BP Deepwater Horizon Risk Management

The news over the past 58 days regarding the consequences of the British Petroleum oil spill in the Gulf of Mexico is really about Risk Management. This process includes identifying serious risks and determining how best to manage them by developing and implementing appropriate internal controls. The Deepwater Horizon catastrophy illustrates the most fundamental risk management errors that can be made.

Traditionally, the most serious risk in the exploration portion of the petroleum industry related to spending huge resources to discover oil by digging a well and ending up with a dry hole. This risk has been addressed by minimizing drilling costs and increasing the speed of creating wells so as to provide the maximum number of chances that a producing well would be created.

Consequences of a blowout (a well that uncontrollably gushes oil) were considered secondary and of little concern. When there was a blowout, a specialized oil services firm was called in to extinguish any fire, install a cap and shut off the value so the owning company could easily take over the production process.

Some major changes that have occured over the past 20 years are:

• Exploration relies more on geological theory and reliable instrumentation and less on random search
• Drilling operations have become more automated and efficient
• More drilling has to be deeper as available local reserves diminish
• More drilling has to be off-shore as available on-land oil fields are becoming fully explored

These changes suggest oil companies should be refocusing their risk concerns from those associated with dry holes to those associated with blowouts.

It is now being painfully documented that there are numerous precautions that were diminised or skipped entirely in the Deepwater Horizon drilling operation. These include not ensuring that only top quality blowout protection equipment was submersed a mile beneath the surface and not thorouhly tesing that equipment before the drilling reached the depth where oil was expected. The most recent revelation was that BP used only about a third of the recommended number of mechanical devices designed to ensure that the drill pipe is centered in the well before attemping to seal the installation of that pipe with cement. The stated rationale for taking such short cuts was that the drilling operation was behind schedule.

There is no question now that the cost of not taking known precautions has greatly exceeded any projected savings from speeding up the completion of the well. Eleven men have died, many others were injured, many millions of barrels or crude have entered the Gulf and adjoining shoreline, wetlands and beaches, killing fish, birds and other wildlife and threatened the fishing and tourist industries throughout the entire Gulf Region.

Stu on Patrol is concerned about wasting resources to protect against risks that have greatly and decreased in relevance and ignoring new risks that are more severe than the old ones. If you know of other instances where industries and organizations seem to be guarding against risks that are no longer as serious as they used to be and have failed to address newer more serious risks, please comment back to Stu on Patrol with what you see and what you think needs to be done about it.

Stu on Patrol will take all comments seriously. If they relate to any aspect of Corporation for National and Community Service operations, they will be greatfully acknowledged and thoroughly researched, but will not be published. If your comment does not relate to the Corporation, it will be published here in its entirety.