SECTIONA:CASESTUDY

BPandtheDeepwaterHorizonDisaster of 2010

ByChristinaIngersoll,RichardM.Locke,CateReavisApril3, 2012

CaseSynopsis

Asof2010,theDeepwaterHorizondisasterwasthelargestmarineoilspillevertooccurinU.S.waters.BythetimethewellwascappedonJuly15,2010,nearlyfivemillionbarrels of oil (205.8 million gallons) had spilled into the Gulf of Mexico. Federal scienceandengineeringteamsrevisedtheirestimatesontherateofoilflowseveraltimes,andinAugust they concluded that between April 20 and July 15, 53,000-62,000 barrels per dayspilled into the Gulf, an amount that was equivalent to a spill the size of the 1989 ExxonValdez every four to five days. Before the Deepwater Horizon disaster, the Exxon Valdezheldtherecordforthelargestspill in U.S.waters.

It was surprising to many analysts how such a disaster could happen, particularlyinvolving a company's operation like BP, which publicly prided itself on its commitment tosafety. It did seem clear that, in an effort to close up the Macondo well, several keydecisionsweremade,eachinvolvingmultiplestakeholdersandtrade-offsoftime,money,safety, and risk mitigation. The public debate began immediately on whether the result ofthese decisions indicated operational or management problems on the rig, and whetherthese problems were endemic to the supply-chain reaction of the oil industry or residedwithin BP itself. To help answer these questions, several task forces were formed toinvestigate the root causes of the disaster and who among the various players involvedwiththeMacondowell boreresponsibilityforthedisasterandforitsresolution.

Introduction

The company that would become BP was founded in 1909 as the Anglo-PersianOilCompany(APOC)shortlyafterEnglishmanWilliamKnoxD'ArcystruckoilinIranafteraneight-yearsearch.Initsearlyyears,profitabilityprovedelusiveforAPOCand,in1914,Winston Churchill, who was head of the British Navy and believed Britain needed adedicated oil supply, convinced the British government to buy a 51% stake in the nearlybankruptcompany.

TheBritishgovernment'smajorityownershipofBPlasteduntilthelate1970swhenthe government, under Prime Margaret Thatcher, a proponent of privatization, beganselling off its shares in an attempt to increase productivity in the company. When thegovernment sold its final 31% share in 1987, BP's performance was floundering. Thecompany's performance continued to decline as a newly private company; in 1992, BPposted a loss of $811 million. Nearing bankruptcy, the company was forced to takedramatic costcutting measures.

Thingsstarted toimprovemeasurablyinthe mid-1990s.Withastreamlinedworkforce and portfolio of activities, BP's new CEO began implementing an aggressivegrowthstrategy,highlightedbymergerswithrivalsAmocoin1998,andARCO(theformerAtlantic Richfield) in 2000. Along with focusing on growth, BP began repositioning itself.In2001,thecompanylaunchedthenewtagline"BeyondPetroleum"andofficiallychangedits name to "BP." The associated green branding campaign indicated that BP wanted tobeknown asanenvironmentally-friendlyoil company.

Over the next decade, the company launched an Alternative Energy division andwas, for a time, the world's largest manufacturer of solar cells and Britain's largestproducer of wind energy. BP invested $4 billion in alternative energy between 2005 and2009. BP's total company investment over the same time period was $982 billion. In May2007,TonyHayward,whohadbeenchiefexecutiveofExplorationandProduction(BPX),replacedJohnBrowneasCEO.Haywardmarkedhisappointmentwithaspeechpledgingto "focus like a laser on safety issues, put the brakes on growth and slash productiontargets." Hayward was able to improve corporate performance, in part, by dramaticallyshrinkingtheAlternativeEnergydivisionandfurtherreducingheadcountatbothmanagerialandlowerstaff levels.

OrganizationalStrategy

Between 2006 and 2009, BP's workforce fell from 97,000 to 80,300. In addition tocutting four levels of management, Hayward also spoke publicly about his desire totransformBP'sculturetoonethatwaslessriskaverse.Hebelievedthattoomanypeoplewere making too many decisions leading to extreme cautiousness. "Assurance is killingus," he told U.S. staff in September of 2007. Despite Hayward's concern about thecompany'sriskaverseculture,inarelativelyshortperiodoftime,BPhadtransitionedfromasmall,state-sponsoredcompanytooneofthesixlargestnon-stateownedoilcompaniesintheworldand,inthemonthbeforetheDeepwaterHorizondisaster,thelargestcompany

listed on the London Stock Exchange. The transition required numerous mergers andacquisitions,andstrictcostcuttingmeasures.Alongtheway,BP'sorganizationalstructurewasalso dramaticallytransformed.

