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Risk Management Factors Assignment
This is a solution of Risk Management Factors Assignment which discuss identification of probable risks in business and how to manage those risks.
Identification of Risks
Reliable details on the evidence about what happened at BP, the United States Minerals Management Services and the onboard Transocean’s Deepwater Horizon drilling unit, are still not complete and are somewhat unsatisfactory. However, to prevent such incidents from occurring in future, it is important to identify and corroborate the development of events throughout the existence of the drilling unit that led to such failure. It is also important to analyze the risk identification approach implemented by BP prior to the conceptual design, construction, and maintenance and also during the operations. Insufficient analysis and missing out on crucial risk identification details have a lot to do with the subsequent failures. From what is understood form past experience, the seeds of this incident had already been sown during the conceptual development and design phases in the construction of the Macondo well. Insufficient identification of risks allowed these seeds to grow during the maintenance and operation phases which severely weakened the system and led to such disastrous failure (Pells, 2010).
Forensic examination and detailed investigation of the Deepwater Horizon disaster brought out the report that the process of identification of risks employed by BP prior to the construction was unsatisfactory and many risk factors originating from technical and organizational issues were not fully assessed. It was mentioned that in the report that the cement design was improper and the cement sheaths were inappropriately segmented. Presence of cement bond logs in the critical sections of the well was overlooked, and the ineffective oversight of operations constituted the flawed quality assurance and quality control policy of BP administration. During the operations, the pressure barriers were removed and the drilling mud below the drill deck was replaced with sea water, questioning the decision making of the operation heads. The operation team was totally not aware of the risks, despite early warning signs originating from repeated gas kick, lost drilling tools and even after evident identification of damaged BOP parts. The lost circulation and changes in mud volume during drilling and cementing were some of the risks that were not properly identified and analyzed prior to the incident. The drilling mud was prematurely off-loaded and the inappropriate operating procedures were highlighted by the flawed design and maintenance of the BOP rams, hydraulic lines and the emergency shutdown and disconnect (ESD) systems (DHSG, 2011).
Assessment of the risks identified
Currently available information suggests that the Maocndo well blowout was a result of inappropriate and unreliable system in the Macondo well development project. The well was produced with a series of critical flaws and deficiencies, which were identified during the conceptual design phase of the Macondo well project. However, the risk identification was ignored and these flaws were incorporated into the system. It was also discovered that the well system when exposed to high pressure high temperature hydrocarbon conditions will exploit the flaws and deficiencies and might result in hazardous conditions. During tests performed on the well structure, there was hydrocarbon leak into the well bore detected at multiple times. Even after a series of efforts to find a solution, the operations could not prevent the flow of hydrocarbon into the well and upward towards the drill floor. At the time of control processing, no effective action was taken against the approach of hydrocarbon liquids and expanding gases towards the drill floor, causing serious exploitation of the well flaws and deficiencies. During the disaster, the rig emergency controls failed and the hydrocarbon ignition which causes the explosion and fire could not be stopped. The blowout preventer failed multiple times and the Macondo well disaster became unstoppable (DHSG, 2011).
The failure of engineering controls which led to the BOPs malfunction, hydraulic failure, gauge malfunction, power disruption and valve failure; were a result of inadequate design, operations and inappropriate maintenance. It is well known that improper risk assessment, testing and maintenance during administrative controls can belittle the greatest of the engineering systems. Administrative system at BP failed to implement standard operating procedures and controls; such as absence of a cement bong log, incomplete circulating procedure, unreliable well completion procedure, inadequate maintenance of ESD systems and inadequate tests and activation for the BOP. Business strategy focused on cutting corners and rewarding faster and cheaper, rather than better work were the main causes of failure during development, implementation and enforcement of controls. These initial findings and identification of existing risks in the well system were testified and supported by the investigation reports. However, there are still many questions that may never be answered (Pells, 2010).
During later investigations, it was indicated that BP’s drilling and well completion operations were not up to the industrial standard mark. BP business management laid more emphasis on faster and cheaper, but not better work, and made grave compromises regarding the quality and reliability control of the Macondo well oil and gas development system. Risk management strategies were inadequate and some major risks were not properly identified and the potential consequences of the discovered risks were ignored. BP never anticipated a blowout of such level and had no effective collaborative and interactive resource plan against countering such a disaster (DHSG, 2011).
