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“What if” Oil and Water Do Not Mix – Lessons from BP

By Denise Harrison, Vice President

Strategic Planning Expert

Strategic planning and risk assessment – yes, you must look at what would happen if…If you fail to assess and mitigate risk during strategic planning you could end up with a BP-like disaster.  While the exact causes of the Macondo rig disaster are not yet known, it is nonetheless fair to ask: “Was this a Threat or did BP shoot themselves in the foot?” Well, probably both actually. 

THREATS

Threats are events that occur due to external forces outside of your control and which significantly impact your business.  Examples include recessions, hurricanes, the death of a key employee, and/or competitors merging (to name a few).  In BP’s case, the drilling team seemingly did not adequately prepare for the oil reservoir pressure exceeding the well’s engineered capacity, and the resulting blow-out. What should they have done to mitigate the risk? Here are five suggestions: your strategic planning should examine each and select the best mix. 

Prevent

BP first and foremost should have considered how they could prevent a blowout from happening:  this well was an exceptionally deep well, so engineering standards should have been set high.  Cutting costs or speeding up the timeframe for the well to come on line should have been weighed against the high-risk nature of a deep-water well.  High risk?  The depth of the well makes adjustments difficult because everything needs to be adjusted by remotely-controlled tools and vehicles in conditions where the significant water pressure adds complexity to any operation. 

Reduce Exposure

Plans should have been in place for a well blowout, as well as plans for evacuation and spill containment.  Evaluation:  all but eleven people were able to evacuate the drilling rig.  But the disaster far exceeded what happened on the rig platform.  The disaster on the surface was the first hint of the catastrophe that was happening beneath the surface.  As has become apparent, BP did not have adequate plans in place to mitigate the massive amounts of oil that began spewing from the well.  

Early Warning

Yes, there apparently were early warning signs – and these should have been signals to slow down the well completion process; not pour the mud and the cement until the pressure was understood, slowing down so that adjustments could be made that would insure the integrity of the well.  If early warning signs had been heeded and appropriate procedures been in place, the drilling team might have taken the time to truly assess what was really happening a mile beneath the water’s surface. 

Contingency

There are also questions with regard to the ill-fated blowout preventer: were all the checks done completely; were some shortcuts taken; were any and all changes to the design fully tested before the blow-out preventer was installed?  Was the effectiveness of redundancy exploited fully? 

Hedge

Typically, we look at ways to hedge when mitigating risk, but there are not necessarily ways to hedge every threat.  In this case, drilling could have been stopped and other wells could have provided oil.  Also, relief wells could have been drilled when the integrity of the well was suspect. 

Had BP really examined their threats, they would have had better plans in place and might have prevented the disaster which will render the well useless and cost BP billions of dollars in funds for clean up.  It is important when developing threats that people understand what the implications of the threat could really look like – so scenario planning might be in order.    For instance, a threat could be a hurricane, but you might have different scenarios for a category 1 hurricane, a category 3 hurricane, and a category 5 hurricane.  I was working with one team which identified hurricanes as a threat and the team came up with mitigating strategies for category 1 and 3 hurricanes – however, they decided that mitigating the risk of a category 5 was not possible, so a contingency plan was developed:  Evacuate and take care of the people; lock down the production facility as suggested in the plans for a 1 and 3, but understand that the people’s safety came first.  In addition, they developed a clean-up plan for after the devastation of a category 5 hurricane.                        

NOW, SHOOTING YOURSELF IN THE FOOT

Shooting Yourself in the Foot involves a self-inflicted blunder. Apparently BP did not have robust plans to mitigate the risk of the well blowout Threat.   Besides having a poor risk mitigation strategy, they also shot themselves in the foot by having only a short-term mindset which prevented them from properly investing (both time and money) in this high-risk, deep water well.  This short-term focus caused them to spend less, increasing the risk and increasing the downside consequences of the higher risk. Not only will the well be shutdown for good and the upfront investment costs of designing and drilling the well lost, but the resulting environmental disaster will also require significant spending to clean up the mess they made.  Additionally, their reputation will be tarnished forever.  Short-term thinking did not only lower this well’s future returns; it obliterated all future returns from this well, as well as cutting into BP’s future earnings and market value. 

Lessons Learned

It is important during strategic planning to think about growth and about profitable growth, but don’t put blinders on and simply chase growth and profit. Taking the time and spending the money to mitigate risk and protecting yourself from downside exposure will save you money in the long-run.  It may well spell the difference between profitable growth and unmitigated disaster.  As you develop your strategic planning, spend time on risk assessment and mitigation of Threats posed by external forces.  In addition, be sure that you take some time and identify ways that you could Shoot Yourself in the Foot, and discuss options which you might pursue to avoid losing your toes.

Denise Harrison is Vice President of the Center for Simplified Strategic Planning, Inc.  She can be reached at harrison@cssp.com.