BP DEEPWATER HORIZON DISASTER

Risk Assessment and Control Strategies

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 EXECUTIVE SUMMARY

Risk management is an old concept and an ongoing debate from the beginning.
Today, businesses are learning hard lessons especially after disastrous events such
as BP Deepwater Horizon, naked credit default swaps, and failure of U.S. technology
projects. This paper aims to contribute the discussion on examining BP’s approach
to risk management in order to identify, assess, control and implement appropriate
strategies. Oil-Spill Risk Analysis (OSRA) model has been used in this report to
identify and assess the risks in the petroleum industry along with control and
containment strategies used by BP to avoid risks of spilt oil. The paper also includes
reasoned discussion as how BP should progress in the future with regards to its
approach to risk management, especially after the terrible incident of oil spill in Gulf
of Mexico.

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1. INTRODUCTION

In today’s business environment, organizations are facing many types of systematic

and unsystematic risks due to environmental and climatic changes, natural
tragedies, changes in political and regulatory policies, changes in interest and
foreign exchange rates, and credit risks (Reuvid, 2006). These risks can be
treacherous for the firm’s reputation, growth, and profit margins and this is the
reason that risk has become an important phenomena and a key interest to business
community.

The BP Deepwater Horizon disaster of 20th April 2010 in the Gulf of Mexico was one
of the biggest accidents in the history of oil spill after releasing more than 200 million
gallons (or 4.9 million barrels) of crude oil in 87 days (Tunnell, 2011). The U.S. Coast
Guard has named both BP (owner of the well) and Transocean (owner of operator of
Deepwater Horizon) as responsible parties (Donovan, 2010). This largest disaster of
the history got high attention of media coverage during 2010.

This report is divided into six sections. Section 2 is the Background of the incident
describing the causes of the event along with the responses to the disaster once it
had occurred. Section 3 describes the importance of risk management by discussing
its traditional view and BP approach to risk management practices. Section 4 is
based on assessment and control strategies utilized by BP after the incident of oil
spill in the Gulf of Mexico. Section 5 highlights the importance of implementing
appropriate corporate governance and the link to risk management; and finally,
section 6 provides a reasoned discussion that how BP should progress in the future
to mitigate the impact of possible similar events.

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2. BACKGROUND

2.1 WHAT WENT WRONG?

There is no harm in saying that BP has competent risk managers, compliance

systems, and regulatory mechanisms for managing risks, but the question is still
holding the ground that what happened in Gulf of Mexico in mid 2010. According to
final report of National Commission (2011) there are three possible reasons of this
accident 1) outdated organizational structure; 2) a chronic shortage of resources;
and 3) the lack of sufficient technological expertise.

U.S. media reported that one of the core reasons of incident was the deadly blast on
oil rig in the Gulf of Mexico caused by exploding bubble of methane gas (BBC,
2010). Before this, some eye witnesses and BP’s accounts of previous month
indicated thousands of barrels of oil leakage. On the basis of these facts, it can be
said that BP management ignored some critical facts and used minimum safety
precautions in drilling offshore oil well after taking approval from US Interior’s Mineral
Management Service (IMMS).

From August 2010, federal government started to investigate the damage from
Deepwater Horizon accident. In order to estimate the losses caused by the incident,
the Gulf Coast Claims Facility (GCCF) was established with the collaboration of BP
and Obama administration. In mid of December 2010, GCCF processed 463,000
claims payable to approximately 166,000 individuals and businesses for the worth of
$2.5 billion (GCCF, 2010).

2.2 RESPONSE TO THE DISASTER ONCE IT HAD OCCURED

An oil spill response strategy was developed as a part of Oil Spill Response (OSR)
planning process. The strategy framework of BP initiated with the designing of Oil
Spill Response Framework Document along with operations and procedures of the
project. Figure (1) is providing an overview of the process followed by BP at the
operational phase.

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 Figure (1) – BP Oil Spill Response planning for the operational phase.

Source: Oil Spill Response Strategy (BP, 2010)

To respond oil spill incident in the Gulf of Mexico and to avoid long term
consequences, BP board set up an additional committee, Gulf of Mexico Committee,
to assist Gulf Coast Restoration Organization (GCRO) in response activities. The
committee met with higher management executives of GCRO to explore risk factors
to cover matters like health and safety, compensating people and businesses,
rescuing wildlife, cleanup processes, and to formulate control and containment
strategies (Davis, 2010).

Until 31st December 2010, BP spent almost $17.7 billion on response activities (BP,
2011). From the beginning of the disaster, BP closely worked with government, local
residents, shareholders, employees and media.

