On April 20, 2010 there was a blowout and then an explosion aboard the Deepwater Horizon platform of the Macondo oil well being drilled in very deep water in the Gulf of Mexico. Eleven people aboard BP’s drilling rig were killed and a heavy flow of oil coming from an underwater rupture of the pipe began to contaminate the water. The drilling platform itself sunk into the sea (Hatcher, 2010). In the following weeks, it became apparent that the continuing flow of oil was creating an environmental disaster of unprecedented magnitude in the Gulf of Mexico.

The contamination of the Gulf waters, coastal lands and habitats was coupled with increasing business losses and failures, and widespread loss of jobs in the fishing, tourism, and all related economic activities. As complaints and losses in the Gulf area rose rapidly, the Obama Administration proposed to BP that the company set up a $20 billion trust fund to pay claims for losses suffered by individuals and companies in the affected areas. BP did so, but it increasingly appeared that even that amount would not be adequate to cover all of the eventual damages.

Highly successful American tort lawyer Daniel Becnel Jr. indicated that over 110 lawsuits had already been filed by the end of May. He estimated that lawsuits against BP and its contractors ‘could add up to half-a-trillion dollars or more’ (Wells, 2010). This may well be the case in the United States where lawsuits, and large monetary awards by juries, are very common.

BP’s handling of the disaster brought widespread criticism. The company’s initial downplaying of the extent of the problem, the CEO’s public comments and subsequent testimony before US Congress committees, and the difficulties the company experienced in its many efforts to reduce and stop the flow of oil, angered both the US public and government officials. It also became apparent that the company had sacrificed safety in order to save money in the operations at the well. Some of the other major international oil companies also criticized BP, and distanced themselves from it.

BP and the White House jointly selected a lawyer, Kenneth Feinberg, to administer the $20 billion fund set up to compensate victims of the oil spill. He has had experience in a number of other cases involving disasters, and has said his main concern will be fairness. This will be complicated by some variations in law between different US states, and possibly by maritime law. Claims filed before the oil flow is stopped will be paid without requirements for signing forms releasing BP from future claims. After the flow stops, Feinberg will propose final settlements that the claimants will not receive unless they sign forms agreeing not to sue BP in the future. Since many people feel that health problems resulting from the spill may not show up until some years later, they will face a difficult (and some feel unfair) decision. In the meantime, many who have claims find the provision of detailed information required and the delay in receiving payments to be annoying and/or unacceptable (Field, 2010). Of course, the claims administrator must also try to guard against paying when false claims are filed.

This case briefly discusses the events leading to the disaster, BP’s handling of it from both the technical and public relations standpoint, and questions about the company’s apparent policies compared to what society expects.

Technical efforts to contain the blowout

Soon after the explosion on the Deepwater Horizon platform, BP assembled a team of 600 people who worked around the clock on the problem. The team included BP engineers and other personnel, plus experts from outside of BP including engineers from ExxonMobile, Chevron, and contractors from some 160 companies. In this command center, ideas were developed and tested, plans made, equipment and tools – some fabricated specifically to work on this job – ordered, plans made for operations, and orders sent to technicians on ships near the site of the well. These technicians controlled the remotely operated vehicles (ROVs) that positioned and operated the tools and machines being used in attempts to reduce or stop the flow of oil (Crooks, 2010a). The many efforts made in the first three months, including trimming the underwater pipe gushing oil, placing different caps at the break point, and attempting a ‘top kill’ to plug the well, failed to stop the leak (The Economist, 2010b). Though the flow of oil was reduced somewhat during part of this period, oil flowed freely into the Gulf during times when new initiatives were undertaken (Breen, 2010). Two remaining efforts, started on May 2 and May 16 respectively, were to drill relief wells to intersect the Macondo well (Crooks, 2010b). In July, the first was getting near to its target after going 5,398 meters. In the meantime, other efforts continued including one to place a new, tighter cap on the well. The US government estimates that during this period the well was sending 1.5 to 2.5 million gallons of oil a day into the Gulf (Breen, 2010).

The members of this team and the technicians worked extraordinarily hard, and for very long hours. However, they were unable to stop the flow until August, over three months after the explosion. Their extraordinary efforts have drawn praise (especially after the oil flow was stopped).

The command center also had people around the clock to handle angry calls from Americans who were being harmed, or expected to be harmed. It also received calls from around the world from people who were angry about the environmental damage being done.

