Crisis Management at BP

On April 20, 2010 a drilling pipe snapped in two during deep water drilling by BP in the Gulf of Mexico. A blowout preventer (BOP) was supposed to shear off the broken pipe and seal the well to prevent oil leakage or an explosion, but the BOP failed. An explosion then rocked the Deepwater Horizon drilling rig, and in the ensuing fire, 11 workers were killed and large volumes of crude oil began spewing into the Gulf of Mexico from 1,600 metres below the surface. BP suddenly had a major crisis on its hands.

Managing the Crisis

In the days immediately following the accident, Tony Hayward, the CEO of BP was calm and relaxed as he dealt with reporters' questions about the oil spill. He assured them that BP had great technical expertise in this area and large financial resources to fix the problem. He set up a special headquarters in a Ramada Inn in Louisiana to manage the crisis, he took full responsibility for the spill, and he brought in technicians and engineers to work on the problem. He also kept the U.S. government informed about progress. But after several failed attempts to stop the flow of oil, things started to go downhill for Hayward. The major television networks gave the spill prominent coverage night after night on their evening news programs. Viewers regularly saw dramatic images of animals and birds covered with oil, and shorelines, beaches, and marshes fouled with oil. Reporters also interviewed politicians, ecologists, commercial fishermen, and tourists, all of whom expressed poignant concerns about lost jobs, the damage to the tourist industry along the Gulf Coast, and BP's inability to stop the flow of oil.

As the negative publicity about the spill increased, Hayward began to realize that BP was facing not only a technical problem in stopping the flow of oil, but a huge public relations problem as well. In fact, BP was facing the biggest public relations crisis ever faced by an oil company. The situation was worsened because Hayward made several major gaffes and strategic communication errors during the next few months. For example, he said the spill wasn't BP's fault; instead, he blamed Transocean, the company that operated the drilling rig. He also said the dangers of the spill were being exaggerated, and that there was no underwater slick of oil. In its press releases, BP consistently underestimated the amount of oil that was leaking. A figure of 5,000 barrels per day was initially cited, but independent sources later put the amount closer to 60,000 barrels per day. Hayward also said that the environmental impact of the spill was actually quite small. His most unfortunate (and widely quoted) remark was that the spill had caused him a lot of stress and that "he wanted his life back." Someone then observed that the wives of the men who were killed in the blast wanted their husbands back. It also didn't help when U.S. President Barack Obama said that he wouldn't want Hayward working for him. Michael Gordon, of Group Gordon Strategic Communications, a crisis public relations firm, says that BP's public relations communication is a great example of how to make a bad situation worse. He says the company lacked transparency in its communication, didn't talk straight, and wasn't sensitive to those who were negatively affected by the spill.

As the public relations problems worsened for BP, day-to-day control of the crisis was given to Bob Dudley on June 23, 2010. He was previously head of BP's joint venture with a Russian oil company. In late July 2010, BP fired Hayward as its CEO and Dudley, the first non-Briton to head BP, was announced as Hayward's replacement. BP also promised to become a company that was much more focused on safety. Dudley's job is to restore BP's credibility and reputation, and one of his top priorities will be safety. But critics said an outsider should have been appointed if the company really wanted to change its culture. In commenting on his dismissal, Hayward said that he had been demonized by the media, and he realized that BP could not move forward until a new CEO was appointed.

As days and weeks passed and the oil continued to escape into the Gulf of Mexico, more unfavourable information came out about the spill. A Wall Street Journal investigation found that several questionable decisions had been made that contributed to the blowout of the well: (1) BP cut short a procedure that was designed to detect gas in the well and remove it; (2) a quality test was skipped that would have shown whether cement that had been placed around the drilling pipe was properly poured to prevent a blowout; (3) workers prematurely removed heavy drilling fluid (called "mud"), which keeps volatile gas from escaping from the well; (4) the BP manager overseeing the well didn't have much experience in deep water drilling; and (5) in an attempt to reduce drilling costs, BP installed only 6 centering devices instead of the 21 that had been recommended (centering devices reduce the risk of gas escaping from the well and exploding). One employee of Transocean also claimed that an alarm system that would have warned workers of impending danger had been disabled before the blowout. Transocean denied the allegation, and there has been some inconsistency in witness testimony about this claim.

