Risk Management Analysis in the BP Oil Spill of the Gulf of Mexico - Case Study Example

Name Tutor Course Date Risk Management Analysis in the BP Oil Spill of the Gulf of Mexico Executive Summary The aim of this report is to analyse a case study that illustrates the consequences of failed risk management procedures. The selected case study will be included in an Internal Safety Manual, that targets to assist members of staff to appreciate the areas of major risks in the firm and the importance of adhering to risk management procedures. The BP oil spill in the Gulf of Mexico is an appropriate and comprehensive illustration of major failures in risk management procedures and the consequences of such actions. This research draws attention to the three major areas of laxity by major players in the construction of the Macondo Well project. In particular, it focus on professional slackness, use of improper and untested construction material, and poor management decisions. Further, it points out to how the lack of prompt and effective communication, significantly contributes to a disaster that could have been averted. The report tabulates the aftermath and consequences of negligence in the Macondo project, which was a capital intensive project and was expected to generate huge profits. The failure of the project culminated to loss of human life, loss of an investment opportunity and capital, loss of public and political goodwill and the resulting legal obligations. The report concludes that safety and precision ought to out-weigh the desire to rush a project, to cut costs or ignore vital expert advice. This project had adequate risk identifiers and procedures. However, management and staff members underestimated the risk and failed to implement safety procedures. Introduction The BP oil spill in the Gulf of Mexico is a classic example of the principle of risk appetite in risk management. The British Petroleum company took a big risk in a bid to acquire more oil wells and consequently increase its market share and profits. Daily operating costs of the Macondo well was estimated at one million US dollars with and estimated total cost of ninety six million (Freudenburg and Gramling 115). Although this was a positive risk, failure to achieve projected output could also led to massive losses, as was the case here. The risk faced in this study is categorized as an unusual event with few or no historical illustrations to refer to. . However this does not negate the responsibility of BP and other stakeholders were required to assess, monitor and control the unforeseen risk. Financial, research and human resources should have been allocated to this project to mitigate threat and unforeseen outcomes. The risk encountered in this study was driven by time constrains, human resource negligence and financial pressure. The British Petroleum company had undertaken several expansion projects in the United States of America in the past six year and invested over 45 million dollars (Freudenburg and Gramling 120). One such venture was the Macondo Oil Project in the Gulf of Mexico. This was a positive risk plan that had a budget estimate of ninety six million dollars. It was expected to generate a total revenue of thirty billion pounds. Upon completion, the expected output of crude oil was five million barrels. The task was projected to end in the month of April in the year 2010. Notwithstanding the BP management had serious concerns pertaining to the project running behind schedule. At the time, they were looming behind by forty five days. Their worry was justified since the project had a daily operating cost of one million dollars. Case study BP contracted Deepwater Horizon to construct the Macondo Oil Well in the Gulf of Mexico. In addition, it subcontracted Halliburton to design the cement plug formula. The project entailed building an oil drilling platform referred to as a rig. From the rig, a massive well of five thousand feet was dug to get to the crust of the earth (Freudenburg and Gramling 12). The rig was linked to the well using huge steel metal pipes that run to the earth’s crust. Primarily, the steel metal pipes descend to a depth of one thousand five hundred feet to the seabed. Subsequently, it extends by another four thousand feet to the earth’s crust, which holds the crude oil deposits. After building the well, the Deepwater Horizon crew carried out a temporal abandonment test (Freudenburg and Gramling 23). Here the well was left idle for several weeks, to establish if it was stable and if it meets the safety standards. Once the team was satisfied that the well was safe, they proceeded to the final stage of construction. In this stage of the construction, the well was aligned with a long string known as the tapered production casing. This casing was held at the centre of the well using centralizers (Freudenburg and Gramling 19). This step was essential in ensuring that when cement was poured around the casing, it held firmly into position, and that the spread was done