royalties and fees from leases). This allowed BP and its partners to have little regard for the pace at which it was getting the rig to full operational mode, with little oversight from MMS, as it was in everybody’s best interests to have the rig in full production mode. Secondly, after repeated accidents at the Texas refinery, the pipeline incident at Prudhoe Bay, and the Thunder Horse rig, BP was subjected to large monetary fines, but not stricter safety guidelines and regulations.

With the Principal-Agent problem pervasive, especially in large public companies, slowing down operations and lowering short-term productivity and output would have a bigger impact in changing the safety culture at BP than monetary fines. Finally, it was the permission that BP received from regulators, allowing them to set the cement plug deeper than usual. This allowed BP and its partners to proceed with temporary abandonment even though many were not comfortable with the change in process. Question 4 What factors does BP appear to take into account when looking at its long-term sustainability?

To understand what factors BP takes into account for its long-term sustainability, we need to look at both the concept of Sustainable Competitive Advantage (SCA) through the VRIO framework (“Applying the VRIO Framework,” n. d. ) and the industry factors using the Porter’s five forces framework. VRIO Framework: 1. Is the Resource Valuable? Yes, the resource is indeed very valuable, without which global markets would stop producing 2. Is the Resource Rare? Yes, as a finite and non-renewable resource, even with existing large resources, oil will finish one day.

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