More negative information about BP's environmental and safety record also came to light as oil continued to spew into the Gulf of Mexico. In 2005, for example, an explosion at BP's Texas City refinery killed several workers. And in 2006, BP had an oil spill in Alaska. All of this negative publicity caused BP's share price to drop by one-third, and its market capitalization to drop by $100 billion as investors began to realize that BP would likely face many class action lawsuits over the spill. These lawsuits and other fines may total $40 billion or more. BP's credit rating was cut to just above "junk" level by Fitch Ratings because of the possibility of long-term liabilities associated with the cleanup. By the end of June 2010, BP's stock price had dropped to a 14-year low. Its second quarter loss was $17.1 billion. In August 2010, BP finally succeeded in capping the well and stopping the flow of oil.

The BP spill triggered congressional hearings in the U.S., and executives from BP, Exxon, ConocoPhillips Ltd., Chevron Corp., and Royal Dutch Shell PLC were grilled by U.S. legislators about their safety plans for deep water drilling. Legislators expressed concerns that oil companies have shoddy safety practices, and that they don't spend enough on new technologies for cleanup when a disaster occurs. President Obama imposed a six-month moratorium on drilling, but Gulf Coast politicians and residents didn't like that because it meant even more lost jobs in an area that has already been devastated by the oil spill.

As part of the negotiations with the U.S. government, BP agreed to set up a $20 billion dollar cleanup fund. It also suspended dividend payments to shareholders. But Gulf Coast residents complained that BP's process for paying damage claims was too long and complicated, and argued that the company was paying out too little.

BP is not the only company facing a crisis because of an oil spill. Near the end of July 2010, Canadian pipeline company Enbridge experienced a pipeline break that eventually released 3.8 million litres of oil into a Michigan river. To date, Enbridge's response to the spill has been much more positive than BP's. On the same afternoon that the spill occurred, Enbridge CEO Pat Daniel arrived at the site to spearhead the cleanup effort. He conducted daily news conferences, brought in 560 workers to clean up the oil, and met with many affected residents to ensure them that they would be compensated for damages. The company set up a web site to keep local residents informed about the cleanup activity, and also engaged the services of a public relations firm to provide communications advice. The governor of Michigan praised the company's cleanup efforts.

Other less well-publicized incidents involving oil have also occurred in 2010. For example, a well failure at Devon Energy Corp. in mid-July 2010 caused bitumen-laced steam to escape into the atmosphere for more than a day. Devon shut down its Jackfish site as a result of the well failure. This incident was just one of several that have occurred in the Alberta oil sands during the past five years. Also in July 2010, a vessel carrying wheat ran aground in the St. Lawrence Seaway. The grounding punctured the vessel's fuel tank and more than 50 tonnes of bunker fuel spilled into the water, causing the closure of a section of the Seaway.

The State of Deep Water Drilling for Oil

Many oil companies are now drilling for oil in very deep water (up to 4,000 metres), and they are pushing the boundaries of worker and environmental safety. There have been many problems: fires, equipment failures, oil spills, wells that collapsed, drilling platforms that sank, and serious gas leaks. Deepwater drilling is also more expensive than drilling on land; BP, for example, was paying $500,000 per day to lease the Deepwater Horizon from Transocean. Serious accidents are rare, but in 2001 a drilling rig exploded off the coast of Brazil; it also killed 11 workers. In 2003, BP had another accident where a drilling pipe broke. Some BP managers at that time warned that the company wasn't prepared to deal with a deep-sea oil spill. One U.S. government study found that less than half of the blowout preventers in use by oil companies were strong enough to shear off the drilling pipe if it broke.

