Case Study Ii-jan 09
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Question Paper Integrated Case Studies - II (MB3J2) : January 2009 Case Study∗ (100 Marks) • This section consists of questions with serial number 1 - 5. • Answer all questions. • Marks are indicated against each question.
Read the case carefully and answer the following questions: 1. a.
b.
explain the significance of safety culture with respect to personal and process safety. ( 0 s)
What according to you could be the essential elements of a strong safety culture and in the light of these elements, discuss the failure of BP. Also, in your opinion, what should Tony Hayward do to counter the criticisms raised against BP’s process safety systems and 1 mark culture? ( 2 s)
However, some of its critics dismissed it as a “greenwashing” effort. In this regard, discuss whether BP’s move was an indicator of being environmental friendly company or a cynical attempt to 2 marks manage its reputation i.e., a PR gimmick to improve image. ( 0 )
3. The case refers to the expression “It-can’t-happen-here” and the concept of “Step-up supervisors” a.
Discuss, according to you, how an HR manager can deal with the “It-can’t-happen-here” 1 mark mentality which is widespread in an organization. ( 0 s)
b.
Discuss the rationale behind using “Step-up supervisors” in day-to-day operations.
1 mark ( 0 s)
accidents in their refineries. Explain the impacts (in terms of financial, operational, etc.) of not adhering to safety and also explain the short-term measures taken by BP to deal with the 1 marks accidents. ( 8 )
5. a.
b.
an integrated and responsible approach to governance, ethics and sustainability. ( 0 s)
Recent safety crises in BP refineries in Texas and Pudhore Bay in Alaska have turned the spotlight on core values such as governance, ethics and sustainability. Why did BP fail to live up to the expectations of superior core values? Also, discuss the probable guidelines for effective governance that should be put in place by BP for the adherence of the core 1 mark values. ( 0 s) BP: Putting Profits Before Safety?
"What BP experienced was a perfect storm, where aging infrastructure, overzealous cost-cutting, inadequate design and risk-blindness, all converged."1 – Carolyn Merritt, Chairman of the U.S. Chemical Safety and Hazard Investigation Board, 2 in 2006. “Based on its review, the Panel believes that BP has not provided effective process safety leadership and has not adequately established process safety as a core value across all its five U.S. refineries. *
The above case is prepared only for the purpose of examination and not to illustrate effective or ineffective performance of the company. The case contains factual information adapted to and combined with other information to enable analysis of the given topics. Page 1 of 25
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“Cost-cutting led to BP Refinery Fire, Report Concludes,” www.pbs.org, November 01, 2006. The US Chemical Safety and Hazard Investigation Board, headquartered in Washington, USA, is a federal agency that is responsible for conducting investigations of industrial chemical accidents in the US. “The Report of the BP US Refineries Independent Safety Review Panel,” www.bp.com, January, 2007. The UK Health and Safety Commission defines safety culture as “the product of individual and group values, attitudes, perceptions, competencies, and patterns of behaviour that determine the commitment to, and the style and proficiency of, an organisation’s health and safety management.” (Source: www.en.wikipedia.org) To help assure safe and healthful workplaces, US Occupational Safety and Health Administration (OSHA) has issued the Process Safety Management of Highly Hazardous Chemicals regulations which contain requirements for the management of hazards associated with processes using highly hazardous chemicals. “BP Safety Standards ‘Wholly Inadequate’,” www.inthenews.co.uk, January 16, 2007. Exxon Mobil Corporation, headquartered in Irving, Texas, USA, is the largest publicly traded integrated oil and gas company in the world. Royal Dutch Shell Plc., headquartered at The Hague, The Netherlands, is the world’s second largest oil company. “BP Surprises by Naming Successor for CEO Early,” www.taipeitimes.com, January 14, 2007. “Safety at Oregon’s BP Plant,” www.13abc.com, January 17, 2007. Sonja Franklin, “BP’s Browne Failed on Refinery Safety, Panel Reports (Update 5),” www.bloomberg.com, January 16, 2007. The Pipeline and Hazardous Materials Safety Administration is an agency under the US Department of transportation. In the pipeline industry, a pipeline inspection gauge (or pig) is a tool that is sent down a pipeline and propelled by the pressure of the product in the pipeline itself. It is the chief device used in pigging (maintenance of pipelines using pigs to perform various operations on a pipeline without stopping the flow of the product in the pipeline). “Oil Giant Told to Fix Pipelines after Alaska Spill,” www.msnbc.msn.com, March 23, 2006. A whistleblower is someone (most often an employee, former employee, etc.,) who provides information about an employer’s supposed misconduct. “As BP’s Hayward Takes Helm, His Priorities Should be Clear,” www.wsj.com, January, 2007. Amoco Oil Corporation was a global oil and gasoline conglomerate founded in 1889 by John Rockefeller. The company was initially incorporated as Standard Oil of Indiana which was formed from the break-up of Standard Oil Co. Burmah Oil Company was a British oil company which was founded in Glasgow, Scotland, in 1886. The company acquired the Castrol Company in 1966. After this acquisition, the company was called Burmah Castrol Plc. Valdez oil terminal, an oil port in Valdez, Alaska, was acquired by the British Petroleum Company from Chugach (it was the name of a native culture and group of people in the Kenai Peninsula and Prince William Sound regions of Alaska). Standard Oil was an American oil company also called Sohio. It was one of the successor companies to Standard Oil founded by John Rockefeller. BP took up a 25 percent stake in the company in 1969 and the remaining in 1987. In October 1973, members of the Organization of Arab Petroleum Exporting Countries including Egypt and Syria decided not to export petroleum to countries (like the US and other West European countries) that had supported Israel in its conflict with Syria and Egypt (Source: www.en.wikipedia.org). Selection Trust, a British based mining finance house, was formed in 1913 by Chester Beatty. The company mainly financed and developed mining operations worldwide. The company’s team of geologists and mining engineers were sent across the world to discover areas that could be explored for minerals. Atle Christer Christiansen, “Beyond Petroleum: Can BP Deliver,” www.fni.no, June 2002. Helios is the sun god in Greek mythology. The company thought that the upper case BP gave an imperialist impression. By shifting to ‘bp’ which was in lower case, the company wanted to project itself as a friendly company. Greenwashing is a term that environmentalists and other critics give to the activity of giving a positive public image to supposed environmentally unsound practices. TJ Aulds, “BP Refinery Manager No Stranger to Challenges,” www.galvestondailynews.com, January 30, 2007. “Safety at Oregon’s BP Plant,” www.13abc.com, January 17, 2007. Laurel Brubaker Calkins and Margaret Cronin Fisk, “BP Faces Growing Criminal Probe over Texas Refinery (Update 3),” www.bloomberg.com, January 29, 2007. The US Occupational Safety and Health Administration (OSHA) is an agency of the US Department of Labor. OSHA’s mission is to prevent work-related injuries, illnesses, and deaths by issuing and enforcing rules for workplace safety and health. John Porretto, “Report: Deadly Fire Followed BP Safety Failure,” www.jacksonholestartrib.com, January, 2007. Micheal Harrison, “Texas Report to Maul BP Management,” www.independent.co.uk, January 15, 2007. Katy Byron, “BP Chided in Report on Fatal Texas Fire,” www.money.cnn.com, October 31, 2006. “Safety at Oregon’s BP Plant,” www.13abc.com, January 17, 2007.
