Seminar: The BP Macondo Oil Spill: The Failure of Corporate Risk Management and Government Regulation
Speaker: Robert Page – University of Calgary Institute for Sustainable Energy, Environment and Economy
Date: April 10, 2012
About the Speaker
Dr. Robert “Bob” Page is the TransAlta Professor of Environmental Management and Sustainability with the Institute for Sustainable Energy, Environment and Economy (ISEEE) at the University of Calgary. From 1997 to 2007 he served as Vice President of Sustainable Development for TransAlta Corporation, and is a also a former chair of the National Round Table on the Environment and the Economy. Other past activities include serving on the boards of the International Emissions Trading Association (as chair), the International Institute for Sustainable Development, and the Clean Air Strategic Alliance of Alberta.
About the Seminar Series
This presentation is part of an ongoing series of seminars on aspects of sustainable energy which are organized by the Carleton Research Unit in Innovation, Science and Environment (CRUISE) and the Carleton Sustainable Energy Research Centre (CSERC). The seminar series was established in 2010, and since then has covered diverse topics ranging from examinations of the sustainability of nuclear power, to Aboriginal energy projects in Canada and their ability to catalyze action on climate change.
All figures stated in this document are repeated here as presented by Dr. Page during his presentation.
About the BP Macondo Oil Spill
The explosion onboard the drilling rig Deepwater Horizon in late April 2010 and the subsequent 3-month long oil spill from BP’s Macondo well serve as a spectacular and sobering example of complex risk interactions, and how important risk assessment, management, and regulation are in public policy. Many of the costliest incidents in recent memory were low-probability, high-impact events, and the incident at the BP Macondo well was no exception. Dr. Page posits that the oil spill originated as a product of interactions between many layers of risk, whose examination yields insight into better risk management practices. Consequently, no “smoking gun” explanations and no “silver bullet” solutions exist. Examination of sworn testimony and reporting analysis allows some lessons to be drawn from such diverse influences as corporate policies, management structures, overconfidence, and technological complexity in order to address the issue.
Contributing Factors
A complex array of factors led to the BP Macondo oil spill, and none represents the single greatest influence. Instead, one must consider the incident a consequence of the combined effects of corporate policies and culture, complex management structures, overconfidence, technological complexity of the operation, and shortcomings in regulation.
1. Corporate Policies vs. Corporate Culture
BP underwent a rapid corporate expansion in the 1990s, following purchases of Amoco and ARCO, which increased BP’s debt load considerably. This resulted in a corporate philosophy of “Do more with less!” – a corporate culture incompatible with extant policies designed to ensure operational safety. The safety aspects of the explosion onboard the Deepwater Horizon which killed 11 were not without precedence: investigation into the 2005 explosion at a Texas City refinery which killed 16 and injured 180 revealed systemic deficiencies in safety practices. Weaknesses in the safety culture were known in advance – surveys as late as March 2010 (one month before the Macondo oil spill) revealed that 46% of workers feared “reprisals for reporting unsafe working conditions” and 15% believed “staff levels were too low for safe working conditions”.
2. Complex Management Structures
In addition to conflicts between corporate culture and policy, safe operation of the well was compromised by complex management structures which hampered communication in decision making. In the case of the Macondo well, BP held a 65% interest in the well as owner/operator, with partners Anadarko (25%) and Mitsui (10%). The drilling rig Deepwater Horizon was owned by another company (TransOcean), while further specialists were brought in to look after separate components of the overall operation, including Halliburton (drilling mud & cement) and Cameron International (blowout preventer).
3. Overconfidence
Overconfidence in technology is also believed to have played a significant role in the Macondo oil spill. With the last major blowout in the gulf a distant memory (Ixtoc, 1979), the risk posed by a blowout at the Macondo well was not taken seriously; “absolute confidence” was expressed in the robustness of the technology in place to ensure safe operation. This is evident in the blowout response strategy drafted by BP: while such a plan was in place, no resources or training were allocated to prepare for such an event.