Risk control and containment strategies utilized
On the day of the incident, an uncontrollable flow of water, oil, gas and other materials leaked out of the drilling vessel Deepwater Horizonowned by Transocean and contracted by BP. The uncontrollable flow was shortly followed with a series of explosions and a huge fire which continued for about two days fueled by hydrocarbons coming out of the Macondo well. The vessel was abandoned shortly after the fire and sank about 36 hours later, perishing 11 of the on-board lives. For the next 83 days, BP employed a series of containment and control strategies to stop the oil from entering the Gulf of Mexico. Initially, the blowout preventer were unsuccessfully attempted to be closed with a remotely operated vehicle. The oil spew from the broken riser was to be captured, which was done by closing the drill pipe on the sea floor. The oil spew from the riser end were partially captured with an insertion tube and a Lower Marine Riser Package Cap installed on the ruptured drilled pipe inside the BOP. BP unsuccessfully tried to kill the well by injecting heavy mud into the BOP, but the flow of oil still continued afterward. The successful shutdown of the well was finally achieved by removal of the riser and sealing of the BOP cap from above, followed by injection of heavy mud into the well to eject effluents and reduce pressure at the well head. Cement was pumped in the permanently seal off the flow paths, and the drilling of two relief wells successfully sealed off the Macondo well, with a few small leaks. The final containment steps included unbolting of the riser adapter from the BOP cap and installation of pressure bearing caps to the BOP components (BP, 2010).
During the 83 days of containment and dispersion in order to stop the oil from reaching the Gulf of Mexico, it turned out that BP’s control strategy was ineffective and repeatedly failed from mitigating the blowout. Despite a series of constructions and engineering implementations, BP was unable to prevent the immense flow of toxic fluids and gases from the Macondo well to escape into the Gulf of Mexico. Some of these toxic fluids even managed to reach the surface. Heavy amounts of dispersants were injected into the well flow stream, but it failed to prevent the Macondo well toxic fluids and oil from being swept away by the strong surface and subsea currents. The hydrocarbons were also swept by the same currents and managed to reach the nearby wetlands and beaches, and were even dispersed into the atmosphere. However, BP successfully managed to prevent the otherwise buoyant oil from reaching the nearby wetlands, wildlife, beaches and the related communities. The containment and clean-up of hydrocarbons in open water with the then existing equipment and processes utilized by BP proved to be severely ineffective. The short and long-term effects of the related marine communities and the coastal environment are still being assessed (DHSG, 2011).
Response to the disaster
After a series of failed efforts in containing the uncontrollable hydrocarbon spills, BP finally managed to contain the well within 84 days following the disaster, and successfully cleaned up the natural and economic damages. The mitigation of oil spills and relief drilling cost the company around $11.6 billion, as reported in their financial report. This cost included the containment response activities and various claims which were directly paid by BP. In addition, BP estimated that the remediation and water-cleaning effort would cost it $30 billion in the future. Immediately after the accident, BP set up a separate team to investigate the aftermaths. The team comprised of 50 specialists, including safety operators, well and subsea drillers, and process hazard analysts. This team worked independently from the other organizations studying spill activities. Access to physical evidence and witnesses was limited, and in some cases restricted. Even though, the team was granted access to Macondo well documents and rig construction data, along with testimony from the witnesses and court hearings, and co-operative information necessary for investigation was also requested from companies such as Transocean- which owned and operated the rig, Halliburton- which provided cement services to the well’s cap, and Cameron- which manufactured the blowout preventer. The team was asked to submit a report on the events that led to the disaster, the possible causes and some effective mitigation measures to prevent such incidents happening in the future. The response team was made in co-ordination with the Homeland Security, and the spill was classified as an event of national significance. A coast guard was appointed as the on-scene coordinator, who overlooked the activities of BP and other federal entities. Under this Unified Command, headed by the federal agency, the oil response activities involved 6,400 personnel and 360 vessels, with the number rising to 47,000 and 7,000 respectively during the summer (BP, 2010). Damage to the natural resources was assessed and restoration planning was undertaken by the federal and natural resource trustees. A number of hearings were conducted by the House of Representatives, which addressed key issues of concern regarding the Gulf oil spill, such as the advantages and disadvantages of off-shore drilling, and the role of BP in the incident. The liability and compensation frameworks were determined and policies regarding off-shore drilling regulations were proposed; three of which were enacted into law (DHSG, 2011).
The initial response of BP towards the disaster reveals a total failure in the safety management system. Engineers only focused on focused on trying to fully engage the rig’s single functional blind shear ram using Remote Operated Vehicles, which repeatedly failed and proved a waste of time. BP engineers, reportedly, had inaccurate knowledge of previous BOP modifications and BOP activation. This shows that BP’s immediate response to the disaster seriously ignored the fundamental safety policies and failed to implement any reliable disaster management practices (Pells, 2010).
