The public would be well-served by seeing more of this type of risk management analysis for the Deepwater Horizon/Macondo blowout. Companies who practice poor risk management see their insurance costs go up. In the case of oil companies this means that consumers pay for those costs at the pump. Cutting safety costs to make the next quarter look good is poor risk management that has ugly long-term consequences as we have seen in the Deepwater Horizon/Macondo catastrophe.
While this report puts the blame squarely on BP as the ultimate responsible party the NAE report points out that deepwater drilling requires a multitude of companies with specific expertise to get the job done. Transocean and Halliburton are huge deepwater players and their safety culture was every bit as wanting as BP's.
I've heard experts comment that deepwater drilling is as technically challenging as space exploration. Unfortunately, the companies engaged in this high-risk endeavor seem to have little inclination to adopt risk mitigation policies commensurate with the danger posed.
It is also worth pointing out that there has never been a scintilla of evidence that BP's constant yammering to the press that it has "learned its lesson" is anything more than them blathering outright lies. BP said the same thing after their Texas City refinery blew up killing 15 workers and the same thing when their Alaska pipeline started gushing due to poor maintenance.
It is well worth clicking through to read the entire report. It succinctly summarizes the series of events that led to the Deepwater Horizon/Macondo tragedy with intertwined explanations of the dangers of normal human attitudes towards risks will inevitably lead to major catastrophes absent solid risk management company policies.
January, 9, 2011
THE BP GULF OIL SPILL: A RISK MANAGEMENT DEBACLE
The BP Gulf oil spill is the worst risk management story, and the best risk management story. It is the best risk management case study: it illustrates vividly how a working risk management program could have (would have) prevented the debacle — not in a “hindsight” manner, but rather in a factual and clearly observable way.
BP appears to have violated all of the following:
• Government regulations
• Safety and loss control standards for the oil exploration industry
• BP’s own safety and loss control standards
• Core risk management principles
The event also showed how BP personnel fell into the traps set by the psychology of risk. Human instincts are flawed when it comes to risk management. For example we focus on the frequent loss, but ignore the vastly more important severe loss. Our minds pay attention to the apparent risks while ignoring the severe remote ones. Ironically BP was, about the time of the blowout, receiving a safety award for the project. They were able to concentrate on the likely events and prevent them (the easy part of loss control), while ignoring the less likely catastrophe.
Even with this mindset, BP was given the gift of warning after warning that a disaster was brewing. Since there was apparently no risk management culture at the company, all were ignored.
In most companies risk management falls under the domain of the CFO. CFOs take note: this event should have been prevented; and it would have been prevented-- not with heroic risk management efforts, but with a reasonably competent risk management effort. This story shows how risk management can, and does, work.
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BP’s own report, released shortly after the incident, stated the following:
“The team did not identify any single action or inaction that caused this accident. Rather, a complex and interlinked series of … failures, human judgments, engineering design, operational implementation and team interfaces came together….”
We don’t know if BP thought this statement was some form of exoneration, as if a whole series of things went wrong, therefore it was an unexpected and overwhelming deluge over which they couldn’t possibly have gained control. In fact, from a risk management standpoint, it was a damning statement. Complex systems fail in complex ways. Usually, as in this BP case, many things need to go wrong for such a disaster to occur; thus, the company has many opportunities to break the chain of failure. It takes a culture that gives little respect to the concept of risk management for so many disastrous mistakes to be possible.
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Again on March 8, 2010, a kick was encountered, this one more severe than the one the prior October. BP staff were concerned. One BP manager emailed to headquarters that the well site leaders “are not well control experts … especially at 1200 feet off the bottom with many unknowns.” BP did not investigate the causes, a violation of its own policy.
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Per the BOEM report:
“By terminating the well where it did, BP set the total depth of the well in a sand-shale interface. BP internal guidelines…specify that drilling should not be stopped in [this kind of area because it] increases the likelihood of cement channeling or contamination.”
On the same day a BP drilling engineer emailed to supervisors that “[Macondo is] a nightmare well that has everyone all over the place.”
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At this point in the timeline notice what has already happened:
There is no indication of a risk management culture at all aboard the Deepwater Horizon.
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From the standpoint of risk management, BP so far is missing in action. Already, by April 10, BP has had sufficient warning of problems brewing, yet has taken no action whatsoever. Management commitment and involvement is nowhere to be seen, communication has gone up the ladder, but nothing has come back down, and no one has stepped forward to say “slow down.”
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The focus is clearly on saving money, speed and production. The rig day rate (charge to BP for use of the rig per day) was $533,495. Those onboard the rig were risking their own lives. They were apparently not aware of the growing risks right in front of their faces. Shortcuts were being constantly taken. If anyone was fully aware of the situation, he was not confident or comfortable enough to come forward. There was clearly either lack of training or fear of reprisal, likely both. Lack of accountability is evident in this email to supervisors by a BP Wells Team Leader on April 17:
“What is my authority? With the separation of engineering and operations I do not know what I can and cannot do. The operation is not going to succeed if we continue in this manner.”
This separation is the antithesis of the “integration” principle of good risk management. Can “engineering” advocate caution, pushing the science to the forefront, only to be overruled by “operations” whose goal is getting the job done, and fast? Not with true integration.
Suggestions of extra precautions were apparently overruled with a clear expression of the priorities. On April 20, a BP Wells Team Leader sent the following to an apparently, in his mind, overly cautious fellow employee:
“We will never know if your million dollar flush run was needed. How does this get us to sector leadership?"
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Per the BOEM report: “A negative pressure test is critical because it tests the integrity of …the well.”
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Caution, this may be shocking to you (though not as shocking as before you started reading): Per the BOEM report: “Neither BP nor Transocean had pre-existing negative test standards and procedures.” In discussing how to do this crucial test, one of the key BP players in the test said to upper management (requesting guidance): “I have gotten different opinions from everyone on the team.”
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As with many disasters in history, many people on board had serious reservations, but everybody was waiting for someone else to act. The psychology of risk, in a couple of its many manifestations was in play here:
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On 4/20/10 at 5:00 pm the first negative pressure test failed. The BOEM report gives this interpretation: “The increase in drill pipe pressure is evidence of an unsuccessful negative test and show the well was possibly flowing.” – emphasis added.
On 4/20/10 at 6:45 pm, the second negative pressure test also failed. Per dialogue captured in the reports, the crew was interpreting the pressure as a to- be- expected “bladder effect.” A rig worker called the BP Houston office to discuss and the reply from Houston was “a successful negative test could not result in pressure on the drill pipe.” In other words what you are experiencing cannot be reconciled with a successful test.
At this critical point, regardless of how many opportunities have been missed till now, BP had the opportunity once again to prevent disaster. It is astounding how everyone up and down the chain at the company was able to ignore such bountiful evidence of impending disaster, particularly at this juncture. It is another lesson in the psychology of risk that group think can take over when there is no culture, no training, no management commitment and no accountability to say otherwise.