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Deepwater Horizon Oil Spill: A Study of Behavioural Decision Making

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This report analyses the genesis of the Deepwater Horizon disaster from a behavioural decision making perspective. In order to write this original paper I borrowed from the investigative work of the …

This report analyses the genesis of the Deepwater Horizon disaster from a behavioural decision making perspective. In order to write this original paper I borrowed from the investigative work of the environmental journalist Abrahm Lustgarten, and from concepts developed by behavioural finance and emotional finance academics such as the Canadian Hersh Shefrin, the American John Nofsinger, and the Britons Richard Taffler and David Tuckett.

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  • 1. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 Jérôme Dauvergne, PhD, MRSC 7/16/2012
  • 2. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 Contents 1. EXECUTIVE SUMMARY ...................................................................................................................... 2 2. INTRODUCTION ................................................................................................................................... 3 3. BP: A CORPORATION’S EVOLUTIONARY TALE ........................................................................ 3 3.1. A GIANT WITH FEET OF CLAY ................................................................................................ 3 3.2. ICARUS’ FLIGHT ........................................................................................................................... 4 3.3. PHOENIX OR OEDIPUS?............................................................................................................. 5 4. THE DEEPWATER HORIZON DISASTER – A FIVE-ACT TRAGEDY ..................................... 6 4.1. EXPOSITION: SETTING THE SCENE ...................................................................................... 6 4.2. RISING ACTION: SECURING THE WELL............................................................................... 8 4.3. CLIMAX: THE BLOWOUT .......................................................................................................... 9 4.4. FALLING ACTION: FOR WHOM THE BELL TOLLS.......................................................... 10 4.5. DENOUEMENT: “BEYOND PETROLEUM” OR “BEHAVIOURAL PITFALLS”? ......... 10 5. CONCLUSION AND PERSPECTIVES ............................................................................................. 12 Jérôme Dauvergne – July 2012 Page 1
  • 3. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 1. EXECUTIVE SUMMARY The present report analyses the Deepwater Horizon disaster from a behavioural decision-making perspective. Borrowing from mythological references, it first describes how its main protagonist, BP’s corporation, shaped its organisational culture and attitude towards risk throughout a history of strategic choices and operational failures. It particularly highlights the tendency of its hubristic top executives to indulge in overconfidence and excessive optimism, and to foster a corporate culture biased towards risk-seeking decisions. In a second section, using the literary concept of the dramatic arc, the report seeks to deconstruct the chain of events related to the Deepwater Horizon blowout, and to examine these events through the lens of behavioural and psychological biases. It identifies a wide array of biases at play in the operational decisions, and proceeds to demonstrate how they mirror the major biases observed at the corporate level. The ramifications of the disaster, in terms of responsibilities and liabilities, are also briefly discussed in order to emphasise the magnitude of the consequences resulting from a flawed decision-making process. Finally, the report concludes on a short reflection regarding the impact of behavioural biases on the corporate decision-making process. It offers some insight on debiasing, advocating the use of rigorous operating procedures and transparent communication processes. Jérôme Dauvergne – July 2012 Page 2
  • 4. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 2. INTRODUCTION On April 20, 2010, the Deepwater Horizon rig operated by BP and its partner Transocean was the scene of several shattering explosions, which resulted in 11 fatalities, an environmental catastrophe in the Gulf of Mexico, and a socioeconomic disaster in the US Southern states. This report examines the defining elements of the decision-making process surrounding this disaster through the lens of behavioural psychology. Several detailed analysis of the chain of events that led to the deep water oil rig blowout have been published,1 therefore our primary goal is not to exhaustively investigate the facts, but rather to provide a wider thematic perspective on the root causes of the accident. We will first shed some light on BP’s corporate identity and culture through a brief synoptic tale of its evolution. We will then focus on the particular context of the Deepwater Horizon’s operations to extract the major behavioural traits characterising the decision-making process, and reflect on their consequences. Finally, we will present the implications of this analysis for corporate decisionmaking. 