Implementation of corporate governance and the link to risk management
The aftermath of the disaster incurred $40 billion loss in BP’s market value and the share prices fell to an all-time low since the past year. This was unwelcomed by the shareholders who decided to sue the board regarding failure in safety monitoring and inability to manage the enormous liabilities generated post spill disaster. The complaints also addressed issues such as the financial implications to the BP subsidiaries and the damage to commercial property and wildlife. Shareholders and investors demanded the board to improve their corporate governance strategies, either by implementing limit to the number of directors and/or establishing a committee to oversee environmental exposure. US President Barack Obama blamed the disaster on lack of responsible management by BP and said that leasing the ownership of the rigs makes it difficult to organize responsibility between different organizations. This sharing of responsibility makes the organizational change and control difficult to implement, and any such discrepancies should be clearly outlined prior to any lease agreements (Miller, 2010).
The implications of the disaster suffered by BP have now forced other companies to implement stricter regulations while shipping crude to the US. Renewal of controls include ban on single hull tankers and chartering of double-hull tankers in order to reduce the risk of oil spill. However, other major companies believe that the long-term consequences of such disaster, although puts BP in a large mess, can exist as a lesson for the future and will likely lead to a review of the risk management guidelines and appropriate implementation (Pells, 2010).
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Importance of risk management
The key factor determining long-term sustainability of an organization is risk management and successful mitigation. The traditional Environment, Health and Safety plan focuses on maintaining compliance with the established environmental and occupational health regulations; and has been a major part of the environmental activities of any company. To survive in a competitive environment and ensure organizational success, a company needs to recognize that simply complying with human health, welfare and environmental resources is insufficient and there is a need for them to go beyond. To minimize and avoid business risks, it is necessary to reduce the company’s adverse environmental, occupational, human health and social impacts. Outlining such steps to reduce the risks of these impacts will, in turn, lead to reduction in business losses and prevent any damage to the company’s reputation. Appropriate implementation of such risk management strategies reduces the risk of lawsuits, fines and unfavorable regulations against the company, and makes it easier for them to positively expand operations without any obstacles of licenses and leases. BP’s approach to the Deepwater Horizon disaster, as reviewed in this report, suggests that a focused and reliable risk management approach can be crucial towards containment of risks and can save the company the cost that BP had to pay. A prudent approach towards minimizing safety, environmental, social and financial risks is an investment that should not be avoided, and an energy company such as BP should be more responsible towards incorporating better safety and emergency processes and systems in their risk management plans. BP failed to oversee the bigger picture and focused on short-term cost cutting rather that resulted in loss of 11 lives and severe health impacts on cleanup workers and local community. This irresponsible approach not only caused damage to the ecosystems, but also adversely affected entire regional livelihoods though extended the damage to national economy and financial situation of the company, thereby sullying its reputation. It’s not just the larger companies that are prone to these potential risks, but the smaller companies as well that face them if they miss out on addressing the environmental impacts in front of extraction industries. The risks and opportunities, although, smaller in proportion to that of BP- which lost over $75 billion in shareholder value and incurred cleanup costs over $1 billion; are by no means less critical to the smaller companies. Not only did BP lost billions of dollars, they also had to face continuous loss of shareholders and related pressures of possible lawsuits. An efficient and reliable sustainability approach is crucial and detrimental in mitigating these types of risks and towards survival of any business (Sheehan, 2010). [Read all other Risk Management Assignment]
- BP, 2010. Deepwater Horizon.Accident Investigation Report. [online] Available at: http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/incident_response/STAGING/local_assets/downloads_pdfs/Deepwater_Horizon_Accident_Investigation_Report.pdf [Accessed 20 April 2011]
- Deepwater Horizon Study Group (DHSG), 2011. Final report on the Investigation of the Macondo Well Blowout.[online] Available at: < http://ccrm.berkeley.edu/pdfs_papers/bea_pdfs/DHSGFinalReport-March2011-tag.pdf> [Accessed 20 April 2011]
- Deepwater Horizon Study Group (DHSG), 2011. Second Progress Report on the Investigation of the Macondo Well Blowout.[online] Available at: http://ccrm.berkeley.edu/pdfs_papers/bea_pdfs/DHSG_July_Report-Final.pdf [Accessed 22 April 2011]
- Miller, A. 2010. BP Oil Spill: Out of Control? ACCA Global.pp. 24-28. [online] Available at: http://www.accaglobal.com/documents/bpcs.pdf?session=fffffffeffffffff0a0121384cfa6dd8e42b30ae01a58b8eb7238991c73bd9f2 [Accessed 21 April 2011]
- Pells, D. 2010. Deepwater Horizon: Lessons from the Recent BP Project Failure and Environmental Disaster in the Gulf of Mexico. PM World Today.12(7). [online] Available at: http://www.pmforum.org/library/editorials/2010/PDFs/july/Editorial-Pells.pdf [Accessed 21 April 2011]
- Sheehan, B. 2010. The Business Case Benefits of Increased Sustainability. SymbioSus.[online] Available at: http://symbiosus.com/cmsdocuments/Business_Case_Benefits_of_Sustainability.pdf [Accessed 21 April 2011]