Sunday, June 20, 2010

Beyond the first cause: Deepwater Horizon and the publicly traded company

Airplane crashes, the Great Recession, amputating the wrong limb, and the Deepwater Horizon eruption all have one thing in common -- layers of causation. To prevent recurrences you need to walk the causal chain. If you stop at the first cause, such as "Dr. Gordon was up to late and confused right with left", you often get nowhere - or worse.

Consider a possible causal chain in our latest whitewater times disaster. Let's assume, for the purposes of discussion, that we have the technology to cost-effectively extract Gulf oil with a "reasonable" risk of "very unwanted outcome". That presumably means a low probability of catastropic blow out and a range of effective response strategies.

Let's further assume that BP made some seriously bad decisions to save a relatively small amount of money. There's some evidence now to suggest that, even by the standards of an extraction industry, BP was unusually negligent.

The next step is to ask if this behavior was an aberration or if it was typical. If it was typical of BP, but less common at (say) Exxon (yes, hard to believe), then we should ask why. Joe Nocera suggests answers to both of these questions (emphases mine) ...
In 2 Accidents, BP Ignored Omens of Disaster - Joe Nocera - NYT
We have to get the priorities right,” the chief executive of BP said. “And Job 1 is to get to these things that have happened, get them fixed and get them sorted out. We don’t just sort them out on the surface, we get them fixed deeply.”

The executive was speaking to Matthew L. Wald of The New York Times, vowing to recommit his company to a culture of safety. The oil giant was adding $1 billion to the $6 billion it had already set aside to improve safety, the executive told Mr. Wald. It was setting up a safety advisory panel to make recommendations on how the company could improve. It was bringing in a new man to head its American operations — the source of most of the company’s problems — who would make safety his top priority...

... the interview took place nearly four years ago, after BP’s previous disaster on American soil, when oil was discovered leaking from a 16-mile stretch of corroded BP pipeline in Prudhoe Bay in Alaska. And that was just a year after a BP refinery explosion in Texas City, Tex., killed 15 workers and injured hundreds more.

Nor was the chief executive in question Tony Hayward ... the interviewee was his predecessor and mentor John Browne, who had spent nearly 10 years at the helm of BP before resigning in May 2007.

Do you remember the Prudhoe Bay leak and the Texas City explosion? They were big news at the time, though they quickly faded from the headlines. BP was fined $21 million for the numerous violations that contributed to the Texas City explosion, and it was forced to endure a phased shutdown of its Alaska operations while it repaired the corroded pipeline, which cost it additional revenue.

In retrospect, though, the two accidents represented something else as well: they were a huge gift to the company. The fact that these two accidents — thousands of miles apart, and involving very different parts of BP — took place within a year showed that something was systemically wrong with BP’s culture. Mr. Browne had built BP by taking over other oil companies, like Amoco in 1998, and then ruthlessly cutting costs, often firing the acquired company’s most experienced engineers...
... On Thursday, during his day before an angry House energy subcommittee, Mr. Hayward was confronted with the fact that BP had been cited by the Occupational Safety and Health Administration for 760 “egregious willful” safety violations in its refineries. Mr. Hayward tried to slough this off by claiming that the violations had taken place in 2005 and 2006 — before, that is, he became chief executive and brought his “laser focus” on safety.

But Mr. Hayward was not telling the truth. According to the Center for Public Integrity, which obtained the data under the Freedom of Information Act, the violations all took place between 2007 and 2010, very much on Mr. Hayward’s watch. What’s more, the company violated something called O.S.H.A.’s “process safety management standard” — which is precisely what that BP advisory panel had been charged with examining after the Texas City explosion. In October 2009, O.S.H.A. fined BP an additional $87 million for refinery deficiencies. It doesn’t sound like the company took its advisory panel’s recommendations very seriously, does it?

Or take the Deepwater Horizon disaster itself, which was preceded by so many instances of corner-cutting and poor decision-making that an accident was practically preordained. Drilling one of the deepest wells in history, the project used only one strand of steel casing, when it should have used at least two. Halliburton recommended that BP use 21 “centralizers,” which help ensure that the well doesn’t veer off course as it goes deeper into the earth, but the company used just a half-dozen. BP failed to conduct a crucial test to make sure that the cement holding the well at the bottom of the sea was sturdy enough.

And the engineers for BP on board consistently ran roughshod over subcontractors like Halliburton, who openly worried that BP was making decisions that could have catastrophic consequences. “This is how it’s going to be,” one BP engineer reportedly said, overruling a contractor on the critical question of when to replace the drilling mud — which keeps explosive natural gas from flowing out of the well — with seawater....

... Changing a company’s culture is always hard, no doubt about it. And it is especially hard for a company like BP, which has had such enormous success these last few years, reaping $14 billion in profits last year alone. For such companies, it often requires a crisis to change. Microsoft changed after its antitrust trial a decade ago. Tyco International changed after its chief executive, Dennis Kozlowski, went to jail. And chances are, BP is now going to change, too.

This time, the world’s attention will not quickly fade, as it did after the Prudhoe Bay spill. The financial hit, which several Wall Street analysts believe could top $100 billion, is going to be severe. The pressure from the United States government will be unrelenting.
If you read beyond the lede, it's obvious Nocera is furious. Oddly the fact that Hayward lied to Congress hasn't gotten much attention elsewhere. Please note the petty fines BP received, pocket change against $14 billion in profits. As is true in many industries economic transformation has made traditional fines irrelevant. We need to start fining companies as a percentage of revenues and profits. A $4 billion fine in 2008 would probably have prevented the Deepwater Horizon disaster.

So we've identified one deeper cause -- a core function of our judicial system, financial penalization, is deeply inadequate.

Moving further along the causal chain, we find a company with a dysfunctional corporate culture, a culture that made very poor risk judgments. The answer to that culture is to remove the board, remove the CEO, and remove most of middle and upper management. That may be most effectively done by dismantling BP.

Moving even deeper, we may ask how BP got such a pathologic culture. We should pay attention to how BP was built and how those acquisitions became profitable ...
... Mr. Browne had built BP by taking over other oil companies, like Amoco in 1998, and then ruthlessly cutting costs, often firing the acquired company’s most experienced engineers...
We've seen similar acquisition patterns in the finance industry. In the short term safety measures are overhead. The quickest way to revenue is to strip them out. Similarly experienced engineers are very expensive, the quickest route to profitability post-acquisition is to eliminate them. It will typically take years for the knowledge impact to be felt.

Deepwater Horizon is a great disaster, but also a great opportunity. If we support Obama's approach, and the investigative panel he's assembling, there's a change people with real power will come to useful conclusions with implications well beyond oil extraction.

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