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Roger Shrives, “BP Condemned over Safety Standards,” www.socialistparty.org.uk, February 1, 2007. Katherine Torres, “Panel Finds BP Lacking in Safety Leadership,” www.occupationalhazards.com, January 17, 2007. Abrahm Lustgarten, “What Went Wrong at Prudhoe Bay,” www.money.cnn.com, August 21, 2006. David Robertson, “BP Failed to Learn from Mistakes, Panel Says,” www.business.timesonline.com, January 17, 2007. Sonja Franklin, “BP’s Browne Failed on Refinery Safety, panel Reports (Update 5),” www.bloomberg.com, January 16, 2007. “Alaska Hit by ‘Massive’ Oil Spill,” www.news.bbc.co.uk, March 11, 2006. The Exxon Valdez oil spill was the most devastating environmental disaster to occur at sea. On March 24, 1989, the oil tanker Exxon Valdez spilled its contents into the sea affecting 1,900 km of the Alaskan coastline. About 30 million US gallons (1US gallon = 3.785 litres) of crude oil were spilled, affecting the marine ecology as well as the lives of Alaskan fishermen. Exxon spent some US$2 billion cleaning up the spill, and a further US$1 billion to settle civil and criminal charges related to the case. In 1994, an Anchorage jury awarded the fishermen and affected communities US$5 billion in punitive damages. Exxon appealed against the ruling, claiming that the amount was excessive and unjustified. On December 2002, the damages were reduced to US$4 billion. As of March, 2007, Exxon had avoided paying the fine. “Oil Giant Told to Fix Pipelines after Alaska Spill,” www.msnbc.msn.com, March 23, 2006. “Prices Climbing after Oil Field Shutdown,” www.cnn.com, August 9, 2006. Wesley Loy and Richard Richtmyer, “Massive Repairs on the Slope,” www.adn.com, August 8, 2006. Abrahm Lustgarten, “What Went Wrong at Prudhoe Bay,” www.money.cnn.com, August 21, 2006. Nelson Schwartz, “BP was Warned,” www.money.cnn.com, October 2, 2006. Stephen Voss, Bloomberg News, “BP Oil Production Declines for Sixth Consecutive Quarter,” www.iht.com, January 10, 2007. RCM is a division of Allianz Global Investors. Nick Bevens, “Browne’s Exit Expected to Boost Lagging BP,” www.business.scotsman.com, January 16, 2007. Stephen Voss, Bloomberg News, “BP Oil Production Declines for Sixth Consecutive Quarter,” www.iht.com, January 10, 2007. TNK-BP is a leading oil company in Russia. It was formed in 2003 as a result of a merger between BP’s oil and gas assets in Russia and the oil and gas assets of the Alfa Access Renova group. (Source: www.tnk-bp.com). “BP Surprises by Naming Successor for CEO Early,” www.taipeitimes.com, January 14, 2007. “BP Surprises by Naming Successor for CEO Early,” www.taipeitimes.com, January 14, 2007. Royal London Asset Management is the wholly owned asset management subsidiary of The Royal London Mutual Insurance Society (Royal London), the second largest mutual life insurer in the UK. (Source: www.scottishlife.co.uk) “BP Surprises by Naming Successor for CEO Early,” www.taipeitimes.com, January 14, 2007. Simon Bowers, “BP Braced for Fallout as Safety Report Threatens to Implicate Board,” www.business.guardian.co.uk, January 15, 2007. Oppenheimer & Co. Inc., headquartered at New York, USA, is a leading investment boutique that provides financial services and advice to high net worth investors, individuals, businesses, and institutions. ING Group, headquartered in Amsterdam, The Netherlands, is a financial institution that offers banking, insurance, and asset management services Mike Elliott, “BP Chief’s Early Exit Ends Uncertainty,” www.stuff.co.nz, January 17, 2007. Liz Chong and Robin Pagnamenta, “BP Told to Expect More Departures after Texas Blast Report,” www.business.timesonline.co.uk, January 15, 2007. John M Biers, “Report Shows Downside of BP’s Refinery-light Strategy,” www.marketwatch.com, January 17, 2007. Katherine Torres, “Panel Finds BP Lacking in Safety Leadership,” www.occupationalhazards.com, January 17, 2007. David Robertson, “BP Failed to Learn from Mistakes, Panel Says,” www.business.timesonline.com, January 17, 2007. “Safety at Oregon’s BP Plant,” www.13abc.com, January 17, 2007. “BP Attacked over Plant Death Blast,” www.icsouthlondon.co.uk, January 16, 2007. “BP Safety Standards ‘Wholly Inadequate’,” www.inthenews.co.uk, January 16, 2007. The US Environmental Protection Agency (EPA) is an agency of the federal government of the US. It is charged with protecting human health and with safeguarding the natural environment: air, water, and land. Ciat Murphy, “Beyond Prudhoe: Why BP Should Go Back to Being an Oil Company,” www.money.cnn.com, August 15, 2006. Nelson Schwartz, “Can BP Bounce Back?” www.money.cnn.com, October 31, 2006. Arctic National Wildlife Refuge (ANWR) covers 19,049,236 acres (79,318 km²) in northeastern Alaska, in the North Slope region. It is endowed with rich natural resources. There was a controversy as to whether to allow drilling in the ANWR. Drilling was finally allowed in 2006. Aaron Smith, “BP ‘Fell Short’ on Pipeline, Execs Admit,” www.money.cnn.com, September 7, 2006. Nelson Schwartz, “BP was Warned,” www.money.cnn.com, October 2, 2006. William Marsh Rice University, located in Houston, Texas, USA, is a private, research university set up in 1912.
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While BP has an aspirational goal of “no accidents, no harm to people,” BP has not provided effective leadership in making certain its management and U.S. refining workforce understand what is expected of them regarding process safety performance.”3 – The Report of the BP US Refineries Independent Safety Review Panel, January 2007. “We will use this report to enhance and continue the substantial effort already underway to improve safety culture and process safety management at our facilities… I intend to ensure BP becomes an industry leader in process safety management and performance.” 4,5,6 – Lord John Browne, CEO, BP Plc., in January 2007. BP – GREEN OR MEAN? On January 16, 2007, the BP US Refineries Independent Safety Review Panel issued its report (popularly known as the Baker report) on its review of safety issues in BP Plc.’s (BP) refineries in the US. BP, the world’s third-largest oil and gas producer after Exxon Mobil Corp.7 (ExxonMobil) and Royal Dutch Shell8 (Shell), had been plagued by safety lapses in its facilities in the last couple of years.9 The panel was formed in October 2005, after The US Chemical Safety and Hazard Investigation Board (CSB) had uncovered many safety lapses at BP’s Texas City refinery during the investigation of an explosion that occurred on March 23, 2005, which had resulted in 15 deaths and 170 people being injured.10 CSB said that BP might have endangered its workers by compromising on process safety and because of its emphasis on cost cutting. Calling into question BP’s safety culture, CSB recommended that BP should form an independent review panel to review the safety of its five refineries in the US. The 11-member panel, which was headed by former US secretary of state, James A Baker III (Baker), was critical of BP’s safety culture and the leadership demonstrated by BP’s top management with regard to safety issues. The chairman of CSB, Carolyn W. Merritt (Merritt) agreed with this finding when she said, “Safety culture is created at the top, and when it fails there, it fails workers far down the line. That is what happened at BP.”11 The panel decried a sense of complacency regarding safety issues at BP’s refineries and BP’s emphasis on personal safety but lack of leadership on process safety issues. The panel lauded BP for co-operating with the review process and said that it did not find sufficient evidence that BP might have intentionally jeopardized the safety of its employees through its cost cutting measures. The panel outlined ten recommendations to BP and urged it to take this opportunity to become a leader in
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Heather Timmons, “Second-guessing of BP’s Departing Chief Begins,” www.iht.com, January 16, 2007. Nelson Schwartz, “BP was Warned,” www.money.cnn.com, October 2, 2006. “BP Attacked over Plant Death Blast,” www.icsouthlondon.co.uk, January 16, 2007. Sonja Franklin, “BP’s Browne Failed on Refinery Safety, Panel Reports (Update 5),” www.bloomberg.com, January 16, 2007. “BP Safety Standards ‘Wholly Inadequate’,” www.inthenews.co.uk, January 16, 2007. David Robertson, “BP Failed to Learn from Mistakes, Panel Says,” www.business.timesonline.com, January 17, 2007. TJ Aulds, “BP, Steelworkers Reach Agreement,” www.galvestondailynews.com, January 17, 2007. “BP CEO’s Pay Fell in 2006 Despite Strong Profits,” www.money.cnn.com, March 6, 2007. Nelson Schwartz, “Can BP Bounce Back?” www.money.cnn.com, October 31, 2006. “BP Seeks Part of Alaska Pipeline Reopened,” www.money.cnn.com, September 15, 2006. Jeannette J Lee, “BP Watchdog Check’s Prudhoe Bay Claims,” www.businessweek.com, February 7, 2007. Abrahm Lustgarten, “What Went Wrong at Prudhoe Bay,” www.money.cnn.com, August 21, 2006. David Ellis, “Safety Panel Slams BP over Refinery Blast,” www.money.cnn.com, January 17. 2007. Carl Mortished, “Opportunity for BP to Lead Industry on Safety Practices,” www.business.timesonline.com, January 18, 2007. Bear, Stearns & Co. Inc., is a leading global investment banks, and, securities trading and brokerage firms in the world. “Ahead of the Bell: BP” www.chron.com, January 16, 2007. Ed Crooks and Carola Hoyos, “BP Faces Fight to Please Investors,” www.ft.com, January 17, 2007. Investec, is a Johanessburg, South Africa-based international specialist banking group. Jane Wardell, “BP Looks to Restore Battered Reputation,” www.forbes.com, February 5, 2007. Carl Mortished, “BP Warns Safety Worries Will Hit Growth,” www.business.timesonline.co.uk, February 7, 2007. Jane Wardell, “BP 4th-quarter Earnings Fall 22 percent to 2-year Low; Cuts Growth Targets,” www.examiner.com, February 06, 2007.