evenly. Uneven cementing would pose the risk of infiltrating the well with gases and oil. The cement foam was then carefully poured round the casing to seal the bottom of the well and created a cement plug. The cement plug is also used to control pressure in the well. The pressure in the well is supposed to be lower than its surrounding. This enables the crude oil deposit which is operating at a higher atmospheric pressure, to go up the well during extraction. Oil and gas are supposed to enter the well only when the miners are ready to extract (Freudenburg and Gramling 65). If gases and other debris go into the well at any other time, it is an indication that the cement plug is broken and unsuitable. Since space in the well operates in a controlled environment, the pressure inside the well ordinarily remain constant. The bottom of the Macondo Well was fragile, hence Halliburton opted to nitrify the cement foam (Freudenburg and Gramling 93). However, subsequent tests established that nitrogen would not remain stable in the Macondo well, since the density within, varied from the upper to the lower levels of the well. Halliburton raised this concern with the BP management who insisted in using the nitrogen cement plug. Halliburton took soil and fluid samples from the well back to their onshore laboratories and carried out a series of tests. The tests established that nitrogen was escaping from the cement foam and they concluded that the nitrified cement was unsuitable and unstable. Unfortunately, they did not sound an alarm with the BP management but instead mentions it casually. In disregard of the cement suitability test results, Halliburton proceeded with the nitrogen cement formula and installed the cement plug with its faults. Risk Management Issues Numerous discrepancies did arise prior to the Macondo blowout and subsequent oil spill into the Gulf of Mexico. The initial inconsistency occurred when the negative pressure test was carried out to establish if the well had any leakages (Freudenburg and Gramling 97). The team observed different pressure readings in the drill pipe and kill switch line. The drill pipe reading showed a steady rise in pressure, of up to one thousand, four hundred pounds per square inch. In the meantime, the kill line that connects the rig to the well, was blocked and showed a faulty constant level of pressure. Instead of carrying out a comprehensive investigation, the Deepwater Horizon team explained the variance using a vague bladder effect theory. They cited that, like the bladder, the seabed water movement asserted pressure on the steel pipe valves and thereby raising the pressure in the well (Freudenburg and Gramling 98). In addition, the offshore crew inserted six centralizers into the tapered production casting instead of the twenty one centralizers that the onshore office had recommended and supplied. The team leader cited that fitting fifteen more centralizers would take them ten more hours and the project was already behind schedule. In addition, against the advice of Halliburton engineering team, who were responsible for the cement plug formula, British Petroleum gave a go ahead to use a flawed nitrogen cement foam formula. Usually, oil wells are fitted with a safety measure known as the Blowout Preventer BOP. It is connected to the Emergency Disconnect System EDS which shuts the connecting valves during emergencies and enables the rig to separate from the well and avert explosions (Freudenburg and Gramling 77). During emergencies, the crew members can activate the EDS using a switch. If that fails to work, it is an indication that connecting cables have been damaged. This triggers the system to automatically switches to the “dead man function” when it senses lack of communication with the rig. Like the blowout preventer, the dead man function separates the rig from the well. In the moments leading to the Deepwater Horizon Blowout, pressure kept mounting in the piping of the well. The team members were oblivious of the loaming danger and failed to pick numerous safety indicators that would have prompted them to cut off the rig connection from the well. The high level of pressure was being prompted by gases making their way into the well through leaks on the cement plug. This pressure forced natural gases such as methane and oil move upwards in the well channel (Freudenburg and Gramling 101). Suddenly, debris erupted out of the steel pipes and shot up high above the rig. The methane gas found its way into the rig and was ignited by a spark in the engineering room causing a blast and subsequent fire outbreak. The stun team members rushed to activate the emergency disconnect but it failed to work. It was later established that the battery that activates the dead man function was not charged and could not function at seven volts (Freudenburg and Gramling 111). At this point, the mega Macondo well project crumbled and collapsed. Repercussion Following the blowout of the Macondo well, several crew members were severely injured