Practice Training Contract Assessment Centre Exercises

British Petroleum Oil, Inc (BP) Deep Oil Spill – CASE STUDY BP is an international oil and gas company which employs over 80,000 people and operates in over 100 countries worldwide. In [year], it made pre-tax profits of £16.8bn. BP has invested heavily in exploration technologies to find oil and gas under the earth’s surface and as declining stocks of easyaccess oil have depleted, BP has been forced to explore reserves at much deeper levels and extraction has become much more complex and high-risk. On 20 April, [year] an explosion on the Deepwater Horizon oil rig drilling in the Gulf of Mexico about 52 miles southeast of the Louisiana Port of Venice resulted in what is potentially one of the worst environmental disasters in US history. Eleven people were killed and seventeen injured as the oil rig sank into the sea, leaving a plume of smoke spanning about 30 miles into the sky and producing a 5mile long oil slick. As the rig sank into the ocean, the well head became untapped and oil gushed into the Gulf. Between the date of the explosion and 15 July when a new stacking cap eventually stopped the flow, the oil eliminated aquatic life and smothered the coastal wetlands of Louisiana and Mississippi.

The Deepwater Horizon was a 9-year-old semi-submersible mobile offshore drilling unit. A massive floating, dynamically positioned drilling rig that could operate in waters up to 8,000 feet (2,400m) deep and drill down to 30,000 feet (9,100m). The rig was built by South Korean company Hyundai Heavy Industries. It was owned by Transocean, operated under the Marshallese flag of convenience and was under lease to BP from March [year] to September [year]. At the time of the explosion, it was drilling an exploratory well at a water depth of approximately 5,000 feet (1,500 m). Production casing was being installed and cemented by Halliburton Energy Services. Once the cementing was complete, the well would have been tested for integrity and a cement plug set, after which no further activities would take place until the well was later activated as a subsea producer. Halliburton modelling systems were being used to design the cement slurry mix and ascertain what other supports were needed in the well bore. Cameron International supplied equipment to the Deepwater Horizon including the blowout preventer, the responsibility of which was passed to Transocean Ltd for installation and maintenance. BP is the operator and principal developer of the Macondo Prospect in the Gulf of Mexico with a 65% share, while 25% is owned by Anadarko Petroleum Corporation and 10% by MOEX Offshore [year], a unit of Mitsui.

Early attempts by BP to stem the flow of oil attracted widespread criticism for being unnecessarily slow and for creating unnecessary delays. Efforts to activate the well’s blowout preventer failed on 25th April; on 7 May the ‘Top Hat’ brought in to cap the well failed and a further attempt after 6 weeks to bring the flow to a stop using an approach called the ‘Top Kill’ also failed. It wasn’t until 15 July, nearly three months after the explosion, that a new capping stack successfully closed the well. By this time estimates suggested that over 4.9 million barrels of oil – or a total of 780 million litres – had leaked from the Macondo oil well into the surrounding waters.

Over 210,000 gallons of crude oil leaking daily into the Gulf for nearly three months upset an intricate ecosystem which serves as a source of 40% of the seafood consumed in the United States. The Gulf of Mexico acts as a home for wildlife migrating between South American and U.S. waters. The oil threatened seabird and other wildlife and birds are being found either dead or coated in oil. Other marine life – sea turtles and fish - are being killed by toxic emulsions permeating the sea.

It is difficult to quantify the damage that has been done and which includes human death, and damage to delicate wildlife and plant ecosystems (and especially the impact on the food chain). There is nothing known about the long-term ecological damage and effects of a deep oil spill as it is a relatively modern phenomenon and there is only a limited amount of relevant information to be extrapolated from the Exxon Valdez disaster in terms of the expected final extent of environmental damage.

