FINAL CASE STUDY - BP and the Deepwater Horizon Disaster of 2010

On the 20th of April 2010, the petroleum industry has been marked by the largest maritime disaster oil spill in its history known as the Deepwater Horizon oil spill.

As of 2010, the Deepwater Horizon disaster was the largest marine oil spill ever to occur in U.S. waters. By the time the well was capped on July 15, 2010, nearly five million barrels of oil (205.8 million gallons) had spilled into the Gulf of Mexico. Federal science and engineering teams revised their estimates on the rate of oil flow several times, and in August they concluded that between April 20 and July 15, 53,000-62,000 barrels per day spilled into the Gulf, an amount that was equivalent to a spill the size of the 1989 Exxon Valdez every four to five days. Before the Deepwater Horizon disaster, the Exxon Valdez held the record for the largest spill in U.S. waters.

It was surprising to many analysts how such a disaster could happen, particularly involving a company like BP, which publicly prided itself on its commitment to safety. It did seem clear that, in an effort to close up the Macondo well, several key decisions were made, each involving multiple stakeholders and trade-offs of time, money, safety, and risk mitigation. The public debate began immediately on whether the result of these decisions indicated operational or management problems on the rig, and whether these problems were endemic to the oil industry, or resided within BP itself. To help answer these questions, several task forces were formed to investigate the root causes of the disaster and who among the various players involved with the Macondo well bore responsibility for the disaster and for its resolution.

The impact of the Deepwater Horizon explosion and the subsequent Macondo well oil leak was devastating on a number of fronts, the most obvious being the death of 11 crew members and the injuries sustained by another 17.

As of early 2011, investigations into the actual causes of the Deepwater Horizon disaster were ongoing, and the various parties involved in the Macondo well project were engaged in a highly publicized finger pointing exercise. The three major decisions on closing the Macondo well involving the well casing, the number of centralizers used, and the decision not to perform a cement bond log may have contributed to the conditions that caused the well to blow out.

The environmental damage from the oil spill was extensive, with 25 national wildlife refuges in its path. Oil was found on the shores of all five Gulf States, and was responsible for the death of many birds, fish, and reptiles. The total amount of impacted shoreline in Louisiana alone grew from 287 miles in July to 320 miles in late November 2010. Unlike conditions with the Alaskan Exxon-Valdez oil spill, the contaminated Gulf shoreline was not rock but wetland. Grasses and loose soil, a perfect sponge for holding oil, dominated wetland ecosystems. The spill also occurred during breeding season for pelicans, shrimp, and alligators, and most other Gulf coast species. Ecologists anticipated that entire generations of these animals could be lost if they were contaminated with oil.

In terms of direct economic damages, the sinking of the Deepwater Horizon rig represented a $560 million loss for Transocean and Lloyds of London, the insurance company which had unwritten the rig. The unprecedented loss of an entire semi-submersible rig was predicted to change underwriting policies for all oil rigs. As one underwriter noted, "It's never happened that a semi could burn into the sea and completely sink. Now underwriters have to include that as a risk. That's probably $10,000 to $15,000 more per day in rig insurance. They'll make it up by charging more on a per-rig basis."

BP's price tag for the lost oil - five million barrels at the average market crude oil price (for April 20, 2010 through July 15, 2010) of $74.81 per barrel- was $374 million. In addition, if a federal court ruled that the company was grossly negligent, BP could face up to $3.5 billion in fines, or $4,300 per spilled barrel. Of course the company's losses didn't end there. On April 15, five days before the disaster, BP's stock was trading on the NYSE at $60.57 and on June 25, it hit a 14-year low of $27.02. In addition to the frustration felt by shareholders and the public at large that the company had failed at several attempts to stop the leak, they were also unimpressed with BP's PR strategy, citing skepticism over the company's offer to pay fishermen if they signed a waiver promising not to sue the company.

