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.

Internal Controls for Painting a Room at Home?

When you decide to paint a room at home you will be concerned with the quality and cost of the job. Therefore, many of the things you do will be similar to the use of internal controls at work.

In planning the job, you will need to:

• Choose the color
• Gather equipment and materials
• Decide when you will do the work

You will do a risk assessment - by thinking of what can go wrong:

• Paint on the carpet, furniture, draperies, windows and/or moldings
• The previous color may not get completely covered
• Spots could be missed
• The color on the wall may not look like the sample picked at the store

You will install controls - to prevent things from going wrong:

• Mask windows, doors and moldings
• Use plenty of drop clothes
• Keep a damp rag handy to wipe up any drips before they dry
• Paint a small section behind where funiture usually sits and let it dry to check color
• Buy some extra paint in case another coat is needed

You will do quality control - so problems can be fixed as soon as possible:

• Stop and check job after completing one wall
  - Is coverage okay?
  - Is there any paint under the drop clothes?
  - Are edges sharp between painted and unpainted surfaces?
  - Does the color look right?
• What changes in procedure are needed before painting other walls?
• What changes in proceudre are needed before painting other rooms?

If you apply these precautions and considerations, you will be glad you did and will also have a nicer paint job to show off to your friends.

Have You Ever Hired a Clushmaker?

When I was a youngster, many years ago, there was a popular campfire story known as The Clushmaker. The story is about an aspect of a strong internal control environment that is often lacking in a well established bureaucracy.

A young man entered a U.S. Army recruiting station. When asked his line of work, he answered that he was a Clushmaker. Not wanting to admit not knowing what a Clushmaker was, the Seargent who first greeted the applicant referred him to the Captain that supervised the station. As the story progressed, the young man was introduced to a long chain of ever more senior officers, none of whom was willing to admit not knowing what a Clushmaker was. Finally, the young man was introduced to a Five Star General who was not not in a position to refer this potential recruit to a more senior officer.

Naturally, the Five Star General was also unwilling to admit that he had never heard of a Clushmaker. But, he also didn't want to miss out on any benefit that a Clushmaker may provide his organization. So, he signed him up and ordered him to begin his clushmaking operation at once. The newly enlisted Clushmaker started by requisioning a long list of needed supplies and equipment as well as a detail of 50 men to make all needed preparations. Finally, when all was ready there was a tower erected that stood 500 feet above a pond that was 10 feet deep and 40 feet in diameter. At the top of the tower was a two ton ball that measured 10 feet in diameter. Connected to the giant ball was a cable that exended all the way down the tower to a large lever on a control panel at which the Clushmaker stood.

The General asked the Clushmaker if all was ready and the Clushmaker answered "yes."
Then the General directed that all available troups on the base where the preparations had been made be assembled around the 40 foot pond so that all of them would know the value of the Clushmaker who was recrutied into this unit.

Then, the General gave the order to "make clush." At which point the Clushmaker pulled on the lever, causing the ball to be dislodged from its resting place at top of the 500 foot tower and plumit down the 500 feet into the pond. The result was an overwelming clushing sound followed by water being splashed out of the pond in all directions thoroughly soaking all those who observed the event.

So, what does Stu on Patrol think of all this? That is an easy question. It was an absolute waste of whatever was paid to the Clushmaker, for the supplies, materials and work detail he requisitioned, and the time taken up by the numerous observers, including the ficticious Five Star General who authorized the project. The only lesson learned is that a great deal of time and expense could have been saved if the Seargent who initially greeted this young man of dubious talents had asked him what a Clushmaker did and what value it would have to the U.S. Army.

The more important question, directed to all those who read this story is, "Have you ever done or observed someone in your organization do anything that resembles hiring a Clushmaker?

Please write in to Are We in Control because Stu on Patrol wants to know.

How Does Risk Differ From Vulnerability?

Risk is a measure of the impact on your mission (or on your lifestyle) of a particular bad thing that could happen. There are two components that determine the severity of a risk:

1. Likelihood or frequency of this bad thing occurring.
2. Cost or other measure of stress caused when it does occur.

Based on the relative intensity of these two factors, risks are classified as High, Medium or Low.

