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The major oil spills of the last forty years have necessiated the updation of Risk Management Techniques in Oil explorations
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Risk Managing Oil Explorations
Energy Risk Management Series ERM 03
Is a Risk an uncertainty?
No longer In these competitive times , when just in time supply
chain management and incremental pricing is the order of the day, risk is no longer an uncertainty.
The new Risk concept
It is a definite probability Risk is now, best defined as a distinct probability of an event that could be
either an opportunity or a threat.
Risk as an opportunity !
When it is good it is a opportunity. The drilling exploration project at the Gulf of Mexico was one such opportunity which could create billions of dollars of oil revenue for BP and its partners APC
(25% shares) and Mitsui (10% shares) in the project.
Risk as an threat !!!
When it is bad it is a threat. The explosion at the Macondo prospect in the Gulf of Mexico, that first caused the oil rig to explode, then destroyed the marine life of the
ocean, and may ultimately consume the risk taker BP was one risk that went bad, to become a
threat.
After the explosion
But it had happened before …California1969
How did it happen again… ?
The causes of failure was similar both in the California and Louisiana
disasters 40 years apart.
The Oil Cos. in the 1969/2010 spills
1969 Oil spill
Operator: Union Oil Co.Well: Dos Curados fieldDepth: 3479 feetDistance from coast 6 miles
2010 Oil spill
Operator: BPWell : Macondo ProspectDepth : 5000 feetDistance from coast 41miles
They rushed the operations
1969 Oil spill TIME RUSH Union Oil Co. had drilled the oil well in 14 days time and was speeding up the finishing operations when disaster struck.
2010 Oil spillTIME RUSHBP was behind schedule and was bypassing safety checks and cement integrity tests to speed up the operations.
They squeezed the cost
1969 Oil spill COST CUTTING UOC had used a single casing of 238 feet to cut cost. Federal Regulations needed 300 ft conductor casing and 870 feet secondary casing at that time .
2010 Oil spillCOST CUTTINGBP used a single segmented casing to cut cost, as per the Congressional enquiry report. No Federal regulations exist today but industry best practices point to a double casing norm.
And what happened ?
1969 Oil spill A blow outAfter worker’s pulled out the drill bit a spout of high pressure gas , oil and drilling mud burst through into the drilling rig.
2010 Oil spillA blow outBP overruled the written recommendations of the cementing contractor Halliburton and bypassed cement integrity tests in reckless time & cost cutting . Oil and Gas leaked through the cementing causing a blowout , an oil spurt BOP failure and an explosion.
When they capped the geysers forcibly , new ruptures appeared
through weak spots in the cementing and from the ocean floor. So the capping was successful only after relief wells relieved the pressure.
Drill & BOP superimposed . Not to Scale
And it caused a …….
1969 Oil spill Sub-surface oil spillAttempts to cap the hole and blind ram it resulted in 5 huge oil plumes to rise from the ocean floor around the rig.
2010 Oil spillA blowout followed by an explosion on the rig The blowout occurred on the BP-Transocean rig as the blowout preventer failed . Possible forced capping led to fire and explosion killing 11 people and sinking the Deepwater Horizon oil rig .
And what happened after the explosions?
Both UOC and BP went in a denial mode, understating the volume of spill, the effect on marine life and the environment.
The offenders were allowed to control access to the site and manipulate evidence.
The sites around the rig were promptly sealed off by the Oil Cos. making independent verification of spill difficult, though in the case of UOC the sealing was largely ineffective due to close proximity of site to the land.
The Oil devastated marine life and beaches
The statements by both oil majors were repeatedly misleading.
1969 Oil spill UOC StatementsInitially 120 barrels /dayRevised 5000 bpd Independent assessment 10,000 /20,000 bpd
2010 Oil spillBP StatementsInitially 5000 barrels/dayRevised 30,000 bpdIndependent assessment 35,000/60,000 bpd
BP plays the blame game
2010 Oil spill
BP remains unrepentant . It now blames both its contractors Halliburton and Transocean in an internal enquiry report, possibly in a strategy move to reduce its own legal liability. It has also launched a multimillion dollar exercise to advertise and buy out the media, the NGO’s and has even influenced news coverage on Google search.
