The Luncheon Society-SF/Abrahm Lustgarten author of Run to Failure: BP and the Making of the Deepwater Horizon Disaster/Palio d’Asti Restaurant/August 17, 2012

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Run to FailureTo fully understand what took place during the Deepwater Horizon disaster, when 4.9 million barrels of oil spewed into the Gulf of Mexico during the summer of 2010, you have to look at the corporate culture of BP and how its senior management team blundered into a terrible chain of events.

Reporter Abrahm Lustgarten demonstrates how BP’s series of cascading failures, far beyond the disaster in the Gulf, shows how senior management turned a blind eye to the growing number of risks that were turning up within their American subsidiaries.  By choosing to grow their brand through a series of highly leveraged acquisitions, BP aimed to retire the debt by gutting the budgets for safety and quality control.  By failing to listen to their American subsidiaries, BP played a callous game of Russian Roulette when proportioning risk against gain.  This is an indictment of a corporate culture gone rouge.

Lustgarten, a former staff writer for Fortune Magazine who now writers for Pro Publica, penned Run to Failure: BP and the Making of the Deepwater Horizon Disaster.  For a deeper understanding of what took place at BP, feel free to watch the PBS documentary on Frontline. Below is the promo

Here is the link for the full broadcast from PBS

Abrahm LustgartenUnlike their television commercials, the oil industry is a grimy business, from the extraction of varying flavors of crude to the refined product that fuels your car and heats your home.  Many are obvious to how it arrives until there is a massive disaster.   In an industry chocked full of inherent risks, most oil producers are dead serious when it comes to safety management because they understand the true costs of a disaster when something goes terribly wrong.  Many Alaskans still talk of the Exxon Valdez disaster as if it happened last week because the coastline is still dealing with the aftereffects over two decades later.

That was a lesson, Lustgarten says, BP never got around to learning.

BP LogoTo understand what went wrong, ask yourself this question: What happens when technology outstrips the ability of a company to manage its safe use? What happens when senior management becomes tone deaf to faraway dangers and bets the house that nothing bad will happen?  When you place the Deepwater Horizon disaster alongside BP’s cascading disasters like BP’s Texas City refinery explosion, the Alaska Pipeline spills, and their Caspian Sea blowout, a darker picture of corporate malfeasance and denial emerges.  While interviewing other oil industry executives at ExxonMobil and Chevron, Lustgarten discovered that BP’s reputation amongst its peers was they were a disaster waiting to happen.

Meanwhile at ExxonMobil, as Lustgarten pointed out, if an employee is hurt in the course of his employment, the matter is automatically elevated to the office of the CEO. Senior management concluded that being on top of one crisis can offer lessons that prevent future disasters. To drive home his point, Lustgarten says that if BP had embraced the safety culture illustrated by ExxonMobil, Chevron, or Shell, none of these disasters would have ever happened.

There are some industries where safety plays a heightened role. When a passenger plane crashes and all are lost, the NTSB (National Transportation and Safety Board) will thoroughly investigate what went wrong.  They will either suggest or mandate changes that address in-flight training or updated equipment requirements. Affected planes are usually grounded until repairs and inspections are made. A good example of this can be seen in the grounding of the entire Boeing 787 Dreamliner fleet due to cabins fires.

What led up to the Gulf Disaster was a series of cascading failures, when elevated to senior management in London, were contested, minimized, or simply ignored.

During the 1980’s BP was British Petroleum, a middling oil producer that had fallen on hard times. Senior leadership began to ossify during the 1960’s and 1970’s, when a number of their oilfields had been nationalized.  Their exploration activities were below industry averages and there was real concern from the analyst community that BP might simply run out of oil to drill.

Enter Sir John Browne.  Sir John was one of the most atypical breed of energy CEO.  He was an “un-Texas” as somebody could get.  Based in London, he lived with his mother and loved the opera.  His background was finance, not geology, but he had risen through the ranks.  He believed that once BP was fully privatized and beyond any ownership stake by the British government, they could grow through acquisitions. With blinding speed, BP grew into one of the largest energy brands as it snapped up Amoco, ARCO, and others.

Sir John also unique amongst his oil peers because he spoke openly about climate change and the oil industry’s role in it. He recast the BP brand as “Beyond Petroleum” as opposed to merely an oil company based in Britain.

The dark side to BP’s acquisition strategy was a staggering debt load.  To pay down the debt, Browne instituted a number of across-the-board cuts, including mission critical functions like refinery safety. While the operational infrastructure could handle smaller cuts over the short term, the deep cuts Browne suggested raised industry’s eyebrows because they could not be sustained over the long haul.  Within time, regulatory adherence soon began to degrade and budgets for safety related inspections were slashed by as much as 65%.

Soon refinery and drilling accidents began to escalate upward at BP facilities. Most of the problems stayed out of the papers but when equipment failure at their Texas City refinery led to a huge explosion.  Because of BP’s ARCO acquisition, they now managed the oil coming down from Alaska’s North Slope and were responsible for maintaining its aging infrastructure of the Trans-Alaska Pipeline.  In both cases, the leadership team at BP found themselves choosing between retiring their debt and maintaining the operational integrity of their refinery and drilling operations. Safety lost twice.

Then came Tony Hayward.  Sir John resigned from BP after he was implicated in a gay sex prostitution ring. He was replaced by Tony Hayward, who promised that BP would do better, but history would prove that nothing would change.

