Strategy and Corporate Governance

BP Oil Spill

Strategy and Corporate Governance

The bp oil spill of 2010

British Petroleum (BP) is one of the largest oil exploring companies in the world. It is recognized for its efficient practices. In recent years it has positioned itself as an environmentally responsible company by stressing its commitment to undertaking exploration activities by causing minimum harm to the natural environment. It has also invested in technologies to make drilling under the seabed more secure so that oil spills do not occur. However, these claims were brought into question on April 20, 2012 when a massive explosion and oil spill took place on the Deepwater Horizon oil rig over the Macondo oil well in the U.S. Gulf. There was huge damage to the marine environment and to the livelihood of people living in the coastal communities in Louisiana and other coastal states. The poor response of the company was shocking to many and suggests a need for reform in its management culture.

Main Events Leading to the 2010 Oil Spill

The Deepwater Horizon rig off the U.S. Gulf Coast had been drilling oil from the seabed since 2001. In 2010 Transocean was operating the rig under license from British Petroleum. On April 20, 2010 an explosion due to a gas leak occurred on the oil rig on which 126 crew members were operating (BP, 2012). Fire erupted as a result of the explosion and 11 crew members went missing after the incident. The number of injured members was estimated at 17 (Guardian, 2010).

Blowout Preventer

The response mechanism consisting of a blowout preventer failed to activate following the explosion. The next day, a search team comprising of members from Transocean, BP and the U.S. Coast Guard began a search for the missing crew members while the rig continued to burn. The next day, the oil rig sank after burning for two days. The big threat now was a massive oil spill from the well. Efforts were needed to seal the exposed well so that oil spills could be prevented. On the following day, the search for the missing crew members came to an end without any rescues being made. On April 25, a blowout preventer was used to try and seal the well. However, the effort was unsuccessful and the oil spill continued.

Magnitude of Leakage

On the same day, underwater cameras deployed by the U.S. Coast Guard revealed that the well was leaking an average of 1,000 barrels of crude oil per day. This estimate was revised the next day when the Coast Guard reported that 5,000 barrels per day were being leaked into the ocean (Guardian, 2010).

There were three leaks in all reported by the coast Guard (Guardian, 2010). On April 28, BP began a series of controlled burns to consume the oil before it could cause further pollution in the sea. The state of Louisiana declared an emergency as the oil spill began approaching the coast on 29 April. To plug the well that was still leaking, a relief well was set up on May 2 to seal the well ad control the damage. A week later, efforts were made to place a containment dome over the leak to stop the continued spill. This attempt also proved to be abortive. On May 5, one of the three valves was successfully shut off but this did not reduce the volume of oil leaking out.

Efforts by BP

On May 8, the plan to place a containment dome over the larger leaks and pump out the oil was also abandoned. On the same day, BP released a report in which the cause of the explosion was identified as a methane bubble. Another similar plan to use a capping dome failed on may 12. On May 13, the amount of crude oil leaking from the well was estimated to be 70,000 barrels per day (Guardian, 2010). Construction on a second relief well began on May 16. On May 20, BP's efforts at drawing up oil from the well through a through an insertion tube were marginally successful at bringing up 5,000 barrels per day.

Negligence with Regard to the Alarm Systems

During the early part of July some of BP's efforts at containing the oil spill and drawing it out were showing signs of success. On July 15, the oil spill was stopped for the first time since it began. On July 23, it came to light that the alarm system on the rig had been switched off on the day of the explosion (Guardian, 2010). On September 23, a report was released estimating that a total of 4.4 million barrels of oil had leaked into the Gulf during the first three months of the oil spill (Guardian, 2010).

Identification of Wrong Moves made by BP

Investigations that followed the oil spill found BP responsible for negligence in several aspects of work on the rig. Along with BP, other partners such as Transocean and Halliburton were also found guilty of not taking the necessary amount of care in constructing and using the Deepwater Horizon oil rig.

A presidential panel that had been assigned the responsibility to investigate the matter revealed in a report that BP along with other partners took "a series of hazardous and time-saving moves without adequate consideration of the risks involved" (Broder, 2011). The panel also reported in its findings that the well had been showing signs of trouble but that senior management had not paid attention to these reports and had not taken preventive measures in time to avoid the explosion that eventually took place. The panel also reported flaws in the cooperation among senior management and noted that senior managers did not consult with one another on serious issues as often as they should have (Broder, 2011).

Systemic Failures

The report squarely placed blame on "systemic" failures within the company and concluded that unless the company undertook major reforms in its management practices, it could not be said with certainty that such incidents would not be repeated.

Cost-Cutting Measures

Along with other companies involved in the incident, the report of the presidential panel also placed blame on BP for cutting corners around the construction and running of the well. Among these was the failure to put in place the required number of devices for maintaining the stability of the well. When the well had been sealed, the company had failed to wait for test results before proceeding further. The company was also guilty of using a riser to take out drilling fluid from the well whereas the proper procedure would have been to install a cement plug first and wait for it to be completely set before the drilling fluid could be extracted. The report also stated that the companies had failed to take necessary action when the initial tests had failed a pressure test when the well was being set up.

Poor Decision Making and Communication

The report declared the basic cause of the incident to be poor information sharing and coordination among employees and managers at the company. The managers were found to be ineffective decision makers and taking risky measures when less risky measures could have been taken. They also failed to seek and share crucial information with other managers and employees within the company and with their contractors. For instance, there was little coordination and sharing of information between employees on the shore and those on the rig. Information about problems such as the cement plug were known to the onshore officials but had not been communicated to the crew members on the rig.