A basic difficulty in dealing with the continuing flow of oil was that no one anywhere in the world had drawn up in advance any adequate plans for controlling a problem of this magnitude at this depth in the ocean.

The flow was finally completely stopped on July 15, just under three months after the explosion, by a ‘top kill’ with sealant pumped in from the top. A final step, in August, was a permanent sealing by cement to be pumped into the well far under the sea floor by an intersecting pipe already very near the original well hole.

Company responses to the public

In the first weeks after the April 20 explosion, the comments of BP personnel and their responses to questions greatly damaged the reputation of the company. They seemed to minimize the importance of the effects the oil flow would have on the environment of the Gulf and surrounding areas. Additionally, company e-mails disclosed to government investigators and in governmental hearings seemed to indicate that the company, in comparing possible loss of life and expenditures for safety, would simply take the least-cost solution. It also appeared that a desire to reduce time on the drilling rig caused less safe methods to be used.
Mr Tony Hayward, the Chief Executive of BP, had been brought in three years earlier to make safety the top priority at the company after a 2005 explosion at its Texas refinery that killed 15 people (Fifield and Luce, 2010). As a spokesman for BP, CEO Tony Hayward’s comments and testimony were particularly damaging to the company. An article in the UK’s Financial Times argued that though BP has about one-third of its reserves and more than half its refining capacity in the United States, it has few Americans in senior roles and didn’t understand local sensitivities (Crooks and Edgecliffe-Johnson, 2010). The article included several quotes from Hayward that had been published in various other sources. Some of these comments, the sources used by the Financial Times, and the comments of one of this book’s authors about them are as follows:

● From The Guardian, May 14, 2010: ‘The Gulf of Mexico is a very big ocean. The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume.’ From Sky News, May 18, 2010: ‘I think the environmental impact of this disaster is likely to be very, very modest.’ These statements would seem at least to demonstrate a lack of a basic understanding of ecology. It is hard to understand why no one in the BP organization with a feeling for public relations was consulted before such statements were made, especially after the angry responses to the first one by the media and the public.

● From Fox News, May 30, 2010: ‘There’s no one who wants this thing over more than I do. You know, I’d like my life back.’ On CNN on June 9, 2010 there was a follow-up comment: ‘A man whose brother was killed wants his brother back, as does his brother’s wife and children.’ How can a company CEO seem to publicly compare his being under stress to the loss of 11 lives?

● Analysts’ briefing, June 4, 2010: ‘I’m so far unscathed . . . They’ve thrown some words at me. But I’m a Brit, so sticks and stones can break my bones but words never hurt me, or whatever the expression is.’ If he thinks that he is unscathed or that his company is unscathed, clearly he did not understand the situation.

● The Financial Times article cited above also noted that the New York Daily News said Mr Hayward had become the ‘most hated and clueless man in America’ because of his remarks.
In a June 17 appearance before a US House of Representatives hearing, Mr Hayward came across as ‘evasive,’
‘stonewalling,’ and impatient as he denied knowing virtually anything about the series of alleged shortcuts taken on the well before it blew up (Fifield and Luce, 2010).
One of the authors of this case study watched part of the hearings on CNN. Mr Hayward answered questions as if he knew absolutely nothing about the rig disaster, or virtually anything else about the company. While this may have been a tactic designed to prevent his being charged personally with anything, he came across as a person who knew nothing and, unfortunately, cared nothing about operations.
The Fifield and Luce (2010) article cited above included ‘The five-point case’ listing accusations by Congressional investigators regarding key decisions made by BP leading up to the April 20 explosion (original source:
US subcommittee on oversight and investigations):

● that BP chose the ‘riskier’ option when it was installing the casing, or lining, in the well before the accident;

● that BP failed to use enough ‘centralizers’ to keep the casing in the center of the borehole as it was lowered into the well;

● that the company and its contractors failed to run an acoustic test to check whether the cement used to attach the casing to the rock walls of the well had formed a seal to prevent gas escaping;
● that BP did not properly pump enough drilling fluid through the well to check for and remove pockets of gas before cementing the well;
● that the company failed to secure the top of the well properly with a ‘lockdown sleeve’ to keep it in place and sealed tightly, thereby allowing oil and gas to leak out and rise up the pipe to the rig at the surface.

