You might think that 2010’s colossal disaster in the Gulf of Mexico would lead to a radical shake-up of the oil industry. So far, that’s not happened
Although it is probably too soon to consider the full ramifications of the Deepwater Horizon disaster, it’s a decent guess that the oil spill will claim a prominent place in the history of corporate disasters. The sheer scale, and very public nature of the incident, mean it will not be soon forgotten by anyone, including the company, regulators, and the general public.
The catastrophe, which took place over the spring and summer of 2010, holds several lessons for safety management and the management of complex systems in general, as well as the importance of sensitive PR, and the value of strong stakeholder relations.
The Deepwater Horizon disaster began when the Macondo well-head blew out on the night of April 20 2010, killing 11 workers. The ensuing saga extended over almost three months, as 4.9m barrels ofcrude spewed into the Gulf of Mexico. The well was not capped permanently until September.
It was the worst spill on record, and the most expensive. By mid-2011, BP had paid out $6.8bn in compensation, on top of clean-up and other costs. In all, it has set aside $41bn, although it is suing its contractors to reclaim some of that money.
Scenes of oil gushing from a broken undersea pipe, and crude lying heavily over miles of sea and shoreline, served as a rallying point for critics of BP and the oil industry. And it is a fair guess that no company has ever faced such a sustained denunciation from the media, politicians, and the general population.
No doubt, few companies would have looked good in the face of such an environmental mess. But there are reasons why BP came off particularly badly.
For one, its immediate PR response was widely seen as ineffectual and self-serving. Critics lambasted Tony Haywood, chief executive at the time, for competing in a yacht race at the height of the spill, and for making several gaffes when speaking to reporters. Haywood famously responded to a question about the impact on local people by saying: “There’s no one who wants this over more than I do. I would like my life back.”
And BP’s problems were compounded by a legacy of previous disasters, particularly a massive fire at its Texas City refinery in 2005, and an extensive oil leak in Prudhoe Bay, Alaska, in 2006.
Drip, drip effect
One corporate responsibility consultant who has worked in the oil sector says those incidents had a cumulative effect by the time of the Deepwater spill, and reduced the potential support in civil society that might have been available in different circumstances.
“The NGO community put BP on a pedestal in the late-1990s, saying ‘Look, this company really believes in sustainable development.’ They felt they could support them after the first controversy. But after the second, third, and fourth, it got weaker. By Deepwater Horizon, people felt like they were being taken for a ride,” the consultant says.
David Nicholas, a spokesman for BP, rejects the idea that BP had shifted away from the “Beyond Petroleum” initiative it announced in the late-1990s. He says BP still spends $1bn a year on alternative energy, and is on track to hit a 2005 target to invest $8bn over 10 years. But he concedes that BP “could have increased [its] engagement with non-business and non-government stakeholders”.
Roger Hammond, development director at the Living Earth Foundation, and a participant at roundtables BP has held with NGOs since the disaster, describes BP’s engagement efforts in the years leading up to Deepwater as “fairly superficial”.
“They viewed it very much as something they had to do, something they had to be seen to be doing. I’m not convinced that they took working with NGOs on the ground to heart,” he says.
Along similar lines, BP was criticised for its advertising spending during and after the disaster, leading observers to conclude that it cared more for its image than the job of cleaning up the spill, and making sure it could not re-occur.
BP spent $93.4m on advertising between April and July 2010 (three times the amount spent in the same period the previous year). President Barack Obama himself said he didn’t want to see BP “spendingthat kind of money”, while “nickel-and-diming fishermen or small businesses here in the Gulf”.
The official US government report, released in January 2011, says the main cause of the accident was “management failure” at BP, and its contractors Halliburton and Transocean, including inadequate supervision of well designs, the cement slurry to seal the well, and a test to judge the effectiveness of that seal. The report says the companies failed to heed the signs of an imminent blow-out, and then produced an ineffective response once it was under way.
Written bythe US National Oil Spill Commission, the reportconcludes thatall the problems could have been prevented, and that most of the mistakes at Macondo can “be traced back to a single overarching failure –a failure of management”.
System failure
A failure of “systems” is another common theme of the official report, as well as BP’s own investigation, published in September 2010. In the wake of Deepwater Horizon, BP has introduced four new policies for deep water drilling, including to use two shear blow-out preventers (to offer an alternative if the first shear fails, as it did at Macondo), greater inspections of blow-out preventers, and third-party checking of slurry and cement used in the drilling process. BP has also launched a new internal unit tasked with overseeing safety across the company, which has the power to halt work if necessary.
