Deepwater horizon

lessons in probabilities

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CONFERENCE PAPER Risk Management, Quality Management 10 October 2015
Greene-Blose, Joanne M.
How to cite this article:
Greene-Blose, J. M. (2015). Deepwater horizon: lessons in probabilities. Paper presented at
PMI® Global Congress 2015—EMEA, London, England. Newtown Square, PA: Project
Management Institute.

Joanne M. Greene-Blose, MSPM, PMP

The Project Solvers of America, Inc.

When one analyzes the root causes behind the Deepwater Horizon oil rig
explosion that occurred on April 20, 2010, killing 11 people and spilling 53,000
barrels of oil per day (19 times the volume spilled by the 1989 Exxon Valdez
oil spill (Repanich, 2010)), one sees a disregard and lack of proactivity in
assessing and responding to potential threats in the offshore oil drilling line of
work. In BP's case, the lack of effective cost, quality, and risk management
are interrelated and reflect a general organizational culture of being reactive
rather than proactive, as well as one that emphasizes cost cutting to, virtually,
the exclusion of all else. With this culture so long entrenched in the company,
disaster was inevitable. This paper will show the significance that
organizational culture has on how a company views and responds to risk
through the context of BP's Macondo well project. We will also show a
comparison of how risk events actually played out in the disaster versus how
they should have been addressed had they used sound risk management
processes. With each poor response to a risk event that transpired, the
probabilities of future risks occurring increased, showing the importance of
continually revisiting and reassessing the project risks.
 The immediate causes of the Macondo well blowout can be traced to a series
of identifiable mistakes made by BP, Halliburton, and Transocean that reveal
such systematic failures in risk management that they place in doubt the
safety culture of the entire industry.
-National Commission on the BP Deepwater Horizon Oil Spill in their Report to
the President, January 2011

Background
The Deepwater Horizon rig, located at the Macondo well in the Gulf of Mexico,
exploded as a result of a blowout on April 20, 2010. Eleven crew were killed,
17 injured, and nearly 5 million barrels of oil leaked from the well that took
three months to cap, representing the largest oil spill in the history of the
petroleum industry. U.S. President Barack Obama ordered a commission to
investigate the cause behind the disaster and in January 2011, the final report
was sent to the President. The commission found that the management of
British Petroleum (BP), Halliburton, and Transocean had failed to manage the
risks of the project (National Commission, 2011, p. 90).

Learning Objectives
Through the context of the BP Deepwater Horizon disaster, we will show how
impactful an organization's culture is on an organization's risk management
strategy, including how integral cost, quality, and risk are in the decision-
making process. The following aspects of managing risk on a project will be
explored and should be taken into consideration during risk planning:

 What are the characteristics of a risk-seeking organization?

 The importance of understanding your organization's risk tolerance level and
attitudes toward risk management. By knowing this tolerance level up front, the
project manager is in a better position to influence how risk can be managed.
 The effect of high risk tolerance on the approach to quality; how it lends itself to
reactivity rather than proactivity; and a tendency to ignore conformance to
quality (in the Cost of Quality framework).
 How a reactive approach to risk can be far costlier than planning for risk.
 Risk events are cumulative and that failure to respond to earlier events will
increase later events in both probability and impact.

Company Overview
BP PLC, headquartered in London, England, is one of the world's largest
companies engaged in oil and natural gas acquisition, refinement, and supply
and operates in over 80 countries. Its history began with oil found in what was
then Persia in 1901. In 2010, BP was the world's 4th largest company in terms
of revenue. They were listed 75th on Interbrand's top 100 brands in 2005,
denoting them as a strong and visible brand. Its stock price on April 16, 2010
was US$59.88/share (BP PLC ADR, 2012) and their earnings in the first
quarter of that year were US$5.6 billion (The Risky Business, 2010, p. 31). By
anyone's measure, BP had been doing very well.

Why Did This Disaster Happen?

