Summary of Risk Management Failures of British Petroleum

BP is a British global energy company which is the third largest energy company and the fourth largest company in the world. As a multinational oil company, BP is the UK’s largest corporation, with its headquarters in St James’s, City of Westminster, London. BP America’s headquarters is in the One Westlake Park in the Energy Corridor area of Houston, Texas; the company is among the largest private sector energy corporations in the world, and one of the six leaders.

In order to project social responsibility and improve its image British Petroleum changed its name into BP in year 2000 with a logo of green and yellow sunflower patterns. Paradoxically the same company symbol is now under derision and the object of controversial attacks from environmentalists and damaging court cases. The company’s predicament further worsened when it was listed as one of the “ten worst corporations” during the year 2001 and 2006. In fact, BP and its competitors Royal Dutch-Shell were considered by activists to be responsible with the threatening phenomenon of climate change.

BP was warned before the oil pipeline leak happened in Alaska, but no action was made by the higher officials to mitigate its possible occurrence and reduce damages. In March 2005, BP’s Texas City, Texas refinery, one of its largest refineries, exploded causing 15 deaths, injuring 180 people and forcing thousands of nearby residents to remain sheltered in their homes. A large column filled with hydrocarbon overflowed to form a vapor cloud, which ignited. The explosion caused all the casualties and substantial damage to the rest of the plant.

The incident came as the culmination of a series of less serious accidents at the refinery, and the engineering problems were not addressed by the management. Maintenance and safety at the plant had been cut as a cost-saving measure, the responsibility ultimately resting with executives in London. The fall-out from the accident continues to cloud BP’s corporate image because of the mismanagement at the plant. There have been several investigations of the disaster, the most recent being that from the U. S. Chemical Safety and Hazard Investigation Board which offered a derisive evaluation of the company.

The US Occupational Safety and Health Administration (OSHA) found organizational and safety deficiencies at all levels of the BP Corporation and said management failures could be traced from Texas to London. The company pleaded guilty to a felony violation of the Clean Air Act, was fined $50 million, and sentenced to three years probation. On October 30, 2009, OSHA fined BP an additional $87 million— the largest fine in OSHA history— for failing to correct safety hazards revealed in the 2005 explosion. Inspectors found 270 safety violations that had been previously cited but not fixed and 439 new violations.

BP is appealing that fine. In August 2006, BP shut down oil operations in Prudhoe Bay, Alaska, due to corrosion in pipelines leading up to the Alaska Pipeline. The wells were leaking insulating agent called Arctic pack, consisting of crude oil and diesel fuel, between the wells and ice. BP had spilled over one million liters of oil in Alaska’s North Slope. This corrosion is caused by sediment collecting in the bottom of the pipe, protecting corrosive bacteria from chemicals sent through the pipeline to fight this bacteria.

There are estimates that about 5000 barrels (790 m3) of oil were released from the pipeline. To date 1513 barrels (240. 5 m3) of liquids, about 5200 cubic yards (4000 m3) of soiled snow and 328 cubic yards (251 m3) of soiled gravel have been recovered. After approval from the DOT, only the eastern portion of the field was shut down, resulting in a reduction of 200000 barrels per day (32000 m3/d) until work began to bring the eastern field to full production on 2 October 2006.

In May 2007, the company announced another partial field shutdown owing to leaks of water at a separation plant. Their action was interpreted as another example of fallout from a decision to cut maintenance of the pipeline and associated facilities. On 16 October 2007 Alaska Department of Environmental Conservation officials reported a toxic spill of methanol (methyl alcohol) at the Prudhoe Bay oil field managed by BP PLC. Nearly 2,000 gallons of mostly methanol, mixed with some crude oil and water, spilled onto a frozen tundra pond as well as a gravel pad from a pipeline.

Methanol, which is poisonous to plants and animals, is used to clear ice from the insides of the Arctic-based pipelines. From January 2006 to January 2008, three workers were killed at the company’s Texas City, Texas refinery in three separate accidents. In July 2006 a worker was crushed between a pipe stack and mechanical lift, in June 2007, a worker was electrocuted, and in January 2008, a worker was killed by a 500-pound piece of metal that came loose under high pressure and hit him.

On April 1 2009, a Bond Offshore Helicopters Eurocopter AS332 Super Puma ferrying workers from BP’s platform in the Miller oilfield in the North Sea off Scotland crashed in good weather killing all 16 on board. On April 20, 2010, a semi-submersible exploratory offshore drilling rig in the Gulf of Mexico exploded after a blowout and sank two days later, killing eleven people and causing a massive oil spill threatening the coast of Louisiana, Mississippi, Alabama, Texas, and Florida. The rig is owned and operated by Transocean Ltd on behalf of BP, which is the majority owner of the oil field.

