BP’s Failure to Debias (Page 2 of 6)

3. IDENTIFYING BEHAVIORAL PHENOMENA IN EVENTS AT TEXAS CITY AND ALASKA

A first step to approaching behavioral issues within organizations is to focus on four specific psychological pitfalls and four specific business processes. For sake of brevity, we refer to this construct as a 4x4 pitfall-process framework.11

Shefrin (2008) applied this framework to analyze the events involving BP at Texas City and Alaska. In this section, we summarize that discussion in order to set the stage for the analysis of BP’s decisions in connection with drilling the Macondo well.

3.1 Pitfalls

In the 4x4 framework, the four pitfalls are: excessive optimism, overconfidence, confirmation bias, and aversion to a sure loss.

  1. Excessive optimism leads people to look at the world through rose-colored glasses, overweighting the probabilities of favorable events and underweighting the probabilities of unfavorable events.
  2. Overconfidence comes in two versions, overconfidence about knowledge and overconfidence about ability. People who are overconfident about their knowledge know less than they think they know, for example about the risks they face. People who are overconfident about their abilities think they are more skilled than they actually are.
  3. People who exhibit confirmation bias overweight evidence that confirms their views and underweight evidence that disconfirms their views.
  4. Aversion to a sure loss leads people to act as if they are risk seeking because they cannot accept a sure loss. In this respect, they choose risk hoping to beat the odds.

3.2 Processes

The four processes are respectively: standards, planning, incentives, and information sharing. These four processes serve as loci for behavioral pitfalls. Although all organizations engage in these processes in some form or fashion, the key issue is the degree to which they do so in an effective and integrative manner. Firms with sound processes

  1. establish sensible standards including quality risk management;
  2. engage in detailed planning for generating results that are in accordance with established standards, with attention to procedures for identifying and mitigating psychological biases;
  3. create incentives that reward performance relative to established standards and plans; and
  4. in the course of conducting operations, share information about critical issues among the entire workforce in respect to how outcomes relative to standards and plans.

3.3 Application to BP’s Decisions and Judgments

In the 4x4 framework, there are 16 possible combinations of pitfalls and processes. In respect to BP’s decisions at Texas City and Alaska, we suggest the following in respect to four of these combinations:

  1. Excessive optimism caused BP’s managers to refrain from establishing clear, measurable standards for sediment buildup in its Alaska pipeline.
  2. Overconfidence led BP’s managers to limit information sharing about liquid hydrocarbon levels at its Texas City facility.12
  3. Confirmation bias led BP’s managers to plan for low investment in safety, in the face of the employees’ complaints highlighted in 2004.
  4. Aversion to a sure loss associated with lower production levels in BP’s Alaska drilling field led the firm’s managers to plan for excessive cuts in maintenance expenditures.

It seems that these statements are, if not obvious, then highly plausible. Therefore, we elaborate no further, but consider how the 4x4 framework can help explain the decisions involving Deepwater Horizon and the resulting explosion and oil spill.

4. DECISIONS DRILLING MACONDO

In this section we focus on how decisions BP made about digging its Macondo well generated the worst environmental disaster in US history. In doing so, we interweave a narrative of the events with behavioral commentary.

On September 2, 2009, BP announced the discovery of a very large field in the Gulf of Mexico called Tiber, estimated to hold more than 500 million barrels of recoverable oil. That day BP’s shares rose by 4.62 percent, indicating the importance investors attached to the announcement. Given declining production in its established fields, such as at Prudhoe Bay, BP’s managers may well have concluded that deepwater drilling would drive the firm’s future growth. Drilling the smaller Macondo prospect was at the forefront of this strategy. Although Macondo was almost 900 feet deeper than Tiber, it was 13,000 feet below the sea bed, in contrast to 31,000 feet for the larger field (Crooks, 2010).

BP engaged the drilling firm Transocean to drill Macondo in preparation for production. The drilling rig for accomplishing this task was named Deepwater Horizon. On April, 20, 2010 Deepwater Horizon exploded, killing eleven people and causing the worst environmental disaster in US history.

4.1 Pitfalls, Standards, and Planning in the Design Phase

There are many psychological issues associated with the explosion of Deepwater Horizon, and subsequent events. Decisions about design were especially critical. In this regard, consider the following remarks made by Rex Tillerson, CEO of Exxon, in testimony before Congress on June 15, 2010, “It appears clear to me that a number of design standards that I would consider industry norms were not followed. We would not have drilled the well the way they did.” Similar comments were made at the 2010 Aspen Ideas Festival by Joe Leimkuhler and John Hollowell, two drilling specialists at Shell. They too emphasized the importance of standards, along with practices, and procedures. In their presentations, they contrasted the well designs at Shell with the one used to drill Macondo. As we now argue, their comments collectively suggest that BP’s standards and planning strongly reflected excessive optimism and overconfidence, consistent with the excessive cost cutting behavior associated with the problems that occurred at Texas City and Alaska.

