BP Deep Water Horizontal Explosion
BP originated from a British petroleum company founded in 1909. After experiencing crises during the 1980s-1990s, the company started to have a cost cutting culture. During mid-1990s, with an aggressive growth strategy, BP started to grow and reposition. After BP merged with Amoco in 1998, John Browne started to serve as chief executive until May 2007. Browne repositioned BP as a “green” oil company after he took over and practiced the model of organizational decision-making strategy, known as “asset federation. Under this new strategy, onsite asset managers had the authority to make decisions, and employees’ compensation was directly tied to asset performance (Ingersoll et. al, 4). Many decisions made by John Browne were directly related to the Deepwater Horizon explosion. In 2007, Tony Hayward replaced John Browne and became the new chief executive. Tony Hayward slightly adjusted BP’s organizational structure and decided to pay more attention to BP’s safety issues and risk averse culture. However, the Deepwater Horizon explosion happened when Tony Hayward was in charge.
The BP Deepwater Horizon oil explosion occurred in the Gulf of Mexico on April 20, 2010, which is considered as the largest accidental marine oil spill in the history of the petroleum industry. The Deepwater Horizon oil spill caused tremendous damages to the surrounding environment and enormous losses to shareholders. BP acquired the right of operating the Macondo Well Project from the U. S. Minerals Management Service in 2009, and then BP leased the Deepwater Horizon rig from Transocean who provides offshore drilling equipment and personnel operation.
Both BP and Transocean operated the Deepwater Horizon when the disaster happened. The Deepwater Horizon explosion resulted in major damages and losses. When the explosion occurred, workers abandoned ship and jumped into the burning ocean. Among the 126 workers on board the Deepwater Horizon, 17 were injured and 11 died. Additionally, the rig burned down 700,000 gallons of oil within 36 hours, and the smoke trail spread over 30 miles (Ingersoll et. al, 2). BP’s stock price declined dramatically after the explosion. The disaster not only dragged BP into the major scandal but also destroyed many surrounding businesses and families.
The consequences of the explosion affected not only organization, shareholders, and employees but also the environment, social issues, and public relations. The Deepwater Horizon disaster had many causes, direct and indirect; it mainly involved people-issues, managers and managing, organizational weaknesses, and external oversight and accountability. “CAUSES” OF THE EXPLOSION Firstly, individuals in an organization always have decision-making biases, and thus they would have a “huge capacity to rationalize their behavior” (Crews).
Individuals usually make decisions subjectively based on their value set. The former CEO John Browne set up how BP would develop after mid 90’s; he also was the key person who affected the future of Tony Hayward. Browne relied on and promoted Hayward. A metaphor in Elkind’s article said that Hayward was favored prince of Browne, and Browne opened Hayward’s eyes to the world of business (Elkind et. al, 9). It was not clear why Browne relied on Hayward so much, but he made Hayward become the CEO of BP.
On the other hand, Browne played an important role in BP’s management strategy. Browne decided to focus on cutting costs and had a desire to make BP become the largest oil producer. He created the big picture of BP’s development, which influenced the future CEO Hayward’s value set of decision-making and employees’ behaviors in BP. Not only managers had bias of decision-making, the engineers who constructed and maintained the rig also had bias. BP chose long string casing for the Macondo well because several individuals overvalued the cost.
As a result, the well casing choice created the condition of the rig’s explosion (Ingersoll et. al, 19). Additionally, the drilling engineers decided not to run the “cement bond log” test, and that test could accurately diagnose a bond failure to improve process safety. Mark Hafle, one of BP’s drilling engineers even claimed the cement job was working fine at court (Ingersoll et. al, 16). The drilling engineers of the Macondo project were warned about potential risks, but they willfully ignored the warnings and insisted everything would work fine.
Such bias and rationalized behavior of drilling engineers just added another warning sign to the explosion of Deepwater Horizon. Secondly, BP’s business relationships are complex, and the legitimate priorities often conflict (Crews). BP’s failure to prevent the explosion was due in part to complex partnership. BP held the rights to drill using the rig and operation services leased from Transocean. As a result, “of the 126 people aboard the Deepwater Horizon, 79 were from Transocean, seven were from BP, and the rest were from other firms” (Ingersoll et. al, 1).
People serving on Deepwater Horizon came from different organizations. A decision making process involved many authorities, which decreased the efficiency and effectiveness of decision-making. Even though BP maintained main operational authority, only six percent of people aboard the Deepwater Horizon rig were from BP. As an important business partner of BP, Transocean provided the equipment and performed the majority of the work, and thereafter it had some authority over operations and maintenance. The complex business partnership caused serious operational consequence.
Upon the day of explosion, the Deepwater Horizon rig had been operating 29 days more than it should had been, and the leasing fee owed to Transocean far exceeded the budget (Ingersoll et. al, 7). It was a problem that both companies had authority of decision making over operation. This led to legitimate conflict of priorities. For example, when closing a well, “11 companies played a role in the construction of the casing for the Macondo well, and all with different responsibilities for various aspects of setting the well” (Ingersoll et. al, 9).