The company originally estimated the size of the leak at about 1,000 barrels a day but later accepted government estimates of a leak of at least 5000 barrels per day. On April 30, BP stated that it would harness all of its resources to battle the oil spill, spending $7 million a day with its partners to try to contain the disaster. BP was running the well without a remote control shut-off switch used in two other major oil-producing nations, Brazil and Norway, as a last resort protection against underwater spills. The use of such devices is not mandated by U. S. regulators. The U. S. Government gave the responsibility of the incident to BP and will hold it accountable for costs incurred in containing the situation. On May 11, 2010, Congress called the executives of BP, Transocean, and Halliburton to a hearing regarding the oil spill. When probed for answers regarding the events leading up to the explosion, each company blamed the other. BP blamed Transocean who owned the rig, who then blamed the operators of the rig, BP. They also blamed Halliburton, who built the well casing.

Coming to analyze BP’s risk management, it is noted first that BP organization employs the systems of centralized direction and decentralized implementation. The centralized direction system was designed to attain business goals and objectives. The company unifies the corporation by implementing strategic objectives, values, behaviors and standards to be performed and easily understood by their people. On the other hand the systematic objective of BP is decentralized implementation of its operations in order to deliver the best quality of products or services and satisfy the needs of the consumers.

The decentralized implementation covered three business segments namely: Exploration and Production, The Gas, Power and Renewable and Refining and Market. As is well known, procedures and controls are a necessary condition for effective risk management, but not a sufficient one. A company’s standards and processes will fail if employees do not feel empowered to follow the standards during times of stress or they fear retaliation for reporting “unwanted” information. Reading the report of BP and other esources at my disposal I have found that how parts of BP’s culture may have tolerated shortened safety procedures as they fell behind investment schedules and other deadlines. For example, the company cut short a procedure involving drilling fluid that is designed to detect gas in the well and skipped a quality test of the cement around the pipe (another buffer against gas) despite BP’s report finding that there were signs of problems with the cement job and despite a warning from the cement contractor company.

The experts also concluded that there was not a strong culture of communication across its own team leaders and partner companies. Having multiple players can restrict access to critical knowledge and slow decision-making processes to a dangerous point. Nor did there appear to be a culture where managers were expected to seek out or share contrary information from a different perspective. These cultural elements allowed issues to continue without the application of comprehensive expertise.

It seems to be necessary adding more controls, more checks and balances, with auditable risk management processes new minimum standards, and increased self-audits. While some criteria and thresholds did not exist prior to the accident, it is unclear whether the lack of these controls and audit mechanisms directly caused the accident itself Companies are not able to entirely shift operational or reputational risk to a partner, subcontractor, or supplier. Presumably, BP had in place significant and comprehensive controls and contractual requirements for its contractors and other service providers.

However, questions remain about whether these contractual requirements were actually implemented, assessed, and monitored by BP. Anyway, risk management referred to in this paper are the activities related to managing an organization that integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources. Its primary objective is to reduce the different risks related to threats caused by environment, technology, humans, organizations and politics.

Firms usually formulate strategies in order to manage or mitigate risk by transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk. BP must apply risk management in its corporate financing as the technique for measuring, monitoring and controlling the financial or operational risk on the firm. The commonly used framework breaks risks into market risk (price risk), credit risk and operational risk and also specifies methods for calculating capital requirements for each of these components.

In enterprise risk management, a risk is defined as a possible event or circumstance that can have negative influences on the survival of a company. Its impact can be on the very existence, the resources (human and capital), the products and services, or the customers of the enterprise, as well as external impacts on society, markets, or the environment. In a financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk or asset liability management, market risk, and operational risk.

All risks can never be fully avoided or mitigated simply because of financial and practical limitations. Therefore all organizations have to accept some level of residual risks. In the case of BP, the following must also be undertaken in addition and consideration of those discussed above. Firstly, it is of major importance to planning how risk management will be conducted must be undertaken: in this regard the plan must include risk management tasks, responsibilities, activities and budget.

Secondly, managers responsible for BP will assign a risk officer who will be responsible for foreseeing potential problems. In this respect, it is important also to maintain the risk database and each risk should have an opening date, a title, a brief description, a probability and a suggestion of importance. Once potential sources of risk have been identified, it will also need preparing a plan for reducing the risk (mitigation plan) for risks that are chosen to be mitigated.

In this regard, it is well known that the purpose of the mitigation plan is to describe how this particular risk will be handled what, when, by who and how will it be done to avoid it or minimize consequences if it becomes a liability. BP, in a perspective of reducing the risks described above in the long run as well as in order to optimize and reduce the resources used for that purpose, must eventually summarizing planned and faced risks, effectiveness of mitigation activities, and effort spent for the risk management.

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