Issues onManagement Layers

BPinthelate1980scomprisedseverallayersofmanagementinamatrixstructurethatmadeitdifficultforanyonetomakedecisionsquickly.Insomecases,simpleproposalchanges required 15 signatures. At the same time, the company was overleveraged, andits overall performance was suffering. Robert Horton, who was appointed CEO in 1989,started a radical turnaround program in an effort to cut $750 million from BP's annualexpenses. He removed several layers of management and slashed the headcount atheadquarters by 80. Horton also intended to increase the speed of managerial decision-making and, thereby, the pace of business in general. Horton transformed hierarchicallystructured departments into smaller, more flexible teams charged with maintaining openlines ofcommunication.

Horton transferred decision-making authority away from the corporate center tothe upstream and downstream business divisions. While deep cuts were made to capitalbudgetsandtheworkforce,employeesatalllevelswereencouragedtotakeresponsibilityandexercisedecision-makinginitiative.In1992DavidSimonwasappointedCEOreplacing Robert Horton. Simon continued Horton's policy of cost cutting, especially instaffing.

Issues onAssetPerformanceModel

The biggest changes during this period occurred in BPX, which was led by JohnBrowne.Buildinguponhispredecessors'efforts,Browne,whoenvisionedcreatingaspiritofentrepreneurshipamonghisstaff,extendeddecision-makingresponsibilitiestoemployees at more levels in the organization. Under the new strategy, decision-makingauthority and responsibility for meeting performance targets was no longer held by BP'sregionaloperatingcompanies,butbyonsiteassetmanagers.

Asset managers contracted with BP to meet certain performance targets andextendedthispracticeamongallemployeesworkingonagivensite.Employeecompensationwastiedtoassetperformanceandtheoverallperformanceofthesite.Themodel, which was known as an "asset federation," was later applied across the companyafter BrownetookoverasCEOin 1995.

Onetradeoffwiththeassetfederationmodelwasthatbecauseeachsitemanagermanaged their "asset" autonomously and was compensated for its performance, therewas little incentive to share best practices on risk management among the various BPexplorationsites.Therewerealsodownsidestoasysteminwhichacentralizedbodyhadlittle oversight over the setting of performance targets, particularly in an industry whererisk management and safety were essential to the long-term success of an oil company.And BP had haditsshares of safetybreaches.

IssuesonSafety Regulations

In the mid-2000s, disaster struck BP twice within a 12-month period. The firsthappened on March 23, 2005 when an explosion at BP's Texas City Refinery killed 15peopleandinjuredanother180,andresultedinfinanciallossesexceeding$1.5billion.BPcommissioned James Baker, a former U.S. secretary of state and oil industry lawyer, towriteaninvestigativereportontheTexasCitytragedy.Oneofthekeyfindingshighlightedin the Baker Report was that the company had cut back on maintenance and safetymeasures at the plant in order to curtail costs, and that responsibility for the explosionultimatelyrested withcompanyseniorexecutives.

AnotherconcernoutlinedinthereportwasthatwhileBPhademphasizedpersonalsafety and achieved significant improvements, the company "has mistakenly interpretedimproving personal injury rates as an indication of acceptable process safety, creating afalsesenseofconfidence."Thereportgoesontostatethefollowing:ThePanel'srefinery-levelinterviews,theprocesssafetyculturesurvey,andsomeBPdocumentssuggestthatsignificant portions of the U.S. refinery workforce do not believe that process safety is acore value at BP. As many of the refinery interviewees pointed out, and as some BPdocumentsandtheprocesssafetyculturesurveyseemtoconfirm,oneofthereasonsforthisbeliefisthatBP'sexecutiveandcorporaterefiningmanagementhavenotcommunicated a consistent and meaningful message about the importance of processsafety and a firm conviction that process accidents are not acceptable. The inability ofmany in the workforce to perceive a consistent and meaningful corporate message aboutprocesssafety iseasytounderstandgiventhenumberof"values"thatBParticulates:

• BP's 18 "Group values," only one of which encompasses health and safetythecompany's broad, aspirational goal of "no accidents, no harm to people, and noharmtotheenvironment."

• Four"Brandvalues,"whichBPclaims,"underpineverythingwedo":beingperformancedriven,innovative,progressive,andgreen.

These messagesto theBPworkforceon so manyvalues and priorities contributetoadilutionof theeffectivenessofanymanagementmessageonprocesssafety.ThisisconsistentwitharecentobservationfromtheorganizationalexpertthatBPretainedunderthe2005OSHAsettlementrelatingtoTexasCity:Thereappearstobenoone,over-arching,clearly-statedworksitepolicyatTexasCity,regardlessofrespondents'answers.

The BP stated policy on health and safety, "no accidents, no harm to people andno damage to the environment" is not widely known at Texas City and points to a weakconnection between BP Texas City and BP as a corporation. Safety communication isviewed more as a function of particular individuals in Texas City versus a BP widecommitment. Until BP's management, from the Group Chief Executive down through therefinerysuperintendents,consistentlyarticulatesaclearmessageonprocesssafety,itwillbe difficult to persuade the refining workforce that BP is truly committed on a long-termbasis toprocesssafetyexcellence.