3. BP: A CORPORATION’S EVOLUTIONARY TALE A quick overview of the firm’s history is critical to understand the contextual fabric of BP’s operations in the Gulf of Mexico back in 2010. As the tale unfolds, the most salient characteristics of the firm’s corporate identity and culture come to light. 3.1. A GIANT WITH FEET OF CLAY In 1908, the wealthy British entrepreneur William Knox D’Arcy founded the Anglo-Persian Oil Company, which would later become British Petroleum, and eventually BP. 1 See for instance: “Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling: Report to the President”, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, January 11, 2011. Jérôme Dauvergne – July 2012 Page 3
  • 5. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 D’Arcy had gambled his personal fortune in the hope to discover an oil field in Persia.2 After seven years of unflinching persistence in the face of looming bankruptcy, he triumphed, and invested heavily in an ambitious development programme. Initially, demand fell short of matching his fledging firm’s substantial oil supply capacity, but a spectacular turn of fortune saw Winston Churchill and two global conflicts help the Anglo-Persian Oil Company become a successful state-owned enterprise.3 In the 1970s, the company, renamed British Petroleum, faced its biggest challenge with the rise of independent oil producing countries, and the necessity to find untapped, geopolitically accessible, oil reserves. In the space of a few years, BP’s disproportionate dependency on an undiversified pool of reserves was laid bare, leading to its privatisation by Prime Minister Margaret Thatcher in the 1980s: the giant British Petroleum was standing on feet of clay. 3.2. ICARUS’ FLIGHT In the late 1980s, the epic tale was taking a tragic turn. BP was experiencing considerable financial distress, and needed nothing short of a miracle, and the emergence of a hero, to secure its future. In the 1990s, under John Browne’s leadership, the company initiated a spectacular turn around fuelled by an aggressive combination of cost cutting measures, external growth and audacious exploratory strategies. The new CEO set himself the goal to turn BP into the oil industry leader. He steered its exploration and production arm towards the exploitation of ever more technically challenging oil fields, such as the risky but lucrative deep water offshore oil reserves. Buoyed by a miraculous financial recovery, the company’s management developed a strong sense of overconfidence, despite the numerous signals that the firm had dramatically increased the risk exposure of its operations, whilst severely constraining its capabilities through substantial reductions in staff and maintenance budgets. A risk-seeking corporate culture became pervasive, as evidenced by BP’s more highly leveraged capital structure than its industry 2 “Dramatic Prospects”, BP Magazine, Issue 2, 2009, from BP website, http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/B/bp_magazine_issue_2_2009_ centenary_first_frontier.pdf, accessed June 23, 2012. 3 Ishaan Tharoor, “A Brief History of BP”, Time Magazine, June 2, 2010, http://www.time.com/time/magazine/article/0,9171,1993882,00.html, accessed June 23, 2012. Jérôme Dauvergne – July 2012 Page 4
  • 6. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 rivals’, and by the high volatility of its stock, and its attractiveness as a high risk high return investment.4 BP’s CEO, who was by then known as Lord Browne, or the “Sun King”,5 had committed the cardinal sin of hubris, just as Icarus once thought he could rally the sun in his flight. 3.3. PHOENIX OR OEDIPUS? In the years leading up to the Deepwater Horizon disaster, BP experienced a long string of accidents and near-misses, and a couple of major catastrophes, which highlighted a failure to harness process safety issues within its operations. 3.3.1. Leaky chimney in Texas City In March 2005, the failure of a blow-down stack at BP’s Texas City Refinery triggered an explosion that resulted in 15 fatalities and 180 injured. The ensuing investigative work6 clearly established that “the Texas City disaster was caused by organizational and safety deficiencies at all levels of the BP Corporation”. This accident had been preceded by many other smaller scale ones at the plant, causing three fatalities in 2004 alone.7 More worryingly still, four years after the accident, BP had failed to correct its safety shortcomings at the Texas City Refinery.8,9 3.3.2. Leaky pipe in Prudhoe Bay In March 2006, the failure of a corroded pipeline in Alaska’s Prudhoe Bay resulted in a giant oil spill of over 200,000 gallons.10 This accident was 4 Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, p. 94. 