Approximately 300 lawsuits have been brought in federal court in New Orleans claiming substantial economic losses as a result of the oil spill and 31 class-action law suits have been filed in Texas and Florida. Plaintiffs include families of the workers killed, commercial fisherman, shrimpers, charter-boat operators and beachfront-property owners asked to represent anyone whose livelihood depends on coastal waters. Due to BP’s global brand and extensive business interests, more than half of the federal judges in the region are unable to preside over these cases due to conflicts of interest. This slows down the legal process which does not work in the favour of the plaintiff where there are practical time limits for parties making a claim.
Almost from the outset, BP acknowledged that it was the “responsible party” (under oath) and that it would be required under the law to pay for the cleanup initially. It admitted that the explosion at the Deepwater Horizon caused the oil spill but says the amount of the oil spill from the Macondo well is still unknown. In early congressional testimony though, company officials implied that other companies were to blame for the explosion (such as Transocean, the sub-contractor who produced the pressure detector in the first place). On May 13, attorneys representing Transocean filed for protection from lawsuits based on 150-year-old maritime law. Although actual recovery could reach tens of billions of dollars, Transocean believes this law caps their liability at slightly under $27m. BP may itself be able to use an antiquated ‘Ship Owners Act’ in the US to place some limitation on liability. Criminal and civil investigations have started and the U.S. government is suing BP, Anadarko Petroleum Corporation, MOEX, Transocean Ltd and QBE (the insurance underwriter) in an effort to try to ensure that American tax payers are not forced to bear the costs of cleaning up the Gulf area and re-inflating the local economy. The suit brought by the US government does not name Halliburton (who cemented the well) or Cameron International (who provided equipment to the rig). In the US courts BP will be accused of violating The Clean Water Act of 1977 (Pub. L. No. 95-217, Dec. 27, 1977, 91 Stat. 1566, 33 U.S.C.A. 1251 et seq.) which was an amendment to the Federal Water Pollution Control Act of 1972 (Pub. L. 87-88, July 20, 1961, 75 Stat. 204, 33 U.S.C.A. 1151 et seq.; 43 U.S.C.A. 3906) and the Oil Pollution Act (OPA) 1990 which dictates that oil companies must be prepared to prevent spillage from rigs and ships. If found guilty of gross negligence firms are liable for fines of up to $4,300 per barrel of oil leaked and up to $1,100 per barrel if no gross negligence is found. Government estimates of the size of the spill suggest companies could face fines ranging from £5.4bn to $21bn. In a statement BP insisted the suit does “not in any manner constitute any finding of liability or any judicial finding that the allegations have merit”. It will “answer the governments allegations in a timely manner and will continue to cooperate with all government investigations and inquiries”. The prosecutors will look at BP’s past violations and whether it has cooperated with the government and will size up the final environmental and economic toll. Though the very nature of natural resource damage is difficult to quantify – what is the cost or value of a bird or fish?

It is difficult to assess whether BP’s previous H&S and environmental incidents will work for or against them – in [year] BP lost 15 employees and injured 170 in a high profile explosion at a Texas refinery. In [year], pipelines in Prudhoe Bay, Alaska, ruptured because of corrosion and spilled more than 200,000 gallons of oil. In [year], BP pleaded guilty in both cases and agreed to pay $70 million in penalties.

BP and its contractors would pay more if the federal government’s investigation finds negligence, deliberate misconduct or violations of federal regulations. Under the leadership of Tony Hayward, CEO since May [year], there has been suggestions of cost cutting exercises. Hayward’s comments that the spill was “relatively tiny” compared to the “very big ocean” and that he wanted the disaster to end because “I’d like my life back” did not enamour him to the American public. BP’s reputation amongst the sustainability community which has praised BP for being best-in-class has been severely tainted and the 1990s PR campaign to go “beyond petroleum” appears to be $200 million poorly spent. There are significant financial impacts for BP going forward – after the explosion the business lost over a third of market value, worth about $70bn, and experienced the biggest share price fall in the four months post-disaster after news of the US law suits. BP has had to set aside $40bn to cover potential damages and legal costs and has agreed to pay $20bn into an independently managed account to provide compensation to individuals and businesses impacted by the spill. So far BP has spent over $5bn responding to the spill and are in the process of selling off a number of assets to strengthen its financial position. It has been downgraded by rating agency Fitch. Some market pundits suggest it makes it vulnerable to takeover once all its liabilities for the oil spill are accounted for.