Different companies made decisions based on their own company’s interest of cost, time, and safety. As a result, any decision-making process would be very time-consuming, given that all companies kept competing and were not willing to compromise. Because of the conflict of interests and inadequate information, decisions made under such condition were inconsistent and unclear. The inefficient and ineffective decision-making processes slowed the progress of drilling and over-drafted the budget. If the drilling on Deepwater Horizon rig would have been completed within 51 days as expected, BP may have stopped a disaster.
Thirdly, the misalignment occurs when managers’ words and action conflict. To prevent corporate scandals, managers’ actions are more powerful than words in shaping employees’ behavior and presenting a positive image to society (Crews). BP faced safety issues in last few decades. Even though each time its CEOs made a commitment to the public about safety, disasters still happened continuously. For instance, “in 2000, after a string of fires and equipment failures, CEO John Browne announced plans to ‘review the commitment to safety. ” In 2005, the explosion of BP’s Texas City refinery killed 15 people; ironically, Browne swore to fix safety problems again like previously. The Deepwater Horizon spill, the worst one in history, happened two years after CEO Tony Hayward took over, and he had promised to focus on safety issue “like a laser” (Elkind et. al, 4). Empty promises are just like checks without sufficient funds. The conflict of managers’ words and action caused the corporation lose credibility to the public. BP’s CEO kept vowing to correct safety issues, and the sequential disasters revoked their promises time after time.
The U. S. Chemical Safety Board investigated BP’s real safety operation after the Texas City refinery explosion, and they found that BP Group failed to review its refinery operation systematically. Even though the Group Chief Executive claimed, “BP would learn lessons from Grangemouth and other incidents” (National Commission Chapter 8, 6), BP’s actions were against its public commitment. BP had desires to change, but it never improved in respect to safety weaknesses. BP emphasized personal safety instead of process safety, which led to the serious consequence (Elkind et. l, 5). BP’s board of directors failed to enhance process safety, and this helped BP lose credibility with the public. They needed to create an environment of safety concern to train employees from every level of the organization. Fourthly, BP’s managers were more concerned with seeking profits than with ethics (Crews). Employees’ performance was evaluated by ability of cost cutting and profit generating. For example, in 2008, BP introduced an “every dollar counts” program that aimed to reduce the costs of their drilling operation (Smith, 1).
Another example would be that leaders of BP’s drilling team considered the $2. 2 million of incremental cost benefit over safety when they handled installation problem of lockdown sleeve (Smith, 2). Likewise, many other decisions of construction of the Macondo well were made based on cost and profit instead of safety concerns. BP’s failure was highly related to managers blindly seeking profit and ignoring safety issues. BP used Long-string casing, which made production less costly and shortened the time of return on investment (Deepwater Horizon Study Group, 56).
This was one of the main causes of the explosion. Oil drilling is a highly risky industry, and BP was supposed to emphasize safety; however, managers valued profit over ethics, and that hastened up the failure of BP. Fifthly, an organization’s culture, structure, strategy, and resource allocation strongly affect the behaviors of managers and employees (Crews). BP’s organizational culture is cost cutting and risk taking, which directly affected managers’ decision-making. Since 1995 when John Bowne took over, he “imposed a tough bottom-line mentality” to focus on cutting costs.
He also chose to give more operating authority to his managers. Bowne targeted aggressive profit growth by making his managers sign an annual performance contract (Elkind et. al, 8). BP’s organizational culture pushed CEOs to set profit as the primary goal. An organization’s culture is its personality, which implies how managers would operate the organization. With the cost-cutting culture, managers and employees made decisions driven by the organizational culture. Additionally, BP’s unethical management structure and strategy caused the bad competition between employees.
BP had a management strategy, “asset federation. ” BP’s onsite asset managers had “decision-making authority and responsibility for meeting performance targets;” moreover, onsite employees’ compensation was valued by overall performance of the site (Ingersoll et. al, 4). As a result, BP exploration sites had an unethical competition and were less likely to share best practice on risk management; that was a big concern for an oil company whose process safety was a problem. On the other hand, BP also had a weakness of high bureaucracy operating costs.
BP had “a starched, rigidly hierarchical management culture;” for example, headquarter employees and senior employees had preferential treatment in company, which shows BP’s unbalanced and unsound reward system (Elkind et. al, 7). In other words, BP was weak in human resource management. The company rewarded employees by position instead of ethical behavior and good performance. A lack of focus on safety issues directly led to the explosion. BP’s “creative” management strategy introduced by John Browne made exploration onsite managers keep their best practice to themselves and blindly chase profit.
Such management contributed to Deepwater Horizon explosion. Finally, external auditing and regulatory weaknesses also indirectly contributed to the explosion (Crews). Offshore oil drilling is a risky industry. Therefore, in some region, the government essentially banned it due to environmental concerns. However, in the Gulf, the environmental protections and safety regulation were relaxed and ineffective because the oil drilling would bring billions of dollars to federal government (National Commission Chapter 3, 3). Driven by revenue, the government and regulators id not put forth too many restrictions for oil industry in the Gulf. With this important advantage, BP continually neglected safety issues and took risks, which eventually caused the disaster. According to the national commission report, revenue increases when moving drilling deeper into the water, but the corresponding safety risks also increases; however, such increased risks were not covered by additional regularly oversight (National Commission Chapter 3, 3). Investigators found that Deepwater Horizon extended drilling by 18360 feet below sea level. BP drilled aggressively by ignoring the risks and consequences.