5 Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, p. 56. 6 U.S. Chemical Safety and Hazard Investigation Board Investigation Report, pp.17-18, http://www.csb.gov/assets/document/CSBFinalReportBP.pdf, accessed June 26, 2012. 7 Peter Elkind and David Whitford, “BP: An Accident Waiting To Happen”, Fortune, January 24, 2011. http://features.blogs.fortune.cnn.com/2011/01/24/bp-an-accident-waiting-to-happen/, accessed June 23, 2012. 8 Fact Sheet on BP 2009 Monitoring Inspection, http://www.oshainfo.gatech.edu/psm-compliance/bp-factsheet.pdf, accessed June 26, 2012. 9 Statement from CSB Chairman John Bresland, U.S. Chemical Safety Board, October 30, 2009, http://www.csb.gov/assets/news/document/CSB_Statement_Following_OSHA_BP_Citations__FINAL.pdf, accessed June 26, 2012. 10 Abrahm Lustgarten and Ryan Knutson, “Reports at BP over years find history of problems”, Washington Post, June 8, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/06/07/AR2010060704826.html, accessed June 28, 2012. Jérôme Dauvergne – July 2012 Page 5
  • 7. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 attributed to BP’s “relentless cost-cutting” and resulted in a heavy fine for the company.11 After these two consecutive major accidents, BP had reached a crossroads in its journey: it could atone, and rise from its ashes as the Phoenix, or else, like Oedipus, persist in its hubris and fulfil its fateful destiny. Following the forced resignation of Lord Browne in 2007,12 the rhetoric of his heir apparent, Tony Hayward,13 led to believe that BP would reform the corporate policies governing its attitude towards process safety and operational risk. However, stakeholders soon realised that Hayward’s discourse was not matched with a genuine commitment to fundamental transformations within BP.14 4. THE DEEPWATER HORIZON DISASTER – A FIVE-ACT TRAGEDY The history of the firm, and the recent geopolitical and oil industry contexts, provide the background for this unprecedented human and environmental catastrophe in the Gulf of Mexico. Following Freytag’s dramatic pyramidal structure,15 our narrative of the tragedy illustrates the behavioural mechanisms at play, and their dire consequences. 4.1. EXPOSITION: SETTING THE SCENE 4.1.1. The Macondo Prospect history: BP in the domain of losses In March 2008, BP acquired the rights to exploit Mississippi Canyon Block 252 from the US Mineral Management Service (MMS) for $34 million.16 The Prospect was renamed Macondo by a BP employee, after the cursed village in 11 Yereth Rosen, “BP set to plead in Prudhoe Bay pipeline case”, Reuters, November 29, 2007, http://uk.reuters.com/article/2007/11/29/uk-bp-alaska-idUKN2864909420071129, accessed June 28, 2012. 12 Sarah Lyall, “In BP’s Record, a History of Boldness and Costly Blunders”, The New York Times, July 12, 2010, http://www.nytimes.com/2010/07/13/business/energy-environment/13bprisk.html?pagewanted=all, accessed June 26, 2012. 13 Sheila McNulty, “BP memo criticises company leadership”, Financial Times, December 17, 2006, http://www.ft.com/cms/s/0/27881cee-8e07-11db-ae0e-0000779e2340.html, accessed June 30, 2012. 14 Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, p. 260. 15 Gustav Freytag, “Technique of the Drama: An Exposition of Dramatic Composition and Art”, 2004, University Press of the Pacific (date of publication of the first German edition: 1863). 16 Lindsay Conlon and Alisa Zomer, “In Deep Water: Weak Governance and the Gulf Oil Spill, a 30-Year Timeline”, World Resources Institute, January 2011, p. 14, http://pdf.wri.org/in_deep_water.pdf, accessed June 29, 2012. Jérôme Dauvergne – July 2012 Page 6
  • 8. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 the novel “One Hundred Years of Solitude” by Gabriel García Márquez,17 and would later be dubbed the “well from hell” by some crew members.18 However, BP clearly demonstrated overconfidence and hubris when it filed its application to drill with the MMS.19 BP then became “the legal “operator” for any activities on that block”.20 The firm started drilling in October 2009 with the Marianas rig, leased from the world’s largest offshore drilling contractor, Transocean. However, the rig was damaged by Hurricane Ida after only 34 days, and BP had to lease the Deepwater Horizon, Transocean’s star rig, as a replacement.21 The firm was then incurring $1 million in daily operating cost. The Deepwater Horizon restarted drilling on February 3, 2010. On March 10, facing a dangerous ‘well control situation’ due to major gas “kicks” at Macondo, BP submitted an Application for Permit to Modify to MMS.22 By the time of the accident, the drilling project was running six weeks late and $58 million over budget.23 BP’s staff found themselves in the domain of losses, for which the prospect theory predicts that risk-seeking behaviour is prevalent due to people’s aversion to a sure loss.24 The resulting framing effects biased decision-making on board the Deepwater Horizon towards the pursuit of riskier alternatives in order to minimise immediate financial losses. 