IssuesonTheMacondoWellProject

TheMacondoProspectwaslocated52milessouthoftheportofVenice,Louisianain the Gulf of Mexico. At nearly 5,000 feet below sea level, the well demonstrated greatpotential for extracting oil, but was also somewhat hazardous. Natural gas levels werehigh in the reservoirs, which made drilling challenging. Drilling in deep water and ultra-deep water started to become economically profitable and technically feasible on a largescaleinthemid-2000s,duetohigherworldpricesforcrudeoilandimprovementsindrillingtechnology.ThenumberofdeepwaterrigsintheGulfofMexicoincreasedfromjustthreein 1992 to 36 in 2008. Because of the complexities of deep water operations, creating aproductive deep water oil field was extremely expensive compared to shallow water oildrilling.Butthepotentialpayoffwasenticing.Awellproducinginshallowwatermightyielda few thousand barrels of oil a day. By contrast, deep water wells could yield more than10,000 barrels per day.26 BP acquired the rights to the Macondo Prospect from the U.S.MineralsManagementServiceinMarchof2009.27Astheoilindustryregulator,theMMSissuedpermitstooilcompanieswantingtodrillonU.S.landorinU.S.waters.Inexchange,it received royalty revenue from oil companies. BP was the principal developer andoperator ofthe prospectand held a65%financialshareintheproject.

WhileBPmaintainedoperationaldecision-makingauthority,Transoceanemployees,whoperformedthemajorityoftheworkontherig,hadsomedecision-makingauthority over operations and maintenance. BP started drilling the Macondo well inOctober of 2009. Drilling, however, was interrupted in the aftermath of Hurricane Ida. BPcommenced drilling on February 3, 2010 leasing Transocean's Deepwater Horizon rig.TransoceanchargedBPapproximately$500,000perdaytoleasetherig,plusroughlythesame amount in contractor fees. BP originally estimated that drilling the Macondo wellwould take 51 days and cost approximately $96 million. By April 20, 2010 the rig wasalreadyon its 80th dayonlocation andhadfarexceededitsoriginalbudget.

IssuesontheMacondoDeepwaterHorizonRig

TheDeepwaterHorizonrigcamewithalonglistofmaintenanceissues.InSeptember2009,BPconductedasafetyauditontherig,whichwasinuseatanotherBPdrillingsiteatthetime.Theauditidentified390repairsthatneededimmediateattentionandwouldrequiremorethan3,500hoursoflabortofix.ItwaslaterlearnedthattheDeepwaterHorizonhadnotgonetodry-dockfornineyearsprevioustothedisasterandneverstoppedworkingatanypointbetweentheSeptember2009auditandApril20,2010.

As Transocean's Chief Electronics Technician Mike Williams experienced, thecrew had to be adept at developing workarounds in order to maintain the function of therig. Williams was responsible for maintaining the Drilling Chairs the three oversightcomputers that controlled the drilling technology. These computers, operating on a mid-1990seraWindowsNToperatingsystem,wouldfrequentlyfreeze.IfChair"A"wentdown,the driller would have to go to Chair "B" and Chair "C" respectively in order to maintaincontrol of the well. If somehow all three chairs went down at once, the drill would becompletelyoutofcontrol.Williamsfrequentlyreportedthesoftwareproblemsandtheneedtohavethemfixed.DespitethehazardsoftheMacondowellsite,theknownmaintenanceissues on the rig, and the setbacks that had caused the project to be over budget, BP feltconfidentthatithadfoundoil.However,sincetheDeepwaterHorizonwasanexploratoryvessel, the crew was under orders to close the well temporarily and return later withanotherrigto extracttheoil.

Anatomyof aDisaster

Whiletheprocessofclosingawellisalwayscomplex,closingtheMacondowellprovedparticularlysoduetocompetinginterestsofcost,time,andsafety,aswellasthe

numberofpeopleandorganizationsinvolvedinthedecision-makingprocess.(SeeExhibit1.) As one example, 11 companies played a role in the construction of the casing for theMacondo well, all with different responsibilities for various aspects of setting the well.Halliburton, for instance, was responsible for cement-related decisions, although many ofthese decisions were contingent on decisions made by BP managers on well design.AddingtothecomplexitiesofdecisionmakingontheDeepwaterHorizonwasthefactthatmany of BP's decision makers for the Macondo well had only been in their positions for ashorttime beforedisasterstruck.

Name Title Days/Months in Position Casing Design? DUPREE Patrick O'Bryan VP, Drilling and 3 months O'BRYAN Completions, Gulf OPERATIONS ENGINEERING of Mexico David Rich Wells Manager 6 months David Rich JOHN SPRAGUE David Sims Drilling Operations 18 days Manager David Sims Greg Walz Robert Kaluza Well Site Leader 4 days JOHN GUIDE Greg Walz Drilling 18 days (took David Sims's HAFLE Engineering Team previous position) Vidrine ( Kalaza MOREL COCALES Leader Note: Exhibit 2 is a corrected version based on court testimonies that includes full names and titles. Source: BP as presented at the hearings of the US Coast Guard and the Interior Department's Bureau of Ocean Management, Regulation and Enforcement, August 26, 2010