Under pressure – the disaster
Considered as the biggest marine disaster in history, on April 20th, 2010, the Deepwater Horizon oil rig exploded in the Gulf of Mexico, killing 11 crew members working onsite. The rig eventually sank and damaged the pipe underneath and started to spew millions of barrels of crude oil into the gulf over the next four months. It contaminated about 400 square miles of the sea floor and 1,300 miles of shoreline of the Gulf of Mexico (DOI: 10.1002/jcaf.22306).
Search-and-rescue operations were executed on April 22nd and within the same day, BP’s CEO Tony Hayward released a statement that they were determined to do everything to contain the oil spill and resolve the situation. When the rig capsized, BP’s initial response comprised of: 1) releasing of a small fleet of response vessels, 2) relief well planning, 3) skimming of oily surface water, 4) implementing protective boom to prevent oil from reaching the shoreline, and 5) placing chemical dispersants in the spill site to break up the oil and keep them from damaging marshes, mangroves, and beaches.
Efforts were made to seal the leaking well but were initially unsuccessful, and as a back-up, they have started drilling relief well in May. To reduce the leak, a tube tool was inserted into the ruptured riser pipe and containment cap was used to collect the oil and pump it to the gulf surface. On July 15th, BP was able to stop the flow of oil for the first time in 87 days but was still under monitoring to ensure that the cap would stay in place. More than 2 weeks later, the US government announced that almost three-quarters of the spilled oil had been cleaned up, and on September 19th, BP reported that the leak had been successfully and permanently plugged.
Several service providers (DOI: 10.1002/jcaf.22306) were involved in the offshore drilling operations of the Macondo well, the area of exploration where BP is operating. BP leased the rig from TransOcean, while the processes such as cementing the well and other critical functions were done by Sperry-Sun, Halliburton’s subsidiary. Other companies involved were Dril-Wuip, Oceaneering, M-I-SWACO, Cameron, and Weatherford.
Numerous investigations were held to find the root cause of the disaster, as well as the parties responsible for the damages. The BP report 2010, the Commission Report 2011 and the Joint Report 2011 concluded that the tragedy occurred due to a series of failures from the multiple parties involved in the operation. BP had been identified as the primary responsible for ensuring the safety and protection of personnel, equipment, natural resources, and the environment under the Oil Pollution Act (OPA). The other companies also shared the same accountability for violating several offshore safety regulations based on the Joint Report 2011.
It was revealed that the crisis has cost BP more than US$65 billion covering the total charges, net of reimbursements and recoveries, as well as insurance claims. However, a study (DOI: 10.1002/jcaf.22306) showed that the ultimate cost of the oil spill was twice what was reported in BP’s income statement, amounting to US$144.89 billion. The detailed computation included not just those mentioned above but also the hidden costs such as the revenue lost, unearned profit, and reputational damage. Needless to say, the spill also damaged fisheries, beaches, and coastal wetlands, including several species of birds, sea turtles, marine mammals, fishes, oysters, and other sea animals. A recent study showed that Gulf inhabitants such as brown pelican and menhaden fish have showed robust recovery while many species such as deep-sea coral, common loons, and spotted sea trout are still struggling to multiply.
The Deepwater Horizon spill also brought significant impacts to the economic activity in the surrounding communities. A research (DOI: 10.1007/978-3-030-11605-7_33) revealed that the total economic costs during the period of 2010-2020 of the foregone commercial fishing revenues and recreational fishing expenditures are loss of 25,000 jobs, US$2.3 billion worth of industry output, US$1.2 billion gross regional product, US$700 million labor income, US$160 million state and local tax revenues, and US$160 million federal tax revenues.
A deep well of learnings
Oil spills are not uncommon in the Gulf of Mexico but the magnitude of impact of BP’s Deepwater Horizon had been massive that it attracted so much attention from various stakeholders, not to mention the several missteps BP took as they navigated through the whole crisis. Here is the list of some lessons learned from the accident that, in some way or another, brought lasting impact on the safety of succeeding oil operations in the industry.
- Never learning enough from previous mistakes. In a high-risk business like oil-drilling, it is expected that large companies such as BP would have anticipated negative events in many of its operations. Even more so when there had been several accidents that happened prior the major oil spill. In 2005, BP’s refinery in Texas City exploded and their Thunder Horse rig in the same gulf got into an accident. In the following year, BP’s pipeline leaked in Prudhoe Bay. It was reported that BP was still paying for the violations in these previous disasters when the Deepwater Horizon spill happened.
- Culture of safety must be embraced by the whole industry. The disaster showed how neither the industry, nor the governments were prepared for risks involved in oil exploration. The investigations revealed how failures in following procedures to mitigate risks, and loose coordination among operators and regulatory bodies led to this disaster. It is important for organizations to understand that regulations are for their benefit, and it can provide level playing field for all stakeholders, especially during a crisis. In addition, regulations must be well-enforced, and penalties must be tantamount to the damages incurred in a disaster. Lax safety enforcement for the part of Minerals Management Service (MMS), the regulating body for offshore oil drilling, was found in the investigations. In fact, in the report released by the General Accountability Office (GAO), MMS showed a series of inconsistencies and omissions in their National Environmental Policy Act analyses and was described to lack organization, guidance, technical expertise, and qualified personnel.
