BP: Ushering in a Risk Conscious World

Avalution Team Avalution Team | Sep 30, 2010

Oil SpillIn the time following the Macondo (BP) well blowout, the world watched a true disaster unfold.  As the days turned into weeks, then weeks into months, and even after BP finally stopped the flow of oil into the gulf, disgust remains on the minds of many because of one simple fact: the disaster appears – by most accounts – to have been totally preventable.

BP’s apparent reckless actions leading up to the Deepwater Horizon disaster propelled risk management into the forefront of many peoples’ minds – people who were previously either unaware or even unconcerned with controls and risk management practices.

Even a cursory glance of BP’s decision making prior to the April 20th explosion exposes a pattern of extreme risk taking.  BP’s response and recovery strategies for an event of this nature were inadequate and out-dated.  Below is a short list of actions on the Deepwater Horizon vessel that lead to the explosion onboard the rig. Keep in mind the cause of the event was gas that built up in the well and drilling system until it flowed out of the drilling column and ignited on the deck of the Deepwater Horizon vessel.

  • Stopped a procedure meant to detect gas in the well so it can be safely removed before it becomes a problem
  • Skipped a quality test of the cement surrounding the pipe, another precaution for gas even when BP was aware of problems with the cement and a warning from their cement contractor
  • Designed the well against industry best practices
  • Removed drilling mud from the well which is a pivotal safety measure to keep gas from rising in order to push towards a deadline
  • The BP manager overseeing final well tests had very little experience in deep-water drilling

The reasoning behind the choices was simple – to minimize costly delays.  However, the cost associated with these delays pales in comparison to the billions BP will spend over the coming years in clean-up, restitution and repairing the oil giant’s tattered public image.  Equally appalling, the U.S. Interior Department Minerals Management Service, the government agency tasked with offshore drilling oversight, approved some of these decisions. Clearly, BP and government regulators did not have an appropriate understanding of risk management practices.

Today the focus is expanding to the rest of the oil industry.  After the Deepwater Horizon explosion, BP’s share price decreased by over 50%, resulting in extensive investor losses.  The evaporation of BP’s market value led 58 investors from all over the world, whose investments total $2.8 trillion, to pen letters with specific risk management inquires to 27 CEO’s of companies with deepwater drilling operations.  It’s unclear if these investors expressed previous interest in the risk management practices, but it’s strikingly clear that such interest exists today.  Risk management expectations are on the rise and the questions aren’t just, “Do you have a business continuity plan?”  The inquiries are specific and comprehensive.  For example, in a letter to the CEO of the Apache Corporation from the Investor Network on Climate Risk, a group of individual and institutional investors and analysts posed a series of probing questions:

  • What lessons has the company learned from the BP spill? Have those lessons caused Apache to reassess its offshore risk management, its well designs and drilling and completion procedures, or its disaster response plans?  If so, what changes have been made or are planned?
  • Based on current information, please describe how Apache’s deepwater well designs, drilling and completion procedures differ significantly from BP’s Macondo well with regard to environmental, health and safety (EHS) performance and safeguards.
  • The BP spill and resulting Gulf of Mexico drilling moratorium suggest all offshore operators will be penalized for the mistakes of weaker operators. Is Apache taking any steps to raise the bar for performance by the offshore oil and gas industry as a whole?  Does the company support improved regulation and improved enforcement of existing regulation, in the offshore environment both in the Gulf of Mexico as well as internationally?  If so, what changes to these regulations and enforcement does the company support?

These are the questions each and every organization, not just those in the oil and gas industry, must ask itself in the wake of BP’s disaster to ensure they don’t experience a similar situation. The New York State Comptroller, Thomas P. DaNapoli, who manages the NYS Common Retirement Fund, summarized the investors’ new state of mind perfectly by saying, “Investors have a right to know that our companies are taking all necessary steps to maximize opportunities without sacrificing safety. We believe improved practices and policies to mitigate risk will ultimately improve the bottom line, which is good for all investors.”

The questionable practices surrounding the Macondo well blowout are strikingly reminiscent when compared to the irregular accounting procedures that came to light after the collapse of companies like Enron, Tyco and Adelphia in the early 2000’s.  The financial fallout experienced by investors was unprecedented and it led to the creation of strictly enforced accounting principles affecting the entire nation.  The parallels present in the offshore drilling industry cannot be ignored.  Formerly, the industry policed itself with government oversight from the Minerals Management Service, but the government placed a great deal of trust in the conclusions and plans presented to them by organizations proposing offshore drilling.

On August 12th, CNN summarized recent testimony to Congress regarding the Deep Water Horizon disaster.  The following paragraph is a compilation of key quotations from Dirk Kempthorne, a former U.S. Interior Secretary, who told a joint congressional subcommittee that previous environmental impact statements, assessments and oil spill response plans were “based on the probability that a significant oil spill was small.”

“When the 2007 and ’12 five-year plan was written, there had not been a major oil spill in 40 years,” he said. “One very real consequence of the Deepwater Horizon accident is that these historical assumptions will be forever changed.” Kempthorne pointed out that Congress had the power to review and reject that plan, but chose to allow it to proceed.  He added that the repercussions from BP’s ruptured oil well in the Gulf of Mexico “will forever change the offshore energy industry. Never again will a cabinet secretary take office and be told that more oil seeps from the seabed than has been spilt from drilling operations in U.S. waters. Never again will decision-makers not include planning for events that might be low-probability events, but which, in the unlikely event they occurred, would be catastrophic.”

Over-the-top, strictly reactionary government regulation is not what offshore drilling and other high-risk industries need.  These organizations must create ownership in their risk management practices.  The industry needs to responsibly police itself with proper government oversight and observance, setting responsible regulations.

Organizations have a responsibility – to their investors, as well as to the public as a whole – to develop, implement and execute appropriate risk management practices.  BP’s mistake is a perfect example of why organizations involved in high-risk operations need to have strong risk management governance processes, as well as viable response and recovery processes in place.  These organizations can not only avoid the immense cost associated with a disaster, but realize the reputational benefits associated with “doing the right thing”.  These businesses have a responsibility to their employees, investors, neighbors and to all who have a stake in the organization’s operation.


Ross Ladley
Avalution Consulting: Business Continuity Consulting