Controls are things and actions that we add to our processes that reduce the likelihood that the potential bad thing will actually occur and/or reduce the resulting cost or other stress resulting when it does occur.

Some commonly used controls are:

1. Having someone else check your work (like a proof reader);
2. Getting a supervisor to watch what you do (like a beach or pool life guard);
3. Wearing protective clothing (like safety shoes or a helmet);
4. Attaching a safety rope or harness (when rock climbing or washing windows on a building).

Vulnerability is the residual level of risk that remains after a control is put in place.

To see how Risk, Controls, and Vulnerability interplay, take a levee on a river that floods 15’ every year. The Risk is your house being flooded. Since the river floods frequently, it is a High Risk. The Control is the levee. High vulnerability would be a 10’ levee and yearly floods of 15’. Low vulnerability would be a 20’ levee and yearly floods of 15’. You can’t change the risk – the river is going to flood - but you can heighten the levee. Thus, by strengthening the control you can lower the vulnerability.

Closing Barn Door After Horses Got Out

One very common apparent dilemma in the world of internal control is whether or not to fix the barn door after loosing one or more of your horses. Some say this is a waste of time and effort. However, more thought is needed. For example, there are some questions to ask before just leaving the current situation alone:

• Are there still more horses in the barn (valuable assets that must not be lost)?


• Is it possible that some of the lost horses could be recovered?


• Will there be new horses added to your stable that need to be protected?

Just recently I had the opportunity to be faced with this question in a very personal way. I had been crossing Rockville Pike at Halpine Road on the way home from the Twinbrook Metro station on December 11, 2008 -- an action I do nearly every day that I go to work. The conditions were bad (dark, raining, a little later in the evening than usual). I was struck by a car driven by someone who either did not see me at all or thought he or she could make a left turn in front of me. The result was that I learned the definition of a pedestrian colision with me, Stu on Patrol, being the pedestrian.

As a student of risk management, I have known that crossing Rockville Pike is always a risky proposition. Now, I knew what happens when that risk is translated into an adverse result. Fortunately, I am still alive and able to tell of this unfortunate event. Moreover, there were no adverse effects shown on the CT scan or X-rays I had taken later than night at the Suburban Hospital Shock Trauma Unit. However, my losses and injuries were still significant:

• I was violently stuck by the car sending me to the ground and injuring the back of my head


• The head injury required 11 surgical staples


• Several places on two or more ribs are bruised or broken (X-rays don't always see breakes)


• Many truck and extremity muscles became strained, requiring weeks to fully recover


• My glasses and hat were knocked off my head on impact not to be found again.

Now that a loss has been sustained, it seems foolhardy to me to assume it would could never happen again. The traffic patterns and personality of the local drivers has not changed. So, what adjustment to my behavior could be made to reduce the likelihoon of a recurrence? I am not likely to change my commuting habbits, such as walking to the Metro, any time soon. Nor is there any way I think I could change the habbits of those who drive cars near where I have to walk.

I decided I had to make it easier to see me and therefore less likely to not see me as I was crossing the street. I will therefore be on the lookout for more reflective or more brightly colored clothing . I also considered wearing a light when it was dark. In the end I purchased a runner's headlight that I have been wearing on my arm in blink mode on my way from home to the station or vice versa if it is dark outside. I will also add more vissible clothing to my wardrobe from time to time as I notice it in stores.

I was extremely lucky to have been hit, was able to limp away from the scene, and most likely have a full recovery in the next week or two. Thus, there were some lost horses, but many more still in the barn worth saving. It is also possible that the collission may have been avoided if I had taken the risk of crossing the street under bad condition more seriously and made myself more conspicuous. But, all decisons have to be made in the present, rather than the past or the future. So, yes, in this case as in most other cases, it does pay to fix the barn door after the horses get out.

If you have an account of how you fixed the barn door after loosing some horses, or it you decided not to fix it, please comment back to Stu on Patrol.