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safety issues. The Texas accident was not the only safety lapse at BP. In March 2006, a huge oil spill was discovered in BP’s pipeline at Prudhoe Bay, Alaska, USA. The spillage was due to a corroded transit pipeline. Investigations found that BP had not been maintaining the pipeline properly. The Pipeline and Hazardous Materials Safety Administration12 ordered BP to review the leak detection system on the affected line as well as two other crude transit pipelines in Prudhoe. Critics were incensed by the fact that BP had last used a pipeline inspection gauge13 (pig) on the pipeline in 1998.14 This led to a criminal investigation by the US Attorney’s Office (in Anchorage, Alaska) into the leaks. On August 6, 2006, BP announced that it had discovered severe corrosion in its pipe and had decided to shut down the oil field indefinitely. This led to an outcry against BP by the public and some policy makers in the US. Safety measures at this oilfield had been neglected despite it accounting for 8 percent of the oil produced by BP. Critics alleged that BP had put profits before safety. On January 12, 2007, BP surprised analysts by announcing that BP’s CEO Lord Robert Browne (Browne) would relinquish his position at the end of July 2007. It announced that the head of BP’s exploration and production, Tony Hayward (Hayward), would succeed him. The growth of BP under Browne since the mid-1990s had been phenomenal. So experts were surprised by the move as Browne was expected to retire by the end of 2008. Analysts felt that the safety issues coupled with other problems, such as the investigation against BP’s US trading unit for market manipulation, declining production and share prices, were some of the factors that had contributed to Browne’s early departure. Still more damaging for the company was the fact that many critics had started questioning BP’s environment-friendly stance and its corporate culture. Under Browne’s leadership, BP had rebranded itself as an environment-friendly oil company. It had increased its investments in nonpetroleum alternative sources of energy. Unlike some of the other big oil companies, BP had acknowledged the problems of global warming. An advertising blitz that projected its new “green” image was also launched. The company renamed itself BP from its original British Petroleum and adopted a new logo and tag line “Beyond Petroleum”. Though the initiative earned BP a lot of accolades at the time, the incidents at Texas and Prudhoe Bay tarnished its reputation. Critics raised doubts about BP’s environment-friendly image and wondered how a company with such major safety lapses could make such a claim. They felt that BP’s drive for cost cutting were in conflict with its efforts to protect the environment. With the announcement of Browne’s early departure, some analysts hinted that BP might have developed an “unhealthy corporate culture” where cost cutting was given more priority than safety of the workers. The problems of BP were compounded when some whistleblowers15 provided information to the media which indicated that while the senior management was aware of safety lapses, they still chose to do nothing about them so as to keep costs under control. BP denied that it had put profits before safety. It said that it would implement the recommendations of the Baker panel and said that it had earmarked billions of dollars to improve the safety of its refineries and oilfields. However, some analysts still felt that much more was required. The Wall Street Journal noted, “Throwing money at the problem probably won’t be enough. BP’s culture needs to change, too. The oil giant became increasingly dominated by a “Yes, Lord Browne” culture.”16 Some analysts opined that BP would likely face significant challenges to gain back its reputation. They said that Hayward would need to focus on resolving safety issues as his top priority. In February 2007, Hayward announced that safety worries could hamper the growth of BP and it would give top priority to safety, even at the cost of growth. Some industry experts believed that BP might take this opportunity to become an industry leader in process safety management and performance. But others felt that BP should return to being an oil company rather than trying to go “Beyond Petroleum”. They felt that the prime duty of an oil company was to run its core business to a high standard. So, rather than “pretending” to stand for something other that petroleum, BP would be well served if it focused on improving its operational efficiencies. BACKGROUND NOTE BP was formed in 1998 as a result of the merger between British Petroleum and Amoco Oil Corporation17 (Amoco). However, the origin of BP can be traced back to 1901, when William Knox D’Arcy (D’Arcy), an Englishman, obtained a concession from the Shah of Persia to explore for oil in the Middle East. When D’Arcy failed to locate any oil deposits despite having incurred huge costs on his explorations, the Burmah Oil Company18 came to his rescue in 1905. In 1909, oil deposits were discovered in South West Persia, which marked the founding of the Anglo-Persian Oil Company Page 5 of 25
(APOC). During that time, Burmah Oil Company held 97 percent of the company’s ordinary shares. That changed in 1914, when the British government acquired a majority shareholding in APOC. In 1917, APOC acquired a division of the German-based Europaische Union which was under the control of the British government. From that time on, APOC started using ‘British Petroleum’ as its trade name. By the mid-1900s, the company had explorations in Africa, Canada, Europe, South America, and Indonesia/Papua New Guinea, and refineries in Europe and Australia. British Petroleum forayed into the US in the 1960s, after finding oilfields in Prudhoe Bay in Alaska, and the North Sea. In 1969, it acquired the Valdez oil terminal19 in Alaska and also acquired a 25 percent stake in the Standard Oil Company20 of Ohio (Sohio). In the 1970s, British Petroleum, like other oil firms was affected by the Middle East oil crisis21. But, the company survived the crisis due to its investments outside the Middle East countries and its diversification into other businesses such as minerals, nutrition, and petrochemicals. In 1980, British Petroleum acquired Lucas Energy Systems, which manufactured solar panels. This deal marked the company’s foray into the solar industry. A subsidiary was formed which later came to be called BP Solar. It also diversified further into minerals by acquiring Selection Trust22, a UK-based mining operations company. In the late 1980s, the company expanded into Colombia, the former Soviet Union, the Gulf of Mexico, Asia, and Africa. It also diversified into gas, power, and solar energy. In 1987, British Petroleum acquired Britoil, a UK-based oil exploration and production company. In the same year, the UK government sold off 31.5 percent of its shares in British Petroleum. The huge investments and accumulated debt resulted in losses for the company. In 1989, the company felt the need to change its image. Its ‘Shield’ logo was modified and changed to green. It adopted a new slogan “Now We’re Greener Than Ever” and painted all its assets green. Despite these measures, the company’s share price had declined during the early 1990s. It also faced pressure from external agencies to stop polluting the environment. In 1995, Browne became the CEO of the company. He realized that the company needed to change its policies and re-brand itself if it had to survive in the industry. In 1998, British Petroleum merged with Amoco. In 1999, BP adopted a new set of business policies based upon the best practices followed by both the companies. The company borrowed liberally from the environment-friendly policies framed by the erstwhile Amoco. In doing so, BP became the first company in the oil industry to emphasize the need for Health, Safety, and Environmental (HSE) performance. On March 11 2002, while giving a speech at Stanford University on climate change, Browne said it would be necessary to take preventive measures to face climate change. He also said BP would reinvent its energy business and would go ‘Beyond Petroleum’.23 BP believed that its HSE performance would be vital to its success in the countries where it operated. In 2002, BP underwent significant changes to project itself as a ‘green’ company. It changed its logo from a green shield to the white, green, and yellow sunburst logo of Helios24 (Refer to Exhibit I for the old and new logos of BP). The company also changed its name to ‘bp’, without any meaning being attached to the letters.25 It also adopted a new motto - “Beyond Petroleum”. Through these changes, BP strove to project its concern for the environment and its entry into renewable sources of energy. The apparent change in image and its business practices earned rich accolades for BP. But some of its critics remained unconvinced. They felt that it was hypocritical of an oil company like BP to project itself as ‘green’. Its promotional efforts to project its new image were also dismissed as “greenwashing”26 by some critics. As of 2006, the company operated in 100 countries with three major business segments: Exploration and Production; Refining and Marketing; and Gas, Power and Renewables. The company marketed its products under five brands: BP, Castrol, Arco, Aral, and AMPM. In 2005, BP’s revenues were US$245.48 billion with a net income of US$19.64 billion. (Refer Exhibit II for BP’s financial summary). TRAGEDY IN TEXAS On March 23, 2005, there was a devastating explosion at BP’s Texas City refinery, the third largest refinery in the US.27 This accident was one of the most serious workplace disasters in the US as it had resulted in 15 deaths and more than 170 being injured. The accident occurred when the workers started the refinery’s octane-boosting unit. Excess gasoline spilled into a vent system and ignited, setting off an explosion that was felt within a five-mile radius. The CSB sent an investigation team to the site on the day of the accident itself. The Texas City refinery blast was the biggest accident in BP’s history. It was also a severe dent to the image of BP. Page 6 of 25