Deep water drilling is subject to government regulation, but critics claim that regulatory agencies haven't held the oil companies accountable. The Minerals Management Service (MMS) is the U.S. government agency that oversees offshore drilling. It has been criticized for moving away from specific safety requirements to more general ones, and for giving the oil industry too much leeway in meeting the standards. And most regulations are designed for shallow-water drilling, not deep water drilling. The BP oil spill is likely to mean much closer regulation of deep water drilling for oil.

The safety record of Transocean (the largest deep-water driller) has come under scrutiny as a result of the oil spill. Overall, Transocean's record is better than the industry average (0.77 injuries per 200,000 man hours, vs. 0.81 for all offshore rigs worldwide). But nearly 75 percent of incidents that triggered federal investigations into safety and other problems on deepwater drilling rigs have occurred on rigs operated by Transocean. Since its merger with GlobalSantaFe in 2007, Transocean has been involved in 24 of 33 incidents investigated by the MMS, even though the company operates less than half the rigs in the Gulf. Ironically, on the day the well blew out, BP and Transocean officials were on the rig to celebrate 7 years without a lost-time accident.

Chevron is currently drilling for oil in deep water off Newfoundland. Concern has also been expressed about this well, but Chevron says it is developing a new, more effective blowout preventer which will avoid a repeat of the BP spill in the Gulf of Mexico.

Implications for the Canadian Oil Industry

When the drilling rig Ocean Ranger sank in 1984 off the coast of Newfoundland during a major storm, 84 people died. Mark Turner has the job of reviewing oil drilling off Newfoundland's coast to determine if a blowout like BP's in the Gulf of Mexico can occur in Canada, but it is difficult to know how much risk should be accepted in offshore drilling. The Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB) has two priorities: to monitor the safety and environmental impact of the offshore oil industry, and to ensure that the maximum benefit will accrue from such drilling. But these two priorities can obviously be in conflict. The C-NLOPB has also been accused of moving too slowly on safety and environmental concerns. In the U.S., the MMS is being split into three separate divisions to avoid future conflicts of interest.

Alberta oil sands companies may benefit from the BP spill because land-based oil wells are seen as safer than deep water wells. MEG Energy Corp., for example, did a $1.25 billion initial public offering (IPO) of stock in the summer of 2010, and Athabasca Oil Sands Corp. had a $1.35 billion IPO in the spring of 2010. Global energy companies are also acquiring Canadian oil sands properties.

Questions for Discussion

1. What is the difference between contingency planning and crisis management? How are contingency planning and crisis management relevant for the BP oil spill? How well did BP manage the crisis it faced?
2. Now that some time has passed since the crisis, what has the impact been on BP? What is its current stock price? What does the company's financial condition look like? What is being written about BP in terms of its reputation and its future?
3. Was it fair to fire Tony Hayward? Defend your answer.
4. Consider the following statement: Consumer demand for gasoline and many other oil-based products means that oil companies are motivated to find more oil, even if that means extracting it from ever-more complicated and dangerous places such as deep water locations. Consumers must therefore accept some of the blame for ecological damage, because without consumer demand, there would be no incentive for oil companies to drill in deep water locations. Do you agree or disagree with this statement? Defend your answer.

