Read case on British Petroleum
Keeping in mind: “Moral Basis of Economic Theory”, “Moral Claims of Economic Theory”, and the “Pragmatic Objections to Economic Theory” discussed in chapter 2, please reflect on the various impacts (benefits and harms) that resulted from this case specifically:
• How did the perceived economic outcomes influence the ethical duties of management and leadership in this case?
• What measures could have been taken to ensure crisis prevention?
• What could leadership have been done differently to better manage the crisis?
• What were some of the ethical duties associated to this case - could management have done things differently to ensure safety?
• When a corporation harms its employees (members of society) as in this case, what can the corporation do to minimize the negative attitudes projected onto them from the community?
• Critical Insight: Student explores issues/problems from critical standpoint using class resources (lessons, text, slides,
• Knowledge of Subject Matter: Student demonstrates strong understanding of subject matter
• Past Experience: Student provides insight to inform on issues/problems based on past experiences, hindsight, and lessons-learned; use of examples and/or stories to enhance understanding of topic
• Grammar and APA: Student employs formal writing skills and strong grammar skills (punctuation, vocabulary, organization, transition of thought) as well as use of proper APA guidelines for both bibliography/references and Intext Citations
British Petroleum and the Delay of Maintenance
On March 23, 2005, a massive explosion rocked the British Petroleum refinery located in Texas City, on the Gulf of Mexico, just outside Galveston. At that time, this refinery was one of the largest in the United States; it employed 1,800 people, covered 1,200 acres, and converted 460,000 barrels of crude oil a day into gasoline and high-value petrochemical products. The explosion occurred in a unit of the refinery that produced one of those petrochemical products. Naphtha, an exceedingly volatile com- ponent of crude oil, was isolated by distillation and converted to a more usable form through isomerization (a rearrangement of the individual atoms within each molecule that changed the physical properties but not the chemical composition of the gas) in high-pressure vessels using high-temperature processes. The resultant output was then used to raise the octane level of the gasoline that was the major output of the refinery. The naphtha, the isomer derived from the naphtha, and the gasoline with the isomer additive were all highly combustible products.
The blast was strong enough to rattle windows in downtown Galveston, 20 miles away, and was even felt in Houston, 35 miles distant. Local emergency services responded quickly, but early reports indicated that 15 people had been killed and well over 150 injured, many of those seriously burned. A BP spokesperson explained that the explosion had occurred while the isomerization unit was being brought back “on stream” to full production after having been shut down for annual inspection and repair. Start-up periods were always a dangerous time, the BP spokesperson contin- ued, especially for the high-volatility “additive” products that are an inherent part—and problem—of petroleum refining.
The immediate reaction throughout the region was, of course, sympathy for the fam- ilies of those killed and offers of help to the individuals who were injured, together with pledges by BP of a “long and intensive investigation to determine the cause of the explosion” (New York Times, March 24, 1005, p. A14).
But then accounts of prior problems at BP refineries, where accident levels seemed to have exceeded normal industry standards, began to appear. On March 30, 2004, almost a year to the day before the most recent explosion reported here, a blast had occurred at this same gasoline processing unit of this same Texas City refinery. No deaths or injuries had resulted, but a subsequent investigation by the U.S. Occupational Health and Safety Administration resulted in citations for 14 alleged violations of stan- dard operating procedures (Wall Street Journal, March 24, 2005, p. A6). And then, just a week prior to the March 24 explosion at Texas City, BP was reported to have settled a large California lawsuit claiming that it had (1) failed to properly maintain the huge storage tanks that are a common sight at most crude oil refineries, and (2) that it had improperly falsified the maintenance records for those storage tanks, at its largest refinery within California. BP agreed in this case to pay a fine of $81 million for these documented errors. And finally, in September 2004, six months before the explosion that forms the topic of this case, an accidental release of superheated steam at the Texas City refinery had scalded two workers to death and seriously injured a third. The Occupational Health and Safety Administration in this instance charged BP with “intentional disregard of or plain indifference to” OHSA rules (Wall Street Journal, March 25, 2005, p. A3). These earlier events expanded the concerns of local residents, state regulators, and federal authorities alike:
[The] deadly explosion at a Texas refinery has increased scrutiny of the safety record at BP PLC, which has been dogged by a spate of recent incidents in the U.S., including several at the site of Wednesday’s explosion. (Wall Street Journal, March 25, 2005. p. A3)
These concerns were further magnified by a rather unusual factor associated with the most recent explosion. Four of the victims were women who worked in an office trailer located only 50 yards from the blast site. There was no official explanation why a wooden office trailer housing clerical personnel had been placed in such close prox- imity to potentially the most dangerous processing unit within the refinery (New York Times, March 15, 2005, p. A3).
