Management Failure

January 10, 2011

Explosion following the Blowout at the Macondo Well

The report's cover picture shows flames consuming the Deepwater Horizon drilling platform after the blowout of the Macondo well

Last week the President’s National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling issued chapter 4 of its report, which called the disaster a failure of management.  The report found a slippery slope of contributing factors.

  • BP used a well design that is unconventional in deep water.  This should have made BP exercise added caution to ensure that the well was sealed properly so as to prevent a blowout.
  • Instead of being extra cautious, BP cut corners in its part of the well sealing process and that increased the need to have a near-perfect cement job to finally seal the well.
  • Halliburton, the contractor for the cement job, used a cement mixture that was probably unstable.
  • BP did not adequately test the quality of the cement job and the other sealing measures.
  • The safety equipment, the Blowout Preventer, that is designed to prevent a blowout if all else fails, did not work, possibly because of poor maintenance.

The whole team forged ahead in spite of the mounting risks, and at every turn were able to convince themselves of what they wanted to believe, that the job was a success.  A few excerpts from the report make clear the extent to which all the contractors indulged in wishful thinking and ignored evidence that should have been troubling.  It is not necessary to understand the technical details, just pay attention to the attitude revealed in the following quotes. 

BP’s team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves.

page 116

Like the two February tests, the first April test indicated the slurry was unstable.  This should have prompted Halliburton to review the Macondo slurry design immediately, especially given how little time remained before the cement was to be pumped. There is no indication that Halliburton ever conducted such a review or alerted BP to the results. It appears that Halliburton personnel responded instead by modifying the test conditions—specifically, the pre-testing conditioning time—and thereby achieving an arguably successful test result.

page 118

Given the risk factors surrounding the primary cement job and other prior unusual events (such as difficulty converting the float valves), the BP Well Site Leaders and, to the extent they were aware of the issues, the Transocean crew should have been particularly sensitive to anomalous pressure readings and ready to accept that the primary cement job could have failed.  It appears instead they started from the assumption that the well could not be flowing, and kept running tests and coming up with various explanations until they had convinced themselves their assumption was correct.

page 119

All this implies that in its quest for short-term success, management took on too much risk.  There were no controls in place to raise red flags and examine the implications when employees deviated from standards.  There is, of course, no point to having standards if anyone can modify them as needed to produce short term results.  

The report makes clear that risky behavior was not just a problem with BP.  BP’s subcontractors shared the same attitude.  Furthermore, the problem of excessive risk is essentially the same one that brought down the banks in the last recession.  Clearly management generated short-term profits and big bonuses for themselves, but did not serve the long-term best interest of the shareholders. 

Why does management not act in the interests of the shareholders?  They do it because their compensation depends on short-term not long-term profits and because they have no real choice if they have to operate in an environment where executives at other companies are sacrificing the long term for the short term. 

Executives know that they and their peers ought to be acting in the best interests of the share holders but they also know that other executives cut corners to make themselves look good.  They intuitively know the truth of Niccolò Machiavelli’s observation that “How one lives is so far distant from how one ought to live, that he who neglects what is done for what ought to be done, sooner effects his ruin than his preservation; for a man who wishes to act entirely up to his professions of virtue soon meets with what destroys him among so much that is evil.”

The Prince, Chapter XV – Concerning things for which men, and especially princes, are praised or blamed

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