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British Petroleum: Success Story That Laid The Foundation Of Collapse

Posted in Finance Articles, Total Reads: 4145 , Published on May 18, 2012

In April 2010, the world watched in alarm as millions of barrels of crude oil began gushing into the Gulf of Mexico following a catastrophic explosion at BP's Macondo well. As spring turned to summer and the accident developed into one of the worst oil spills in history, alarm gave way to disbelief and anger. Why had this happened? Why was it taking so long to fix? And who was ultimately to blame? The question remains, whether John Haywards, then CEO of the company, could be held accountable or the seeds of the incident were laid in the term of former CEO John Browne.

The Spill

In January 2010, Transocean’s Deepwater Horizon was deployed on MC 252 oil block. The procedure of drilling includes pumping of ‘drilling mud’ through the drilling pipe to lubricate the drill. The mud comes back along with pieces of rock via the gap between drilling pipe and well wall. However, the procedure had an issue of ‘lost return’ for Deepwater Horizon. This could lead to drop in pressure, a subsequent crack in rocks and a spill. The general procedure in such a case is that when gas pushes up through the pipe with a ‘kick’ and makes the pipe to shake, Blowout Preventer (BOP) activates automatically to stop the gas from reaching the surface. The key to drilling safely is a good cement job. Companies like Exxon and Shell have R&D for cementing job, which is not with BP due to cost reduction activities. BP’s policies state a need for risk assessment in such conditions, which in this case company did not do.

On 20 April 2010, an explosion and fire engulfed Deepwater Horizon. Two days later the rig sank. Despite rescue operations, 11 employees went missing and assumed dead.

Safety Issues under BP

Historically, BP has had a very poor safety record, worse than most oil companies (Mouawad, 2010).

According to experts in the oil business, BP has a history of taking too many risks, cutting corners, and skimping on safety in the service of higher profits and growth (Lyall, 2010). Some previous problems include a March 2005 explosion in a Texas City refinery owned by BP – 15 people died and 170 were injured. The facility was very old (built in 1934) and was not maintained well. An investigation by the U.S. Chemical Safety Board concluded that the explosion was caused by “organizational and safety deficiencies at all levels of BP” (p. A14). More than 300 safety violations were discovered at the Texas refinery and BP was fined $21 million – a record at that time.

The Thunder Horse oil platform in the Gulf of Mexico almost sank in 2005 in the aftermath of Hurricane Denis; it was actually tilting very ominously. The problems were due to a total disregard for safety. Some of the problems that were discovered included a check valve that had been installed backward and pipes not welded properly. There could have been a horrific oil spill at Thunder Horse, had the well been active. BP has had additional problems at its Ohio oil refinery (62 violations) and a 200,000 gallon oil spill on May 25, 2010 in Alaska (Lyall, 2010).

BP had another crisis in 2006 when 267,000 gallons of oil leaked from their pipelines in Alaska. Investigators found that the cause of this oil spill was poorly maintained pipes that were corroded. The company did a very inadequate job of Journal of Business Systems, Governance and Ethics inspecting the pipes on the North Slope in Prudhoe Bay, Alaska. BP had to pay more than $20 million in fines and compensation (Lyall, 2010).

BP Payouts

In the aftermath of the spill, resource damage assessment has begun, but will take time to complete. Some 185,000,000 gallons (4.4 million barrels) of oil were discharged, 6 and, while clean-up efforts and natural processes appear to have removed much of the oil from the water surface, the effects may remain for several years.

The intensive media coverage raised many questions that were left unanswered before the media moved on to other issues. Among these are questions regarding who was in charge, delayed emergency response efforts, the laxity of federal oversight, the culpability of the companies involved, 8 the impact of the oil on the ecosystem, the use of dispersants, and the ability of the environment to recover.

BP reported initially that the spill was a mere 1,000 barrels per day, then increased that estimate to 5,000 barrels per day. Experts with Columbia’s Lamont-Doherty Earth Observatory reported that as early as May they were able, using reliable techniques, to estimate from video of the blowout a flow rate of 40,000 to 60,000 barrels per day, ten times greater than what BP was stating.

The total cost to BP in penalties and damage claims will be very large. An article published in the New York Times estimated that total costs to BP, including civil and criminal penalties, could exceed $60 billion.

A Strategic Time Bomb

Oil price crash of 1980s left BP struggling for survival and other companies with crashing profits. That is when BP changed itself from technology driven company to cost leader. CEO John Browne transformed the company in a way that each manager turned into an entrepreneur. Earlier technological expertise was outsourced and business spirit brought in. The company not just survived, but excelled through times.

A successful strategy for 30 years explains how a company that got transformed into an industry’s dynamic player and most sophisticated PR machine paved the way for BP’s darkest hour.

This article has been authored by Kanika Bansal and Varun Arora from LBSIM.

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