Identified causes of failure :
•Well operators speeded up the operation•Operators ignored risk prevention procedures• Operators bypassed quality norms as per prevalent regulations or industry best practices• Operators changed proven designs to cut cost and reduce time
Only Financial Risk Planning not enough
Operational Risk Plans Are Essential Whereas BP had an excellent financial risk
planning, its operational risk management (ORM ) was totally absent. Even 90 days after the incident BP failed to submit its updated emergency plan for crisis management which is mandatory as per the regulator BOEM (previously MMS ).
Operational Risk Management (ORM)
ORM has principally three stages :Risk prevention Risk MitigationPrevention Of Risk Escalation BP failed to address all three of them adequately.
ORM must be integrated with QAP
BP flouted risk prevention operations during design, drilling, cementing, and testing of the well prior to the accident. Operational Risk Prevention procedures are normally built in the Design and Quality Assurance Plans QAP either derived from industry standards or best practices norms.
Media Feeds need Transparency
Public dealing needs transparency One of the major needs of crisis project handling is transparency. Despite a high voltage media campaign with robotics and video support, BP could not ensure transparency of feeds. It failed to develop a credible communication process and lost its brand image despite a lavish media budget, and big ticket lobbying.
Social Responsibility Is Needed
Business Practices must evolve Big Business has increasingly been accused of lack of social responsibility, as they take added risks to increase profits. There is nothing wrong in risk taking for profitability, so long as it does not adversely affect the environment and the social fabric. In short business practices must be socially responsible.
What can still save BP
Nationalism before Environment !Despite all the environmental damage it has created, the Anglo Dutch support and the loyalty of British nationals and share holders may still save BP.
Legal Process can be a savior
Legal Delays Will Help BPThe lengthy process of law in deciding such cases as seen in the Exxon Valdez oil spill will also work in its favor. So BP which failed in ORM, Media Management and Social Responsibility may still survive due to its good political and legal risk management.
Mergers and Acquisitions
Partial disinvestment or sell offBP has an extremely strong trading arm and some of the fastest selling brands in the business. Partial disinvestment of BP is possible raising added cash to pay off its liabilities on a year by year basis. A buyout by any other oil major is also possible.
Loss of Brand image
Not meeting social responsibilities and damaging the environment and livelihood of thousands of fishermen was not forgiven. It was punished by loss of brand image. This was perhaps the biggest loss of BP which overnight became the most hated company not only in the US but also globally.
Social Media Justice
Brand Image Loss is today’s Swift Market Place Justice which is more effective and telling than long drawn judicial indictments which big business try and manipulate. This takes place initially through word of mouth and then spreads through the social media. The 1969 Goo (Go Out Oil ) movement and the 2010 Boycott BP movement were such campaigns.
Higher Risk Can Lead To Both Higher Profits or Losses Risks must be managed
Time Reduction is an legitimate business objective And Cost Cutting is an effective business tool
But both increases risk of failure if not well managed So it is important for Big Oil to understand and respect
the environmental laws and ethics and manage the risks professionally and efficiently.
For Oil explorations to continue the following Risks need be managed.
Operational Risk ( ERM 03/1) Environmental Risk (ERM 03/2) Financial Risk (ERM 03/3) Social, Media, Legal and Political Risks (ERM 03/4)
References and Sources
Ecology to Economics blog Ecothrust0r at Amazon Kindle http://bit.ly/7XwAG Article in Economic Times Oil: A tale of 2 cartels Risk Managing Oil Prices Technorati Articles on Oil Exploration and Environment News CollectiveAre BP’s Risk Management Techniques Tested ? Sources : Bloomberg, Business Week, The Economic times, OPEC, The Oildrum , Telegraph U.K., Wikipedia, The Guardian, Financial Times, BBC, Daily Bahrain and U.S. Senate Proceedings. FOR ANY QUERIES MAIL TO ecothrust@gmail.com
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