Deepwater Horizon.

This case study has been set for undergraduate students

in their final year. I am including it in my IPW sessions so you can assess the
moral and operational complexities faced by multinational corporations.

William Scarff

April 13 2015

The Deepwater Horizon oil spill, also known as the Macondo Project, involving British
Petroleum (BP), was described by President Barack Obama as the worst environmental
disaster America has ever faced. It was certainly the worst in the history of the petroleum
industry even worse than the notorious Exxon Valdez tanker accident off Alaska in March
1989. Deepwater Horizon was an offshore rig in the Gulf of Mexico, which exploded on 20
April 2010, killing 11 workers, and unleashing 4.9 million barrels (200 million gallons) of
crude oil over a period of 87 days, affecting 16,000 miles of coastline, and causing
immense damage to marine wildlife, beaches and wetland. It is estimated that 8,000 birds
and mammals died in the ensuing six-month period. The fishing and tourism industries
suffered enormously.

Tony Hayward was appointed as CEO in 2007, succeeding John Browne, who had made
ruthless attempts at cost-cutting in order to make BP more efficient and prosperous.
Between 1992 and 1996 Browne almost halved the companys workforce, reducing it from
100,000 to just over 50,000, but after merging with Amoco in 1988, BP became the worlds
second largest oil company. Browne appointed a number of executive assistants, one of
whom was Tony Hayward, who succeeded him as CEO in 2007. Hayward continued
Brownes hardnosed policies; while Browne had been keen to establish BPs reputation as
an environmentally friendly organisation, Hayward described green efforts as
philanthropy, and reduced the firms investment in alternative energy.

Extracting oil on land is easier, cheaper and safer but, as resources dwindled, the oil
industry increasingly came to develop off-shore exploration. The first attempt at offshore
drilling was in the 1890s. Subsequent seismic surveys in the 1970s enabled the detection
of oil at depths of over 1,000 feet. The Gulf of Mexico was a promising area, and on 19
March 2008 Minerals Management Service held a lease sale offering 28.5 million acres of
land in the Gulf for excavation, and for which BP obtained more licenses than any other
company. These included one for the Mississippi Canyon Block 252 (MC252), also known
as Macondo.

BPs track record on safety was not good, however, and the Deepwater Horizon disaster
was by no means its first. In 2000 there were three accidents within 13 days at the
Grangemouth refinery in Scotland, and in 2005 a large explosion at their Texas plant left 15
people dead and hundreds badly injured. In 2006 an oil leak was discovered at a pipeline
owned by BP Exploration, Alaska (BPXA) in Prudhoe Bay, in which 6,400 barrels of oil
(267,000 US gallons) spilled over 1.9 acres of land. In 2008 there was a major blowout at a
gas-injection well in Azerbaijan involving BPs partners, and which was caused by a bad
cement job, possibly similar to the one which contributed to the deepwater Horizon

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disaster. (The Azerbaijan incident was not widely publicised, and only came to light through
the controversial WikiLeaks.) In 2009 the US Occupational and Health Administration
(OSHA) imposed a fine of $87.4 million on BP for safety violations at their Texas City
refinery (the highest fine ever imposed by a safety regulator), and between June 2007 and
February 2010 BP received 162 citations. When Greg Coleman was appointed as the chief
executive responsible for health and safety he was taken on a tour of BPs refining plants,
and commented afterwards, It frightened the sh*t out of me (Bergin: 78).

As part of its cost-cutting measures, BP had introduced outsourcing, starting with its
Alaskan project in the late 1960s. Outsourcing enabled different specialist firms to compete
for work, thus helping to drive down the cost. Transocean won the contract to supply the
Macondo oil rig, and Halliburton supplied the cement for the wells lining. In February 2009
BP filed a document with Minerals Management Service (MMS) on the projects
environmental impact, in which it stated that an accidental spill was unlikely, and that, being
48 miles out, the proposed well was far enough away from the shore for the impact of any
such spill to be minimal.