The report did not place the blame squarely on any one company and held all three equally responsible for the negligence. However, Halliburton placed the greater responsibility of BP saying in its defense that it was acting after major decisions had already been made by BP. As a result, it was not equally guilty of negligence as BP. The failure of the company to keep the pipe in the centre indicates the lack of coordination and poor decision making by BP and its partners (Mufson, 2011). On the basis of these reports it can be said that BP was guilty of negligence and had taken a casual attitude by ignoring the warning signs for a large-scale incident. The absence of responsible management practices can be said to be the source of the poor preparation and readiness of the company.

Identification and discussion of Stakeholder Groups

The BP Gulf oil spill released almost 5 million barrels of oil into the sea and had far-reaching effects on the community. The following discussion aims to identify some of the important stakeholder groups that were affected by the oil spill as well as those who played a role in bringing about the damage.

Marine Life, Birds and Mammals

The most serious threat from the oil spill was to the wildlife in and around the waters that were affected. There are expected to be long-term consequences of the contamination of the habitat and food source of the wildlife in and around the Gulf coast. It is estimated that more than 8,000 birds and other forms of marine life including sea turtles and other marine mammals were found either injured or dead during the first six months after the oil spill occurred. In addition to the effects of the toxic hydrocarbons in the crude oil, the chemicals and dispersants used by BP to restrict the spread of oil in the sea may have serious long-term effects on the marine and coastal wildlife. National Wildlife Federation (2012) reports that among some of the immediate effects of the oil spill were those seen in the form of bodies of birds and sea turtles covered in oil. There is also the risk that marine mammals may have swallowed the oil causing health problems for them. Coral had also been killed because of the increased levels of toxicity. The sharp decline in the wildlife population may have impacted the local food chains and may have a visible effect on the food webs in the years to come. However, the death to marine life was less than that in the Exxon Valdez oil spill (Alleyne, 2010)

Coastal Communities

The major coastal areas affected by the oil spill are Texas, Louisiana, Mississippi, Alabama, and Florida. The coastal communities in these states are dependent on the coastline for their livelihood and living. They have homes built along the coastal region. Several fishing communities dot the coast that supports a $3 billion dollar fishing industry and provides more than 30% of the seafood for Americans (Johnson et al., 2012). Oyster beds, breeding grounds for various species of shrimp and fish, and coral were destroyed as a result of which the local communities have suffered a loss of livelihood. The coastal communities also depend on tourism. After the oil spill, there were a large number of tour cancellations and the local hotel industry suffered losses as a result.

Oil Companies

Following the oil spill, BP faced severe criticism for its disregard for the environment. There is a risk that the negative impact of the incident may carry over to other companies exploring oil in the region. Scott (2010) reports that legislation might be on the way to limit offshore drilling in the country and to impose increased liabilities on oil exploring companies by more than a 100 times.

Managers and Employees at BP

Employees and managers at BP are important stakeholders and were both affected by the oil spill and also served to bring it about. Eleven crew members were reported missing and many were injured. The management practices were responsible for the lack of coordination and faced criticism for this. The management also faced claims by the affected communities and demands from environmental groups to do more to clean up the environmental damage caused by the oil spill. There were even demands for the CEO Tony Hayward had to resign in July 2010 following these demands (Arnott, 2010).

Shareholders at BP

BP is a public limited company and had a shareholder's equity worth almost $95 billion in 2010. Following the news of the oil spill in the Gulf, the share price of the company immediately fell to half the value before the incident. Share price fell from $60 to $30 within two weeks (Hargreaves, 2012). The share price improved somewhat as BP tried to contain the oil spill and engaged in a PR attempt. By June 2010 the share price was only 13% lower than the price before the oil spill (BBC, 2010). BP also announced a cut in dividends and in payments to pensioners as well (BBC, 2010). This was a massive shock for shareholders of the company as many people saw that their investments were being lost because of the incident. They were concerned about the viability of the company in the future.

Regulatory Agencies

The regulatory agencies were also found to be guilty of negligence in the presidential panel's investigative report. They were found not to have taken all measures to assess the integrity of the structure and the procedures employed by the relevant companies and had signed approvals without paying complete attention to the requirements. A reform of the regulatory framework is needed to avoid such incidents in the future (Saenz, 2011).

Claims made by Stakeholders and the Response of BP

The most affected stakeholders of the BP oil spill were the shareholders, employees, local communities and government entities. They made claims against BP for the loss of their livelihood, income and damage to their property.

In the aftermath of the oil spill, BP created a trust fund with the agreement of the government worth $20 billion in which the amount were to be deposited over the subsequent years to alleviate apprehensions that it would try and evade financial compensation to the victims.

A steering committee was created to advocate on behalf of more than 100,000 individuals who wanted to file claims against the company. The claims were allowed for economic loss, damage to property of a vessel, damage to crops, trawlers and other fishing equipment or machinery, and for expenses incurred in helping the company with personal vessels at the time of the oil spill (Guarino, 2012). In addition to individuals whose lives have been affected by the incident, individual states and the U.S. government have also filed claims against the company for damage to the coastline and the economy. As of April 2012, BP had paid out $6 billion in claims out of the $20 billion trust fund. It has also pledged $57 million to help the tourism industry in the affected states to recover. The Court had approved a preliminary settlement between the company and the plaintiffs worth $7.8 billion (UPI, 2012).

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