4.1.2. BP and Transocean confident in their “magical rig” When the Deepwater Horizon rig arrived at the Macondo Prospect, it had just set a world record for the deepest oil and gas well at BP’s Tiber well in the Gulf 17 Kristen Hays and Rebekah Kebede, “BP's Macondo fate echoes that of fictional city”, Reuters, August 9, 2010, http://www.reuters.com/article/2010/08/09/us-oil-spill-macondo-idUSTRE6784BF20100809, accessed June 28, 2012. 18 “Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling: Report to the President”, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, January 11, 2011, p. 2. 19 Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, p. 290. 20 “Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling: Report to the President”, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, January 11, 2011, p. 92. 21 “Macondo: the well before the blowout”, Oil & Gas Journal, June 21, 2010, http://www.ogj.com/articles/print/volume108/issue-22/general-interest/macondo--the-well.html, accessed June 23, 2012. 22 Lindsay Conlon and Alisa Zomer, “In Deep Water: Weak Governance and the Gulf Oil Spill, a 30-Year Timeline”, World Resources Institute, January 2011, p. 19, http://pdf.wri.org/in_deep_water.pdf, accessed June 29, 2012. 23 “Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling: Report to the President”, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, January 11, 2011, p. 2. 24 Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk”, Econometrica, 1979, Vol. 47, No. 2, pp. 263-292. Jérôme Dauvergne – July 2012 Page 7
  • 9. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 of Mexico.25 Despite its poor maintenance records,26 this feat bestowed on the rig the status of “phantastic object”, as defined by proponents of emotional finance, allowing management “unconsciously to feel omnipotent”.27 Furthermore, past successes induced the crew to indulge in the familiarity bias.28 Therefore, despite the setbacks experienced since the inception of the Macondo project, the team became prone to overconfidence and excessive optimism, two major cognitive behavioural biases.29 4.2. RISING ACTION: SECURING THE WELL In the weeks preceding the disaster, the operations had entered the critical phase of stabilising the well in readiness for its future exploitation. 4.2.1. A complex job This phase consisted of technically challenging operations. BP was responsible for coordinating the work of several specialised contractors, including Transocean and Halliburton. Task familiarity and past successes create illusion of control in technically complex situations,30 breeding overconfidence. For each operation, several technical alternatives were available, some of which were considered as best practice in the oil industry. Investigations in the accident demonstrated that BP’s staff consistently ignored these best practices in their decision-making process.31 4.2.2. Making complex decisions under high uncertainty 25 “Deepwater Horizon Drills World's Deepest Oil & Gas Well”, Featured article, from Transocean website, http://www.deepwater.com/fw/main/IDeepwater-Horizon-i-Drills-Worlds-Deepest-Oil-and-Gas-Well-419C151.html, accessed June 30, 2012. 26 Ian Urbina, “Workers on Doomed Rig Voiced Concern About Safety”, The New York Times, July 21, 2010, http://www.nytimes.com/2010/07/22/us/22transocean.html?_r=1&pagewanted=all, accessed June 23, 2012. 27 Richard J. Taffler and David A. Tuckett, “Emotional Finance: The Role of the Unconscious in Financial Decisions”, Chapter 6 in Baker, K. and Nofsinger, J (eds) Behavioral Finance, 2010, Wiley. 28 Hersh Shefrin, “Behavioural Corporate Finance”, 2007, London: McGraw-Hill Irwin, p. 46. 29 Hersh Shefrin, “Behavioural Corporate Finance”, 2007, London: McGraw-Hill Irwin, pp. 3-7. 30 John R Nofsinger, “The Psychology of Investing”, 2010, London: Pearson Prentice Hall, pp. 19-20. 31 Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, p. 320. Jérôme Dauvergne – July 2012 Page 8