However, some question whether new structures will be sufficient to address underlying issues. Hammond says the problem was not only a lack of systems, but an over-reliance on them. “These wells are very complex, with lots of sub-contractors, and sometimes management relied too much on processes. Information drifted up through the systems, but they didn’t short-circuit it.”
Karina Litvack, head of governance and sustainable investment at F&C, a fund manager, notes that BP has since moved away from a decentralised country-by-country management approach – which was criticised for encouraging excessive risk-taking in the US – to something more top-down.
She says oil companies with vertical structures tend to have better safety records. But she is not fully convinced such changes will fix the problem. BP is the product of a series of mergers, and there remains a lack of alignment between UK and US safety models, she says.
“Our biggest worry is that BP has a UK head, but lots of limbs, including some American ones. There is a strong legacy culture from the Amoco days that is very rules-based.” She accepts that back-up systems that will catch mistakes have been developed. “But, at the same time, you don’t want human beings to stop using their judgment.”
She also questions whether the industry as a whole has taken the lessons of Deepwater Horizon to its heart. “There have been vastly different responses in the industry. At the one end, Exxon has said ‘this is a BP problem, and nothing to do with us’. On the other, BP has said it is an issue for the whole of the industry.”
The US government commissionis in little doubt. It says management deficiencies at BP, Halliburton and Transocean “reveal such systematic failures in risk management that they place in doubt the safety culture of the entire industry”. It also notes that lax regulatory oversight contributed to the disaster, and that no company would have been prepared to deal with the accident.
Investors and the future
An interesting question is what part investors played in creating the conditions for the Deepwater accident. BP has complained since that it often tried to discuss safety initiatives with shareholders, but that investors tended to focus exclusively on BP’s plans for future reserves, and its capacity to deliver on its financial targets.
Litvack says there has been a shift in investor attitudes in the wake of the spill, with more so-called mainstream funds asking questions about safety, and other “non-financial” issues. But she criticises BP for continuing to hold separate meetings for mainstream and socially responsible investment analysts. She describes the schism as “unfortunate”, not least because the two groups “could learn a lot from one another”.
BP’s Nicholas says the arrangement is simply to ensure that questions from investors can be answered “as efficiently as possible”.
In the next few years, BP is likely to continue to have a difficult job regaining trust among its stakeholders, including the general public. A survey by Harris Interactive of 30,000 Americans between December 2010 and February 2011 found only one company – AIG, the insurance giant at the very centre of the financial crisis of 2008 – less respected.
Nicholas says BP understands it can only repair its image through consistent safety improvements over the long term. “We fully understand that people will only believe us by actions and proof in performance,” he says.
Jackie Savitz, senior campaign director at Oceana, a US NGO that has called for an end to deepwater drilling, says the only way for BP to improve its reputation would be to end the practice completely, which she describes as inherently “dirty and dangerous”. She calls instead for BP to invest 20% of its profits in clean energy as part of a shift away from fossil fuels.
But Nicholas rules out investments in clean energy as a way of improving goodwill. He says: “You have to recognise that oil and gas will be the mainstay of energy demand around the world for some years to come.”
As for BP’s stakeholders, Hammond is impressed by BP’s effort to reach out since the accident. But he says he wants to see “leadership [in] highlighting the importance of co-creating solutions with civil society groups”.
Hammond says BP needs to talk “openly and transparently” to organisations “that have a legitimate place at the table that BP has been ignoring the last few years”. It would be helpful for the company to create “clear targets and indicators that show how they want to evolve the company, which people can then follow up on”.
For now, the spill has hurt BP’s ability to win future licences in the Gulf, excluding the company from a key source of future deposits. Its share price is 40% below where it was before the disaster, leading some to think it could become a takeover target, or a candidate for break-up. And some analysts say BP is in strategic disarray following its ill-fated tie-up with Rosneft in Russia.
In future, BP will have to do a better job of managing short-term needs alongside long-term imperatives, including the need to maintain its standing as a corporate citizen. It would be incredible, given the fallout, if BP or its rivals were to forget the damage caused by Deepwater Horizon, and repeat the same mistakes again.
BP in numbers
Market capitalisation $138.4bn (at Dec 31 2010)
Sales and other operating revenue $297bn (at Dec 31 2010)
Number of employees 79,700
Proved reserves 18,071m barrels of oil equivalent
Refining throughput 2.4m barrels per day (year 2010)
Refined product sales 5.9m barrels per day (year 2010)
Retail sites 22,100
Source: BP