Containing the Leak: Immediately after the incident, many teams were assigned to
stop the leakage from the source to recover the flow by employing two techniques:
fitting caps on the well using containment systems and sealing the well through static
kill procedure (BP, 2011). After working very hard, the teams successfully stopped
the leaks from the well within few weeks.

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Compensating people and affected communities: According to the agreement of
Deepwater Horizon Oil Spill Trust of $20 billion funds with the government, BP paid
$5 billion to compensate individuals and local businesses during 2010. In order to
compensate government and other agencies, BP directly managed claims and
funding requests for losses and expenses to cover associated costs of removal and
other activities (BP, 2010)

Offshore and Onshore clean-up: From the beginning of the incident, BP took the
responsibility for cleaning activities by containing, removing, or dispersing the oil
offshore by employing nearly 48,000 people and 6500 vessels and other resources.
The other relevant strategies associated with BP risk control and containment will be
discussed in the later section (BP, 2010).

Wildlife rescue and rehabilitation: To develop a rescue plan for wildlife rehabilitation,
BP worked with nationally recognised wildlife groups to save the wildlife from the
effects of spilled oil. The plan included booming wild life refuges, state wildlife
management areas along the coast and to stop wildlife to enter in affected areas
(BP, 2011).

Health and safety in the response effort: In order to manage health and safety risks
of 48,000 individuals, BP worked with U.S. Coast Guard and National Institute of
Occupational Safety and Health and other organizations to prevent the employees
from many types of hazards such as chemical reactions, biological risks, and snake
or rodent bites (BP, 2011). Even after these preventions, U.S. Gulf Coast Guard
reported 2.86% injuries per day (BP, 2011). The graph below is showing the details
of Deepwater Horizon injuries from 2001 to 2011.

Figure (2) – Deepwater Horizon Accidents from 2001 to 2010

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 Source: Personal Safety – Deepwater Horizon Accidents (BP, 2011)

3. IMPORTANCE OF RISK MANAGEMENT

3.1 TRADITIONAL VIEW OF RISK MANAGEMENT

According to Schneider and Rado (2008) the traditional view of risk management is
concerned with the importance of insurance in order to reduce losses of the
companies. Kloman (1992) mentioned that many risks are ignored because of too
much focus on ‘insurable risks’. Schneider and Rado (2008) also identify that in the
traditional view of risk management, risks have been dealt individually and this is the
reason that many researchers such as William et al. (1998) criticized the narrow
approach of risk management by declaring that there cannot be any integrated
measurement applicable on all individually managed risks.

Samad-Khan (2008) reported that traditional approach of risk management caused

many problems such as financial losses, failure of management, corporate
governance issues and earnings surprises. Today, companies are applying
enterprise risk management to meet new challenges and to avoid uncertainties.

3.2 RISK MANAGEMENT IN PETROLEUM INDUSTRY

Risk management in petroleum industry primarily deal with health, safety and
environmental issues because critical accidents can bring lots of environmental and
economical problems. According to Skipper and Kwon (2007) oil and gas companies
use risk management techniques to maximise economic value and to reduce
economic harm. Similarly, Reuvid (2006) stated that risk management facilitate firms

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by proving them a logical and systematic way for dealing with uncertainty and
without proper risk management organizations may experience financial losses and
downturn (Sadgrove, 2005).

3.3 BP APPROACH TO RISK MANAGEMENT

BP is a multinational oil company with effective risk management and internal control
system to avoid critical situations such as oil spill. The company consider all risk
management techniques on case-by-case basis by taking into account the location,
size and volume of the problem. BP risk management approach consists of two core
elements:

 Identification, prioritization, management, monitoring and improvement of risk

management activities on daily basis in order to deal with hazards and
uncertainties.
 Effectively reporting of key problems in risk management to assist corporate
planning and decisions as long term strategy.

Board Performance Report (BP, 2010)

According to information on site, each year board review and resolve key risks as a
part of annual group plan (BP, 2011). In case of complex issues board allocate
committees with appropriate reporting system.

4. RISK ASSESSMENT AND CONTROL

Risk assessment is a handy tool to minimise the damages in any industry. Oil spill
risk assessment involves the identification of areas, resources and activities that may
cause oil spill incident. In 1980s, oil companies started to realise that it is important
to identify and assess risks and uncertainties to avoid problems such as oil spill.

4.1 IDENTIFICATION OF OIL SPILL RISK FACTORS

It is hard to identify when a disaster is going to happen and how much loss is
expected. However, it is likely to discover the risk factors involved in tragedies such
as explosions and oil spills. Most of the oil spills happen when transported across the
ocean. These incidents may occur due to collision, grounding, hazards to navigation,

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unseaworthiness of vessels, negligence and incompetence of owner of the crew,
presence of oil terminals and depots and heavy vessels traffic (Thai-Eng, 2006). On
the other hand, oil spills also occur during drilling, extraction and refining processes
(Etkin, 2006).