Under the US Occupational Safety and Health act of 1970, employers were responsible for providing a safe and healthy workplace for all their employees.28 This accident had resulted in over 1,700 lawsuits being filed against BP.29 A fine of US$21.3 million was imposed on BP by the US Occupational Safety and Health Administration30 (OSHA) as its investigations indicated that BP had committed more than 300 willful violations of its rules.31 The most devastating for BP was the CSB finding that BP had endangered workers in its bid to cut costs. In late October 2006, CSB revealed that although BP had known about problems at its Texas refinery before the explosion, it did not fix them. Merritt said that though the company improved working conditions and paid heed to personal safety (such as slips, trips and falls), “unsafe and antiquated equipment designs were left in place, and unacceptable deficiencies in preventative maintenance were tolerated”. It was reported that the Texas City refinery had had 23 accidents in its 30-year history before the accident in 2005.32 The report pointed out that between 1994 and 2005, there were eight incidents at the Texas City refinery (including two incidents of fire), which was a sign of severe problems.33 In 2004, in the twenty-third accident, a worker was burnt alive. Daniel Horowitz of the CSB, said, “There’s a lack of safety leadership in BP. There were inadequate resources for safety at their North American refineries. And there were broken safety systems.”34 It was reported that the site’s director had admitted that the refinery was held together by ‘Band Aid’ and ‘superglue’ for years before the tragedy occurred in 2005.35 CSB said that a lot of blame for the accident should go to the cost cutting measures adopted by BP. BP’s management had allegedly ordered a 25 percent saving on costs, and were frugal in sanctioning funds for the refinery. For these reasons, alarms and instruments were not replaced and leaking pipes were often patched up using temporary clamps and valves. On August 17, 2005, the CSB made a recommendation to BP requiring the company to set up an independent panel of experts to review safety at the company’s five US refineries.36 Though BP co-operated with the authorities and took full responsibility for the accident, it denied any wrongdoing. Robert Malone (Malone), president, BP (America), said, “Texas City was a tragedy; a lot of lessons were learned. And when I listen to the trader tapes there is no doubt in my mind, what happened may not have broken the law, but it broke our values. In my visiting facilities across the country and talking to employees and management though I cannot draw a systemic problem in BP America.”37 Following the recommendations of the CSB, BP formed an independent panel to review its corporate safety culture, safety management systems, and corporate safety oversight at its US refineries. On October 24, 2005, the formation of the BP US refineries independent safety review panel was announced.38 The 11-member panel headed by former US secretary of state, James A. Baker III (Baker) began investigations into the matter. The panel visited all the five BP refineries in the US. It conducted various anonymous employee surveys and also conducted public hearings. In addition to this, it reviewed technical documents and also interviewed the management and employees of private contracting firms who worked at the refinery. As many people awaited the panel’s report (‘the Baker Report’), BP settled more than 1,200 claims, including all the death related lawsuits. After Hurricane Rita in September 2005, BP closed the refinery for months to upgrade equipment and review safety practices.39 It also moved to improve safety and bring in a new corporate culture in all its five refineries in the US. BP had set aside US$1.6 billion to resolve all the lawsuits related to the Texas City refinery incident. ALARM IN ALASKA BP’s image was also affected in early 2006, when leaks were found in its oil pipelines at Prudhoe Bay, Alaska, the largest oil field in the US. On March 2, 2006, a BP worker discovered a large oil spill in western Prudhoe Bay. It was estimated that at least 267,000 gallons had spilled out, making it the largest oil spill on Alaska’s North Slope.40 The spillage was due to a corroded transit pipeline. The spillage brought back memories of the infamous Exxon Valdez Spill41 in Alaska, and led to a public outcry against BP. The Pipeline and Hazardous Materials Safety Administration found that there was “ineffectiveness of the leak detection system to identify the leak” in the Prudhoe Bay transit line. The inspection team found that the pipeline had several defects, including an area of the 0.375 inch wall that was worn thin by internal corrosion. The team believed that the leak might have passed unnoticed for at least five days before it was discovered. The safety agency ordered BP to review the leak detection system on the affected line as well as two other crude transit pipelines in Prudhoe Bay. Critics took exception to the fact that pipeline inspection gauges (pig) had been last used on the pipeline in Page 7 of 25
1998.42 Analysts felt that the incident would lead to more fines against BP. On August 6, 2006, BP announced that it had started a phased shutdown of the Prudhoe Bay oil field after it discovered severe corrosion and an oil leak in an oil transit pipeline. BP had to replace 16 of 22 miles of pipeline. Malone said, “We have now taken the decision to replace the main oil transit lines at Prudhoe Bay. This will be accomplished as part of our overall plan for ensuring the integrity of the field.”43 BP’s share price, already down because of the criminal investigation by the US Attorney’s Office (Anchorage, Alaska) into the leaks (of March 2006), was severely jolted by the company’s decision to shut down the oil fields. While BP’s production reduced on account of the closure, US production of oil experienced a decline of 8 percent. The economy of Alaska, which was dependent on taxes levied on the oil industry, was also expected to be impacted. BP said that it expected the oil fields to be reopened in January, 2007. The oil spill also attracted the ire of the US Congress. Congressman John Dingell criticized BP for its poor maintenance of the pipelines and called for a congressional investigation. He said, “It is appalling that BP let this critical pipeline deteriorate to the point that a major production shutdown was necessary. BP must take all steps necessary to repair or replace problem pipelines quickly, so the American consumer does not pay for BP’s laxity.”44 As of February 2007, BP was faced with another investigation into this incident, as Federal criminal investigators began probing charges that BP had substituted water for corossion-inhibiting chemicals since 1998. It was also probing allegations that BP’s staff were given written instruction against replacing deficient systems, pipes and components due to cost considerations. Replying to criticisms that BP was neglecting worker safety and maintenance to cut costs, Malone said, “I’ve visited a number of facilities and I not only test the management, I also get out on the shop floor. I have not had an employee tell me that they were concerned to raise a safety issue, or an employee tell me they would not hesitate to shut down an operation they thought was unsafe. On Prudhoe Bay; there has been an 80% increase on our spending on the corrosion management year over year since 2000. Our corrosion experts said they felt that they were spending the money that they needed.”45 He explained that BP didn’t use pigging to identify corrosion in its pipes as it felt that UT technology was a better alternative. Since that practice had led to the spillage, BP would use pigging in the future. In a testimony before Congress on September 12, 2006, Malone admitted that BP had “fallen short of the high standards we hold for ourselves” but denied that it was putting profits before safety and maintenance. For instance, BP said that at Prudhoe Bay the corrosion spend had actually increased since 2001 despite the decline in production. (Refer to Exhibit III for Prudhoe Bay: Corrosion spend versus production). OTHER PROBLEMS Apart from the safety lapses, BP also had to deal with several other problems. Its US trading unit was accused of artificially driving up the prices of propane in 2003 and 2004.46 In December 2006, US regulators threatened to press civil charges against BP after an investigation into allegations of market manipulation of the gasoline futures market. BP was also struggling to increase its production levels. On January 09, 2007, BP said that oil production had reduced for the sixth consecutive quarter due to the shut down of its facility in Alaska and delay in opening of new fields in the Gulf of Mexico. In fourth quarter of 2006, BP’s oil production had reduced by 5 percent over the same period of the previous year.47 Analysts were disappointed by the production performance of BP. Mark Lovett, head of British and European equities for RCM,48 said that though both Exxon and BP had the same production issues, ExxonMobil had “hugely outperformed” BP. The company’s share price was also on the decline. (Refer to Exhibit IV for a Chart of BP’s stock price movement). Analysts pointed out that in 2006, BP’s shares had under-performed the global energy sector by 16 percent, ExxonMobil by 23 percent and Royal Dutch Shell by 5 percent.49 BP also said that the opening of BP’s two production platforms, Atlantis and Thunder Horse, in the Gulf of Mexico had been put off until 2007 and 2008, respectively, due to equipment failure.50 BP, which had a strong position (due to its 50 percent stake in TNK-BP51) in Russia was also likely to face potential trouble as Russia’s president Vladimir Putin (Putin) pushed for nationalization of Russia’s natural resources. BP SPRINGS A SURPRISE AHEAD OF THE BAKER REPORT On January 12, 2007, BP announced that Browne would step down in favor of Hayward by the end of July 2007. Browne had been expected to stay until the end of 2008. Browne’s early departure came as a surprise as he had been credited with transforming BP into a major player in the industry Page 8 of 25
with a series of M&A deals. He had also given BP a new image as a company that was concerned about the environment, long before any of its competitors had done so. During his tenure BP’s profits and market capitalization had grown fivefold and its share price had increased by 250 percent.52 Many analysts felt that Browne’s departure was brought forward to preempt the Baker panel report that was expected to be critical of BP’s top management. BP’s chairman, Peter Sutherland (Sutherland), was reported to be very concerned about the negative fallout of the report. In announcing that Browne was leaving before the report was announced, the notion that Browne’s departure was a consequence of the negative external report could be avoided. Sutherland and other key officials were also concerned that some of BP’s top managers would be named in the report. This might require them to depose before authorities or even go to jail for negligence. Browne himself was reportedly fed up with the spate of bad news over the past couple of years, and wanted a “dignified departure”. Sutherland, who had hailed Browne as “the greatest British businessman of his generation”, said that since the decision regarding Browne’s exit and Hayward’s succession had already been made, it made better sense to opt for a handover in six months’ time rather than over a longer period.53 Robert Talbut, chief investment officer at Royal London Asset Management54 said that it made sense for BP to clarify the succession issue quickly if the company was concerned about the findings of the Baker report so that Browne could be left to deal with the disclosures. While some analysts saw the move