I don’t have any inside information. I don’t know any more than is available in press reports 1), 2), and 3).
What do I know???
I know there is a lesson that all senior executives should learn.
And I know the pipeline leak is costing BP much more than they ever imagined.
Let’s look at some estimates of the cost…
The most obvious is the lost production. The hit to BP’s bottom line. If they loose 200,000 barrels of production (1/2 the field) for 20 days, that equals 4,000,000 barrels of oil that will not be sold. At a price of $70 per barrel, that is $280,000,000. That’s a sizable hit in a quarters earnings. But that is just the tip of the iceberg of costs.
Perhaps the biggest loss to BP is that this spill could provide the bad publicity that keeps drilling in the Arctic National Wildlife Refuge from happening. If it is assumed that BP would lead that effort, an estimate of the loss is 1,000,000 barrels per day of production over a decade or more. A quick calculation …
1,000,000 barrels per day X 365 days per year X 10 years X $40 per barrel = $146 Billion.
But there is even a bigger loss to the US and world economy. The loss of the ANWR oil supply impacts the economy. Oil prices went up 3% on the news of a loss of production of 400,000 barrels per day. If the loss of 1,000,000 per day is figured into the price of oil, that’s a 7.5% increase in the price of oil over a 10 year period. I’m not an economist, but I can make an attempt estimating the impact on the average family…
If I assume $3 per gallon gas and the price is passed through to consumers, that’s a 22.5¢/gallon price increase over 10 years. If families in the US fill up twice a week at 15 gallons per fill up, that’s over $300 per year per family. That might sound small. But would BP reimburse all of us? All they would have to do is make a car payment once a year for every family in the US. Or maybe they should buy a new car for 10% of the families every year. I think that would make BP a bigger auto supplier than GM or Toyota. Got the idea … big impact!
Of course there is also a more personal side to this story. Within BP a big impact like this won’t go unnoticed. Somebody’s career – or maybe several careers – will be ruined.
And what about BP’s corporate reputation for protecting the environment? Didn’t they pay for a bunch of commercials about how environmentally friendly BP is? Kiss that PR champaign goodbye. I’ve already seen pictures of workers cleaning up oil from the pristine tundra. This probably won’t be as bad – PR wise – as Exxon’s Valdez oil spill (the North Slope is more remote and there aren’t very many cute animals), but it will be a big black eye.
So what should senior management (CEO’s, COO’s, CFO’s, …) be learning?
Give me your opinions as comments by clicking on the comment link below…
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Was it Ben Franklin that said:
“An once of prevention is worth a pound of cure.”
I would like to know what decisions were made about the maintenance strategy for the pipeline and how high up the management chain the decisions were made.
Also, I would like to know if “concerns” about pipeline maintenance were passed up to the appropriate level of management. Is there a system to evaluate the risk involved in the decisions about concerns and maintenance strategies? Does senior management believe in the system and keep informed about high risk decisions?
Finally, I would like to know:
What previous incidents or near-misses were investigated?
How they were investigated?
What were the root causes and corrective actions from those investigations?
How involved was management in those investigations?
Corporate senior management might have to direct changes in how site senior management and middle management handle problems. Senior corporate management may also want to be more informed of issues with serious HSE or bottom line risk for the corporation (so that they can assure that the decision are in line with their risk tollerance).
I would be especially interested in this after senior management at BP was surpised by the explosion at the BP refinery in Texas. It seems that BP corporate senior management is being surprised too frequently by HSE issues.
Senior management should never use the excuse … “If I had only known…” It is their job to know.
Wow – good point about risk management!
It seems somewhat obvious that this event is the outcome of a flawed decision process. But, the fundamentals of pipeline management are so well known and established (including oversight by the DOT) that it would appear this is a breakdown at lower levels outside of structured risk based strategy discussions. Viewing the severity of the corrosion sample displayed last week, the scenario comes down to two possibilities:
1. BP knew it had a corrosion problem, and did not take the appropriate action to address it, or;
2. BP did not know it had a corrosion problem, due to the absence of information from testing and examination of the pipeline.
More than likely, it is a combination of both, as time goes on more information will come out from those who knew about the corrosion, and who they told. Why no action was taken will most likely fall on individuals who made the decision to avoid the continued costs associated with “smart pigging” the standard method of examining pipelines for defects, due to cost concerns.
As has been said in this discussion, the true risk of this decision was clearly not understood at the time, the point about lost credibility and potential future pipeline construction is significant. This ligh level risk view is not a common consideration at lower levels when they are making cost decisions in the absence of clear policy guidelines and corporate standards for pipelines.
One of the solutions to this would appear to be robust policies at both the corporate and government levels, similar to DOT guidelines for pipelines, extended to within the fencelines of facilities.
This SHALL, vs. SHOULD mandate would prevent poor decisions based on cost avoidance by lower level managers, which, I believe, will be one of the major causes of this unfortunate event in Alaska.
This was an oil field feeder pipeline to the TransAlaska Pipeline.
Was this considered on-site or off-site?
Did DOT regulations apply?
Here is a link to an NBC story about a possible criminal investigation of the BP pipeline leak.
Here is a letter from the US DOT about corrective actions for the spill that happened last March.
Does this change anyone’s comments?
Mark
More links.
First, this is how BP gets a black eye from this type of environmental incident.
And here’s another black eye. (How many black eyes can you have?)
Second, here is a BP story in a trade journal about the March oil spill. There is some interesting information in this article that may be very revealing when you read the NBC story from the posting above.