lessons in probabilities
Joanne M. Greene-Blose, MSPM, PMP
The Project Solvers of America, Inc.
When one analyzes the root causes behind the Deepwater Horizon oil rig explosion that occurred on April 20, 2010, killing 11 people and spilling 53,000 barrels of oil per day (19 times the volume spilled by the 1989 Exxon Valdez oil spill (Repanich, 2010)), one sees a disregard and lack of proactivity in assessing and responding to potential threats in the offshore oil drilling line of work. In BP's case, the lack of effective cost, quality, and risk management are interrelated and reflect a general organizational culture of being reactive rather than proactive, as well as one that emphasizes cost cutting to, virtually, the exclusion of all else. With this culture so long entrenched in the company, disaster was inevitable. This paper will show the significance that organizational culture has on how a company views and responds to risk through the context of BP's Macondo well project. We will also show a comparison of how risk events actually played out in the disaster versus how they should have been addressed had they used sound risk management processes. With each poor response to a risk event that transpired, the probabilities of future risks occurring increased, showing the importance of continually revisiting and reassessing the project risks.
The immediate causes of the Macondo well blowout can be traced to a series of identifiable mistakes made by BP, Halliburton, and Transocean that reveal such systematic failures in risk management that they place in doubt the safety culture of the entire industry.
-National Commission on the BP Deepwater Horizon Oil Spill in their Report to the President, January 2011
The Deepwater Horizon rig, located at the Macondo well in the Gulf of Mexico, exploded as a result of a blowout on April 20, 2010. Eleven crew were killed, 17 injured, and nearly 5 million barrels of oil leaked from the well that took three months to cap, representing the largest oil spill in the history of the petroleum industry. U.S. President Barack Obama ordered a commission to investigate the cause behind the disaster and in January 2011, the final report was sent to the President. The commission found that the management of British Petroleum (BP), Halliburton, and Transocean had failed to manage the risks of the project (National Commission, 2011, p. 90).
Through the context of the BP Deepwater Horizon disaster, we will show how impactful an organization's culture is on an organization's risk management strategy, including how integral cost, quality, and risk are in the decision-making process. The following aspects of managing risk on a project will be explored and should be taken into consideration during risk planning:
- What are the characteristics of a risk-seeking organization?
- The importance of understanding your organization's risk tolerance level and attitudes toward risk management. By knowing this tolerance level up front, the project manager is in a better position to influence how risk can be managed.
- The effect of high risk tolerance on the approach to quality; how it lends itself to reactivity rather than proactivity; and a tendency to ignore conformance to quality (in the Cost of Quality framework).
- How a reactive approach to risk can be far costlier than planning for risk.
- Risk events are cumulative and that failure to respond to earlier events will increase later events in both probability and impact.
BP PLC, headquartered in London, England, is one of the world's largest companies engaged in oil and natural gas acquisition, refinement, and supply and operates in over 80 countries. Its history began with oil found in what was then Persia in 1901. In 2010, BP was the world's 4th largest company in terms of revenue. They were listed 75th on Interbrand's top 100 brands in 2005, denoting them as a strong and visible brand. Its stock price on April 16, 2010 was US$59.88/share (BP PLC ADR, 2012) and their earnings in the first quarter of that year were US$5.6 billion (The Risky Business, 2010, p. 31). By anyone's measure, BP had been doing very well.
Why Did This Disaster Happen?
Organizations have different utility preferences, or risk tolerance levels. What may be considered a high risk for an organization that is risk-averse may be a medium risk for a risk-neutral or risk-seeking organization. This preference, in turn, influences the way an organization manages risk. The Project Management Institute (PMI) denotes this within the Plan Risk Management and Identify Risks Processes, where risk attitudes and tolerances are shown as inputs within the Enterprise Environmental Factors value (Project Management Institute, 2013, pp. 314, 315, 323). Acceptable risk is influenced by many factors, including the perception of risk reduction costs versus benefits, time-dependence, regulations and industry standards, and training (Manuele, 2010; Pinheiro, Cranor, & Anderson, 2011).