In May 2005, two months after the March 25 explosion, BP issued an interim report that laid most of the blame on a small number of employees for “operational and super- visory mistakes.” The company did, however, accept overall responsibility for the acci- dent, and said that it had set aside $700 million to compensate all of the victims (Wall Street Journal, December 10, 2005, p. A9).
In September 2005, seven months after the March 25 explosion, the Occupational Health and Safety Administration issued a far more condemning report. This govern- mental agency found hundreds of safety violations that it called “egregious and will- ful,” and levied a fine of $21.4 million. Most of the safety violations were related to a venting system at the isomerization unit that should have captured and “flared off” (harmlessly incinerated) all leaking gases and sent all leaking fluids to an underground and airproof (and therefore flameproof) storage tank. That safety system—with its interrelated valves, controls, tanks, flares, and alarms—was found not to have been working properly.
The $21.4 million fine, though a record size for the agency, was much more a minor matter for BP, which had reported an after-tax profit of $15.7 billion for the prior year. Far more important to the company, doubtless, were the terms of a three-year
probationary period imposed by OHSA. BP had to (1) request permission from the agency before starting up the totally destroyed isomerization unit after rebuilding was completed; (2) report all accidents and all injuries, regardless of cause, to the agency on a regular basis; and (3) hire outside professionals to review all refinery safety pro- grams and management communication procedures (Wall Street Journal, September 23, 2005; p. B1).
All of these events, reports, fines, and requirements came as a surprise to most inves- tors, competitors, and even environmentalists. British Petroleum, long considered a laggard in the global petroleum industry, had apparently been almost totally rejuve- nated starting in 1995 by the appointment of John Browne, a Cambridge University– educated physicist, art collector, and opera buff who differed markedly from the tra- ditional image of rough-and-tumble petroleum industry executives, as CEO. The new appointee, however, did have extensive oil field experience. He had joined BP in 1966, shortly after graduation, and then lobbied extensively to be detached from the London headquarters office, which was the traditional training ground for new university hires in Britain, and sent to the North Slope of Alaska. The North Slope at this time was a cold and inhospitable place that was in the midst of an active drilling and development program to gather new supplies to meet the oil shocks and shortages of the 1970s and 1980s caused by two sequential Arab oil embargoes.
John Browne did both manual and managerial work in Alaska for eight years and then, buoyed by that experience on his résumé, rapidly moved up the corporate promotion lad- der. He became manager of North American operations (and gained an MBA from Stan- ford while stationed in San Francisco), vice president for global development, executive vice president for global operations and then, in 1995, at 52 years of age, was appointed president and chief executive officer. BP was a traditional British company, and part of that tradition was the rule that the chairman of the board of directors had to serve in a non-executive position. The chairman oversaw operations; he or she did not direct them.
As president, John Browne quickly began directing operations in a forceful yet urbane way. In 1995, oil prices had fallen from the high levels of the 1980s when there were continual shortages of most petroleum products due to the Arab embargoes. The new supplies from Alaska, South America, and Africa had ended those shortages, cre- ated surpluses, lowered the market price for crude oil to $10 per barrel, and created a totally new set of problems for senior oil company executives.
John Browne convinced members of the board of directors that acquisitions to gain economies of scale and investments to get efficiencies of operation were the only means of survival for an underperforming company under those changed conditions. He quickly negotiated the acquisition of Amoco Oil Company, a midsized firm headquar- tered in Chicago with refining and retail operations in the Midwest, and then a merger with Atlantic Richfield, a somewhat larger Los Angeles firm with extensive holdings in southern California. At the same time, he endeared himself, and his company, to environmentalists when he became the first oil company executive to agree, in 1997, that global warming was real, adopted the “Beyond Petroleum” slogan for BP, and announced active programs to develop less environmentally harmful sources of energy.