Sources: Monica Langley, "U.S., BP Near Deal on Fund; Gulf of Mexico Oil Production Would Secure $20 Billion Damage-Claims Plan," The Wall Street Journal, August 10, 2010, p. A1; Shawn McCarthy, Kevin Van Paassen, and Cigdem Iltan, "Enbridge Shifts PR Campaign into High Gear," The Globe and Mail, July 31, 2010, p. B3; David Runk and Tim Martin, "Pipeline Oil Spill Firm's Latest, Winnipeg Free Press, July 30, 2010, p. A17; Lauren Krugel, "Response to Latest U.S. Oil Spill 'Inadequate'," Winnipeg Free Press, July 29, 2010, p. A9; Paul Vieira, "Gulf Oil Spill 'Wake-Up Call' for Industry: New BP CEO; Safety a Priority," National Post, July 28, 2010, p. FP1; Guy Chazan, "BP Reveals Comeback Plan; Oil Giant Takes $32 Billion Charge on Spill, Taps New CEO; Investors Skeptical," Wall Street Journal, July 28, 2010, p. A1; Russell Gold and Ben Casselman, "Alarm Was Disabled Before BP Blast," The Wall Street Journal, July 24, 2010, p. A1; Shawn McCarthy, "Gulf Residents Decry Drilling Ban," The Globe and Mail, July 14, 2010, p. B8; "Oil Leak From Grounded Cargo Ship Closes Section of St. Lawrence Seaway," National Post, July 14, 2010, p. FP4; Nathan VankerKlippe, "Devon Energy Blowout One of Several in Recent Years," The Globe and Mail, July 14, 2010, p. B7; "BP’s Colossal PR Blunder," National Post, June 30, 2010, p. FP3; Carrie Tait, "BP Stock at 14-Year Low as Cleanup Costs Soar; Storm Worries," National Post, June 26, 2010, p. FP5; Shawn McCarthy and Paul Waldie, "In Deep Water Drilling, a Delicate Dance," The Globe and Mail, June 26, 2010, p. B1; "BP’s Diplomat Unlikely to Repeat Gaffes; Changing of Guard; Bob Dudley Takes Control of Oil-Spill Daily Operation," National Post, June 23, 2010, p. FP3; David Ebner, "For BP’s Lawyers, a High-Stakes Chess Match Begins," The Globe and Mail, June17, 2010, p. B1; "Big Oil Blasted Over Safety; Hearing Heaps Scorn on Spending on Preparedness for Offshore Oil Spills," National Post, June 16, 2010, p. FP1; Peter Shawn Taylor, "BP’s Credit Rating is Slashed Six Levels to Two Above Junk Over Clean-Up Costs," National Post, June16, 2010, p. FP16; Andrew Willis, "As Slick Spreads, Oil Sands Beckon," The Globe and Mail, June 16, 2010, p. B1; "BP to Set up $20B Fund; Scraps Dividend," Business News Network, June 16, 2010, www.bnn.ca/newes/18322.html; Shawn McCarthy and Nathan Vanderklippe, "Spill Puts New Oil Frontiers at Risk," The Globe and Mail, June11, 2010, p. B1; David Ebner, "BP Spill Causes Transatlantic Tensions," The Globe and Mail, June 11, 2010, p. B5; Nathan Vanderklippe, "Investors Flee BP as Spill Woes Mount," The Globe and Mail, June 10, 2010, p. B1; Eric Reguly, "Why BP Chief's Days are Numbered," The Globe and Mail, June 3, 2010, p. B2; Ben Casselman and Russell Gold, "Unusual Decisions Set Stage for BP Disaster,"//The Wall Street Journal//, May 27, 2010, p. A1; Fabrice Taylor, "A Bullish Case for BP," The Globe and Mail, May 21, 2010, p. B12; Ben Casselman and Guy Chazan, "Disaster Plans Lacking at Deep Rigs," The Wall Street Journal, May 18, 2010, p. A1; Ben Casselman, "Rig Owner Had Rising Tally of Accidents," The Wall Street Journal, May 10, 2010, p. A1.

Answers to Questions for Discussion

1. What is the difference between contingency planning and crisis management? How are contingency planning and crisis management relevant for the BP oil spill? How well did BP manage the crisis it faced?

Contingency planning involves (1) identification of events that might occur in the future that would affect a company's ability to achieve the financial and other goals it has set, and (2) deciding how the company would respond if those events actually occurred. Crisis management involves actually taking action to deal with a crisis that needs immediate attention. Thus, contingency planning focuses more on planning, while crisis management focuses more on action. Contingency planning is also a more general approach to deal with possible future outcomes (good or bad), while crisis management focuses on coping with an immediate problem that is harmful for the company.

