Original: SABRE Simulation, please give sources if someone likes to quote

Volume 14 Letter 10

Everyone remembers the sinking of the Deep Water Horizon oil rig in the Gulf of Mexico in 2010 and the devastating oil spill. Many questions still remain as to how this could have happened, especially to a company like BP which so publicly declared itself a friend of the environment and a 'safety first' company. Behind the scenes, authors Ingersoll, Locke and Reavis paint a very different picture of BP. 1 Regardless of its external portrait, internally the oil company was operating a very different business model, solidly focused on a single metric ....the bottom line. The sinking of the Deep Water Horizon was the ultimate outcome of a strategy that had gone terribly wrong!

In business, risk taking is necessary and moving business strategy decisions deeper into the organization is something I applaud. However, it is important to distinguish between business decisions and engineering decisions. Drilling for oil, flying airplanes and building skyscrapers is not the place for risk taking and applying a risk taking model to engineering decisions can only lead to disaster.

In the 1970's BP was a government owned Oil Company which Margaret Thatcher then spun off to the private sector. By the early 1990's the company was almost bankrupt and had started to take some cost cutting measures. John Browne, who became CEO of BP in 1995, wanted to create a spirit of entrepreneurship among BP employees by extending decision making responsibility down the organization. Under his leadership responsibility for meeting performance targets would move from the regional operating companies to the onsite asset managers. Employee compensation was tied to site performance in a model known as "asset federation" . In an industry where risk management and safety are vital to long term success the asset federation model removed any incentive to share best practices.

Fast forward to 2007 when Tony Hayward took over as CEO. He spoke openly about transforming BP's culture to one that was less risk adverse. Too many people were making too many decisions that he felt were leading to extreme cautiousness. "Assurance is killing us" he told staff in 2007. 
The accidents started in the mid 2000's. First was an oil refinery explosion that killed 15 people and injured 180. The second was a major oil spill in Alaska Prudhoe Bay spilling more than 200,000 gallons of oil into the bay due to poor pipeline maintenance. Despite strong criticism in a report written for congress outlining BP's focus on performance over safety, BP stayed the course.

The BP Oil disaster in the Gulf of Mexico can't be blamed on one single mistake. It can be said that the numerous safeguards considered best practices in the oil drilling industry were consistently ignored. Poor decisions included: saving money by running an extra-long casing rather than short sections which can better control gas, saving time by not circulating the drilling fluid to see if gas was present, choosing not to wait for the extra centralizers needed on the casing that would ensure a better cement seal. And the list goes on.

BP's "Asset Federation" pushed risk where it didn't belong and inadvertently rewarded corner cutting without a real understanding of the possible consequences. Incentives are powerful drivers of strategy but in the wrong places they can cause disaster. As you develop your strategies for 2015 and beyond consider the role that incentives play and make sure they are driving the desired behavior!

1. Christina Ingersoll, Richard M. Locke, Cate Reavis, "BP and the Deepwater Horizon Disaster of 2010" MIT Sloan School of Management, Sept. 13, 2011.