The study reveals that since 1980s, most common factors of oil spills were either the
degradation of equipment (pipes, pumps, wells, and tankers) or human mistake
(Etkin, 2006). According to Nuka Research and Planning Group of Homer, 80% of oil
spills and marine accidents were caused by human error (Sorum, 2009). Not just the
human mistakes, these incidents may happen because of breakdown of machinery
or intentional spills in case of wars or destruction (Etkin, 2006).

On the other hand, there are also some uncontrolled factors may cause oil spills
such as sea conditions including tidal flow, weather, current, wind, temperature, and
sea slate (Thai-Eng, 2006). In case of uncontrolled incidents, governments and
responsible agencies must take corrective actions during or after the accident
because these factors seriously harm the environment. It is clear from the final year
reports of big oil companies that they are well aware with the importance of health,
safety, and environment to avoid disasters such as explosion and oil spill.

4.2 RISK ANALYSIS USING HAZARD ANALYSIS

Once risks are identified, organizations can use variety of risk analysis techniques
depending on the nature of the organization. The 5 formal techniques are:
Brainstorming with SWOT/PESTLE analysis, Risk profiling/Risk Matrices/Risk
register, Pilot trials, Decision tree analysis, and Hazard analysis. In this report,
hazard analysis is used to analyse oil spill risks in the petroleum industry using Oil
Spill Risk Analysis (OSRA) model.

4.2.1 OIL-SPILL RISK ANALYSIS (OSRA) MODEL

The Oil-Spill Risk Analysis (OSRA) model is an assessment tool to conduct hazard
risk analysis by producing probability estimates of oil spill occurrence. The model
was originally developed by Smith et al. (1982) and enhanced by (Labelle and
Anderson, 1985; Ji et al., 2003 and Ji et al., 2004, Ji et al., 2003) over the years. The

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model integrates the spill velocity by integrating in time to produce the spill
trajectories.

Oil-Spill Trajectory Simulations: The ocean water moves the spilled oil on the
complex surface by applying a sheer force from below and on the other hand, wind
exerts an additional force on the spill from above. The combination of these two
forces results to put oil spill away from the original spill location (Ji et al., 2007). The
OSRA model calculates the movement of hypothetical spills by successively
integrating time sequences of two spatially gridded input fields: the surface ocean
currents and the sea-level winds (Smith et al., 1982; Labelle and Anderson, 1985; Ji
et al., 2007). The way, an OSRA model calculates time sequences of hypothetical
oil-spill locations – essentially, oil spill trajectories is shown in the figure below:

Figure (3) – Oil Spill Trajectory Simulations

Source: Oil Spill Trajectory Simulations (Ritholtz, 2010)

Conditional Probabilities of Contact: The probabilities of oil spill normally analysed on

seasonal basis and it can be calculated by dividing number of contacts by the
number of trajectories. These probabilities are termed as conditional probability
means that the probability of an oil spill will contact specific environmental resource
within a specific time of movement from original location (Ji et al., 2007).

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Application of OSRA Model on Gulf Oil Spill: By applying OSRA model to Gulf of
Mexico incident, time-integrates the superposition of surface current velocities and
an empirical (3.5% rule) wind including drift using an ocean current field, and a wind
field provided to the model as inputs (Ji et al., n.d.). The application of integration
can be performed over 3, 10, 20, and 30 days time period in order to produce oil spill
trajectories for the approximation of probabilities of oil-spill contact. The accuracy of
produced trajectories in Gulf Oil Spill depends upon the accuracy of wind and ocean
current fields integrated by model (Ji et al., n.d.). The Figure (2) is showing the oil
spill trajectories on surface currents in the Gulf of Mexico.

Figure (4) – Oil Spill Trajectory on Surface Currents in Gulf of Mexico

Source: Oil Spill Trajectory on surface currents in Gulf of Mexico (Glitch, 2010)

4.3 BP RISK CONTROL & CONTAINMENT STRATEGIES

Effective risk control and containment strategies of spilt oil limit the extent of any
potential environment harm. BP used 3 control and containment strategies after the
oil spill disaster: (1) the use of dispersant, (2) skimming the oil from the surface of
the water, and (3) deploying boom to prevent oil from reaching the coast.