Concerns about BP company policies and actions

Earlier BP had clearly indicated Mr Hayward’s and the company’s objectives: ‘As CEO Tony Hayward constantly makes clear, safe and reliable operations are his number one priority for BP and the company has a strong record of safe and reliable operations in the Gulf of Mexico.’
A number of BP documents, statements by a survivor of the explosion, and testimony by others indicate that company actions at many levels showed a lack of concern for safety and/or gave higher priority to moving ahead quickly and keeping costs low.
Over time, much additional information surfaced about the conditions and actions taken prior to the explosion.
On May 17 the widely respected weekly CBS television program 60 Minutes aired an ‘Interview with Mike Williams’ (Pelley, 2010). Mike Williams worked for Transocean offshore drilling company and was the Chief Electronics Technician in charge of computers and electrical systems aboard the Deepwater Horizon.
In the explosion, Williams was blown overboard from the rig and managed to survive. In the interview, he stated that in seven years on the Deepwater Horizon, no worker had been seriously injured, considered remarkable in a very difficult environment. However, in the period leading up to the disaster, they had already spent six weeks on a drilling job that had been scheduled to take only 21 days. BP managers told the crew to speed up the rate of drilling. After this was done, the bottom of the well split open and swallowed up the ‘mud’ and drilling tools (‘Mud’ is a very heavy fluid, continuously recirculated as it is pumped down into the well and back up. It serves to maintain sufficient pressure to prevent gas and oil from coming up the well pipe.)
Four weeks before the explosion, the rubber gasket seal of the blowout preventer (BOP) (POV) had been accidentally subjected to extreme pressure. (The POV is a set of valves designed to automatically prevent a blowout when unexpected pressure comes up from the well hole.)
Subsequently, an operator discovered pieces of the critically important and extremely heavy-duty rubber gasket of the BOP coming up in the drilling ‘mud.’ He was concerned and took the pieces to the manager, but the manager said it wasn’t important. After wires leading from the surface to the BOP and associated equipment seemed to be unreliable, the manager for Transocean held a meeting to explain how the problem could be fixed. He was interrupted by a BP manager who said he was going to do it a different way.
The day of the explosion, Williams was in his office when the BOP failed and methane gas came up from the well. The rig’s diesel generators sucked in the methane gas and then speeded up, sending a powerful surge of electricity through the lines. The light bulbs and some other electrical equipment exploded. Several other explosions ripped a three-inch thick steel door from its hinges.
Williams ended up in the water, and was eventually rescued. Other facts surfaced as additional people provided information, more than 50,000 pages of company e-mails, inspection reports, engineering studies, and other company documents were seized from BP, and analysts studied various materials.
On May 27 the New York Times obtained a document from a US Congressional investigator indicating that BP officials had used a cheaper but less safe type of casing for the well because of economic considerations. The method the company used was ‘without a doubt a riskier way to go’ according to the director of the Petroleum Extension Service at the University of Texas at Austin, an assessment with which several other engineers agreed (Urbina, 2010a).
A May 30 article in the New York Times cited many problems that had been called to the attention of the company by its own personnel long before the disaster, but on which the company had not taken corrective action (Urbina, 2010b). It was determined that in June of 2009, 11 months before the blowout, BP’s own engineers had warned that the well casing the company intended to use might collapse under high pressure.

The company needed to obtain permission from other company personnel to use this type of casing because it violated BP’s own safety policies and design standards. Nevertheless, company officials approved its use. In April of 2010, a company document stated that the plans for cementing the casing would not meet regulations of the US Minerals Management Service. A second version of the report was then made saying that it would meet the regulations.

In the same article, several other problems were discussed. It stated that in March 2010, BP had informed US regulators that they were struggling with a loss of ‘well control,’ and a post-explosion BP internal investigation found that before the explosion there had been warning signs that gas was entering the well and a blowout was coming. The director of the Petroleum Extension Service at the University of Texas, Austin subsequently said that BP should have stopped drilling at that point to get the operation under control. What BP did, however, was to ask the US Minerals Management Service for permission to delay a regular test of the BOP and continue drilling. In their dealings with BP, it appears that the Minerals Management Service did not adequately regulate BP’s operation.
A June 6 article in the San Francisco Chronicle provided comments and analysis by Robert Bea, a UC Berkeley engineering professor (formerly manager of Shell Oil’s offshore technology development group, and later a consultant to BP). He discussed not only BP’s problems at the Deepwater Horizon, but the earlier experiences with BP that have led him to fault continuing problems in BP’s culture.
In a 2002 consulting report to BP on organizational issues in its US refinery operations he identified a number of problems. The refineries had been acquired through a series of acquisitions and some of the different workplace cultures clashed with BP’s corporate culture. In particular, he and a colleague identified serious problems at one of the Texas refineries and made recommendations for changes. As far as Bea can determine, BP did not really use the report or its recommendations. Three years later, the facility suffered an explosion and fire that killed 15 people. Bea indicated that BP made a number of specific bad decisions that led to the disaster at the Deepwater Horizon. These included allowing quality control procedures to slip, ‘displacing drilling mud with lighter seawater that didn’t exert as much downward pressure on the oil’ and failing to properly address evidence that the BOP had been damaged. The fact that the drilling was costing much more and taking much more time than had been forecast added exceptional pressure on the managers involved. He also cited the US Minerals Management Service for inadequate oversight (as others have also done) (Baker, 2010).