to call forward the succession as a bold strategic move, others felt that market pressure was at the root of Browne’s early exit. In January 2007, it was reported that BP had lost around US$39 billion in market capitalization since August 2006.55 After the announcement of Browne’s early exit, BP share prices rose by 1.8 percent.56 Oppenheimer & Co., Inc.’s57 oil and gas analyst in New York, Fadel Gheit (Gheit), said that Hayward’s appointment boded well for BP. Jason Kenney (Kenny), oil analyst at ING58 in Edinburgh, said, “I see it as positive news. They had a difficult choice because there were a number of positive people who could have taken over the role. The fact that Tony Hayward has got it will enable BP to move forward, put the succession behind them and get on with the job.”59 Analysts expected a bigger shake up at the top management of BP after the Baker report came out, as there were indications that the report would be critical of BP’s top management. They felt that, in particular, John Manzoni, the head of refining and marketing, who was ultimately responsible for the Texas City refinery could be part of the reshuffle. “If the report is bad, then more people might have to leave. There is no doubt that sentiment has taken a big kicking. The oil and gas industry is a hazardous business – your reputation is your license to operate,” 60 said Kenny. THE BAKER REPORT On January 16, 2007, the Baker report was released at Houston, Texas. As expected, the Baker report was very critical of BP’s approach to process safety at its refineries in the US. The panel said that a lack of focus on manufacturing process safety on BP’s part contributed to the March 2005 accident in Texas. It said that BP had failed to give process safety the same emphasis that it gave to personal safety and environmental initiatives. The report said that the management should have paid more attention to earlier incidents, such as product chemical releases and fires at the plant. The Baker report also said that the top management at BP had failed, as they had apparently ignored concerns raised by lower-level employees. It noted that the role of top management in providing safety leadership was paramount, and BP’s top management was found wanting in this regard. It further said that BP failed to devote adequate resources to keep its operations safe. The panel found that refineries in BP did not get the same importance at BP as exploration. It was more of a “tolerated cousin” and was subjected to budget cuts.61 The panel said, “BP tended to have a short-term focus, and its decentralized management system and entrepreneurial culture have delegated substantial discretion to US refinery plant managers without clearly defining process safety expectations, responsibilities or accountabilities.”62 The report said that BP should have learnt from three similar incidents in BP’s Grangemouth refinery in Scotland in 2000.63 In fact, it severely criticized BP’s management for failing to learn from those past incidents. The report revealed that BP’s refinery at Toledo, Oregon, was actually worse than the Texas refinery with respect to safety. In 2006, the Toledo refinery was fined US$2.4 million for its unsafe operations, including the practice of keeping workers in vulnerable buildings near processing facilities and failing to prevent the use of non-approved electrical equipment.64 The panel found that in the Toledo and Whiting plants, there was mistrust between employees and the management. Communication was also a problem. For instance, in the Whiting refinery many work orders to Page 9 of 25
replace damaged parts had not been attended to for more than a year. There was also high tension between union and contract workers. The panel was critical of BP for using a large number of contract workers in its refineries. This problem of a large contract workforce was attributed in part to the high turnover of regular workers in its refineries. BP’s Cherry Point, North Carolina, refinery was rated the highest in safety among the company’s five US refineries. Though there were some safety issues at this refinery too, overall, the report found a good safety culture at Cherry Point refinery, with a “very positive, open and trusting environment.” The panel also endorsed the elevation of Cherry Point’s former plant manager, Rick Porter, to the new position as vice president in charge of safety oversight. In his new role, Porter would look after the safety practices at BP’s refineries worldwide. The panel said that there were “instances of a lack of operating discipline, toleration of serious deviations from safe operating practices, and apparent complacency toward serious safety risks at each refinery” - but it could not find sufficient reason to believe that BP had intentionally endangered the life of its workers due to cost cutting measures.65 The panel made ten recommendations (Refer to Exhibit V for the 10 recommendations of the Baker panel). The panel made it clear that these recommendations were not for BP alone, but for all other companies as well. The panel said, “We are under no illusion that deficiencies in process safety culture, management, or corporate oversight are limited to BP. Other companies and their stakeholders can benefit from our work. We urge these companies to regularly and thoroughly evaluate their safety culture, the performance of their process safety management systems, and their corporate safety oversight for possible improvements.”66 The report also complimented BP for co-operating with the investigation and noted that many of its recommendations were already being implemented by BP. It also noted that safety culture at the Texas City refinery and the Whiting refinery were improving. After the accident in Texas, BP focused on bringing a new corporate culture to the refinery. Keith Casey, who was the head of the refinery in January 2007, said that he was in a position to call up Malone, Hayward or Browne, if he had any issues. The top management also called him up to know if any help was required. But problems seemed to be far from over. As of end-January 2007, BP was facing intense scrutiny from federal investigators for possible criminal environmental and safety violations at its Texas refinery. The lawyers suing BP said that the US Environmental Protection Agency67 (EPA) had joined a federal investigation that had been started in October 2006 by the US attorney in Houston. It was reported that the federal investigators were looking for evidence that could be used to bring criminal charges against the higher levels of management at BP’s refinery in Texas as well as the top management of BP. CRITICS QUESTION BP’S “GREEN” IMAGE AND CULTURE The Baker report was a big blow to BP’s reputation and a major embarrassment for BP’s top brass. The safety lapses at BP coupled with the findings of the Baker report led many to question BP’s integrity as well as its corporate culture. Some wondered whether the oil and gas behemoth built by Browne was “fundamentally flawed”. The announcement of Browne’s early departure was viewed by some as an admission of its flawed practices. Investors and analysts started to question the underlying structure that gave rise to such business practices in BP. In hindsight, some analysts said the problem in the refineries stemmed from Browne’s July, 1999, bold strategic decision to reduce refining capacity by a third to counter weak profit margins – a move that was widely appreciated by industry experts at the time. Browne’s strategy of re-branding BP as a “green” company had earned the company a lot of laurels. Its advertising blitz in the 2002 had differentiated it from other oil and gas majors. In 2005, BP was named the Financial Times’ “most respected energy company” and Fortune’s “most admired company in Britain”. BusinessWeek had ranked it in the second position in “the greenest company of the decade”.68 Analysts felt that BP did well to earn that image in an industry where corporate ethics were challenged by the very nature of the business – extracting crude oil, burning of fossil fuel, dealing with repressive regimes, etc. With the safety issues exposed since 2005, some critics raised doubts as to whether BP was indeed as environment-friendly as it had projected itself. They wondered how a supposedly environment-friendly company could allow accidents such as the Texas City refinery and Prudhoe Bay to occur. They noted that within the span of one year, BP had suffered both the worst refinery accident in the US and the worst oil spill in the history of the North Slope. Senator Dianne Feinstein, said, “I have always respected BP, and I met John Browne and respected him. I thought finally there was an oil company that has a sense of conscience. I no longer think that.”69 Some critics felt that BP’s projection of itself as a “green” company and its foray into renewable Page 10 of 25
energies, backed by the ad campaigns were nothing more than a PR gimmick. They pointed out that its actual investment in alternative resources was very small when compared to its investment in exploration and refining, and also in relation to its profits. Moreover, it was BP that had aggressively lobbied for the opening up of the Arctic National Wildlife Refuge70 to drilling. Critics contended that if BP had spent as much on maintenance of its facilities as it had on advertising and lobbying for tax cuts, it could have averted these major disasters. Some even said that ‘BP’ stood for a company with “bloated profits” that failed to fix “bad pipelines”.71 Critics said it was BP’s excessive emphasis on cost control that had led to these environmental problems. An employee of BP, who had worked in both Prudhoe Bay and Texas, had said, “The mantra was, Can we cut costs 10 percent? There was an it-can’t-happen-here mentality on the part of middle management. The values are real, but they haven’t been aligned with our business practices in the field. A scream at our level is, if anything, a whisper at their level.”72 Amy Jaffe, associate director of William Marsh Rice University’s73 energy program, said that there was a “disconnect between the public emphasis on environmental sustainability” and actual practice at BP.74 Analysts felt that BP had failed to communicate what was more important – cutting costs, or safety and protection of the environment. Since the company rewarded its employees for cutting costs rather than for steps to protect the environment, they clearly thought cost-cutting was more important. BP workers and union representatives interviewed by Fortune in 2006 revealed that BP might have known about the problems in both Texas City refinery and Prudhoe Bay well in advance. Fortune also obtained a 2002 letter written by an employee to the management predicting the “catastrophe” waiting to happen at Prudhoe Bay. Some insiders had said that BP’s culture was marked by extreme pressure to keep costs down, even if routine maintenance and safety were neglected in the process.75 This made it more likely for mishaps to occur. Some analysts also