To begin the argument, consider Figure 1 which illustrates the general situation involving the explosion of Deepwater Horizon. At the top of the figure is an image of Deepwater Horizon, on the surface of the Gulf of Mexico, in this case ablaze. The column descending from Deepwater Horizon is called a riser pipe. It carries a long drill bit which extends to the ocean floor and below. The drill bit burrows a borehole into the rock below the ocean floor to pierce the region containing oil and gas trapped some distance below. The objective of the drilling activity is to construct a production well with a series of “pipes” to carry oil and gas from its cavity deep below the ocean to the surface of the ocean, with minimal leakage, in order to be collected. Because the oil and gas are trapped at great pressure below the ocean floor, it is critical that the borehole be appropriately lined with steel casing and cement to prevent leakage.

Figure 1. Event Sequence in the Explosion of Deepwater Horizon

Figure 1. Event Sequence in the Explosion of Deepwater Horizon

 

Figure 1 displays a device called a blowout preventer (BOP) just above the ocean floor, through which the drill pipe and drill bit descend to the sea bed below. In case of an emergency, what are known as blind shear rams in the blowout preventer are supposed to shear the drill pipe (and bit if present) in such a way that the BOP blades remain closed, thereby preventing oil and gas from rising towards the ocean surface. In addition to the blowout preventer, BP planned to install two cement plugs to serve as barriers for oil and gas escaping from the portion of the well below the ocean floor. One plug was to be positioned in the borehole at the bottom of the well, just above the oil and gas deposit. The second plug was to be placed below the ocean floor.

The features just described are common to the well design used by BP and the designs used by other firms such as Shell. However, Shell routinely includes a series of additional barriers in the borehole between the bottom of the well and the ocean floor, to serve as backups in case of leakages in the borehole at intermediate points below the ocean floor. For Shell, the blowout preventer is redundant, what they call a “control” as opposed to a “barrier.” For BP, the blowout preventer was intended to serve as a barrier. And in that role, it failed.

In March 2011, a Joint Investigation Team from the Bureau of Ocean Energy Management, Regulation and Enforcement and the US Coast Guard released a report on the reasons for the failure of the blowout preventer. The analysis, undertaken by the firm Det Norske Veritas (DNV), concluded that off-centered drill pipe, prevented the blind shear rams from fully closing and sealing the wellbore. The report raises the possibility that a large leak of escaping hydrocarbons from the well had caused the pipe to buckle.

The numbered text in Figure 1 traces the sequence which led to the explosion at the ocean surface. In April 2010, BP was on the verge of completing the drilling stage at Macondo. It had put a cement plug in place at the bottom of the well, and was about to put a second cement plug in place just below the ocean floor, along with a “lockdown sleeve.” The lockdown sleeve locks steel casing that lines the wellbore to the wellhead in order to prevent the casing from lifting out of place during subsequent production operations. Before it could complete this task, there was a leak of oil and gas in the well below the ocean floor. Escaping gas rose through the riser pipe to the ocean surface and ignited, creating an explosion and fire. Personnel on Deepwater Horizon attempted to activate the blowout preventer (BOP), with the intent of preventing the oil and gas from rising above the BOP. However, the BOP did not function properly, and so oil and gas continued to pour from the well.


NYU Masters in Risk Management


The design used by Shell is more expensive, but less risky, than the design BP chose to drill Macondo. Given its risk management practices in Alaska and at Texas City, and the attendant results, we conclude that excessive optimism and overconfidence in BP’s planning and choice of standards were major factors in the explosion of Deepwater Horizon. Reinforcing this contention are the following conclusions from Congress’ investigation of the incident:

  1. BP chose a risky option in installing the casing the day before the accident.
  2. BP did not use enough centralizers to keep the casing in the borehole as it was lowered into the well.13
  3. BP and its contractors did not run an acoustic test to check that the cement attaching the casing to the rock walls of the borehole had formed a seal to prevent gas from escaping.14
  4. BP did not pump enough drilling fluid through the well to detect and remove pockets of gas before cementing the well.
  5. BP did not properly secure the top of the well with a lockdown sleeve to keep it sealed tightly, so that oil and gas were able to leak out and rise to the rig at the surface.

As a backdrop to these specific points, we note that on April 9, the drilling operation suffered a serious setback. The geologic formation containing the wellbore was not strong enough to sustain the pressure from drilling, without fracturing. As a result, drilling fluid began flowing into cracks in the formation instead of returning to the rig. This event had several ramifications. First, drilling had to stop until the crew sealed the fracture and restored the circulation of drilling fluid. Second, the well could not be drilled as deeply as BP originally planned. Third, there was now the strong realization that the well was more fragile than originally thought, which led the crew to be less aggressive in key procedures. In particular, they reduced the circulation of drilling fluid in the well prior to injecting cement, reduced the rate at which they pumped cement into the well, reduced the total amount of cement injected, and used a novel cement mixture featuring bubbles of nitrogen that increased the risk the hardened cement would become porous.

4.2 Pitfalls, Planning, and Information Sharing on the Day of the Explosion

Consider the context for the tasks and associated decisions that were undertaken on April 20, the day of the explosion. Before the second cement plug and lockdown sleeve could be put in place, the well needed to be tested to ensure that the cement and steel locked together, thereby preventing any gas from leaking and causing a fire or explosion. The well could then be abandoned temporarily until BP was ready to begin production.

