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Where BP Went Wrong

Written By Brian Hicks

Posted June 28, 2010

“What the hell have we done to deserve this?”

— BP CEO Tony Hayward, in reported remarks to BP executives following the Macando well explosion

We are now 70 days into the Gulf oil spill crisis and the disturbing details keep rolling in. I keep going back to that question posed by Mr. Hayward shortly after the explosion.

So here’s my answer…

Dear Mr. Hayward,

Enclosed is my reply to your question, What the hell have we done to deserve this?

If you wish to refute or respond to any part of it, please email me at adam (dot) sharp (at) angelpub (dot) com.

Without further delay, here is precisely what your company has done to deserve this.

You cut costs and placed profits over safety.

This is the big one. The Wall Street Journal recently reported that your firm frequently used a cheaper well design, known as “long-string.” The more expensive option — a “liners” design — offers more protection against a gas blowout like the one experienced on the Deepwater Horizon.

In this case, the $7 million or so you “saved” by using the cheaper design may end up costing you $100 billion+.

Also, the New York Times reports that BP’s business model is based on acquiring smaller firms, then slashing costs by skimping on safety and experienced personnel:

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. Taking shortcuts was ingrained in the company’s culture, and everyone in the oil business knew it.

Apparently the Macando well was behind schedule; it appears that the process was rushed to make up for lost time. Consider the WSJ editorial by Terry Barr, President of Samson Oil and Gas.

Mr. Barr wrote an extremely detailed piece that rips BP’s operations to pieces. Here’s the conclusion — though I do recommend reading the whole article:

This well failed its casing integrity test and nothing was done. The data collected during a critical operation to monitor hydrocarbon inflow was ignored and nothing was done. This spill is about human failure and it is time BP put its hand up and admitted that.

WSJ reader Donald Ferrel summed it up well in the comment section:

By relying on the blow out preventer, BP did the equivalent of jumping out of an airplane knowing that the main chute was faulty and relying on the back up chute. No responsible person one would do that. BP’s backup didn’t open.

Every step of the way, it seems your managers placed cost savings and expediency over safety and responsibility.

Secondly, you downplayed the size of the spill.

Since the explosion, your organization has done much to make things worse.

First and foremost is underestimating the size of the spill. This undermined response efforts and cost responders desperately needed time.

The Deepwater Horizon exploded on April 20th. As far back as April 29th, government agencies were using flow rate estimates of 64k-110k barrels per day. The image below is from a video released by NOAA on the spill response.

This image is from 04/30/2010  — yes, just 10 days after the Deepwater Horizon sank.

Note: 5k bpd was the official number at that time.*

NOAA-estimates-bp-oil-flow-rate                                                                                                                                                  *red MS paint edits are editor’s

 Any suggestion that BP did not know about these higher estimates is suspect. They were the only ones with access to HD video from the leak itself, until government pressure forced them to share…

And their own application to the MMS showed a “worst-case scenario” of 125,000 barrels per day escaping from the well.

Note: I am not placing any blame on the scientists at NOAA. These guys are working around the clock and doing a critically important job, for which they deserve our thanks.

Unfortunately, I suspect there is a political nightmare unfolding around them as BP and politicians fling blame and marching orders around haphazardly.

And so concludes my response to Mr. Hayward’s ridiculous question.

To be fair, it is unclear how much responsibility Hayward himself bears for the accident. He took over leadership of BP in May 2007, just over three years ago. While that is a significant amount of time, changing a corporate culture can be difficult.

Hopefully we will learn how hard he was truly trying.

Until next time,

Adam Sharp
Analyst, Wealth Daily

P.S. My colleague Keith Kohl has been highlighting onshore drilling opportunities for years. His latest report explains how to profit from the pullback in offshore drilling. It’s a good read, and the picks look interesting.

Editor’s Note: I should disclaim that I currently short BP stock. Also, sources used in this story include NOAA whiteboard photo, Free Republic, and WSJ: BP relied on “Cheaper Wells.”