The Texas City refinery was another one of BPs pickups as a result of the Amoco acquisition.  It was an older facility, opened in 1934, and it became clear that a substantial investment was needed to insure basic safety.  BP was simply not willing to make the appropriate investment.  It also underscored the commonality many of BP’s acquisitions—they were all in need of significant structural improvement.

The most heartbreaking moment came when the Texas City leadership pleaded with London to budget more funds to for safety-related inspections. They ended their PowerPoint and showed photos of those who had died at an earlier explosion to dramatize the need for better safety.  Tony Hayward and his team were unmoved.

On March 23, 2005, a huge explosion ripped through the Texas City refinery. Lustgarten details in poignant terms what it was like for those doomed people in the nearby conference room. He describes of how it must have felt as the shrieking noise of the explosion ripped through the room, how people were levitated in the air by the force of heat, and how the room was turned into a blast furnace as their bodies began to crackle under the intense heat and flame.  15 died and 170 were injured in the blast.

Tony Hayward visited the Texas City facility and bore the right emotions and said the right words. He spoke how this was a dark day for the BP family of workers.  He promised that there would be needed changes.

In Alaska, the pipeline that was built during the mid 1970’s was now showing its age. It traverses through some of the most sensitive ecosystems in the state as it moves crude oil from the North Slope to Prudhoe Bay.  BP cut back their safety staff and cut back on inspections, perhaps hoping that the diminished budgetary allocation would not impact overall safety.  Employees had warned for years that an aging pipeline infrastructure was a breeding ground for corrosions and rust.  Once again, BP’s stubbornness proved to be a shortsighted policy.  Between 2006 and 2007, pipeline corrosion led to the spilling of 212,000 gallons of crude and forced to pay the highest EPA fine in American history at that time, $20 million, which for BP was pocket change.  Once again, BP promised to listen to their staff.  Despite the promises of reform and reflection, nothing changed.

By 2009, regulators in Washington began to take a tougher look at BP’s safety record.  It was now under scrutiny unseen during the Bush years and regulators began to realize the true extent of the degradation of BP’s safety infrastructure.  Signals were sent to BP senior management in London that they might be barred from any future participation in any deep water drilling because of their safety-related issues found on dry land.

BP Deepwater Horizon fron spaceWe all know what happened on the evening of April 20, 2010.  Officials on the floating drilling apparatus sidestepped rules surrounding protocol and subsequently hit a pocket of high pressure methane gas while drilling an exploratory well. As the methane expanded and headed up to the floating rig, it ignited and caused a massive explosion.   11 people of the 126 man crew were killed and another 17 were treated for injuries.  As the fire raged out of control, the Deepwater Horizon listed and toppled over, where it sank to the bottom of the Gulf.  Thus began the worst accidental oil spill in recorded history, which would be clearly seen from outer space.  It would take 87 days to finally cap the oil spill.

The PR disaster only amplified what was happening in the Gulf.  At first, BP’s CEO Tony Hayward explained that the spill was only a “tiny amount in a very big ocean.”  Then in a moment of extreme foolishness, Hayward tried to paint himself as the chief victim of the ecological disaster and said, “He wanted his life back,” perhaps forgetting the families of the dead who wanted their loved one back too.

Tony Hayward compounded the human tragedy by creating yet another public relations fiasco. As pictures of oil soaked workers attempted to cap the stricken area, Hayward was seen going to events in London wearing a tuxedo. Hayward was soon replaced by American Bob Dudley.

In congressional testimony, each of the participants blamed the other.  Congressional investigations blamed BP for most of the faults, but also blamed TransOcean (which owned the rig) and Halliburton.   Fines were paid but the environmental cost will go on for decades.

However, most oil industry executives understood something that took time to bubble up with in the mainstream press–BP was out of control. They were unable to control the unintended consequences of the expansion during the 1990s.  They purchased aging assets from competitors but were unwilling to make the appropriate safety investments on the drilling and refinery side. Industry experts agreed that BP was over their collective heads when it came to understanding the risks of deep water oil drilling.  They exhibited a failure to listen, there was a complete breakdown of their corporate culture, which led to a daisy chain of job-site accidents.

It’s quite possible that BP’s senior management simply chose to ignore the risks that came with aging acquisitions. Perhaps they hoped that their luck would hold until their balance sheets righted themselves for the analyst and investment community. However, we know what happened in the end. Those who say that the “fear of reputational harm” will keep corporations on the right path need to realize that risky decisions come with their own unintended consequences –talking points never considered in PowerPoint presentations.

50 years from now, the decisions made at BP will still be taught in our nation’s business schools.  Just as the Exxon Valdez distaste continues to haunt decision makers within the hallways in Houston, time will only tell if BP has identified the root causes of their management failures and prescribed the right fixes. If past is prologue, they have a long way to go.

luncheon-logo-fc7The Luncheon Society ™ is a series of private luncheons and dinners that take place in San Francisco, Los Angeles, Manhattan, and Boston. We essentially split the costs of gathering and we meet in groups of 20-25 people. Discussions center on politics, art, science, film, culture, and whatever else is on our mind. Think of us as “Adult Drop in Daycare.” We’ve been around since 1997 and we’re purposely understated. These gatherings takes place around a large table, where you interact with the main guest and conversation becomes end result. There are no rules, very little structure, and the gatherings happen when they happen. Join us when you can.

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