- Plans must be prepared and reviewed to the highest standard possible. BP had MMS-approved Gulf Oil Spill Response Plan that detailed cleanup equipment and techniques, surface containment methods, and the use of chemical dispersants while missing out the more important parts of preventing or stopping a blowout. It was later found that BP’s response plan was written by the same contractor that prepared the plans for other oil companies such as ExxonMobil, Chevron, ConocoPhillips, and Shell Oil. Congressional inquiry described the plans as “cookie-cutter” that similar errors were found in some of the companies’ response plan. Furthermore, BP received a categorical exclusion for exploration plan for Macondo Prospect, allowing them to drill without preparing detailed site-specific environmental assessment based on the outdated assumption that “the impacts from the common operations are expected to be negligible to non-existent…”.
- Ensure that Business Continuity Plan includes third-party agreement. Several subcontractors involved in the Deepwater Horizon operations had made the already complex nature of the business even more complicated. Complex risks may arise from third party contractors and their capability to continue their operations. This is why it is important that critical suppliers must have Business Continuity Management arrangement in place. Furthermore, a robust action plans as part of collective response among suppliers in case of a disruption must be included in their contractual obligations. Had the employees well-informed of their responsibilities and safety actions, the death of 11 crew members would have been prevented. Had BP and its contractors have pre-arrangement contracts that included BCM, they would have not blamed each other and engaged in multi-billion dollar litigation after the accident.
- Communication is an integral aspect of crisis management. BP has become a textbook example of how not to handle public relations. Several studies evaluating BP’s actions in terms of crisis communication have been published following the major incident. Below is a quick rundown of both weaknesses and strengths of BP’s campaign (DOI: 10.1080/13527266.2018.1559218).
|Strong points||Weak points|
Initially, BP’s several mishaps in managing the disaster making it easy for environmentalists, politicians, media, and other concerned individuals to paint the company as uncaring and greedy organization that cares for profits more than anything else. When the rig exploded and oil spill happened, BP was quick to shift the blame to TransOcean through their official statements, and the former CEO Hayward’s media interview. He said: “This wasn’t our accident. This was a drilling rig operated by another company. It was their people, their systems, their processes. We are responsible not for the accident, but we are responsible for the oil and for dealing with it and cleaning the situation up.”
Lack of concern for the victims was also seen by many when there were reports that BP asked the cleanup workers and those who were affected by the spill to sign a waiver that would limit BP’s liability. This was during the ironic time that BP reported their 135% first quarter profit of $5.6 billion. The company also failed to be transparent, hindering people to build confidence and trust that they were on top of the situation early on. For example, the initial estimate of the leak was only 1,000 barrels per day, increased it to 5,000 barrel per day after more than a week, then later submitted a figure of 100,000 barrels per day to the Congress for investigation.
Lastly, former CEO Tony Hayward’s statements and actions attracted a lot of negative attention. In an interview with The Times of London, he mentioned that some victims would try to scam them for profit (Ibid) “I could give you lots of examples. This is America – come on. We’re going to have lots of illegitimate claims. We all know that.” Furthermore, he tried to downplay the damage caused by the accident by saying “the Gulf of Mexico is a very big ocean. The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume.” He was also recorded saying in front of many reporters, “The first thing to say is I’m sorry. We’re sorry for the massive disruption it’s caused their lives. There’s no one who wants this over more than I do. I would like my life back.” He was later seen on a yacht off the Isle of Wight, 2 days after testifying before Congress.
The reputation repair
As BP struggled to find solution to stop the oil spill and its dwindling reputation, its share price and credit rating also grappled. The shareholder value of BP plummeted by 55% after the incident, from US$59.48 per share on April 19th, 2010 to US$27 per share on June 25th, 2010. Furthermore, Fitch cut its credit rating from AA to BBB after US politicians demanded US$20 billion deposits in an escrow account to fund the damage claims for the oil spill as the agency was concerned about the ratio between long-term and near-term cost payments would become skewed towards the near-term cost. However, the meeting of BP’s executives with Obama in June was considered a turning point. BP’s Chairman Carl-Henric Svanberg told Obama: “Our boat is keeling over right now. We’re not taking on water but we’re not far away. If you and the administration can be supportive going forward, that would help us do the right thing.” Obama responded that it is the country’s interest for the company to remain strong and viable to be able to fulfill its commitments. It was on this meeting that BP agreed to fund the US$20 billion escrow account, which investors received positively.
In the same month, BP hired Purple Strategies, a public affairs firm run by a Democratic and a Republican strategist, for its US campaign, alongside Anne Womack Kolton, a former US Energy Department official, to manage its US media relations. The new strategy team was able to showcase what BP had been doing for those affected by the crisis. Television, radio, and print campaign featured BP workers and Gulf Coast locals, volunteers, and BP officials. They were able to put faces on the real and human stories related to the incident. After the leak was plugged, they expanded the communication strategies to image-building by highlighting how BP was helping the Gulf Coast residents to get back to business as usual. They created two major campaigns – “Voices from the Gulf” and “My Gulf”.
