Today's Must Read - BP - Cutting Corners?

BP is the story that will not go away.  And with no end of the oil spill foreseeable, BP will be in the news for sometime. 

Today an article from Naked Capitalism caught my eye.  In the article, BP: House Energy and Commerce Committee Chairmen Send Damning Letter to Hayward, they discuss short-cuts and other dangerous decisions by BP which likely contributed to this disaster.  From the article:

The House Energy and Commerce Committee chairmen, Henry Waxman and Bart Stupak published the text of a 14 page letter sent today to Tony Hayward, BP’s CEO. The House website not only contains the text of the letter, but also 23 additional documents from BP, Halliburton, Schlumberger, and Transocean.


The letter itself provides a damning bill of particulars on BP’s lapses in warning Hayward of the topics on which he will be grilled later this week. The overview:

On April 15, five days before the explosion, BP’s drilling engineer called Macondo a “nightmare well.” In spite of the well’s difficulties, BP appears to have made multiple decisions for economic reasons that increased the danger of a catastrophic well failure. In several instances, these decisions appear to violate industry guidelines and were made despite warnings from BP’s own personnel and its contractors. In effect, it appears that BP repeatedly chose risky procedures in order to reduce costs and save time and made minimal efforts to contain the added risk.

At the time of the blowout, the Macondo well was significantly behind schedule. This appears to have created pressure to take shortcuts to speed finishing the well. In particular, the Committee is focusing on five crucial decisions made by BP: (1) the decision to use a well design with few barriers to gas flow; (2) the failure to use a sufficient number of “centralizers” to prevent channeling during the cement process; (3) the failure to run a cement bond log to evaluate the effectiveness of the cement job; (4) the failure to circulate potentially gas-bearing drilling muds out of the well; and (5) the failure to secure the wellhead with a lockdown sleeve before allowing pressure on the seal from below.

Each of the five major cost cutting actions are documented in considerable detail. The letter has extensive footnotes which reference the other documents on the website, testimony from other hearings, and other online sources). Effectively, the letter follows the format of a prosecution: it demonstrates motive (that BP was behind on the well and was therefore incurring additional charges above its original budget for leasing the rig. It also gives a good recitation of the typical procedures in drilling a deepwater well.

The letter highlights various points at which BP documents indicate that BP understood the risks it was taking. For instance, on p. 4-5:

An undated “Forward Plan Review” that appears to be from mid-April recommended against the single string of casing because of the risks. According to this document, “Long string of casing … was the primary option” but a “Liner … is now the recommended option.”

The document gave four reasons against using a single string of casing. They were:

• “Cement simulations indicate it is unlikely to be a successful cement job due to formation breakdown.”

• “Unable to fulfill MMS regulations of 500’ of cement above top HC zone.”

• “Open annulus to the wellhead, with … seal assembly as only barrier.”

• “Potential need to verify with bond log, and perform remedial cement job(s).”

In contrast, according to the document, there were four advantages to the liner option:

• “Less issue with landing it shallow (we can also ream it down).”

• “Liner hanger acts as second barrier for HC in annulus.”

• “Primary cement job has slightly higher chance for successful cement lift.”

• “Remedial cement job, if required, easier to justify to be left for later.”

Communications between employees of BP confirm they were evaluating these approaches. On April 14, Brian Morel, a BP Drilling Engineer, e-mailed a colleague, Richard Miller, about the options. His e-mail notes: “this has been [a] nightmare well which has everyone all over the place.”10

Despite the risks, BP chose to install the single string of casing instead of a liner and tieback, applying for an amended permit on April 15.

Yves here. I hope readers will look again at this list. This is corporate decisionmaking at its worst. The document may well have been prepared under duress (as in the person writing it was opposed but had to dress up plausible reasons). If I read this correctly (and oil industry experts are encouraged to chime in) reasons 1 and 3 in the first set of dot points look particularly damning, but it looks as if by listing an equal number of items arguing for the liner (no matter what weighting they deserved) that this could be made to look like a coin toss, when a realistic assessment of the risks would argue otherwise (of course, given the success Exxon had in getting it payout for the Exxon Valdez disaster delayed and then punitive damages on its leak reduced from $5 billion to $500 million. I’m curious as to what an NPV analysis on possible liability, using the Exxon precedent, would have shown). This move saved BP at least three days of drilling at $500,000 a day for rig rental plus contractors’ fees.

The other decisions hew to the same pattern. Halliburton recommended 21 centralizers (proper centralization is key to displacing the mud from the narrow side of the annulus, which if not done properly, leads to “bypassed mud channels and inability to achieve zonal isolation.” Even as few as ten centralizers would result in a “moderate” gas flow problem, per Halliburton. BP instead deemed it “too late” to get more centralizers out (again, clearly a budget rather than a real world constraint) and rationalized it would do just fine with artful arrangement of the six it had on hand (in fact, someone located 15 additional centralizers and could have flown them out, but the offer was rejected, with some spurious-sounding objections, plus the likely key one, it would take ten additional hours to put them in place.

The rest of the letter proceeds along similar lines. Halliburton urges BP to run a cement bond log (an acoustical test), as also appeared to be required by MMS rules. A Schlumberger team was flown out to conduct the test, and was curiously sent home with no test conducted. (Note that there are some Internet reports on what happened that appear wrong in some particulars [they allege that Schlumberger called for its own helicopter to evacuate its crew out of safety concerns, when it appears instead that they returned on a BP helicopter] but may still not be off base as far as the real reason as to why the test was not completed). BP again failed to circulate the mud fully, against Halliburton’s advice. BP did not install a lockdown sleeve, a device that helps prevent gases from breaking the wellhead seal and entering the riser.

Reader bill pointed to the AP coverage of the letter, the most complete version of which he found at the San Francisco Chronicle. Its take:

BP took measures to cut costs in the weeks before the catastrophic blowout in the Gulf of Mexico as it dealt with one problem after another, prompting a BP engineer to describe the doomed rig as a “nightmare well,” according to internal documents released Monday….

“Time after time, it appears that BP made decisions that increased the risk of a blowout to save the company time or expense,” the lawmakers wrote in the 14-page letter to Hayward. “If this is what happened, BP’s carelessness and complacency have inflicted a heavy toll on the Gulf, its inhabitants, and the workers on the rig.”

As reader Scott said, “This doesn’t look very good for BP.” Bloomberg is reporting that the oil company may lose its US oil leases and contracts, an outcome we had suggested was possible early on:

BP Plc may lose control of its U.S. oil and natural gas wells and be barred from doing business with the federal government as punishment for the worst oil spill in U.S. history, industry and regulatory analysts said. …

 The U.S. may revoke BP’s status as operator of producing wells in the Gulf of Mexico, such as Thunder Horse, or of leases at Prudhoe Bay, said David Pursell, a managing director at Tudor Pickering Holt & Co. LLC, a Houston investment bank. Separately, Congress is considering measures to bar BP from contracts with the Department of Defense and Environmental Protection Agency….

The administration has the power to force BP out as operator of existing leases on federal lands and offshore tracts. The operator, typically the partner with a majority interest, is designated before drilling begins. The Interior Department tracks each operator’s performance and may “disapprove or revoke your designation as operator” based on accidents, pollution events or other cases of noncompliance, according to federal regulations.