questioned the corporate culture of BP. Some critics felt that Browne’s legacy, so effective for the 1990s, was no longer relevant. BP had to move beyond the “Yes, Lord Browne” culture that had developed internally. BP’s organizational structure was decentralized - broken down on geographical lines. While this structure was good for cost cutting and mergers, some felt that BP had to change its organizational structure and opt for a structure on functional lines similar to that of ExxonMobil. A few industry experts had also criticized BP for looking at non-oil alternatives, saying that it would distract BP from its core business. Some analysts felt that if it had concentrated on being an excellent oil company, the accidents might not have occurred. ExxonMobil was cited as an example of an oil company that despite all the criticisms levelled against its business practices, had a much better safety record. DAMAGE CONTROL AT BP Soon after the Baker report was released, BP said that it would implement its recommendations. Browne said that the findings of the report were consistent with its own findings and were in fact already being implemented in BP’s refineries. Browne also said that it would take time to bring about big changes in a large organization and that still a lot needed to be done. Browne said, “Many of the panel’s recommendations are consistent with the findings of our own internal reviews. As a result, we have been in action on many of their recommendations for a year or more. Our progress has been encouraging but there is much more to do.”76 He assured the panel that BP would use these insights to become an industry leader in process safety management and performance. He announced that BP planned to spend US$1.7 billion annually until the end of 2010 to improve the integrity and safety of its refineries.77 Browne said that the company had earmarked US$200 million to pay for external audits from industry experts.78 Even before the report was released, BP had announced that it would invest US$1 billion in the Texas City refinery.79 BP also entered into an agreement with United Steelworkers, the union which represents 4,300 BP employees in the US, to help improve the safety culture within the company. The union and the company would henceforth work together on a joint safety initiative focusing on the 10 recommendations made by the Baker report. Kim Nibarger, the union’s safety and health representative, said that it would push for a voice about who could be appointed to supervisory roles in individual units. It intended to prevent the use of “step-up supervisors”. “Step-up supervisors” were hourly employees who filled up for regular supervisors in their absence. It was found that during the blast in the Texas refinery, many of the supervisors were step-ups. The union alleged costsaving measures were at the root of BP’s practice of over-using and keeping “step-up supervisors” in place for years at a time. The union had for long argued that this was one of the reasons for the accident. However, with the settlement, the union felt that BP was finally moving away from a Page 11 of 25
“blame-and-denial game” that it said BP had played for close to two years. 80 Browne pointed out that the panel had concluded that the errors were made in good faith. He said that BP never put profits before safety. He felt that part of the BP’s problem stemmed from its rapid growth, a series of mergers, and turnover among the management. He also denied that the report had anything to do with his decision to relinquish his position at the helm. BP also ruled out any reshuffle of its top management. Browne also declined from commenting on his legacy, which was at the threat of being tarnished due to the safety-related incidents. It was reported that Browne’s pay in 2006, decreased by 28 percent despite of the BP posting a 15 percent rise in profits compared to 2005.81 In 2005, too there was a decrease in his salary and bonus which was attributed to ‘qualitative factors’ such as the lack of safety leadership in light of the refinery accident. Regarding the spill at Prudhoe Bay, Malone said that BP’s decision to shut down the facility was evidence of the fact that it had learnt from the Texas City refinery tragedy. “The reason we closed the field was to prevent something from happening. That’s very important to remember,”82 he said. After taking over as the president of BP, American operations, shortly after the spill, Malone had established an open line of communication with the top bosses in London. The company had earmarked an additional US$550 million to improve the integrity of its 1,500 miles of pipes, along with wells and gathering centers. The inspection team was also increased to more than 100 people compared with less than 50 people deployed earlier. The company also planned to invest around US$195 million on maintenance of Prudhoe Bay by 2007.83 Reacting to the allegations that BP had substituted water for more expensive chemical agents used to prevent corrosion in BP’s Prudhoe Bay pipelines, BP said that it had put a team in place to thoroughly investigate this allegation. In January 2007, Chuck Hamel, a long-time critic of the oil industry had levelled this allegation, which he said was based on the evidence provided by an oilfield employee. A BP spokesperson said, “Whenever issues are raised by employees or folks like Mr. Hamel, we always look into them. We take these issues very seriously.”84 BP also clarified that its safety lapses in Texas City refinery and Prudhoe Bay should not be held against its efforts toward protecting the environment. Malone said, “I understand if people want to say, “How can you have something like this happen and you are supposedly a green company?” … But we’re investing heavily in alternative energy, and we are putting our money where our mouth is.”85 Reacting to the critics’ comment regarding BP’s corporate culture, Browne said that the issues at Texas and Prudhoe Bay didn’t reflect an unhealthy corporate culture; rather it was indicative of BP’s “strength of character” as it had subjected itself to a meticulous review. OUTLOOK Analysts felt that BP was already on the “right track” as far as its safety culture was concerned. 86 They expected BP to spend generously on process safety experts, health and safety auditors, process engineers, etc.87 Expenditure on equipment was also expected to rise. Some experts felt that the order from the top was to spend – and this time as before, the employees would fall in line and obey. Some analysts felt that it would be a tough task for anyone to fit into Browne’s shoes. But on the positive side, Browne was leaving behind a “strong and well-positioned” oil company. Bear Stearns & Co. Inc.,88 analyst Nicole L. Decker, wrote, “Lord Browne hands over a company that is extremely well-positioned to compete in the future, in our opinion. Recent incidents aside, BP’s performance under Lord Browne has been remarkable.”89 BP also had a strong and diversified energy portfolio. Though Hayward, the CEO-designate, had been shielded from dealing with the Baker report in the initial days, analysts felt that he would soon have to deal with the issues raised by the report. Experts felt that Hayward would focus on improvement in safety as a top priority. Hayward was also reportedly in favor of keeping safety ahead of costs. In an email leaked from the company’s intranet, in December 2006, he was critical of BP’s cost cutting measures and reportedly questioned BP’s emphasis on “more for less” and trying to do “100 percent of a job with 90 percent of the resources.”90 Analysts felt that a change in BP’s corporate culture was another key priority. They also said that just spending money on this issue might not be sufficient. Another priority would be to ensure that BP’s production increased. Some analysts felt that Hayward should continue to maintain BP’s leadership in developing alternative energy resources. Hayward also needed to stand up strongly to Putin who wanted to nationalize the natural resources of Russia, a BP stronghold. Some analysts also did not rule out more extreme measures in the future, such as a merger with Shell, or BP breaking up into two smaller companies. As BP worked toward restoring its reputation in the market, there were many challenges ahead of it. Investec91 analyst Tony Eccles said, “BP’s management must step up to the plate. We believe a ‘business as usual’ approach will not be acceptable to a skeptical market.”92 On February 7, 2007, Page 12 of 25
BP modified its oil production forecasts downwards and said that safety worries would hit its growth prospects in the near future. Hayward said, “We have further increased our focus on safety and operational integrity and will in some cases deliberately slow the pace of our activity in order to improve safety and efficiency.”93 The company revealed that it was facing a shortage of skilled manpower. It also said that it would increase its capital expenditure in 2007 to US$18 billion from US$15.9 billion in 2006.94 While the debate regarding whether BP should be viewed as an environment-friendly company continued, some analysts opined that BP would be well served if it focused less on its supposedly “green” image and focused instead on what it was actually supposed to do – improve operational efficiency and create wealth for its shareholders. Ciat Murphy, assistant managing director, Fortune, wrote, “It’s too soon to know what has been going wrong and why, but it’s worth pointing out that when it comes to corporate social responsibility, the first duty of any oil company is to run its oil operations to a high standard … Instead of trying to be the non-oil oil major, BP would be better served by trading in the sunflower ethos for a steely-eyed rigor in running its core business. Because in the end, the best thing it can do for the environment is to be a good oil company, not to pretend it is something else.” Exhibit I The Old and New Logo of BP
The Green Shield Logo
The Helios Logo
Source: www.answers.com. Exhibit II BP’s Financial Summary (In US$ Billion) 2005 2004 Total Revenue 245.48 196.60 Gross Profit 57.24 48.45 Operating Income 32.18 25.75 Net Income 19.64 17.09 Source: www.finance.google.com. Exhibit III Prudhoe Bay: Corrosion Spend Versus Production
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2003 168.51 40.72 18.78 12.94
Source: www.bp.com. Exhibit IV Chart of BP’s Stock Price at the New York Stock Exchange
Source: www.uk.finance.yahoo.com. Note: Stock price is in US$. Exhibit V The 10 Recommendations of the Baker Panel 1.
Process Safety Leadership: The Board of Directors of BP, BP’s executive management (including its Group Chief Executive), and other members of BP’s corporate management must provide effective leadership on and establish appropriate goals for process safety. Those individuals must demonstrate their commitment to process safety by articulating a clear message on the importance of process safety and matching that message both with the policies they adopt and the actions they take.