On April 12, BP personnel began to put a plan in place for the final steps they would be taking in preparation for temporarily abandoning the well. On April 16, after several rounds of internal discussion, they applied for a permit to the government body regulating their activities, requesting permission to make modifications to the plan previously submitted.

Part of the plan involved a test requiring the removal of approximately 300 feet of a thick drilling fluid (called mud) below the blowout preventer, which would then be replaced with seawater. This is because mud is used to prevent leaks of gas into the well during drilling. The purpose of the test is to check that the well is fully sealed, before removing too much of the mud as a prelude to the later production phase. For this particular test, BP’s managers wanted to remove an unusually large amount of the mud from the well, and then run the test. Doing so would involve inserting a deeper cement plug than was originally envisioned. On April 16, when BP requested permission from federal regulators for changes involving a deeper plug, it received approval in less than 90 minutes.

In its January 2011 report, the National Commission charged with investigating the explosion of Deepwater Horizon criticized the planning processes at both BP and at the regulating agency. They commented that “There is no evidence that these changes went through any sort of formal risk assessment or management of change process.” (p. 104) Moreover, the actual plan undertaken on April 20 was not fully consistent with either the April 12 plan or the April 16 filing.15 The National Commission concluded that replacing so much mud with seawater was ill advised, in that it placed more stress on the cement job at the bottom of the well than necessary. (p. 119)

In July, Ronald Sepulvado, BP’s manager in charge of the rig, was asked under oath by the Interior Department-Coast Guard panel if he had ever run a test where so much mud had been removed. His reply, “No, ma’am.” When asked if he had ever heard of BP doing so anywhere, his reply was the same, “No, ma’am.” Robert Kaluza was BP’s day-shift manager on April 20. When interviewed by BP’s internal investigators as to the motivation behind removing so much mud, he is reported to have replied, “Don’t know why—maybe trying to save time… At the end of the well sometimes they think about speeding up.”

Was the decision by BP about changing the testing procedure driven by aversion to a sure loss in respect to excessive cost cutting? As it happens, the Macondo drilling project was five weeks behind schedule and over budget by US$20 million. BP’s altered test would help speed a process that was costing an estimated US$750,000 a day. Indeed, many of BP’s decisions during April 2010 lead us to suspect that BP’s managers were averse to a sure loss.

Even more interesting are the issues associated with the way that managers at BP and Transocean shared information with each other. Transocean workers and contractors aboard the rig indicated that they were not informed of the change in test procedure until the morning of April 20, at an 11 a.m. meeting. The change caught the Transocean crew off guard. Jimmy Harrell was the most senior Transocean worker on Deepwater Horizon that day. Harrell voiced objections to removing so much mud. Kaluza responded, “This is how it’s going to be,” and Harrell agreed, albeit reluctantly. Harrell’s attorney Pat Fanning is quoted as saying, “It was BP’s well, they were paying for it. BP gave the marching orders.”

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Hersh Shefrin and Enrico Maria Cervellati


11. A more general framework involves more than four pitfalls and more than four processes. We focus on these particular pitfalls and processes because we regard them as the most important, and for reasons of tractability.

12. Steve Arendt, a safety specialist who assisted the panel appointed by BP to investigate the company’s refineries after Texas City explosion, referring to BP’s management, affirmed “They were very arrogant and proud and in denial. It is possible they were fooled by their success” (Rowell, 2010).

13. Centralizers are pieces of metal that maintain a casing centered in the hole. When installing the casing string, BP used approximately six centralizers when its sub-contractor Halliburton had suggested 21. If not enough are used, the casing might get squeezed too hard against one side of the well bore. Then when the cement job is complete, the end result is uneven, and there might be portions where there is almost no cement. The BP crew had actually planned to use 21 centralizers. However, 15 of the centralizers delivered from their supplier were not the custom designed ones they had ordered and used on previous jobs. Consequently, BP personnel decided it would be safer to rely on six they did consider appropriate, and which they judged would be adequate. The National Commission points out that to the exclusion of many sources of risk, BP managers focused on only “one particular risk: that slip-on centralizers would hang up on other equipment.” (p. 116) In hindsight, there is some evidence that correct stabilizers might actually have been sent. In addition, BP personnel appear not to have shared information about stabilizers with Halliburton personnel in charge of the cement job.

14. Notably, a crew from Schlumberger was actually on site and ready to perform the test at a cost of US$128,000. However, BP’s diagnostic testing indicated that the newly injected cement was not being moved by escaping gas and oil. Therefore BP judged the acoustic test to be unnecessary. Cancelling the test also saved time and the US$128,000 fee.

15. For example, to separate the seawater and mud, BP managers made the decision to mix spacing liquids that had not been tested for that purpose, but whose use would allow the liquids to be discharged into the Gulf after the procedure, instead of the more costly alternative of being transported back to land. In this regard, the National Commission comments that at BP’s direction, its subcontractor “combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer, nor been thoroughly tested for that purpose.” (p. 106)

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