A Risk-Seeking Organization
Organizational culture had an enormous impact on BP's approach to risk in 2010. With a very high tolerance to risk, they would be considered a risk-seeking organization.
Hillson and Murray-Webster (2005) characterize a risk-seeking organization as being willing to accept threats passively or rely on reactive actions if threats do materialize. There is a lack of commitment to taking proactive actions and a tendency to take shortcuts where possible. Additionally, there's a tendency to downplay threats and be overly optimistic about opportunities. Further, there is more emphasis placed on probability than on impact when assessing risk.
What makes BP risk-seekers includes a multitude of factors, such as a deeply-entrenched culture of valuing cost over quality, minimal financial repercussions in operational failure, minimal independent oversight of operations, and deep cash reserves. All these factors together enabled the organization to accept risk events as standard operating procedure rather than proactively identifying and managing risk.
As an example, a BP 2007 internal report described unprecedented levels of issues and accidents and a pervasive culture of “unwillingness to stop work when something was clearly wrong” (Jennings, 2010). This corroborated the general culture of the company when a survey of the crew at the Macondo well, weeks before the April 20th incident, showed that 46% of crew members feared reprisals if they reported an unsafe situation (National Commission, 2011, p. 222).
Revenues and cost cutting were unquestionably the driving force behind BP's decisions and risk tolerance. Cost cutting became a common theme behind the causal factors of a series of incidents at BP:
- In 2005, at a BP refinery in Texas City, Texas, 15 employees were killed and 170 injured in an explosion. OSHA subsequently found 439 violations in investigating (it had already failed to comply with 271 regulations just prior to the accident – none of which had been addressed) and fined BP US$87 million, the largest in OSHA's history (Jennings, 2010). The Chemical Safety Board (CSB) concluded that cost-cutting had played a role in BP's failure to address the violations. Exacerbating the problem was a company directive in 2004 to cut budgets across the board at all refineries by 25%.
- In 2006, a BP pipeline at Prudhoe Bay, Alaska burst, spilling 267,000 gallons of oil. The cause was the piping, which had corroded and was three years overdue for replacement. Industry standards required replacement every five years (Jennings, 2010).
- In 2008, BP experienced a minor oil spill (193 barrels) in the Gulf on the Atlantis rig. The contributing factor was the decision that needed repairs to a faulty pump could be put off in the context of a tight budget. A BP safety officer told investigators that leadership wouldn't question a delay in repairs because, “You only ever got questioned on why you couldn't spend less” (Jennings, 2010).
The Effect of High Risk Tolerance on the Approach to Risk and Quality
With an emphasis on costs to be as low as possible, and with schedule slips merely representing additional costs, quality at BP was the one constraint that could be sacrificed. Quality assurance in particular (the activities involved in ensuring that appropriate quality processes and procedures are being followed (Project Management Institute, 2013, p. 242)), was always subordinate to achieving cost and schedule goals. In 2004, then Secretary of State James Baker, who headed the CSB investigation into the Texas City explosion, found “toleration of serious deviations from safe operating practices and apparent complacency toward serious process safety risks at each refinery” (as cited in Jennings, 2010). This behavior continued into 2007 when the CSB reported in their investigation to the Texas City explosion that “senior executives did not adequately address major hazard risk or process safety performance” (as cited in Cohen, Gottlieb, Linn, & Richardson, 2011).
The Cost of Quality is a concept that describes the costs incurred through conforming to quality activities, such as training costs, audit costs, maintenance and prevention costs, and testing costs. Costs of not conforming include repair and rework costs, warranty costs, lost time, excess inventory, and in severe cases, the costs to the environment, brand damage, and litigation costs. We've shown that BP has consistently borne the cost of non-conformance and we will now show the rationale that existed for non-conformance with respect to the Macondo Well project.
