Deepwater Horizon case study Essay
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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 company’s workforce, reducing it from 100,000 to just over 50,000, but after merging with Amoco in 1988, BP became the world’s 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 Browne’s hardnosed policies; while Browne had been keen to establish BP’s reputation as an environmentally friendly organisation, Hayward described˜green efforts as philanthropy , and reduced the firm’s 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.
BP’s 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 BP’ partners, and which was caused by a bad cement job, possibly similar to the one which contributed to the deepwater Horizon 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 BP 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 project’s 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 earth’s 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 BP senior drilling engineers, warned that the blowout preventer’s 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. BP’s 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. Hayward’s policies saw a sizeable rise in production, with profits soaring by 50%, and Hayward’s pay doubled, reaching $6 million.
The BP engineers bonuses were linked to drilling efficiency. The well’s 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 industry’s 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 Gulf 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 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 BP’s 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. Hayward’s 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, ‘we’re sorry for the massive disruption it’s caused to their lives. There’s no one who wants this thing over more than I do, I’d 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. BP’s 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 BP’s 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 BP’s part. He could look forward to a pension of £11 million, plus a year’s 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, 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

Sources:
Bergin, Tom (2011). Spills and Spin: The Inside Story of BP. London: Random House.
Blackmon, Douglas A. et al (2010). There Was ‘Nobody in Charge’. Wall Street Journal 27 May. Accessible online at www.wsj.com/articles/SB10001424052748704113504575264721101985024 Accessed 3 January 2015.
Guidance, instructions, and questions.
YOU MUST USE relevant theory from the module to answer all the questions. Each question carries equal marks.
When you have fully understood the case, write an essay for each question below. Word length. The guidance is 1000 words per question but a total of 3000 words will be acceptable. The word length should not exceed 5000 words. To achieve a grade of 60% or above you must include at least 2 academic journal articles in the total assignment, but not for each question. Do not include general unreferenced sources from Wikipedia or other sources without peer academic review.
Assignment
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 BP’s actions that led up to the oil spill.
3. Do you think BP acted correctly in causing its shareholders to miss three quarterly dividend payments from June 2010? Consider arguments for and against, relating your answer to stakeholder theory.
4. One important issue for a firm involved in a disaster or scandal is how it manages the crisis. Referring to the Case Study in Chryssides and Kaler (1996) chapter 4, use ethical and/or stakeholder theories, as taught in the class session, to consider how effectively BP handled the crisis. How might the firm have responded more effectively? Include here your assessment of the possible future development and impact of csr and ethics in organisations.

Confine your answers to the moral and csr aspects of this case. You will not improve your grade by adding new information about the case. Seek guidance from your tutor in case of doubt, at an agreed scheduled session during the module. Your lecturer will not mark emailed draft assignments. You should NOT use the case to express any personal opinions about the nature and operation of modern capitalism.
Assessment Criteria
The module Learning Outcomes tested by this assessment task are indicated on page 1. The preciswill be marked are as follows:
• Analyse concepts and theories of Corporate Social Responsibility (CSR) and business ethics.

• Discuss the relevance of ethical and CSR concepts in organisational contexts.
• Differentiate CSR issues from the perspective of different stakeholders
• Evaluate the outcomes of CSR strategies and provide reasoned predictions on the future use of CSR, and ethical perspectives, within organisational policy making.