However, regulators might be more than happy to accept the huge revenue contributions instead of considering environmental concerns and set restrictions. More importantly, the regulation and auditing office had a culture of revenue maximization. BP acquired the right of exploration from MMS. The national commission report points out that the MMS office had culture of accepting gifts from oil companies. An employee of MMS even negotiated with the oil company when he conducted inspections on this company’s oil platforms (National Commission Chapter 3, 23).
Oil companies and public regulation office benefitted each other, and that made improvement of safety issue in entire oil industry became obstructive. The government did not provide strict regulation to an industry that could bring it money because more regulation means less revenue. Along with a long list of safety issues, BP risked drilling down below the sea to seek more oil and profit without additional auditing and regulation; all the factors pushed and forced the disaster happened.
First, The Deepwater horizon explosion killed 11 people, and 17 were injured. The ocean was flaming when the rig became a graveyard. To those dead employees, their family had to face the loss of family members. Second, The Deepwater Horizon explosion affected BP’s and Transocean’s financial market. The sharp drop of stock price wiped out $91 million in market value. BP’s working capital that founded by $10 billion in short-term paper was shut out (Elkind et. al, 20). The credit situations of both companies weakened.
Moreover, BP and Transocean had to pay for the damages by billions of dollars. Even two years later in 2012, BP still had $8. 3 billion on damage payouts caused by the explosion (Helman, 3). Both companies were required to pay for environmental restoration, damage to surrounding businesses, and cleanup cost. On the other hand, the explosion also destroyed the reputation of BP and Transocean, and scandals were harmful to two companies’ public relationship. After Deepwater Horizon explosion, the financial market for BP securities had a dramatically change.
BP’s investors faced a huge loss on investment. BP’s stock price dropped more than 50%, and the stock and option trading volume increased instantly by fifteen to twentyfold. Interest rate of BP bonds increased, and the company announced the suspension of cash dividends to shareholders (Fodor and Stowe, 1). BP’s disaster made shareholders face a tremendous loss. The value of stocks in hand became worthless and the dividend payments might endless delay. Furthermore, the explosion also affected business in the gulf and the coast tourism industry.
The disaster dramatically affected the Alabama coast, which depended on tourism: compared to 2009, the number of visitors decreased by 1 million, real estate values dropped by more than 65%, retail sale declined by 50% (Keegen, 2). The most affected business was fishing industry in the gulf. Since the spilling oil, many fishes were killed and many families whose life depended on fishing and tourist service were bankrupt instantly. In addition, the explosion affected the gulf coast ecosystem. After the explosion, the rig burned for 36 hours. Deepwater Horizon rig exploded about 100 miles southwest of Orange Beach,” and “more than 200 million gallons of crude went into the gulf” before July 15, 2010 (Keegen, 2). As a result, spilling oil “fouled beaches and shorelines,” and it destroyed gulf coast ecosystem; creatures and species were killed. The Deepwater Horizon explosion “created one of worst environmental disaster in U. S. history (Keegen, 2). Based on a research of Texas A& M’s Harte Research Institute for Gulf of Mexico Studies, the real loss of gulf coast ecosystem and fisheries were huge and need decades for recovery (Keegen, 5).
PREVENTION One of the reasons for BP’s failure is that top managers did not have ethical concerns. The safety issue is the major problem of BP; however, CEOs and managers were concerned for profit over safety concern. Internally, the Board of Directors should create a clear plan that focuses on addressing particular ethical needs for different situations. Additionally, BP should increase the responsibility of the Board of Directors in overseeing the managing executives. An organization should had ethical oversight, and it should provide employees ethical training to advocate ethical behavior.
Management fault also was the main reason contributed to the explosion. BP had problems with management structure and management strategy. Managers who focused on cost cutting and wilfully ignored safety problem made numerous poor decisions. Employees should be rewarded by performance overall instead of the ability to cut cost. Rig managers and engineering leader should regard the warning signs and conduct safety test regularly. The managers should pay attention to “near misses” and avoid the “favorable wind direction,” and then they might be able to predict and prevent the crises (Tinsley et. l, 1). Considering all of the factors that contributed to Deepwater Horizon explosion, the root cause was the cost-cutting organizational culture. An organizational culture is the characteristic of a corporation; it affects people’s perspectives and values. Employees use the organizational culture to guide and rationalize their behavior. Therefore, directors of board, executives, and top managers should create and inform employees with a positive organizational culture and build conditions for employees’ learning and appreciating.
BP’s explosion had internal and external reason. Internally, BP Deepwater Horizon explosion involved two CEOs’ main decisions; besides, BP had a complex organizational strategy, management structure, and partnership. Externally, the outside weakness of legality and regulation contribute to BP’s ethical scandals. Thereafter, besides corporation internal control, the regulators should provide more specific regulations and auditing that conduct oil industry operating with a safer procedure.