When planning the project, BP had several proactive measures they could have invested in to minimize the impact of a potential well blowout. For example, they could have built a relief well which would have decreased the time to cap a blowout from weeks (or in the Deepwater Horizon case, months) to days (Hagerty & Ramseur, 2010). However, BP was not keen to invest the additional US$100 million (Fountain, 2010) and elected against it.
They also could have paid US$500 thousand for an Acoustic Switch (Gold, Casselman, & Chazan, 2010) which would have provided an additional means of actuating the wellhead's Blow Out Preventer (BOP) if the standard method (a control pod on the BOP) was damaged. A BOP will sever the rig from the drill pipe in the event of a blowout and cap the pipe so that further oil doesn't leak.
Finally, they could have paid US$50 million for a Capping Stock, which is a backup device should the BOP fail to function. BP invested in none of these options. They were not regulatory requirements by the United States and were viewed by the company as optional.
A cost/benefit analysis on whether to include a number of proactive measures while in the planning stage of the project likely included the knowledge that their liability would be limited in the event of an accident. The Oil Pollution Act of 1990 placed total liability in the event of a spill to US$75 million (The Risky Business, 2010, pp. 2, 5). In addition, the United States allowed corporations to write off punitive damage fines on their taxes (The Risky Business, 2010, p. 3). US$75 million is an inconsequential number to an oil company the size of BP, costing less than a relief well, and the tax loophole makes it even more so.
From a regulatory point of view, BP had received an exemption from doing an environmental impact study by the US government, which would have required them to provide details on how they might control a potential spill (McQuaid, 2010). In addition, the Minerals Management Service, which is tasked with overseeing sea drilling operations in the Gulf, was understaffed and under-equipped to perform such activities (National Commission, 2011, pp. 76–77). Knowing oversight was minimal, BP would be confident in knowing they could run the project as they saw fit.
The abundance of cash reserves was another factor allowing them to tolerate risk. Aswath Damodaran in his book, Strategic Risk Taking: A Framework for Risk Management (2008, p29), notes how companies with large cash balances and access to capital markets are much better able to survive risks and, consequently, are more comfortable with risk-seeking behavior. Cash was not an issue for BP, who were enjoying in the first quarter of 2010, profits of US$93 million each day (The Risky Business, 2010, p. 4). Their cash position was so great, in fact, that they were able to self-insure the project (Lack of Major, 2014). In 2010, they held US$1.35 trillion in oil reserves (18 billion barrels), which could be sold to another oil company for liquidity purposes if necessary (Schoen, 2010). In this past year (2014), they are rebounding from the disaster nicely, generating US$32.8 billion in operating cash flow (Ciura, 2015).
Knowing all these things, the company surely must have seen little cause for spending millions in speculative quality conforming, preventative measures. Past failure expenses (fines) had been easily absorbed, as shown in Texas City, Prudhoe Bay, and the Atlantis, for instance.
Enter the Macondo Well Project
It's been established that BP's culture is one that values doing as much as possible for as little as possible. With that in mind, it's worth noting that the Macondo well project had a budget of US$96.2 billion and was scheduled to take place in 51 days. The effort began in January of 2010 and the explosion occurred in April. The project, at the time, was six weeks behind schedule and US$58 million over budget (National Commission, 2011, p. 2). Facing such time and cost constraints, it is not difficult to conclude that decisions had been made in haste.
Deepwater Horizon Blowout: Several Key Causes and Effects
The National Commission Report (2011, pp. 114–115, 117–118) identified the factors described as causes (risks) in Exhibit 1 as being among those contributing to both the probability and the impact of the Deepwater Horizon explosion. For brevity's sake, we are highlighting just these three, though there are numerous additional factors as well. A simple cause and effect diagram (also known as a fishbone or Ishikawa diagram), useful for identifying, assessing, and understanding the root cause of risks (Project Management Institute, 2013, p. 236), may have provided the necessary insight into the appropriate risk quantification and response at BP. The Exhibit 1 causes could have been used as input to, or in conjunction with, a cause and effect diagram.
Exhibit 1: Cause and effects of threats to the Deepwater Horizon rig.
