Reference no: EM132290736

The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath

The BP Deepwater Horizon spill is a multifaceted disaster that, despite popular opinion, cannot be explained by any one root cause. The April 20, 2010 oil spill was a point of crisis for oil giant BP, and CEO Tony Hayward faced a significant challenge in responding to this crisis.

The events leading up to the BP blowout unearth a highly complex network of circumstances, which though preventable, together culminated in the worst envi- ronmental disaster in American history. Repercussions of the incident are still felt today, and all stakeholders involved have an opportunity to learn about the sig- nificance of crisis management.

Events Leading up to the BP Spill

In March 2008, the Occupational Safety and Health Administration (OSHA) stated on public record that BP had one of the worst safety records in its industry. This same month, the Minerals Management Service (MMS) gave BP an exclu- sive right to drill a parcel of Gulf of Mexico floor called Block 252, for a fixed fee of $34 million. Over the coming months, BP boarded a rig to supervise contractors who set out to drill the Macondo well using Transocean rigs.

On October 2009, Hurricane Ida hit the drilling site, damaging BP’s oil rig and requiring BP to rent a more technologically sophisticated rig, called Deepwater Horizon.

The Point of Crisis

On April 9, 2010, BP exerted unreasonable pressure during drilling and fractured the rock in its well. According to the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, “BP informed its lease partners Anadarko and MOEX that ‘well integrity and safety’ issues required the rig to stop drilling further.” BP management compared safety to profit-maximization and made the decision to plug the fractures in an effort to maximize profit, rather than cease drill- ing. The plug worked, but BP knew it was precarious, and that they needed to mitigate this risk by balancing pressure carefully. After the incident, BP wells leader admitted that losing returns “was the No. 1 risk.”

The Warning Signs

When BP and Halliburton tested float valves, BP used a decision tree to evalu- ate the job based on whether there were lost returns on the cement factor, rather than engineering or risk principles and decided the test went well enough to excuse Schlumberger technicians, who were also scheduled to perform ce- ment evaluation tests. That decision, which was based on an effort to save the 3 Stakeholder and Issues Management Approaches 159 company time and money, was another example of a decision that could have prevented the oil well blowout that is ironically costing over $20 billion in reme- diation to date.

BP is documented to have sought Halliburton’s counsel on how it could use cement centralizers to mitigate some of this drilling risk. However, due to low inventory, BP again allegedly compromised on quality and safety by changing Halliburton’s design and using the wrong kind of cement centralizers.

Halliburton conducted a routine cement slurry test which revealed that the foam was unstable, but they did not adequately report or address it. This event was sadly not uncommon among the various subcontractors on the Deepwater Horizon project. There appeared to be a team culture of poor communication driven by an effort to save time, money, and reputation, which ironically resulted in catastrophic loss of the same, at the expense of stakeholders of this project.

The company finished its cement job and began to lock down the Macondo well so it could move a smaller rig into place, but BP had amended Deepwater’sprocedures to omit a pressure test (which would have checked the bottomhole cement job), among other things. (Incidentally, on April 12, BP had sent its amendments to the procedure to the MMS, but there is no evidence that they were reviewed.) While this combination of events, which were caused by several actors, was highly uncanny and improbable, given the circumstances of the weak cement job, their occurrence proved to be deadly. The more that the details of the story were unraveled, the more sweeping the participation among parties and stakeholders in the negligence, insufficient funding, and insufficient commu- nication that led to the Deepwater Horizon explosion surfaced.

BP was also discovered to have used a broken pressure gauge during this same time. This too became a critical issue that, if it had been prevented, could have possibly averted the disaster. Still, the root cause of these errors is unclear, as the disaster could have been prevented with tighter risk management proto- col, more sufficient inspection, as well as closer attention to fluctuation in gauge readings. Nonetheless, incompetence and risk mitigation planning negligence again appeared to be rife on the job.

Other important precrisis warnings included the fact that the well was leak- ing and was in danger of exploding. The site workers were also found to have not adequately read or responded to the confounding results of the pressure test, i.e., they needed to use a different gauge to detect a leak that was later found in the well. This also indicated negligence (and incompetence) on behalf of site workers as they should have checked for this. Drill-pipe pressure increased 250 psi as shown on the monitor, but no one appeared to be checking the monitor. As could be expected from these warnings, the pressure relief valve soon blew. In response to this, the pumps were shut off; but pressure increased and no one seemed trained to know the significance of this issue and appropriate action was not taken. The warning signs were ignored.

Next, mud emerged on rig floor indicating that there was a problem in the well. Six–eight minutes passed before this was addressed, and the spill was not diverted overboard. The lack of response indicated negligence in emergency 160 Business Ethics response training and a disregard for the warning signs that a crisis was coming.

After countless emergency indications, a high enough concentration of nat- ural gas leaked into the air to cause an ignition. This explosion forced five million barrels of oil into the Gulf of Mexico over 87 days; the worst environmental disaster in American history.