Alongside those companies directly involved with the Macondo well project, the Deepwater Horizon disaster affected the oil industry as a whole. On May 28, 2010, Secretary of the Interior Ken Salazar issued a moratorium on all deep water oil drilling in U.S. waters. The purpose of the moratorium was to allow time to assess the safety standards that should be required for drilling, and to create strategies for dealing with wild wells in deep water. Government analysts estimated that about 2,000 rig worker jobs were lost during the moratorium and that total spending by drilling operators fell by $1.8 billion. The reduction in spending led to a decline in employment-estimates indicated a temporary loss of 8,000 to 12,000 jobs in the Gulf Coast-and income for the companies and individuals that supplied the drilling industry. The moratorium also reduced U.S. oil production by about 31,000 barrels per day in the fourth quarter of 2010 and by roughly 82,000 barrels per day in 2011. This loss, however, was not large relative to total world production, and was not expected to have a discernable effect on the price of oil. The moratorium, originally intended to last until the end of November, was lifted in mid-October 2010.

The economic losses also extended to the thousands of coastal small business owners including fishermen, shrimpers, oystermen, and those whose livelihood depended in whole or in part on fishing or tourism. The tourism industries in Alabama, Louisiana, and Florida were particularly hard hit.

Ironically, analysts had previously predicted that tourism in the Gulf region, which was devastated by Hurricane Katrina in 2005, would return to pre-Katrina levels in 2010. Between the energy, fishing, shrimping, and tourism industries, the Gulf region lost an estimated 250,000 jobs in 2010.

In anticipation of the economic aftershocks that would be felt from the oil spill, BP pledged to compensate those individuals whose livelihoods would be affected. On June 16, 2010, in agreement with the U.S. government, the company established the Gulf Coast Claims Facility (GCCF), an escrow fund of $20 billion to pay for the various costs arising from the oil spill. GCCF staff evaluated the claims of companies and individuals who suffered demonstrable damages from the oil spill. The fund was also intended to pay municipalities, counties, and state organizations for lost tax revenue or additional clean-up costs. Kenneth Feinberg, who led the September 11 Victim Compensation Fund, was appointed to oversee the GCCF.

By February 28, 2011, the GCFF had received over 500,000 claims, and 170,000 people and businesses had been paid over $3.6 billion. Some people accused the facility of not acting quickly enough to process claims and make payments. In response, the GCCF increased transparency of the system and hired staff in the Gulf to answer questions from applicants in person. The GCCF was scheduled to remain in place until August 2013.

CASE OBJECTIVES

1. To illustrate the impact of Petrol and Oil risks and hazardous and importance of making safety management the utmost priority.

2. To discuss the financial impact of the Petrol and Oil disaster.

3. To illustrate the long-term negative effect of Petrol and Oil disaster on the environmental and ecological system.

4. To identify how different stakeholders can be affected by a disaster affecting single industry.

5. To discuss how the community could be negatively influenced by developing major projects that need high risk management attention.

6. To discuss the roles of stakeholders and governmental opponents in controlling developing ecological sensitive projects.

7. To discuss the corporate social responsibility practices that could be implemented following a major crisis to alleviate the impact of such crisis on the triple bottom-line.

Imagine you are the journal reporter and you are requested to write a report to answer the following questions.

Question 1: Identify all possible business function areas of CSR that have been addressed in the Deep-Water Horizon Crisis.

Question 2: Illustrate the economic effect of Deep-Water Horizon Crisis on the company, the industry, the community and the government.

Question 3: Demonstrate in details the environmental effect of the Deep-water Horizon Crisis at different ecological systems.

Question 4: Clarify the effect of the Deep-water Horizon Crisis on the community and their local business, labor force and potential health hazards and wellbeing.

Question 5: Answer the following question USING YOUR OWN IDEAS AND THOUGHTS and based on your recent readings and references from different searching sources: If you have been hired as a manger for a BP in the US.

• What are the environmental initiatives that you will take?
• Tell your initiative to support the community in the neighborhood?
• Identify potential CSR projects and ideas that could be in place to increase profit?
• There are some risks that can threaten the company position in the market and in turn can threaten your position. Identify Five possible risks and relate each one to the corresponding stakeholders.