The original rig that was brought to the Gulf was the Marinas Rig. This was severely
damaged by Hurricane Ida in October 2009, and had to be replaced with Deepwater
Horizon. Both rigs were built in Korea, and hired by the day. The Deepwater Horizon Rig
was highly sophisticated: floating, mobile and semi-submersible, capable of operating at
10,000 feet under the sea. The well to be drilled was 5,100 feet below sea level, and there
were two options for its construction. Two methods of accessing the oil were available to
Transocean: liner and tie-back, and long string, the latter involving a single shaft
employing steel and cement, and which is quicker and more economical to install. The liner
and tie-back construction involves placing extra barriers within the shaft. Transocean opted
for the long string method, which was unusual for exploration at such depth. Shell, Exxon
and Chevron had all opted for the liner and tie-back method for similar projects. Such
explorations involve drilling through the earths crust, penetrating various layers of rock
some porous and some non-porous with pockets of gas, water and oil. The excavation
involves high temperatures and pressures, and the bore of the drill has to be sealed off for
protection with steel and cement. Not everyone at BP was happy with the design of the
metal casing: on 22 June 2009 Mark E. Hafle, one of BPs senior drilling engineers, warned
that the blowout preventers metal casing could collapse under pressure.

In order to maximise revenue, it was important to reduce unproductive days, as well as to

ensure that that the rig drilled as fast as possible. Managers bonuses were therefore linked
to the speed of drilling. While safety was also a performance indicator, it only accounted for
10% of managers bonuses. There were written policies on safety, but their implementation
was not monitored. BPs drilling engineers did not have formal systematic training, unlike
Shell, which required two years of preparation, with formal examinations to be passed.
Safety was also measured on the basis of the number of recordable injuries sustained by
workers; this involved, for example, counting a worker who was scalded by the canteens
hot coffee as an injury, rather than looking at the overall safety of plant. More risk was
taken in aid of short-term improved performance. Haywards policies saw a sizeable rise in

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production, with profits soaring by 50%, and Haywards pay doubled, reaching $6 million.

The BP engineers bonuses were linked to drilling efficiency. The wells completion was
scheduled for 8 March, with a budget of $96 million. Drilling involves pumping mud into the
shaft to replace the volume of dislodged rock, and hence the volumes of mud and rock
should be equal. In the case of Deepwater Horizon discrepancies were noted, indicating
the likelihood of the rock being cracked or porous. On 8 March the rig suffered a kick the
industrys term for gas seeping into the well and shaking the drill pipe violently. In this
instance it caused the drill pipe to become stuck, and the pipe and drill had to be severed
around the area. The team managed to control this by means of the blowout preventer, but
the incident should have caused the project managers to realise that their procedures were
less than adequate. On 9 April the drilling of the final section commenced, and finished on
18 April. The well was now due to be cemented, so that another rig could be brought in to
extract the oil. BP had outsourced this part of the work to Halliburton, who supplied the
cement. Halliburton had not subjected the cement to the expected tested procedures, and
it was subsequently claimed that the material was sub-standard for the purpose,
contributing to the accident. Halliburton completed its work two days later. At this point a
cement bonding test should have been conducted, but Macondo was 45 days behind
schedule. The test would have taken between 9 and 12 hours, at a cost of $128,000.

At around 9.50 p.m. a severe jolt rocked the rig, and instruments indicated the highest level
of gas intrusion. Seconds later there was an explosion and the rig ignited. Oil began to
gush out of the well uncontrollably. In such circumstances an emergency disconnect
system (EDS) can be employed, but since the employment of EDS costs $10 million or
more, it is not used readily. Pressure was building up, but the computer banks which
controlled it on the shore only operated during office hours. There had been practice
exercises in abandoning the rig in the event of an emergency, but these were invariably on
Sunday mornings, rather than when it was dark. When the explosion occurred, the 126
workers evacuated the rig, but had difficulty finding their way on to life rafts, and some
simply dived 75 feet into the water in panic. When a body count was taken, it became
evident that there was a shortfall of 11 people.

The most obvious visual impact of the disaster, as reported in the media, came from the
images of birds who were unable to fly because they were coated in oil. Dolphins and other
sea life suffered, and toxins subsequently found their way into shellfish. An area of 86,985
m (36%) of the regular fishing area was closed, and 50% of the Gulfs oyster beds were
destroyed. Tourism suffered: many visitors cancelled intending holidays in the surrounding
area, and bookings of charter boats halved. A further spin-off was the mental health of
significant numbers of inhabitants. Clinical depression increased by 25%, and there was a
marked rise in domestic violence, no doubt fuelled by family financial difficulties.