Organizations have different utility preferences, or risk tolerance levels. What
may be considered a high risk for an organization that is risk-averse may be a
medium risk for a risk-neutral or risk-seeking organization. This preference, in
turn, influences the way an organization manages risk. The Project
Management Institute (PMI) denotes this within the Plan Risk Management
and Identify Risks Processes, where risk attitudes and tolerances are shown
as inputs within the Enterprise Environmental Factors value (Project
Management Institute, 2013, pp. 314, 315, 323). Acceptable risk is influenced
by many factors, including the perception of risk reduction costs versus
benefits, time-dependence, regulations and industry standards, and training
(Manuele, 2010; Pinheiro, Cranor, & Anderson, 2011).

A Risk-Seeking Organization
Organizational culture had an enormous impact on BP's approach to risk in
2010. With a very high tolerance to risk, they would be considered a risk-
seeking organization.
Hillson and Murray-Webster (2005) characterize a risk-seeking organization
as being willing to accept threats passively or rely on reactive actions if threats
 do materialize. There is a lack of commitment to taking proactive actions and
a tendency to take shortcuts where possible. Additionally, there's a tendency
to downplay threats and be overly optimistic about opportunities. Further,
there is more emphasis placed on probability than on impact when assessing
risk.
What makes BP risk-seekers includes a multitude of factors, such as a
deeply-entrenched culture of valuing cost over quality, minimal financial
repercussions in operational failure, minimal independent oversight of
operations, and deep cash reserves. All these factors together enabled the
organization to accept risk events as standard operating procedure rather
than proactively identifying and managing risk.
As an example, a BP 2007 internal report described unprecedented levels of
issues and accidents and a pervasive culture of “unwillingness to stop work
when something was clearly wrong” (Jennings, 2010). This corroborated the
general culture of the company when a survey of the crew at the Macondo
well, weeks before the April 20th incident, showed that 46% of crew members
feared reprisals if they reported an unsafe situation (National Commission,
2011, p. 222).
Revenues and cost cutting were unquestionably the driving force behind BP's
decisions and risk tolerance. Cost cutting became a common theme behind
the causal factors of a series of incidents at BP:

 In 2005, at a BP refinery in Texas City, Texas, 15 employees were killed and

170 injured in an explosion. OSHA subsequently found 439 violations in
investigating (it had already failed to comply with 271 regulations just prior to the
accident – none of which had been addressed) and fined BP US$87 million, the
largest in OSHA's history (Jennings, 2010). The Chemical Safety Board (CSB)
concluded that cost-cutting had played a role in BP's failure to address the
violations. Exacerbating the problem was a company directive in 2004 to cut
budgets across the board at all refineries by 25%.
 In 2006, a BP pipeline at Prudhoe Bay, Alaska burst, spilling 267,000 gallons of
oil. The cause was the piping, which had corroded and was three years overdue
for replacement. Industry standards required replacement every five years
(Jennings, 2010).
 In 2008, BP experienced a minor oil spill (193 barrels) in the Gulf on the Atlantis
rig. The contributing factor was the decision that needed repairs to a faulty
pump could be put off in the context of a tight budget. A BP safety officer told
investigators that leadership wouldn't question a delay in repairs because, “You
only ever got questioned on why you couldn't spend less” (Jennings, 2010).
The Effect of High Risk Tolerance on the
Approach to Risk and Quality
With an emphasis on costs to be as low as possible, and with schedule slips
merely representing additional costs, quality at BP was the one constraint that
could be sacrificed. Quality assurance in particular (the activities involved in
ensuring that appropriate quality processes and procedures are being
followed (Project Management Institute, 2013, p. 242)), was always
subordinate to achieving cost and schedule goals. In 2004, then Secretary of
State James Baker, who headed the CSB investigation into the Texas City
explosion, found “toleration of serious deviations from safe operating practices
and apparent complacency toward serious process safety risks at each
refinery” (as cited in Jennings, 2010). This behavior continued into 2007 when
the CSB reported in their investigation to the Texas City explosion that “senior
executives did not adequately address major hazard risk or process safety
performance” (as cited in Cohen, Gottlieb, Linn, & Richardson, 2011).
The Cost of Quality is a concept that describes the costs incurred through
conforming to quality activities, such as training costs, audit costs,
maintenance and prevention costs, and testing costs. Costs of not conforming
include repair and rework costs, warranty costs, lost time, excess inventory,
and in severe cases, the costs to the environment, brand damage, and
litigation costs. We've shown that BP has consistently borne the cost of non-
conformance and we will now show the rationale that existed for non-
conformance with respect to the Macondo Well project.
When planning the project, BP had several proactive measures they could
have invested in to minimize the impact of a potential well blowout. For
example, they could have built a relief well which would have decreased the
time to cap a blowout from weeks (or in the Deepwater Horizon case, months)
to days (Hagerty & Ramseur, 2010). However, BP was not keen to invest the
additional US$100 million (Fountain, 2010) and elected against it.
They also could have paid US$500 thousand for an Acoustic Switch (Gold,
Casselman, & Chazan, 2010) which would have provided an additional means
of actuating the wellhead's Blow Out Preventer (BOP) if the standard method
(a control pod on the BOP) was damaged. A BOP will sever the rig from the
drill pipe in the event of a blowout and cap the pipe so that further oil doesn't
leak.
Finally, they could have paid US$50 million for a Capping Stock, which is a
backup device should the BOP fail to function. BP invested in none of these
options. They were not regulatory requirements by the United States and were
viewed by the company as optional.
A cost/benefit analysis on whether to include a number of proactive measures
while in the planning stage of the project likely included the knowledge that
their liability would be limited in the event of an accident. The Oil Pollution Act
of 1990 placed total liability in the event of a spill to US$75 million (The Risky
Business, 2010, pp. 2, 5). In addition, the United States allowed corporations
to write off punitive damage fines on their taxes (The Risky Business, 2010, p.
3). US$75 million is an inconsequential number to an oil company the size of
BP, costing less than a relief well, and the tax loophole makes it even more
so.
From a regulatory point of view, BP had received an exemption from doing an
environmental impact study by the US government, which would have
required them to provide details on how they might control a potential spill
(McQuaid, 2010). In addition, the Minerals Management Service, which is
tasked with overseeing sea drilling operations in the Gulf, was understaffed
and under-equipped to perform such activities (National Commission, 2011,
pp. 76–77). Knowing oversight was minimal, BP would be confident in
knowing they could run the project as they saw fit.
The abundance of cash reserves was another factor allowing them to tolerate
risk. Aswath Damodaran in his book, Strategic Risk Taking: A Framework for
Risk Management (2008, p29), notes how companies with large cash
balances and access to capital markets are much better able to survive risks
and, consequently, are more comfortable with risk-seeking behavior. Cash
was not an issue for BP, who were enjoying in the first quarter of 2010, profits
of US$93 million each day (The Risky Business, 2010, p. 4). Their cash
position was so great, in fact, that they were able to self-insure the project
(Lack of Major, 2014). In 2010, they held US$1.35 trillion in oil reserves (18
billion barrels), which could be sold to another oil company for liquidity
purposes if necessary (Schoen, 2010). In this past year (2014), they are
rebounding from the disaster nicely, generating US$32.8 billion in operating
cash flow (Ciura, 2015).
Knowing all these things, the company surely must have seen little cause for
spending millions in speculative quality conforming, preventative measures.
Past failure expenses (fines) had been easily absorbed, as shown in Texas
City, Prudhoe Bay, and the Atlantis, for instance.
Enter the Macondo Well Project
It's been established that BP's culture is one that values doing as much as
possible for as little as possible. With that in mind, it's worth noting that the
Macondo well project had a budget of US$96.2 billion and was scheduled to
take place in 51 days. The effort began in January of 2010 and the explosion
occurred in April. The project, at the time, was six weeks behind schedule and
US$58 million over budget (National Commission, 2011, p. 2). Facing such
time and cost constraints, it is not difficult to conclude that decisions had been
made in haste.

Deepwater Horizon Blowout: Several Key

Causes and Effects
The National Commission Report (2011, pp. 114–115, 117–118) identified the
factors described as causes (risks) in Exhibit 1 as being among those
contributing to both the probability and the impact of the Deepwater Horizon
explosion. For brevity's sake, we are highlighting just these three, though
there are numerous additional factors as well. A simple cause and effect
diagram (also known as a fishbone or Ishikawa diagram), useful for
identifying, assessing, and understanding the root cause of risks (Project
Management Institute, 2013, p. 236), may have provided the necessary
insight into the appropriate risk quantification and response at BP. The Exhibit
1 causes could have been used as input to, or in conjunction with, a cause
and effect diagram.