  • 10. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 Securing an oil well relies on three critical parameters: the design of the well casing, the use of centralisers to guarantee the efficiency of the cementing, and the integrity testing of the cement bond. In all three areas, BP’s decision-making process was heavily influenced by the cost and duration of each alternative, rather than by the level of protection it offered against the risk of a catastrophic failure. When BP’s staff selected the “long string casing” option, they knew it was inherently less safe, but felt it offered the best expected value.32 They displayed overconfidence in their ability to control the gas “kicks”, and excessive optimism in evaluating the probability of their occurrence. BP’s decision concerning the use of a reduced number of centralisers bears the hallmarks of the confirmation bias.33 The validity of Halliburton’s OptiCem model was questioned because its output failed to support the adoption of a cheaper and more expeditious well design. BP’s staff displayed excessive optimism in the form of wishful thinking,34 as exemplified by the words of Brian Morel (“hopefully the pipe stays centralized due to gravity”), and Brett Cocales (“will probably be fine and we’ll get a good cement job”). 35 Biases were also at play in the decisions concerning the testing of the cement bond integrity. BP’s team demonstrated the bias of aversion to a sure loss when they decided to cancel the cement bond log, which would have resulted in extra costs and delays.36 Their subsequent decision to alter the conditions of the negative pressure test, dismissing the unsatisfying measurements previously obtained,37 provided further evidence of confirmation bias in action. 4.3. CLIMAX: THE BLOWOUT On April 20, another major “gas kick” caused the failure of the well, resulting in fire and explosions on the Deepwater Horizon rig. 32 http://democrats.energycommerce.house.gov/documents/20100614/BP-Production.Casing.TA.OptionsString.Again.Best.Option.pdf, accessed July 10, 2012. 33 Hersh Shefrin, “Behavioural Corporate Finance”, 2007, London: McGraw-Hill Irwin, p. 7. 34 Hersh Shefrin, “Behavioural Corporate Finance”, 2007, London: McGraw-Hill Irwin, page 46. 35 Christina Ingersoll, Richard M. Locke, Cate Reavis, “BP and The Deepwater Horizon Disaster of 2010”, September 13, 2011, MIT Sloan Management Case Study. 36 Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, pp. 313-314. 37 Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, pp. 318-320. Jérôme Dauvergne – July 2012 Page 9
  • 11. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 The crew were caught unaware. Indeed, Transocean management’s overconfidence had led the firm to operate its rigs with a significant number of alarms wilfully disabled.38 The accident turned into disaster as the blowout preventer, the ultimate safety device relied upon in case of emergency, failed to seal the well effectively.39 4.4. FALLING ACTION: FOR WHOM THE BELL TOLLS 4.4.1. A miscalculation of expected value The operational decisions taken in the build-up to the Deepwater Horizon disaster allowed BP to save a few million dollars. Although BP and Transocean knew that the costs of a catastrophic failure would largely outweigh these savings, they believed the value function of their gamble to be positive because they grossly underestimated the probability of such an event. 4.4.2. Who’s to blame? BP was quick to downplay its own responsibility for the accident, arguing that Transocean was responsible for the operations on the rig, and Halliburton for the defective cement job.40 This behaviour, illustrative of the self-attribution bias,41 was symptomatic of BP executives’ habit to resort to denial as a defence mechanism.42 4.5. DENOUEMENT: “BEYOND PETROLEUM” OR “BEHAVIOURAL PITFALLS”? In 2001, John Browne strategically re-labelled BP as “Beyond Petroleum”. However, his firm’s persistent commitment to a flawed corporate process of decision-making under uncertainty should have earned it the label of “Behavioural Pitfalls”. 38 Ed Pilkington, “Deepwater Horizon alarms were switched off 'to help workers sleep'”, The Guardian, July 23, 2010. http://www.guardian.co.uk/environment/2010/jul/23/deepwater-horizon-oil-rig-alarms, accessed July 8, 2012. 39 Ben Casselman and Russell Gold, “Device's Design Flaw Let Oil Spill Freely”, Wall Street Journal, March 24, 2011, http://online.wsj.com/article/SB10001424052748704050204576218653335935720.html, accessed July 11, 2012. 40 Steven Mufson and David Hilzenrath, “In its report on the gulf oil spill, BP spreads the blame”, Washington Post, September 8, 2010. http://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090807789.html, accessed July 9, 2012. 41 John R Nofsinger, “The Psychology of Investing”, 2010, London: Pearson Prentice Hall, p. 12. 42 See for example: Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, pp.159-160. Jérôme Dauvergne – July 2012 Page 10