The most important action was to clean up the oil, which was attempted by skimming,
burning and employing dispersants. Stopping the flow of oil from the well was the most
obvious problem, but there had never been an oil leak at 5,000 feet of depth before. It was
87 days before the well was finally capped, and in the meantime oil was pouring out at a

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rate of between 5,000 and 10,000 barrels a day. (The exact amount was uncertain, and
was disputed.)

Crises in industry are bound to happen occasionally, but it is important to respond in an

appropriate way when they do. In the case of Exxon Valdez the CEO flew to the site, was
open about the disaster, and responded with an action plan. Following the Deepwater
Horizon disaster, Hayward stated, We will be judged on our response. He asserted that
the amount of spill was 1,000 barrels a day, and that the environmental impact would be
modest; the spill would not last long, he assured everyone, and it could be remedied by
skimming the ocean surface. The crisis was much worse than Hayward had stated: the
leak was 5,000 feet deep something that had never occurred before, and a more realistic
estimate of the oil flow was 5000-10,000 barrels a day. In its attempts to clear up the spill,
BP employed numerous workers from the fishing and tourism industry who had lost their
livelihood on account of the disaster. BP attracted criticism for its choice of the oil
dispersant Corexit to counter the spill, since it was allegedly toxic and not as effective as
possible alternatives. However, BP defended its decision on the grounds that the product
was readily available at the location, and that swift action was needed.

Hayward appointed the public relations firm Brunswick to handle the crisis a strange
choice since Brunswick specialised in finance rather than issues relating to oil or the
environment. Some $30 million was spent on advertising the way in which BP was handling
the cleanup operation, showing various residents thanking the firm for remedying the
damage. Another strategy was to pay to ensure that Internet search engines did not direct
enquirers using search terms like oil spill to news sites or protest groups, but to BPs own
website, where some of the images of the damage were crudely doctored. BP placed the
blame on Transocean, and issued lawsuits against Transocean and Halliburton, claiming a
total of $120 billion. Haywards own personal PR could have been better. He stated that
we made a few little mistakes early on, and on another occasion he committed a gaffe by
saying, were sorry for the massive disruption its caused to their lives. Theres no one who
wants this thing over more than I do, Id like my life back.

Numerous BP employees have been charged with federal crimes in the wake of the
disaster. BP pleaded guilty to 11 counts of corporate homicide, and private lawsuits and
civil government actions have been brought. At the time of writing, litigation continues. In
September 2014 the District Court apportioned 67 percent of the blame to BP, with 30 % to
Transocean, and 3% to Halliburton. BPs actions were described as reckless and gross
negligence. BP has challenged the verdict, and in January 2015 a further round of court
proceedings will determine BPs liability and the extent of due compensation.

Tony Hayward stepped down by mutual agreement on 27 July. This was not technically a
sacking, since dismissal would have been an admission of blame on BPs part. He could
look forward to a pension of 11 million, plus a years salary of 1 million. He was
subsequently appointed to the board of TNK-BP (the Russian arm of the BP organisation
at a salary of $150,000 per annum. He would still receive any stalled payments under the
incentives plan relating to his previous job. His salary had been protected. However,

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because of this crisis, BP decided not to make three dividend payments to shareholders
from June 2010.

As for the oil, no one knows for sure what has happened to it. Some 25% may have been
removed through burning and skimming. Some experts claim that 75% has gone, others
that 80% still remains in the ocean. BP optimistically asserted that 40% evaporated at the
surface. Others believe that a substantial proportion still remains under water, and it has
been suggested that there remains a persistent oil seep from the well, despite the cap.

In January 2015, the BBC notes that claims against BP continue in the American
courts

Questions

1. Identify the various possible stakeholders involved in BP Deepwater Horizon / Gulf

of Mexico oil spill in 2010. To what extent might each share some responsibility for the
disaster?

2. Briefly outline TWO contrasting ethical theories you have studied on this module.
Examine how you can use them to assess BPs actions that led up to the oil spill.

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