Voices from the Gulf: Mississippi Fishermen
Voices from the Gulf: Louisiana’s Restaurant Owners
Voices from the Gulf: Florida Business Owners
My Gulf: Dawn Moliterno – Walton Tourism Development
My Gulf: New Orleans, Louisiana – Cooking the Perfect Gumbo
My Gulf: Josephine, Alabama: Shrimpin’ with Papa Roy
Another unprecedented albeit necessary decision happened in the following month, Tony Hayward, whose gaffes had enraged a lot of Americans, announced that he was stepping down as CEO and would be replaced in October by Bob Dudley, a Mississippi native who was in charge of BP’s clean-up response.
A year of change – the post crisis phase
Changing leadership amidst the crisis was a pivotal step for BP to redirect its direction through the crisis. Bob Dudley’s first tasks as the CEO were: 1) securing the company’s finances, 2) ensuring the safety of BP’s operations worldwide, and 3) restoring the environment of the Gulf Coast. He needed to sell BP’s oil and gas assets quickly, including their prized assets such as the Texas City refinery, Gulf of Mexico oilfields and Russian joint venture, and also do forward sale oil to safeguard BP’s future while meeting its commitment to the Gulf.
Guided by his principle of “value over volume”, Dudley cut the number of BP-operated upstream installation by 50%, the number of wells by more than 30%, and oil and gas reserves by 10%. In addition, he formed a new global Safety and Operational Risk team to instill the culture of safety in the company. Apart from the operation and culture, he mentioned in an interview that capital allocation and decision-making were also reformed. BP became “inclusive, and modern place to work where leaders were encouraged to listen to the quietest voices in the room”.
BP’s support to its business partners and people during the crisis did not wane but even strengthened. Dudley found that while several of BP’s partners such as banks were pulling away, there were some partners that were supportive and willing to help. Moreover, he also felt the need to rebuild the confidence of their employees in their company as he was worried that competitors might try to hire their talent away.
The oil company remained committed to environmental restoration. They provided up to US$1 billion for restoring natural resources that were impacted by the accident. In addition, BP has allocated US$500 million for a decade of support to independent research designed to provide better understanding of the Gulf ecosystem and industry. With the help of experts in high-hazard sectors such as nuclear energy, chemicals and the military, BP strengthened their operational risk function. Furthermore, they were able to design and prepare a capping stack that can be used in case another leak in deep water happens.
Rising above pressure
The post-crisis organizational reform was able to regain the investors’ trust as shown by the share price increase from June 29th, 2010. Although the share has not gone back to its pre-oil spill crisis price at around US$60, it did not go below US$27 until the COVID-19 pandemic hit.
BP strengthened its finances after the crisis by cutting costs to reduce breakeven point while improving oil production. In 2017, Moody’s increased BP’s credit rating for the first time in 19 years citing the company’s resilience to oil price volatility and increased clarity in terms of the remaining cash payments related to the US$20 billion Deepwater Horizon settlement.
BP continued to acquire various projects including those that focus on natural gas such as shale gas production from about 200 wells in Oman, the natural gas production at Atoll gas field in Egypt, and several American oil and shale projects bought from mining firm BHP, its first major US investment since the oil spill, among others. Although only a small fraction of their total spending, BP started investing in renewable energy at around US$400 million a year. They invested in startup firms like Freewire, which possesses a technology that allow charging electric vehicles faster. It also acquired Chargemaster, UK’s biggest network of EV charging stations, as well as 43% share of Lightsource, Europe’s largest solar development firm. Like other oil companies, BP received several criticisms for doing inadequate efforts to reduce carbon emissions and increase renewable energy, especially that between 2016 and 2019, BP expanded its oil and gas production by 20%.
In 2020, BP announced that it aims to become a net-zero emissions company by 2050 or sooner. It revealed their commitment to a 10-fold increase in low-carbon investment or an estimate of US$5 billion per year, and a 20-fold increase in renewable generating capacity to 50 gigawatts. Headed by the current CEO Bernard Looney, who succeeded Dudley in February 2020, the oil giant plans US$25 billion in fossil-fuel asset sales by 2025, with US$15 billions of which has already been liquidated by unloading the Oman deal, oil and gas field in Alaska and the North Sea, and BP’s entire petrochemical operation. Although the company does not expect profits from its clean-energy business such as solar, EV-charging, and wind ventures until 2025, Looney continues to spend on renewable energy.
The Final Cap
To keep its commitment to meet its obligations in the Gulf of Mexico in spite of almost losing its whole business to the accident is praiseworthy; to move forward, learn its lessons, and transform into a better organization is even more admirable; but nothing can beat a well-prepared company that can prevent a crisis to happen, or at least mitigate the risks. The BP’s Deepwater Horizon Oil Spill is a great example of how return on investment of robust emergency response and business continuity programs can worth priceless.
In addition, the accident showed us that the most critical aspect of crisis leadership is clear and trustworthy communication. The goal of communicating during a crisis is not to lessen the uncertainty but to acknowledge it and the fear that comes with it. Transparency, honesty, and empathy are always the best policy.
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Author: Lucil Aguada