2.
Integrated and Comprehensive Process Safety Management System: BP should establish and implement an integrated and comprehensive process safety management system that systematically and continuously identifies, reduces, and manages process safety risks at its US refineries.
3.
Process Safety Knowledge and Expertise: BP should develop and implement a system to ensure that its executive management, its refining line management above the refinery level, and all US refining personnel, including managers, Page 14 of 25
supervisors, workers, and contractors, possess an appropriate level of process safety knowledge and expertise. 4.
Process Safety Culture: BP should involve the relevant stakeholders to develop a positive, trusting, and open process safety culture within each US refinery.
5.
Clearly Defined Expectations and Accountability for Process Safety: BP should clearly define expectations and strengthen accountability for process safety performance at all levels in executive management and in the refining managerial and supervisory reporting line.
6.
Support for Line Management: BP should provide more effective and better coordinated process safety support for the US refining line organization.
7.
Leading and Lagging Performance Indicators for Process Safety: BP should develop, implement, maintain, and periodically update an integrated set of leading and lagging performance indicators for more effectively monitoring the process safety performance of the US refineries by BP’s refining line management, executive management (including the Group Chief Executive), and Board of Directors. In addition, BP should work with the CSB and with industry, labor organizations, other governmental agencies, and other organizations to develop a consensus set of leading and lagging indicators for process safety performance for use in the refining and chemical processing industries.
8.
Process Safety Auditing: BP should establish and implement an effective system to audit process safety performance at its US refineries.
9.
Board Monitoring: BP’s Board should monitor the implementation of the recommendations of the Panel (including the related commentary) and the ongoing process safety performance of BP’s US refineries. The Board should, for a period of at least five calendar years, engage an independent monitor to report annually to the Board on BP’s progress in implementing the Panel’s recommendations (including the related commentary). The Board should also report publicly on the progress of such implementation and on BP’s ongoing process safety performance.
10.
Industry Leader: BP should use the lessons learned from the Texas City tragedy and from the Panel’s report to transform the company into a recognized industry leader in process safety management. The Panel believes that these recommendations, together with the related commentary in Section VII, can help bring about sustainable improvements in process safety performance at all BP US refineries.
Source: “The Report of the BP US Refineries Independent Safety Review Panel,” www.bp.com, January, 2007. END OF QUESTION PAPER
Suggested Answers Integrated Case Studies - II (MB3J2) : January 2009 1.
a.
i.
Safety culture < TOP > Safety culture is a term often used to describe the way in which safety is managed in the workplace, and often reflects “the attitudes, beliefs, perceptions and values that employees share in relation to safety”. Organizations with a positive safety culture are characterized by communications founded on mutual trust, by shared perceptions of the importance of safety and by confidence in the efficacy of preventive measures. The safety culture of an organization acts as a guide as to how employees will behave in the workplace, where their behavior will be influenced or determined by what behaviors are rewarded and acceptable within the workplace. With respect to BP, the employees Page 15 of 25
ii.
b.
i.
were more of a follower type i.e., they adhered to the decisions made by the top management. They were exhibiting their behaviors based on the rewards announced by the company. Since the company rewarded its employees for cutting costs rather than for steps to protect the environment, they clearly thought cost-cutting was more important. Process safety vs. personal safety The area of process safety focuses on preventing fires, explosions and accidental chemical releases in chemical process facilities through an effective alarm system. Personal safety, comparatively, focuses on injuries such as slips, trips, falls, struckby incidents and strains. In general, process safety focuses on workplace safety, and personal safety focuses on worker safety. In BP though the top management improved the working conditions of the employees and paid heed to personal safety (such as slips, trips and falls), unsafe and antiquated equipment designs were left in place, and unacceptable deficiencies in preventative maintenance were tolerated with respect to process safety. The alarms and instruments were not replaced and leaking pipes were often patched up using temporary clamps and valves that resulted in a lapse on process safety. BP emphasized personal safety over process safety but did not ensure that its management and workforce understood what was expected of them regarding process safety. Process Safety Management (PSM) PSM applies to most industrial processes containing 10,000+ pounds of hazardous material. It is the proactive and systematic identification, evaluation, and mitigation or prevention of chemical releases that could occur as a result of failures in process, procedures, or equipment. BP had been obsessed with personal accident statistics, the catalogue of trips, falls and road accidents, while failing to focus on the safety of core industrial processes within its US refineries. BP’s programs for analyzing process hazards did not ensure adequate identification and rigorous analysis of those hazards. Their corporate safety management system did not ensure timely compliance with internal process safety standards and programs for managing process risks, nor did it ensure timely implementation of external good engineering practices that could improve process safety performance. Essential elements of a safety culture: While many different models of safety culture have been proposed, some essential elements have been identified as organizational indicators of safety culture. These include the organization’s commitment to safety, the involvement of operational supervisors in safety-related activities, the formal safety system of the organization, and the organization’s informal safety system. •
Organizational Commitment. It refers to the degree to which an organization’s senior management prioritizes safety over production in the decision-making process and allocates adequate resources to safety. In particular, an organization’s commitment to safety is reflected by three major components, safety values expressed by senior management, safety fundamentals such as training requirements, manuals and procedures, and equipment maintenance, and going beyond compliance in giving priority to safety in the allocation of company resources. Role of senior management in safety at BP: Criticisms on BP’s senior management by some whistleblowers that in spite of being aware of the safety lapses, they still chose to do nothing about them so as to keep costs under control. This indicated that adequate resources were not allocated to safety by the senior management of the company thus showing that it prioritized costcutting in comparison to the more serious issue of safety. BP also faced criticism that preventing fires, explosions and accidental chemical releases in chemical process facilities through an effective alarm system was not incorporated into management decision-making and also did not effectively define the level of process safety knowledge or competency required of senior management, refinery personnel, and contractors and that the management was not held accountable for process safety. Page 16 of 25
•
Operational Personnel. This factor refers to the degree to which those directly involved in the supervision of employees’ safety behavior are actually committed to safety and reinforce the safety values espoused by senior management (when these values are positive). These include the involvement on the part of supervisory and “middle” management at an organization on safety issues. Commitment of the supervisory level employees at BP: With respect to the commitment of the supervisory level employees, BP was criticized for using step-up supervisors as a practice for cost-saving. At the time of the Texas incident the company had many step-up supervisors who could not commit themselves to safety and reinforce the safety values espoused by senior management as they are not the regular employees. The union had for long argued that this was one of the reasons for the accident.
•
The formal and informal safety system. It refers to the processes for reporting and addressing both occupational and process safety hazards, including rewards and punishments for safe and unsafe actions and the manner in which such rewards and punishments are instituted in a just and fair manner. It also focuses on the authorization and employee involvement aspects in safety decision making, including empowerment, delegation of responsibility for safety, and encouraging commitment to the organization. With respect to BP, though it maintained a formal safety system it was not effective, which was very important for an oil company. With respect to the employees involvement in the safety decision making, BP did not encourage a culture of employee involvement in the decision making process. However, on the issue of delegation of responsibility for safety, though BP has delegated substantial discretion to US refinery plant managers, the process safety expectations, responsibilities or accountabilities were not defined clearly. BP’s work culture did not feature any informal safety system, which involves active involvement of the workforce in the safety process voluntarily.
Communication – Effective communication between management and the workforce is an indicator of a positive safety culture. However, the employees at BP were not empowered with a positive, trusting, and open environment with effective lines of communication with their management. This also resulted in lapse on the part of BP’s management in communicating the safety values to the supervisory level workforce. Performance evaluation, corrective actions and audit system—BP’s use of injury rates to measure process safety performance hindered their perception of process risk, which created a false sense of confidence that process safety risks were adequately being addressed. Assuming the nature and possibility of accidents as a result of poor safety management, it is important for BP or any organization in this industry to adopt an appropriate performance indicator and also develop audit system for ensuring the success of safety management practices. Although they tracked some metrics relevant to process safety, they didn’t understand or accept what these data indicated about the risk of a major accident. BP did not have effective root cause analysis procedures to identify systemic causal factors; therefore, corrective actions only addressed immediate or superficial causes rather than the true root cause, which could contribute to future accidents. BP’s process safety audit system relied on internal auditors that focused primarily on compliance and legal issues rather than safety performance or assessing against industry best practices. They also failed to track process safety deficiencies to completion. BP’s “bottom-up” reporting system allowed refinery-specific data to be aggregated and lost as it moved up the reporting chain. Executive management either did not receive refinery-specific information’s regarding process safety deficiencies or didn’t effectively respond to the information it received.Therefore, the safety culture at BP’s five U.S. refineries was not unified and was fraught with a lack of operating discipline, tolerance of serious deviations from safe operating Page 17 of 25
practices, and complacency toward serious process safety risks. ii.