The timing for all of these moves could not have been better. BP earnings expanded rapidly as industrial development in China and India created new demands for petroleum products and raised price levels for crude oil over the next seven years from $10 per barrel to $160 per barrel. BP had secure supplies of that oil, in the United States and the Arab Emirates, and was able to report record profits starting in 1998. John Browne became known as the man who had transformed BP from an also-ran into a global pow- erhouse. He was knighted in 1998 by Queen Elizabeth; in 2001 the government awarded him a life peerage with the title Lord Brown of Madingley.
Lord Browne’s record of continual success began falling apart in late 2005. The March 25 explosion at Texas City started the decline, and the subsequent accounts of unreported or underreported accidents at other locations accelerated the process.
In December 2005, BP published its final report on the Texas City explosion. Here it accepted wider managerial responsibilities than previously acknowledged. The report explained that there were underlying causes that included a poor working environment at the facility, poor priority-setting among managers, and a lack of clear accountability at all levels. This report concluded with a plan to spend more than $1 billion over the following five years to replace older equipment and improve maintenance procedures (Wall Street Journal, December 10, 2005, p. A9).
The greatly increased level of spending was quickly said to be needed. There had not been a new oil refinery built in the United States since 1975 due to strict environmental laws that made it less expensive to operate abroad—particularly in smaller nations and less developed regions, where new investments, even in the so-called dirty industries, were warmly welcomed. The old U.S. plants continued to operate, however, partially because the technology of petroleum refining had not changed very much so they were still fairly efficient, but primarily because they were fully depreciated and thus highly profitable. Federal regulators and company officials alike claimed that these older U.S. plants did not pose unusual dangers, as long as effective safety and maintenance pro- grams were in place (Wall Street Journal, July 27, 2005, p. A1).
Additional problems and damaging disclosures kept appearing, however. In March 2006, BP was responsible for the largest oil spill on the North Slope of Alaska since the active development of that area had started. Oil spills were greatly feared in that region as the permafrost made full remediation almost impossible. The cause was quickly determined to be the rupture of the major BP pipeline that served their gathering fields; it was found to have been poorly maintained, to be badly rusted, and to require total replacement (New York Times, July 27, p. C2).
Then, in October 2006 the consulting firm that BP had been required to hire to review all of their worker safety and management communication procedures by the Occupational Health and Safety Administration as one of the conclusions to their ear- lier study on the causes of the March 25 explosion, issued its first report. It was dis- closed that the isomerization tower that had leaked the flammable gases and fluids that caused the deadly explosion on March 25 had leaked those same gases and fluids not once before, as reported by the company, but eight times. On two of those eight occa- sions, the safety systems had failed and serious fires had occurred, though without casualties. The investigator leading this inquiry found that BP managers were focusing on “high-frequency, low-consequence events” such as accidents to individual work- ers, not on the mechanical integrity of processing equipment that could result in major harms to many persons. The OSHA statement that accompanied the release of this consultant’s report charged that BP’s continual demands for substantial reductions in fixed costs adversely impacted both infrastructure maintenance and worker training
It had been found, for example, that the refinery’s central training staff had been reduced from 30 in 1998 (the year of the purchase from Amoco) to 8 in 2004 (New York Times, October 31, 2006, p. C3).
Senior BP officials objected to these findings. They claimed that budgetary deci- sions did not play a crucial role in the March 25 explosion that had resulted in a final toll of 15 killed and 170 injured. But that claim was at least partially overridden by a series of statements from local managers that were recorded during an internal account- ability review conducted by BP, and either leaked or distributed to the press. The man- ager of the Texas City refinery was reported to have claimed that he had been ordered to cut costs by 25 percent in early 2005, just months before the deadly accident. He added that he had pleaded for additional funds, citing problem areas such as the poor condi- tion of the processing equipment, but had been denied. The claim of this manager of the Texas City refinery was supported by a statement of the BP executive in charge of North American operations that he had been directed to keep maintenance expenditures low because of “10 years of lousy refinery margins.” Both men’s statements, however, were refuted by the BP vice president for global refining, who said that he had never received a request for additional funds for maintenance at Texas City
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