Former partners that worked on the well have continued to try and push the blame for the explosion and oil spill onto BP. The US presidential National Oil Spill Commission found that “the companies involved in the oil spill had made decisions to cut costs and save time”. Research and investigations conducted so far have identified a number of separate risk factors, oversights and outright mistakes
which combined to overwhelm the safeguards meant to prevent just such an event happening. Each of the mistakes made on the rig and onshore by industry and government increased the risk of the well blowout:

• Halliburton did not fully report the results of tests on the foam cement used to seal the well until after the blowout, including ones that suggested that the mixture might have been unstable. • The failure by BP to use 15 additional centralisers to stabilise the well instead of six, as recommended by Halliburton, which were critical to a good cementing job. • The failure to properly conduct and interpret the negative-pressure test was seen as a major contributing factor to the blowout. • It was not necessary, or advisable for BP to place 3,300 ft (1,006m) of mud below the mud line with seawater, which placed more stress on the cement job at the bottom of the well than necessary. • The drilling crew and other individuals on the rig missed critical signs that a kick (an unplanned influx of gas and fluids) was occurring. The crew could have prevented the blowout – or at least significantly reduced its impact – if they had reacted in a timely and appropriate manner.
BP has come to its own conclusions as a consequence of its own internal investigations:

• No one action or inaction was behind the accident. Instead “multiple companies, work teams and circumstances were involved over time. • The blame can be put down to the combination of “a complex and interlinked series of mechanical failures, human judgements, engineering design, operational implementation and team interfaces” • Transocean was responsible for the safety valve known as the blowout-preventer. The report says six leaks were identified in its hydraulic system. While it was on the wellhead, the investigators say the preventer appeared to follow BP and Transocean’s standards. However, they say there were “no indications” that intervention systems had been tested at the surface, “as was required by Transocean policy” before it was deployed on the well. • The day before the accident, cement was poured into the drill column of the well to prevent hydrocarbons entering it from the reservoir. The BP investigation says there were “weaknesses in cement design and testing, quality assurance and risk assessment”. It suggests that “improved engineering rigour, cement testing and communication of risk” by Halliburton could have identified those flaws. • The report recognises that Houston-based BP staff at the site could have raised awareness of the problems on the rig. • A ‘negative-pressure test’ was carried out to check the mechanical barriers. The report says that Transocean rig crew and BP leaders on the site “reached the incorrect view” that the test had been a success and the well was secure. • The report says that the Transocean rig crew and a team described as “mudloggers” working for Halliburton Sperry Sun may have been distracted by what are described as “end-of-well activities” and, as a result, important monitoring was not carried out for more than seven hours. • The crew “unbalanced” the well by pouring seawater into it, rather than heavy-drilling mud. This allowed gases through the blowout-preventer. For an estimated 40 minutes, the influx of gases into the well was apparently not spotted. By this time “hydrocarbons were rapidly flowing to the surface” and, according to witnesses, mud flowed uncontrolled on to the rig platform. The BP report says that if the blowout-preventer had been closed and sealed around the drill pipe before that point, gases probably would not have entered the pipe known as the riser. • The gases moved to areas of the rig, where there was a greater risk of explosion. The heating, ventilation and air conditioning systems “probably transferred a gas-risk mixture” into the engine rooms on the Deepwater Horizon. “The surface facilities were overwhelmed with the volumes of fluids and gas, which resulted in the explosions and fire”.

BP denies that it failed to “use the best available and safest drilling technology to monitor and evaluate the Macondo well” or that it failed to “maintain continuous surveillance of the rig floor.” It denies that it contributed to the spill through “corporate practices of disregarding federal regulations, as evidenced by various safety and other audits of Deepwater Horizon, reflecting the known failure, prior to the Deepwater Horizon spill.” BP claims “there are superseding causes of the relevant discharges of oil beyond any events proximately caused by BPXP, including but not limited to, defective design and/or manufacture of the [blowout preventer] and/or negligent operation of the [blowout preventer].” A Federal investigation of the failure of the blowout preventer showed that a bent pipe prevented the device from sealing off the broken well. The blowout preventer was made by Cameron International.

Case study questions:
1. Give a short overview of the situation. 2. Clearly summarise the main issues in the case study. 3. Identify what you believe to be the root-cause of the problem or dispute. 4. Contribute any additional information or data from your own research. 5. Make your own judgement of the situation.