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4.3.1 DISPERSANT STRATEGY

In case of oil spills, dispersant strategy is used to break the oil into droplets that may
decompose more quickly (Donovan, 2010). According to Board (1989) spilled oil on
water rapidly spread into a slick, with thickness from several millimetres down to one
micrometer depending on the oil type and the area available for spreading.
Spreading chemical to an oil slick greatly increase the amount of surfactant available
and can reduce oil-water interfacial tension to very low values – it therefore takes
only a small amount of mixing energy to increase the surface area and break the
slick into droplets (Board, 1989).

As a risk control and containment strategy, BP use dispersants strategy to break the
oil into droplets (Schor, 2010). BP, so far, dropped 2.2 million litres of “CorexitTM
9500” and CorexitTM 9527A chemicals on the oil spills in Gulf of Mexico (Reiser,
2010). BP choose these dispersants from EPA’s approved list of dispersants in case
of oil spills (EPA, n.d.) because according to Oil Pollution Act 1990 these are
considered as least effective chemicals in breaking up the oil (Donovan, 2010).

The major benefit of oil spill control by chemical dispersion is to remove oil from
surface of the sea, so that the oil will not drift ashore and contaminate coastal
habitats. In addition, it will also not contaminate seabirds that live on or dive through
the sea surface. Many scientists and environmentalists appreciate the policy of
dispersant but few indicate that when toxins will be broken, it will largely effect to
marine life (Donovan, 2010).

4.3.2 SKIMMING STRATEGY

Skimming strategy is used to skim the oil from the surface of the water. Skimming
strategy is the quickest and least expensive way of recovery in an oil spill incident
but it is possible when a crew attempts to reach the spill in an hour or two and use
equipment and tools that suck or scoop the oil from the water and put it in
containment tanks.

Since 22 April 2010, BP recovered 187,000 barrels “oily liquid” that is equal to
19,000 to 28,000 barrels oil by employing over 933 vessels and three tankers,
capable of collecting 1,149,000 barrels of spilt oil; and via a series of onboard skid-

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mounted three-stage oil/water separators, be able to separate a combined total of
432,000 barrels/day of BP oil spill (BP, 2010).

4.3.3 BOOM CONTAINMENT STRATEGY

Containment boom strategy is basically used to corral spilled oil on the water and
often associated with vessel-to-vessel or vessel-to-shore fuel or oil cargo transfer
(Mechanical, 2006). Among various types of containment booms, hard boom is the
most commonly containment strategy which is used for deeper waters and rougher
conditions to stop whatever is at the surface of the water from moving further.
Deploying boom can be effective containment strategy in the calm waters of rivers,
lakes and swimming pools and has been demonstrated over the past few months
(Donovan, 2010).

BP and US Government also utilized boom and containment strategy to breach the
boom in Gulf of Mexico. Initially BP deployed more than 100,000 feet (30KM) to
protect the coast and by the next few days they extended up to 370,000 feet (BBC
News, 2011). When asked about the cost of nearly 4 million feet of boom deployed in
Gulf, the BP official, who wants to remain anonymous, told the Epoch Times that:

“I don’t think there is any way of knowing that because containment booms
are coming from all over the country and all over the world through different
manufacturers, for these manufacturers, at least, the oil spill has had positive
consequences resulting increased their business and revenues.”

The Epoch Times (2011)

5. IMPLEMENTATION OF CORPORATE GOVERNANCE

It is well known that the core purpose of risk management is to maximize firm’s value
or shares. Secondly, risk management also capitalize on maximizing the well-being
of executives. These two objectives may conflict with each other and produce
governance problem when executives are paid with degree of specific stock options
(Smith and Stulz, 1985). The link between risk management and corporate
governance can be made by asking a question that how risk management produce
value for managers and owners in their best interest.

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Organizations often implement internal controls for the purpose of achieving internal
corporate governance and this is the reason corporate governance is always defined
by “a sound system of internal controls” (Fisher, 2010). Internal control is one aspect
of corporate governance and risk management is one aspect of internal control that
includes activities to control and manage risks attached with day-to-day operations.

5.1 BP’S GOVERNANCE FRAMEWORK & INTERNAL CONTROL SYSTEM

In discharging the responsibility for BP’s risk management and internal control
systems under UK Corporate Governance Code, the board considered the various
risks within the context of the annual plans presented by committees in order to
update the governance framework (Svanberg, 2010). The corporate governance
framework of BP includes the principles that guide board and management how to
control and manage risks. The board is responsible for the activities for developing
risk management strategy for all the aspects of BP’s business by delegating
authority to management within defined limits (BP, 2011). The BP governance board
consists of different committees to maintain internal control and risk management
activities as shown in the figure below:

Figure (5) – BP Governance Framework

Source: BP Governance Framework (BP, 2011)

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For the implementation of corporate governance framework internal control system,
BP gives importance to risk management in order to identify, manage, monitor and
control risk management activities to handle hazards (Castell, 2010). Under
corporate governance framework, authority is delegated to the group chief executive,
and then executive management is responsible to report the board on periodic basis.
Moreover, the internal control system of BP includes 3 core elements: environmental
control, management of risks and operational performance, and management of
people and individual performances as shown in the figure below.