Exhibit 1: Cause and effects of threats to the Deepwater Horizon rig.

Proper risk management would have unquestionably reduced, if not
eliminated, the probability of a blowout. In fact, the very first conclusion stated
in the National Commission's report (2011, pvii) was, “The explosive loss of
the Macondo well could have been prevented.”
The risk register that BP should have used to address the above risks would
be similar to the one in Exhibit 2. The risk is stated, along with its trigger or
signal that the risk event is imminent. Sample probabilities and impacts and
recommended risk responses are also stated. Once project execution begins,
the risk triggers can be monitored and if detected, the documented response
 placed in action. Of significance to note is that as one poor decision is made,
it increases the probability of future risks down the road. The impact of
cumulative risks was a fact that BP hadn't considered or anticipated. As was
stated in the National Commission's report (2011, p. 115) to the President,
“Each of the mistakes on the rig and onshore by industry and government
increased the risk of a well blowout…the cumulative risk that resulted from
these decisions and actions was both unreasonably large and avoidable.”

Exhibit 2: Sample risk register for BP's Macondo well project.

What Actually Happened With Respect To

These Risks
One week prior to the accident, the BOP was accidentally damaged (Pelley,
2010). Portions of the rubber seal broke apart and were washed up the drill
pipe on board the Deepwater Horizon. In addition, one of the sensors on the
control pod was not functioning due to a worn battery and the other wasn't
functioning due to a defective solenoid valve (National Commission, 2011, p.
115). No action was taken by those on board (Pelley, 2010). Recall Hillson
and Murray-Webster's (2005) characterization of risk seekers tending to
downplay threats; this was most certainly the case here. One week prior to the
blowout, the project team had failed to recognize risk triggers for a major
threat. As a result, both the probability and impact of this risk has increased,
as remedial, preventive action is now not an option. The risk has been
accepted.
Regarding the cement risk (Exhibit 2, Risk 2), both independent testing and
Halliburton's internal testing showed that the type of cement that Halliburton
created for this job was unstable (National Commission, 2011, pp. 101–102).
Testing occurred between February and April with only one test passing.
Although the initial test results were sent to BP, final results (showing
instability in the cement) were never communicated to the project team until
April 26th, one week after the Deepwater had blown up (National Commission,
2011, p. 102). BP had elected to use the cement, regardless of knowing the
final test results and had, consequently, missed a risk trigger for another
major threat. Of significance also, the probability of this risk occurring has now
increased (although BP is not aware of this).
Regarding Risk 3 (Exhibit 2), BP had poured the cement and done a
preliminary displacement test. Essentially, if the amount pumped into the well
is equivalent to the amount pumped out, it is an indication that the cement
plugs used to seal the well were holding up. However, a thorough evaluation
would determine this conclusively. Such an evaluation would have determined
if there were channels in the cement (thereby creating instability) and whether
the cement had bonded correctly. If errors were found, remedial action would
be needed. Although the contracted Schlumberger team was ready and
available to perform the evaluation test, BP decided there was no need to
perform it based on the displacement test results. The team was sent home,
saving schedule time and US$128,000 (National Commission, 2011, pp. 102–
103). We now have seen another opportunity to detect a risk trigger (results of
the evaluation test) disappear.
As we now know (as reported in the National Commission Report (2011), the
cement job did not hold up. The result was a blowout. The BOP failed to
operate and did not seal off the well. Flammable gas quickly overwhelmed the
Deepwater Horizon rig and caught fire. Efforts by the Coast Guard to douse
 the flames were to no avail and the rig sank to the bottom of the ocean two
days later. The well continued to release oil for another three months before
BP finally purchased and installed a Capping Stock and built a relief well.