The Aftermath—Response to the Crisis

During the emergency response, scientists, including Ian MacDonald of Florida State University, alleged that BP withheld the facts around the spill, likely to pro- tect its reputation. Possibly due to this obfuscation, it took 87 days until the well was finally capped on July 15, 2010.

Aside from some controlled burning and microbial digestion, only upon the capping of the well did the remediation of the oil’s damage truly begin. BP set up a $20 billion claims fund, which is still being administered as of March 2012. It is estimated that BP will pay $585 million in pollution violations. The company “has claimed about $40 billion in charges to cover the costs of litigation and cleanup”. New CEO Bob Dudley has a difficult task ahead in continuing remediations. BP has already set aside $3.5 billion to cover expected Clean Water Act fines on the estimated 3.2 million barrels spilled. However, the ripple effect of the spill has had no small impact on the Gulf Area tourism and fishing, which has some- how gone unaccounted for in BP’s legal restoration.

The legal aftermath of the spill is very consequential, as the U.S. Department of Justice (DOJ) filed a civil suit against BP and its business partners. This civil suit is expected to be followed by criminal charges–so much so that BP has already divested some assets.

Legislatively, oil companies are likely to face much more strict safety, environ- mental, risk management and reporting standards in the future. From the federal government level, President Obama is pushing for the cut of oil subsidies, which could lead to higher oil prices for consumers.

This type of large environmental crisis required swift corrective action and strategic public relations. There are many lessons to be learned from the way BP continues to handle the consequences of the accident and the way it employed crisis management.

Fatal Ethical Flaws

The root fatal flaws in this drilling project were not scientific in nature, but rather the tears in the fundamental ethical fabric of the team and its strategic business partners—negligence, poor risk management, and possible willful obfuscation of information for the apparent purpose of salvaging reputation, while risking the safety and well-being of BP’s stakeholders.

The first ethical flaw is negligence. While some degree of mistakes is un- avoidable due to human error, BP and its constituent contractors displayed a systematic failure to prevent error, which could be classified as negligence. At the time of this case, several claims had been filed against BP to this extent, but 3 Stakeholder and Issues Management Approaches 161 courts have not rendered a decision and BP executives expect the case to last until at least 2014. What made the events surrounding the explosion tragic is that there were many opportunities for BP to make choices that could have prevented the disaster, but team members systematically compromised the safety and stake- holder consideration, when it cut corners to save time and to maximize profits, flying in the face of justice and utilitarianism, as discussed in the following sec- tion. This distinction is both ethically significant and economically consequential for businesses as it is embedded in our criminal law system, which penalizes on the basis of negligence.

A subset of this negligence was the failure to report safety risks, which was endemic to the broader BP contracting team, including Halliburton, Transocean, and BP staff. To this point, BP was ironically celebrating Deepwater Horizon’sseven years of safety at the exact moment of the explosion. As this problem was so pervasive, and as the moral burden of a team’s culture lies with its leadership, this implicated BP in this failure.

A third classification of ethical failure recognized by the U.S. legal system is willful misconduct, which implies a conscious and willful choice to endanger others when other options are available. Whether or not this will be found suf- ficiently compelling in court, this could be seen in several of BP’s decisions, including its decision to drill after fracturing the well and its decision to dismiss Schlumberger before testing the well. At this point in BP’s work, BP made both an ethical and financial miscalculation by actively choosing to compromise many of its stakeholders’ safety, economic livelihood, environment, and personal prop- erty to maximize its own profits. This decision was systematic and was not made in isolation, suggesting abuse and grounds for liability on the part of BP and its team members.

Whether or not BP will be indicted for criminal charges, BP and nine of its business associates have faced civil charges from the DOJ in pursuit of reme- diation of the damages under the Oil Pollution Act and Clean Water Act. In this is an important lesson: companies like BP should consider not just the letter of the law, but the spirit of the law, such as the anti-pollution provisions of the Oil Pollution and Clean Water Acts when guiding ethical decisions. A big part of BP’s damaging ethical tapestry is its failure to consider its stake- holders in driving its corporate strategy. By balancing their focus on short- term profits and considering others in their business, as well as governments, consumers, and the environment, BP’s costly mistakes could also have been averted. This Stakeholder Management Approach identifies corporate strategy by mapping and evaluating the implications of strategy through the lens of stakeholder impact as shown in the following analysis. This approach is built upon “win-win” collaborative outcomes rather than short-term profits by identi- fying the issue at hand, by assessing the nature of stakeholder interest, by assessing each stakeholder’s power, identifying stakeholder moral responsi- bilities, and developing the appropriate strategies and tactics. Incidentally, these same outcomes will likely save companies like BP up to billions of dol- lars in the long run.

Who and what factors were responsible for the Deepwater Horizon Oil Spill?

Evaluate BP’s corporate culture from an ethical standpoint. What role did top management have in shaping that culture?

What actions could/should BP management have taken in response to the many early warning signs? Did the “in action” of BP demonstrate the company’s ethics? Explain.

What responsibility did BP’s partners and oversight agencies like OSHA have in the crisis?

How did BP’s corporate strategy affect its ethical decision making?

Do companies like BP should have an ethical responsibility to protect the environment? Why or why not?