Figure (6) – Internal Control System of BP

Source: BP Governance Framework (BP, 2011)

6. HOW BP SHOULD PROGRESS IN FUTURE?

The Deepwater Horizon accident highlights many challenges for petroleum industry.
Now the question is holding the ground that how BP should progress in the future,
with regard to its approach to risk management, in order to lessen the likelihood of,
or to mitigate the impact of possible similar events in the coming years? For the
purpose of safely progress in the future, BP and Government agencies that regulate
offshore activities should adopt risk-based performance approach that is particular to
individual facilities, operations and environment (Dudley, 2011) to avoid disasters.

National Commission on BP Deepwater Horizon Oil Spill and Offshore Drilling

provide 3 recommendations to develop new risk management approach to assess
risks, as follows:

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 1. The department of Interior should develop and provide a complete risks
management program based on safety and pollution prevention standards
after consulting international regulatory peers in oil-producing nations.

2. The department of Interior should develop and provide risk based

performance approach that facilitates individuals, operations and
environments, similar to “safety case” approach in North Sea, which requires
an operator and drilling rig owners to assess the operational risks.

3. The department of Interior should recognize drilling, production, and

emergency response standards to protect offshore workers and environment.
In addition, department should take correcting actions to overcome
insufficiencies after initiating and applying new standards in order to fill the
gaps. These standards should be applied on Gulf of Mexico in the freezing
conditions and must be updated after every 5 years.

National Commission on BP Deepwater Horizon Oil Spill and Offshore Drilling (2011)

In order to build long term value, BP should engage competent, independent

engineers to re-examine and re-evaluate current regulations and procedures against
highest standards. As the part of safety and risk management strategy formation, BP
needs to obtain the expertise of experienced professionals to develop
comprehensive safety and production plans to avoid exploration.

In order to grow and maintain expertise in offshore drilling safety, government

requires to establish a process with the support of National Academy of Engineering
to discover the criteria of high-risk wells and also to develop methodology to assess
those risks (National Commission, 2011). Moreover, the department of Interior
should also extend in-house competence to perform such sophisticated risk
assessment. According to National Commission (2011), developing more detailed
incident reporting system in particular to all offshore activities can be helpful for
stronger risk assessment and analysis.

In a press release on 14th April 2011, the Chief Executive of BP claimed that the
company is involved in making comprehensive program of activities to strengthen

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safety and risk management approach over the last few months (Dudley, 2011). The
main focus areas of BP in particular with safety and risk management are:

 Strengthening and clarifying requirements for safe, compliant and reliable

operations.
 Consultation with 500 specialists for taking help, guidance, advice and
intervene during the project.
 Stopping the operations in case of hazards and bring about safety procedures
under risk management standards.

Annual General Meeting – CEO Speech (Dudley, 2011)

7- CONCLUSION

It is understood from various studies and literature review that risk management has
become an important part of the organizational policy. A formal risk based framework
can be a useful tool for decomposing the problem of risk management in petroleum
industry. The risks in petroleum industry are mainly based on machinery breakdown,
human mistakes, and changes in natural environment. In order to avoid the effects of
these risks, companies must employ an effective risk management framework which
provides solutions tailored not only to the industry, but also to the specific company
and sectors in which it operates.

The study provides a reasoned discussion on critical appraisal of BP approach to

risk management. With reference to oil spill in the Gulf of Mexico, there is no doubt
that BP had “competent risk managers who did their jobs properly” and appropriate
“compliance system, regulators and oversight mechanisms” but few main reasons of
the disaster were an outdated organizational structure, a chronic shortage of
resources, a lack of sufficient technological expertise and inherent difficulty of
coordinating effectively with all other government agencies that had statutory
responsibility for some aspect of offshore oil and gas activities (National
Commission, 2011). On the basis of these evidences, it can be said that BP
management ignored some critical facts and use minimum safety precautions as it
drilled offshore oil well.

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In order to avoid such accidents in the future, it is therefore recommended to BP and
other government agencies to develop comprehensive safety plans and reporting
systems to identify and assess risks attached with operational activities. For this
purpose, they must keep in touch with competent and experience personnel in the
petroleum industry in order to review existing regulations and operations to avoid
disastrous situations in the future.

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