4. Technological Complexity
Compounded by the overconfidence described above, the technical complexity of the Macondo well was not well understood. Gas and cement tests performed during Halliburton’s well sealing process were misinterpreted, leading to the realization a problem had occurred only when the rising gas reached the rig; at that time, further human error resulted in the gas being redirected into the rig instead of overboard, resulting in an explosion and conflagration which consumed the rig. Following the blowout, it became clear that the complexity of blowout control had been vastly underestimated, as insufficient maintenance of the blowout preventer prevented its operation. Additionally, early efforts to perform a “top kill” operation were stymied by the unexpected formation of methane hydrates at the well head, contributing to the well’s three-month long unabated spill.
5. Regulatory Shortcomings
Regulatory oversight of offshore drilling operations such as those at the Macondo well was seriously hindered by severe structural and political problems within the regulating agency, the Minerals Management Service (MMS). At its core, the design of the MMS was flawed: it was mandated with the promoting the development of assets and securing government revenue, while also tasked with safety and environmental protection in the public interest. Even beyond this fundamental conflict of interest, the MMS also lacked the resources necessary to act in any of its roles. Salary for many positions was non-competitive, with engineers earning as little as half that of their counterparts in industry, leading to difficulties securing top-quality talent. Consequently, too few staff existed to adequately enforce the department’s mandate, including inspection of the 30,000 wells in the Gulf of Mexico.
The MMS also suffered from political weaknesses. After former MMS officials joined industry at the end of their service, frequent allegations were made of excessively close ties, effectively creating a “revolving door” between the two. Additionally, legislation which allowed charges laid by the MMS to be overturned by senior officials in Washington greatly weakened the resolve of regulators to enforce their rules. These problems were known well in advance of the Macondo incident, making the MMS a frequent target of Democrats’ criticisms during the Bush administration; however, once they took power no immediate action was taken.
Consequences
The effects of the BP Macondo oil spill were severe: having been tasked with paying to “make it right”, the overall final costs of the incident have been estimated at over $60 billion. This has forced BP to sell off some 20% of its productive assets as cleanup efforts involving as many as 10,000 people took place. As a result of the enormous environmental damage and associated cost, BP’s brand and reputation have been battered.
An interesting precedent to emerge from the BP Macondo incident is the US Department of Justice’s effort to seek criminal convictions in the case. This would shape how future environmental risks are perceived by companies and how they are prosecuted. The scale of civil fines levied under the Clean Water Act is $1,100 per spilled barrel yielding a total cost of roughly $5.5 billion. By comparison, a criminal conviction would result in fines as high as $4,300 per barrel, totalling as much as $21 billion. In some jurisdictions fines could have been even higher, as in Alaska ($5,000/barrel).
A third consequence of the spill is the recognition of shortcomings in the regulatory arrangements resulting in the rapid creation of three new regulatory agencies in the United States born out of the Minerals Management Service (MMS). The Bureau of Ocean Energy Management was created to handle technical matters including leasing arrangements, while the Bureau of Safety and Environmental Enforcement and Bureau of Natural Resources Revenue handle environmental and royalty matters respectively. While the long-term effectiveness of these new entities remains to be determined, their sharpened focus and increased resources present an opportunity to improve regulatory outcomes.
Implications for Canada
The events at the BP Macondo well serve as a strong reminder to Canada of the need for effective risk management and regulation of offshore oil and gas operations. While the Deepwater Horizon incident occurred in the Gulf of Mexico, drilling operations off the east coast of Canada already occur in water even deeper than the Macondo well, such as the Hibernia near Newfoundland. Meanwhile in the high arctic, exploratory drilling in the Beaufort sea has currently stopped but may resume as early as 2013, paving the way for commercial production operations to follow. The latter is of particular concern, as local capacity to handle a blowout or oil spill is greatly diminished, and the operating season is limited to a few months of the year due to seasonal ice cover. Dr. Page posits that, at present, the National Energy Board of Canada lacks of the human, financial, and knowledge resources necessary to safeguard the environment. We must thus consider the nature of the failures seen at the Macondo well as we consider options between self-regulation, standards regulation, and comprehensive regulatory oversight by full government in order to bolster risk management systems which will protect the environment and also be effective and fair for both the public and private sectors.
This précis was prepared for CSERC by Gordon Baird,
M.A. Candidate, Sustainable Energy Policy, Carleton University.