2. Now that some time has passed since the crisis, what has the impact been on BP? What is its current stock price? What does the company's financial condition look like? What is being written about BP in terms of its reputation and its future?

Students must do a bit of research to answer these questions. It is not difficult for them to find the current stock price, but they should also trace BP's stock price from mid-April 2010 to the present time. The company's quarterly financial reports should also be analyzed over the same time frame. (You might remind students that some analysts were predicting that BP would end up in bankruptcy because of the oil spill. Has that happened?)

Students will also need to look in the business press (//Canadian Business//, The Globe and Mail, National Post, etc.) to determine what is being written about BP's reputation and its future. The results that students uncover will provide an interesting insight into how much long-term attention the public actually pays to a disaster like the oil spill. While media coverage of the spill was intense during the summer of 2010, the students may find that coverage has become very slight in the months following the capping of the well.

3. Was it fair to fire Tony Hayward? Defend your answer.

This question can serve as the basis for an in-class debate on the nature and extent of authority and responsibility in organizations.

In the most fundamental sense, the CEO is responsible for what a company does (or fails to do), so yes, he was responsible. But there are two complications that must be considered. First, it may be difficult to decide how bad an outcome must be in order to rationalize firing the CEO. The oil spill was indeed very bad (and media coverage was dramatic), but was it sufficient to rationalize firing Hayward? It would be useful to ask students to develop criteria that could help boards of directors of companies to decide whether a given negative outcome is sufficient to cause the CEO to be fired. These criteria should include both financial issues (the effect of the outcome on the company's stock price and its overall financial condition) and other issues (for example, the impact of bad public relations on the company's reputation with customers and the general public).

Second, there will be debate about how realistic it is in a company the size of BP to hold the CEO responsible for the vast number of specific decisions that are made at various levels in the organization. Some students will say it is not realistic, and they may also point out that sometimes a CEO is simply the victim of bad luck. They may argue that other oil companies have probably taken the same general approach to deep water oil wells that BP took, and they didn't happen to experience a blowout. They will conclude that firing Hayward just because BP happened to have an accident is not reasonable. Other students (even those who accept that a CEO can't know everything that is going on, and that Hayward may have just had bad luck) will say it is necessary to fire the CEO to show the public that the company views the negative outcome as serious and is taking action to ensure that it doesn't happen again.

4. Consider the following statement: Consumer demand for gasoline and many other oil-based products means that oil companies are motivated to find more oil, even if that means extracting it from ever-more complicated and dangerous places such as deep water locations. Consumers must therefore accept some of the blame for ecological damage, because without consumer demand, there would be no incentive for oil companies to drill in deep water locations. Do you agree or disagree with this statement? Defend your answer.

Students will likely fall into one of two basic groups when responding to this statement. The first group will agree with the statement and point out its rather compelling logic: without consumer demand for specific products, profit-oriented companies have no incentive to produce them. To then place the blame solely on companies when problems like oil spills occurs ignores the fact that consumers have responsibilities too.

Those who disagree with the statement will make two arguments. First, they will say that that while it is true that consumer demand motivates companies to produce certain products, that fact does not relieve companies of the responsibility of providing a safe workplace and taking care to avoid damage to the environment. They will point out that BP failed on both counts (11 workers died, and the oil spill was an environmental disaster). Second, they will argue that companies actively influence consumers to use certain products, and this fact increases the responsibility that companies have when problems arise.

If the instructor is so inclined, the statement may be used as a springboard for a much broader discussion about the much bigger issue of society's continued heavy reliance on oil and the potential for problems that such reliance brings. Discussion of the feasibility of other sources of power (coal, natural gas, solar, wind, tidal, nuclear) would also be useful and interesting. An objective analysis of the advantages and disadvantages of all these sources of power would demonstrate that there is no easy or short-term solution available.