We’re pleased to feature another post from Steven Kopits of Douglas-Westwood, this time on lessons to be learned from the BP oil disaster.
by Steven R. Kopits
Do Focus on the Blow-out Preventer.
Many of us in the industry were shocked by the failure of the BOP, the failsafe device intended to prevent blow-outs like the one in the Gulf of Mexico. It was supposed to work, and it didn’t. Moreover, some excellent reporting from the New York Times indicates that BOP failures are more common than thought. Nevertheless, in the future, as in the past, the BOP must remain the focal point of spill prevention. BOP design and practice needs to be thoroughly reviewed and updated for safe and appropriate use in deep water. BP, as well as the other oil majors, can carry the cost, which would probably run into the low hundreds of millions of dollars. But it should be done, and Congress may have an interest in monitoring progress.
Do Capture the Lessons of BP’s Response.
In many ways, it is astounding that BP was able to get control of a rogue well in 5,000 feet of water in less than 90 days, given that no real contingency plans were in place at the time of the blow-out. These lessons should be recorded and institutionalized in the public record in the next three months. Let’s figure out what BP did wrong and what it did right after the blow-out, and make sure the industry has access to the knowledge. Congress may wish to monitor progress in this area.
Do Make Safety Records More Public.
Some believe BP’s corporate culture may be implicated in the accident, the result of a financially-driven management pressing field managers to take too much operating risk. In such a culture, the low-level safety personnel need to be able to push back on senior management. One method may be to compel more standardized, public disclosure of safety issues. This institutionalizes the whistleblower function; that is, rather than putting the safety manager in the position of whistleblower ‘ratting out’ his company, the safety report is by definition public. This is a tricky area, but one worth pursuing. Assign it to Cass Sunstein, Administrator of the White House Office of Information and Regulatory Affairs, and his team and see if they can make some progress on the topic.
Don’t Assume Whistleblower Legislation will Work.
It won’t. It’s not the Texas thing to do, and these topics are far too complex for a simplistic whistleblower approach. What do you want the whistleblower to say?: “Don’t you understand, they’re using only 5 spacers instead of 11! Don’t you understand what this means!? No, they won’t.
Do Send Field Managers to the ‘Rickover School’.
In an aggressive corporate culture seen in many oil majors, the ability of field managers to push back is critical. In such a situation, the most dangerous manager is one trying to dutifully comply with the mandates passed down from above. All field managers in the oil business (frankly, in the energy business) responsible for major at-risk activities, for example, the management of a refinery or an offshore drilling rig, need to know how to push back against management. The best I have ever met in this respect have been alumna of the nuclear fleet under Admiral Hyman Rickover. Rickover, considered the father of the US nuclear navy, left a legacy of technical achievements including the United States Navy’s continuing record of zero reactor accidents. A key component of this legacy was the empowerment of subordinate officers and enlisted personnel to resist the unreasonable requests of senior officers. I don’t know if this program is available commercially, but it wouldn’t be too difficult to set up a school. Attendance should be mandatory.
Don’t Permit Unlimited Liability.
In principle, companies should pay for the damage they cause. However, the potential damages are so great in the case of offshore drilling, that the small risk of a large spill may be enough to deter companies from the field. Over the past five years alone, more than 18,000 wells were drilled offshore, of which some 2,500 were in deep water (greater than 500 meters). And nothing remotely like this happened — the offshore oil & gas industry has in the last 22 years achieved an excellent safety record. Can oil companies absorb the risk of another accident? Of the thirteen oil companies producing oil and gas in the deepwater Gulf, seven qualify as supermajors, and six are smaller companies like Murphy Oil (market capitalization: $10 billion) and ATP (market cap: $0.6 bn). While the industry’s giants can handle the risk, the smaller companies would have been wiped out if they had caused the spill.
At least as important are equipment providers like Cameron (market cap: $10 bn), the manufacturer of the implicated BOP. If equipment and parts manufacturers are to have unlimited liability, then many may simply leave the US or stop serving the segment. Not all the parts that could fail are large. For example, the world’s largest floating production platform, BP’s Thunderhorse, nearly sank when a valve was inadvertently installed backward. Work on a valve was also implicated in the fire aboard the Piper Alpha platform in 1988. In this, the worst offshore oil incident ever in terms of human loss, 167 men died in the ensuing explosion and inferno. In both cases, the failure involved a small part and a relatively minor service error. Thus, not only large companies, but also the entire offshore component manufacturing and service sector could be affected by unlimited liability.
The oilfield services segment is a key exporter and competitive industry for the US. Consider: Douglas-Westwood analysis indicates that just four US companies — FMC, the Vetco Gray division of GE, Dril-Quip and the above-mentioned Cameron — will sell more than $3 bn of just subsea hardware this year to Brazil alone. Private equity firms have expressed concern to us about whether such companies can be financed in light of the Gulf accident. If liability is to be unlimited, then these companies may no longer be viable in the US. A manager of a major listed company providing equipment to the offshore segment told us last week that senior staff is moving en masse to Paris from Houston. Thus, unlimited liability may result in either an abandonment of the Gulf of Mexico or the relocation of companies’ headquarters to foreign jurisdictions, with minimal financial and legal exposure retained in the United States. The loss to the US economy could be much greater than the environmental cost of the Macondo blow-out.
So there’s a need to balance accountability with the health of the oil field services business. Liability needs to consider not only the damage inflicted, but also the ability of a given company to pay. For example, liability could be capped at 30-40% of a company’s book equity. Prior to the Macondo blow-out, BP’s book equity was about $100 billion; and Citi Investment Research suggests the total bill to BP will run just approximately $38 billion — about 38% of book value. In the case of BP, the ratio would seem to hold up.
In any event, the Obama administration should announce that it intends protect the overall health of the oil industry, even as it seeks to insure accountability for damages inflicted.
Mr. Kopits heads the New York office of Douglas-Westwood, energy business consultants. The views expressed are his own. Douglas-Westwood is the leading global consultancy in the commercial analysis of the offshore oil and gas services sector.