It's Almost Always Cheaper to Conform to

Quality
Although BP's corporate culture was one of operating within a reactive
environment with the hopes of keeping costs as low as possible, they are now
learning that upfront spending (i.e., conforming to quality) that takes risk into
account from both a schedule and budget perspective, will actually save
money in the long run (not to mention lives). BP was never oblivious to risk;
their annual reports (Annual Report 2009, 2010 and Annual Report 2010,
2011), are proof that they're aware of the various threats in their line of work.
However, their intent on prioritizing costs and revenues above all else has, to
them, been a gamble that they felt they could take on. Up until the Deepwater
Horizon event, there had been no threat that, even if faced reactively, they
couldn't absorb financially. However, on April 20th, 2010, they pushed the
gamble too far. Here are some of the costs that BP has since had to bear:

 On June 25, 2010, BP's stock price fell to US$27.02 (BP PLC ADR, 2012). They
lost US$30 billion in stock value by year-end.
 Paid US$53.8 billion as of July 2015, which includes US$5.5 billion in civil court
fines and US$18.7 billion for federal and state claims. They are still facing over
60,000 claims from private businesses (Huddleston, 2015).
 Sold US$45 billion in assets to help pay for cleanup efforts (Jackson, 2011).
 Suffered a net loss for 2010 of US$17 billion (Jennings, 2010).
 CEO Tony Hayward was forced to resign because he would become “a walking
public-relations disaster” (Business: The Wages of Failure,, 2010).
 Damage to the BP brand. Interbrand stated (Stucky, 2010) that the Deepwater
Horizon incident is strongly associated with the BP brand and that “the negative
response is long lasting.”
 Were forced to cease all operations in the Gulf of Mexico for 18 months, being
allowed to resume again in October 2011. This represented a 12% drop in
production (Jackson, 2011).
 Transocean lost the Deepwater Horizon rig, valued at US$350 million (National
Commission, 2011, p. 2).
 BP and Transocean have pled guilty to 14 criminal charges.
 And the largest cost of all: Transocean 10 ten men; BP lost one.

Practical Implications and Lessons Learned

We've shown a very significant example of the effect that an organization's
culture has on the way in which it views risk through the context of BP's
Macondo well project where the Deepwater Horizon rig suffered a blowout
and subsequent explosion. The decision makers for the Macondo Well project
did not adequately consider the impact of risks accepted with the specter of a
late and over-budget program foremost on their minds. We've reviewed three
of such decisions and showed how these events could have been assessed
and documented in a sample risk register along with recommended responses
and contingency plans.
A risk-seeking organization will often choose to accept risk rather than pay for
preventative measures up front. We've shown that among the factors that led
BP to be risk-seekers included a deeply entrenched culture of valuing cost
over quality, which was evidenced by a number of other costly accidents in
the years prior to the Deepwater Horizon disaster. This culture, combined with
past experience of suffering quite minimal financial repercussions in previous
operational failures, along with the knowledge that there would be minimal
independent oversight of operations in the Gulf, all contributed to their
collective mindset. Finally, deep cash reserves made it easier to absorb and
accept threat.
It behooves the individual, particularly those entrusted with a critical project
where lives, property, and our environment are at stake, to be aware of the
potential stakeholder risk tolerance level—what might be known quite
innocuously as Enterprise Environmental Factors—but are not to be
underestimated. It behooves this individual to be aware of these factors in
such a situation and become an ambassador for effective risk management.
Being cognizant of the culture puts the project manager in a better position to
strategize and lobby for effective risk management.
The cost for a reactive risk acceptance policy in the long run is far more
expensive than the option of applying solid, proactive risk management
practices. One hopes that the average project would not have as dramatic an
outcome as the failed Macondo Well project, though the lesson can still be
applied; there's a greater ROI on managing risk proactively, rather than
reactively. Nowhere is this case more evident than in this particular situation.
But for the millions that BP could have spent up front, they have now lost well
over US$100 billion and still counting.
Another lesson learned is that a poor response to a single risk event by itself
may not necessarily amount to a large impact or increased probability to a
future threat, but a succession of unheeded and unplanned-for risk events will.
After each risk event, all future risk events should be re-evaluated for
probability and impact, and an appropriate response taken. This is even more
critical for environments such as offshore oil drilling where the impacts of a
poor decision can be catastrophic. Where the stakes are this high, the risk
management processes should be all the greater. BP, Halliburton, and
Transocean have paid dearly to learn this lesson—but none so dearly as the
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© 2015, Joanne M. Greene-Blose
Originally published as a part of the 2015 PMI Global Congress Proceedings –
Orlando, FL, USA