Proper risk management would have unquestionably reduced, if not eliminated, the probability of a blowout. In fact, the very first conclusion stated in the National Commission's report (2011, pvii) was, “The explosive loss of the Macondo well could have been prevented.”
The risk register that BP should have used to address the above risks would be similar to the one in Exhibit 2. The risk is stated, along with its trigger or signal that the risk event is imminent. Sample probabilities and impacts and recommended risk responses are also stated. Once project execution begins, the risk triggers can be monitored and if detected, the documented response placed in action. Of significance to note is that as one poor decision is made, it increases the probability of future risks down the road. The impact of cumulative risks was a fact that BP hadn't considered or anticipated. As was stated in the National Commission's report (2011, p. 115) to the President, “Each of the mistakes on the rig and onshore by industry and government increased the risk of a well blowout…the cumulative risk that resulted from these decisions and actions was both unreasonably large and avoidable.”
Exhibit 2: Sample risk register for BP's Macondo well project.
What Actually Happened With Respect To These Risks
One week prior to the accident, the BOP was accidentally damaged (Pelley, 2010). Portions of the rubber seal broke apart and were washed up the drill pipe on board the Deepwater Horizon. In addition, one of the sensors on the control pod was not functioning due to a worn battery and the other wasn't functioning due to a defective solenoid valve (National Commission, 2011, p. 115). No action was taken by those on board (Pelley, 2010). Recall Hillson and Murray-Webster's (2005) characterization of risk seekers tending to downplay threats; this was most certainly the case here. One week prior to the blowout, the project team had failed to recognize risk triggers for a major threat. As a result, both the probability and impact of this risk has increased, as remedial, preventive action is now not an option. The risk has been accepted.
Regarding the cement risk (Exhibit 2, Risk 2), both independent testing and Halliburton's internal testing showed that the type of cement that Halliburton created for this job was unstable (National Commission, 2011, pp. 101–102). Testing occurred between February and April with only one test passing. Although the initial test results were sent to BP, final results (showing instability in the cement) were never communicated to the project team until April 26th, one week after the Deepwater had blown up (National Commission, 2011, p. 102). BP had elected to use the cement, regardless of knowing the final test results and had, consequently, missed a risk trigger for another major threat. Of significance also, the probability of this risk occurring has now increased (although BP is not aware of this).
Regarding Risk 3 (Exhibit 2), BP had poured the cement and done a preliminary displacement test. Essentially, if the amount pumped into the well is equivalent to the amount pumped out, it is an indication that the cement plugs used to seal the well were holding up. However, a thorough evaluation would determine this conclusively. Such an evaluation would have determined if there were channels in the cement (thereby creating instability) and whether the cement had bonded correctly. If errors were found, remedial action would be needed. Although the contracted Schlumberger team was ready and available to perform the evaluation test, BP decided there was no need to perform it based on the displacement test results. The team was sent home, saving schedule time and US$128,000 (National Commission, 2011, pp. 102–103). We now have seen another opportunity to detect a risk trigger (results of the evaluation test) disappear.
As we now know (as reported in the National Commission Report (2011), the cement job did not hold up. The result was a blowout. The BOP failed to operate and did not seal off the well. Flammable gas quickly overwhelmed the Deepwater Horizon rig and caught fire. Efforts by the Coast Guard to douse the flames were to no avail and the rig sank to the bottom of the ocean two days later. The well continued to release oil for another three months before BP finally purchased and installed a Capping Stock and built a relief well.
It's Almost Always Cheaper to Conform to Quality
Although BP's corporate culture was one of operating within a reactive environment with the hopes of keeping costs as low as possible, they are now learning that upfront spending (i.e., conforming to quality) that takes risk into account from both a schedule and budget perspective, will actually save money in the long run (not to mention lives). BP was never oblivious to risk; their annual reports (Annual Report 2009, 2010 and Annual Report 2010, 2011), are proof that they're aware of the various threats in their line of work. However, their intent on prioritizing costs and revenues above all else has, to them, been a gamble that they felt they could take on. Up until the Deepwater Horizon event, there had been no threat that, even if faced reactively, they couldn't absorb financially. However, on April 20th, 2010, they pushed the gamble too far. Here are some of the costs that BP has since had to bear:
- On June 25, 2010, BP's stock price fell to US$27.02 (BP PLC ADR, 2012). They lost US$30 billion in stock value by year-end.