Anadarko, a 25% partner in the project, has accused BP of ‘gross negligence’ in the operation (The Economist, 2010a). The US House energy committee found no trace that any information about potential problems at the Deepwater Horizon had reached Tony Hayward or any other member of senior management (Jackson, 2010).

Effects on worldwide operations of oil companies

In late May, the Obama Administration declared a sixmonth moratorium on new drilling in the deep waters of the Gulf, subsequently challenged in the courts. The Gulf provides 33% of America’s domestically produced oil and 10% of its domestically produced natural gas. The moratorium directly affected not only BP, but also other major oil companies ExxonMobile, Shell, and Chevron working in the Gulf, Anadarko Petroleum (which is a 25% partner in the project), Mitsui (which is a 10% partner), smaller companies Murphy and Noble, associated partners and contractors, and workers (Crooks, 2010c). While BP had indicated that the accident represents industry-wide challenges in deepwater drilling, a number of other major oil companies defended the safety of their own practices and tried to distance themselves from BP (McNulty and Blas, 2010). All companies fear that more US requirements and restrictions on deepwater drilling might affect requirements and practices in other producing areas in the world.
Norway has suspended any new deepwater drilling until the investigation of the oil leak is complete. Other countries are also taking actions of some kind regarding deepwater drilling. Brazil was still planning to go ahead, though the issue was under discussion.
BP cancelled its 2010 dividends. Though it had enough money to handle the $20 billion fund set-up, it was concerned about potential additional losses. The company needed an additional $10 billion and sold off some major assets to obtain it.
PetroChina, the country’s largest listed oil and gas producer offered closer cooperation with BP, and might enter into joint ventures or purchase some of BP’s assets.
CNOOC, China’s largest offshore exploration company, is also likely to be interested in buying assets from BP.

Chinese companies have already made major investments in raw material producers overseas, as mentioned in Chapter 1, and are actively looking for more (Hook, 2010).

Some closing comments

An article in The Economist noted that Mr Hayward, with his background in exploration, has emphasized ‘a commitment to safety with ambitious company-wide schemes meant to bring it about.’ But it also notes that years of effort are required to bring about a change like this (The Economist, 2010c). The authors of this case have some brief additional comments based on their experiences in industry and consulting.
BP does give recognition for safety achievements as it was about to do at the Deepwater Horizon for seven years of operation without an accident. However, managers in many organizations perceive that they will receive large rewards, such as bonuses, promotions, or simply avoiding criticism, for achieving high productivity, cost-cutting and/or on-time completion of jobs/projects. They may also believe that they will receive lower rewards if they emphasize safety when it may result in lower productivity or higher costs. It is also true that many individuals tend to discount the extent of the potential damage to the company or their own careers when they take risks. The larger the organization, and the longer safety or quality have had lower priority, the longer it takes to change the corporate culture. One of the key BP managers involved in the decision to save time and expense by using fewer ‘centralizers’ when placing and cementing the pipe running from the wellhead to the drilling rig sent an e-mail before the explosion: ‘Who cares, it’s done, end of story, will probably be fine’ (The Economist, 2010c).
After the leak was stopped, Tony Hayward was replaced by another BP executive who is an American. Hayward was assigned to head up one of BP’s major divisions.

Questions
1. How can BP now go about attempting to create a real ‘safety first’ attitude in the company’s managers and employees? What are the problems and how could they be solved?
2. How fair to those having claims is the approach being used by the claims administrator? Is there any other solution that would be fair to both those filing claims and BP?
3. Should the US government try to prohibit any more deepwater drilling in the Gulf of Mexico? Why, why not? What factors should be considered in coming to a decision?
4. Should other governments consider restricting deepwater drilling in their territories? Why, why not? What factors should be considered in coming to a decision?