  • 12. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 4.5.1. A tale of behavioural biases at work Table 1: Illustrative overview of behavioural psychology insights relevant to the Deepwater Horizon Disaster case Theoretical concept Hubris Overconfidence Excessive optimism Illusion of control Confirmation bias Representativeness heuristic Familiarity bias Self-attribution bias Framing Corporate level illustration Browne, the “Sun King” Hayward: “Assurance is killing us”43 Systematic underestimation of probabilities of accidents Faith in “statistical” corporate safety metrics Emphasis on corporate safety metrics, dismissal of flagged process safety issues Individual safety = Process safety Self-proclaimed excellence in offshore deep water drilling Blaming contractors and bad luck for accidents John Browne, 1989: “This is dreadful. We’re declining”44 Loss aversion Habit of cutting costs to remain in the domain of gains Aversion to a sure loss Deep budgetary cuts in maintenance and repairs Mental accounting45 / Narrow framing46 - Groupthink47 “Phantastic object” BP’s history of retaliations against whistle-blowers48 Browne’s “magical abilities”50 Operational level illustration Application to drill with MMS Departure from industry best practices Desirability: huge “pay zone”; attractiveness of shortcuts Task familiarity and past successes (Tiber well) Rebuttal of OptiCem model; well negative pressure testing BP & Transocean’s past offshore successes Macondo project in the domain of losses Cheapest and fastest options: “long string casing”, reduced number of centralisers Decision to cancel the cement bond log Failure to account for risk compounding Polarisation:49 BP engineers’ decision for the centralisers The Deepwater Horizon rig 43 Terry Macalister, “BP boss warns of shake-up after dreadful results”, The Guardian, September 26, 2007, http://www.guardian.co.uk/business/2007/sep/26/oilandpetrol.news, accessed July 10, 2012. 44 Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, p. 4. 45 Hersh Shefrin, “Behavioural Corporate Finance”, 2007, London: McGraw-Hill Irwin, p. 114. 46 Hersh Shefrin, “Behavioural Corporate Finance”, 2007, London: McGraw-Hill Irwin, p. 12. 47 Irving Janis, “Groupthink”, 1982, Houghton-Mifflin, Boston, MA. 48 For example: Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, pp. 201-202. 49 Hersh Shefrin, “Behavioural Corporate Finance”, 2007, London: McGraw-Hill Irwin, p. 146. 50 Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, p. 53. Jérôme Dauvergne – July 2012 Page 11
  • 13. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 Table 1 gives a short illustrative overview of the major behavioural and psychological biases at work in BP’s organisation and on the Deepwater Horizon rig. Although the intimate mechanisms involved in the unfolding of the Deepwater Horizon disaster are highly complex, overconfidence, excessive optimism and framing effects can be identified as the overarching biases at play, both at the corporate and operational levels. 4.5.2. The real cost of risk… and learning from experience Following the disaster, BP’s executives were confronted with the genuine cost of adopting an extreme risk-seeking culture, and learning from mistakes: the financial losses that would result from the lasting damage to BP’s reputation with its various stakeholders would undoubtedly dwarf the colossal sums of money the accident had already cost the firm.51 5. CONCLUSION AND PERSPECTIVES Our analysis demonstrates how, over the past two decades, BP’s biased attitude towards operational risk led the organisation down a path rife with human and environmental tragedies. In particular, overconfidence, excessive optimism, and framing effects, led BP’s management to foster an organisational culture of excessive risk-seeking. At the operational level, this translated into the regular acceptance of inadequate standards of process safety and unmanageable levels of risk, and culminated in the Deepwater Horizon blowout. The contribution of other factors, such as conflicts of interest within US governmental agencies, and agency problems between BP and its contractors, must also be acknowledged. However, this study highlights the critical influence of the behavioural and psychological biases underpinning corporate decisions. It particularly emphasises the pernicious impact on operational performance of conflicting pressures and messages in top-down communication. These findings suggest that in order to debias, or to mitigate the effect of behavioural pitfalls, major corporate decisions must be supported by a rigorous set of company-wide implemented standards. This implies the establishment of transparent communication channels across the various levels within the firm. In 51 Guy Chazan, “BP results show a company still in recovery”, Financial Times, May 1, 2012, http://www.ft.com/cms/s/0/33424d32-935d-11e1-8c6f-00144feab49a.html#axzz20i5o9nbt, accessed June 23, 2012. Jérôme Dauvergne – July 2012 Page 12
  • 14. A Study of Behavioural Decision Making: BP and the Deepwater Horizon Disaster of 2010 the context of process safety policy in the oil industry, Exxon’s celebrated implementation of its Operations Integrity Management System following the Valdez disaster is a good case in point.52 BP’s subsequent failed attempt at emulating Exxon’s model serves only to reiterate the influence of corporate culture on behaviours. 52 Abrahm Lustgarten, “Run to Failure: BP and the Making of the Deepwater Horizon Disaster”, 2012, W. W. Norton & Company, p. 104. Jérôme Dauvergne – July 2012 Page 13

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