- Paid US$53.8 billion as of July 2015, which includes US$5.5 billion in civil court fines and US$18.7 billion for federal and state claims. They are still facing over 60,000 claims from private businesses (Huddleston, 2015).
- Sold US$45 billion in assets to help pay for cleanup efforts (Jackson, 2011).
- Suffered a net loss for 2010 of US$17 billion (Jennings, 2010).
- CEO Tony Hayward was forced to resign because he would become “a walking public-relations disaster” (Business: The Wages of Failure,, 2010).
- Damage to the BP brand. Interbrand stated (Stucky, 2010) that the Deepwater Horizon incident is strongly associated with the BP brand and that “the negative response is long lasting.”
- Were forced to cease all operations in the Gulf of Mexico for 18 months, being allowed to resume again in October 2011. This represented a 12% drop in production (Jackson, 2011).
- Transocean lost the Deepwater Horizon rig, valued at US$350 million (National Commission, 2011, p. 2).
- BP and Transocean have pled guilty to 14 criminal charges.
- And the largest cost of all: Transocean 10 ten men; BP lost one.
Practical Implications and Lessons Learned
We've shown a very significant example of the effect that an organization's culture has on the way in which it views risk through the context of BP's Macondo well project where the Deepwater Horizon rig suffered a blowout and subsequent explosion. The decision makers for the Macondo Well project did not adequately consider the impact of risks accepted with the specter of a late and over-budget program foremost on their minds. We've reviewed three of such decisions and showed how these events could have been assessed and documented in a sample risk register along with recommended responses and contingency plans.
A risk-seeking organization will often choose to accept risk rather than pay for preventative measures up front. We've shown that among the factors that led BP to be risk-seekers included a deeply entrenched culture of valuing cost over quality, which was evidenced by a number of other costly accidents in the years prior to the Deepwater Horizon disaster. This culture, combined with past experience of suffering quite minimal financial repercussions in previous operational failures, along with the knowledge that there would be minimal independent oversight of operations in the Gulf, all contributed to their collective mindset. Finally, deep cash reserves made it easier to absorb and accept threat.
It behooves the individual, particularly those entrusted with a critical project where lives, property, and our environment are at stake, to be aware of the potential stakeholder risk tolerance level—what might be known quite innocuously as Enterprise Environmental Factors—but are not to be underestimated. It behooves this individual to be aware of these factors in such a situation and become an ambassador for effective risk management. Being cognizant of the culture puts the project manager in a better position to strategize and lobby for effective risk management.
The cost for a reactive risk acceptance policy in the long run is far more expensive than the option of applying solid, proactive risk management practices. One hopes that the average project would not have as dramatic an outcome as the failed Macondo Well project, though the lesson can still be applied; there's a greater ROI on managing risk proactively, rather than reactively. Nowhere is this case more evident than in this particular situation. But for the millions that BP could have spent up front, they have now lost well over US$100 billion and still counting.
Another lesson learned is that a poor response to a single risk event by itself may not necessarily amount to a large impact or increased probability to a future threat, but a succession of unheeded and unplanned-for risk events will. After each risk event, all future risk events should be re-evaluated for probability and impact, and an appropriate response taken. This is even more critical for environments such as offshore oil drilling where the impacts of a poor decision can be catastrophic. Where the stakes are this high, the risk management processes should be all the greater. BP, Halliburton, and Transocean have paid dearly to learn this lesson—but none so dearly as the eleven men who lost their lives on April 20, 2010.
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© 2015, Joanne M. Greene-Blose
Originally published as a part of the 2015 PMI Global Congress Proceedings –Orlando, FL, USA