and others were fatally killed. On this fateful day, the rig had one hundred and twenty crew members on board. Fortunately, most of them escaped using rescue boats before the blast became fatal. Regrettably, eleven crew members lost their lives and their bodies have never been found. Various rescue teams were dispatched to the scene and attempted to put off the wild fire in vain. The rig sunk leaving behind an eruption of crude oil from the earth’s crust into the open sea. The destructive oil spill lasted for eighty six days (Freudenburg and Gramling 154). As a result, lives were lost, livelihoods were cut off, the ecosystem was destroyed, the environment was adversely affected and billions of dollars lost. The spillage released more than five million barrows of oil into the sea and sea shores (Freudenburg and Gramling 160). BP was helpless to stop the discharge. Analyst observed that British Petroleum had a poor safety operation culture. Failure to properly manage risks in this study caused the petroleum company billions of US dollar in civil suits (Freudenburg and Gramling 161). In addition the firm lost public and political goodwill. The negative publicity the share index of the firm to rapidly drop by fifty percent. In addition, the company had set aside ten billion pound for dividends allocation but was unable to pay share holds. This was because the civil suits were projected to cost a total of twenty million. The petroleum firm was also required by government to clean up the over five million barrows of oil that had settling in the Gulf of Mexico and the American shores line (Freudenburg and Gramling 166). At the end of the cleaning exercise the company was counting losses in operating costs. Following public pressure, the President of the United States, Barack Obama held a series of meetings with BP management and insisted that they set aside twenty million US dollars to pay for damages (Freudenburg and Gramling 78). That year, BP was unable to pay shareholders the ten million dollars that was set aside for dividends. Continued negative publicity and the prolonged delay in stopping the spillage caused the value of BP share to drop drastically. Consequently, lenders were apprehensive to extend further credit in fear that BP would not be able to repay its loans. Likewise, debtors demanded to be paid in advance for fear of bad debts. BP was at the brink of collapse. Conclusion and Recommendations British Petroleum Company, the rig construction and installation company – Deepwater Horizons and the cement formulating company Halliburton, failed to see the looming risk of unusual events. Communication between the major stakeholders concerning major decisions was slack and casual. BP management dismissed Halliburton’s concerns that nitrogen induced cement was unstable in this particular well due to variance in density. BP did not carry out independent suitability tests to support their opposing Halliburton’s recommendation. On the other hand, Halliburton team carried out tests that confirmed there fears that the nitrogen cement foam was unstable. Instead of resigning on ethical and safety grows they installed the cement flag using a substandard formula. Deepwater Horizon team displayed the lack of chain of command and serious negligence of risk management procedures. The crew initiated a negative pressure test, which is routinely used to test for safety of the construction and failed to give a proper diagnosis based on facts and not assumptions. Pressure was monitored in two different areas in the same well and showed inconsistencies instead of being uniform. The drill pipe clearly showed that pressure was mounting and a crew member pointed out that this was an indication that the installation job had flaws. At this point, the risk should have been prioritized, the well should have been shut and further investigation carried out. The Deepwater Horizon team did not assign any staff to monitor safety measure equipment. The blowout preventer had a malfunction and failed to work during emergency. The extra precaution that is usually put on the system to sense disconnect with the rig and automatically activate the dead man function also failed. No team member was assigned to charge the batteries used by the emergency disconnect system. Hence, the safety equipment was dysfunctional in two different vital points. The Deepwater Horizon offshore team should have constantly informed the management team of any risks identified. While deliberating appropriated measures, the team should have been conscious of the importance of safety. In this regard, when risks are identified the well should be shut and investigations carried out. Furthermore, any deviation from the original design of installation, should be approved on the management level of the installation team as well as contracting team. Work cited Freudenburg, W. R., & Gramling, R. (2011). Blowout in the Gulf: the BP oil spill disaster and the future of energy in America. Cambridge, Mass, MIT Press. Read More