The following steps can be taken up by Tony Hayward to counter the criticism: •
BP’s image had been severely affected by the safety lapses. The priority for Tony Hayward (Hayward) would be to take action on improving the company’s image. In addition to the money being invested on safety initiatives, Hayward should also address the cultural aspects that led to these safety lapses. As the person at the helm, he should work toward making BP a leader in process safety management. His rhetoric such as, - “We have further increased our focus on safety and operational integrity and will in some cases deliberately slow the pace of our activity in order to improve safety and efficiency” – would go a long way in showing the company’s emphasis on safety to the various stakeholders, especially the employees. The communication has also been perceived as credible as it was well known that Hayward had been critical of BP’s excessive emphasis on cost cutting in the past. But equally important for Hayward would be to show decisive action and let the public know about the corrective action being taken quickly and clearly. 2.
At the very outset, it should be noted that oil and automobile companies are the favorite < TOP > targets of any environmentalist group. The very nature of their business (i.e., extracting and burning fossil fuels) put them at loggerheads with the environmental activists. When such companies try to project an environmental-friendly image, they bear significant risk, as allegations of being hypocritical and greenwashing are leveled against them. In 2000 the transnational oil giant BP Amoco rebranded itself as “BP: beyond petroleum.” The rebranding was part of an effort to portray BP as an energy company, not just an oil company: one that incorporated solar energy in its portfolio and was willing to move away from oil. BP replaced its logo with a vibrant green-white-and-yellow sunburst named after Helios, the ancient Greek sun god. The logo was meant to connote “commitment to the environment and solar power” and promote the new BP “as the super major of choice for the environmentallyaware motorist.” This was not the first time BP had revamped its logo and appearance to improve its environmental image. In 1989, as British Petroleum, it underwent a similar makeover. At a cost of about 100 million it shortened its name to BP, redesigned its logo and refurbished its petrol stations to promote a greener, more socially responsible image. David Walton, head of public relations, said BP’s image was “a major commercial and political asset. Like any asset, it has to be managed and looked after.” The dramatic break with other oil companies on the issue of global warming provided a useful diversion as well as a much-needed refurbishment for a reputation under attack on human rights grounds. In 1997, amid favorable publicity about its stance on global warming, BP’s share price and profit rose. Only the logo is green Certainly BP’s record of environmental protection has been no better than other oil companies’. In 1991 it was cited as most polluting company in the US based on EPA toxic release data. And in 1992 Greenpeace International named it one of Scotland’s two largest polluters. Nor has it become a model company since its apparent environmental conversion in 1997. In 1999, it was charged with burning polluted gases at its Ohio refinery and agreed to pay a $1.7 million fine. In July 2000 BP paid a $10 million fine to the EPA and agreed to reduce air pollution coming from its US refineries by tens of thousands of tons. BP’s existing and proposed activities in Alaska have worried indigenous people and environmental groups. “Between January 1997 and March 1998, BP Amoco was responsible for 104 oil spills in America’s Arctic,” according to US PIRG research. In 1999 BP admitted illegally dumping hazardous waste at its “environmentally friendly” oil field in Alaska and was fined $500,000 for failing to report it. It paid $6.5 million more in civil penalties to settle claims associated with the waste’s disposal. BP has invested heavily in solar power and introduced a program to reduce its own greenhouse gas emissions. But despite its investment in solar energy, the company remains committed to ever-increasing production and usage of oil and gas. And while BP has promised to reduce its own emissions, it does not accept the need to reduce Page 18 of 25
those arising from the products it sells. Browne argues the company’s contribution is relatively small: “If one adds up the emissions from all of BP’s operations and from all the products we sell, it comes to around one percent of the total emissions from human activity.” Yet this is a huge amount for one company to be responsible for, and certainly a more important contribution than that of BP’s own operations. By 1999 BP’s emissions were greater than those of Central America, Canada or Britain, according to Corporate Watch. And BP’s recent acquisitions mean the company is now thought to be responsible for about 3 percent of worldwide greenhouse emissions. BP continues to explore for oil, often in environmentally sensitive areas such as the Atlantic Frontier, the foothills of the Andes and Alaska. BP’s North Star project involves the first undersea pipeline in the Arctic, and the Army Corps of Engineers calculates that “the total probability of one or more large oil spills is approximately 11 percent to 24 percent” during its 15-year lifetime. BP has emphasized its solar investments while being attacked for its Arctic exploration. In March 1999 it launched its “Plug in the Sun” program based on its investment in solar energy and the installation of solar panels on gas stations around the world. Its ads said, “We can fill you up by sunshine” but it was still gas people were putting in their cars. For this program it was awarded a Green wash Award by Corporate Watch. In a similar satirical vein, Greenpeace USA gave CEO Browne an award for the “Best Impression of an Environmentalist.” An investment in image It seems BP is investing more in image than environment. Would a company spend hundreds of millions of dollars in solar investment just to enhance its reputation? Well, BP has already spent that much just on its “beyond petroleum” rebranding. Research and preparation cost $7 million; BP planned to spend $200 million between 2000 and 2002 rebranding its facilities and changing signs and stationery and another $400 million on advertising its gasoline and pushing the new logo. In the end, despite BP’s rhetoric about social responsibility, triple bottom lines and enlightened self-interest, profits seem to count most. An oil company might invest in solar energy and admit that global warming should be prevented, but it will do all it can to ensure it can go on drilling for fossil fuels and expanding its markets for them. However, BP’s investments in alternative sources of energies, its “green talk” and advertising campaigns resulted in many people believing that BP was indeed committed to being a environment-friendly company. But the safety lapses at Texas City refinery and Purdhoe Bay renewed the debate on whether BP could claim to be an environment-friendly company at all. The main argument for this was that an environment-friendly company would never have allowed such accidents to occur. BP’s critics dismissed its investments in alternative energy resources as a mere gimmick. While there is no doubt that big lapses had occurred at BP, it would not be justified to discount BP’s investments in alternative resources. It should also not be forgotten that when other companies like ExxonMobil chose to trivialize the threat of global warming, BP was the first company to accept it. It should also not be forgotten that BP is an oil company and extracting oil is its core business. It cannot be expected to leave its line of business to project itself as an environment-friendly company. 3.
a.
It can’t happen here mentality: < TOP > The attitude of giving advices and suggestions is common among employees and employers, but events point clearly to the fact that both the management and employees are aware of the safety lapses prior to the occurrence of mishap. Why is it so that the preventive steps were not taken, the issue is not taken with serious consideration when it was spotted for the first time and no is willing to change. The answer is the attitude on both sides, which is the “it -can’t- happen- here” mentality among employees and to an extent, employers. Reason: The source of this attitude may be tradition, or an ideology which succeeded in gaining supremacy in competition with other ideologies. Ill effects: •
Such attitude offers no scope for improving and upgrading the available body of Page 19 of 25
knowledge. It cannot admit direct observation as evidence because in case of a conflict the authority of dogma would be undermined. It must confine itself to applying the doctrine of every individual. The greater the coercion employed to maintain “it can’t happen here” attitude in force, the less likely it is to satisfy the needs of the human mind. Human beings, over the years, aren't terribly original in their behavior and thinking. History really does repeat itself, as has happened countless times throughout the ages. We all have this "it can't happen here" mentality. But it is happening, and we don't see anything at all on the horizon to stop it. If something doesn't radically change, this is going to make the situations much worst than before. Yet carelessness with information and failure to take available precautions contributes to such incidents as BP. No company is immune to the threat of safety lapse. Failure to take sufficient preventative measures is widespread, and following a safety lapse or incident, most companies will invest in the very preventative technologies and programs that might have helped avoid the incident in the first place. BP scenario: The same thing happened with BP, it is not that it lacks proper infrastructure and preventive measures, they were there, but the problem is that they were just on paper only. When it came to the practical implementation of those measures the company has clearly failed, and this failure is caused not just by the management alone, even the casual attitude or “it cant happen here“ mentality among the employees also contributed towards havoc. While industry experts agree companies need to start assuming they will someday suffer a safety lapse and must have a plan in place to soften the blow, they note that it's still possible to prevent a breach with some common-sense preventive measures. Measures to overcome this kind of mentality:
b.
• The only way to over come this behavioral hurdle is the continued effort to educate people regarding these risks and how important it is to not have an ‘it can’t happen here’ mentality. Design of safety programs including safety training, should be behaviorally motivated. Moreover both management and employees should keep the fact in their mind that this is not an overnight process, it needs to be addressed with at most care and sincere efforts on either sides. Experience bears no relationships with work injury indicating that a less experienced worker is equally likely to be injured as an experienced worker. It implies that experience though helps workers in understanding the physical hazards; however, avoiding the imminent danger is much more behavioral. Addressing variables like negative affectivity, job dissatisfaction, and risk taking behaviors are therefore crucial in avoiding accident/injuries. Step-up-supervisors: Step-up-supervisors can fill vacancies when the organization’s full time employees are vacationing, taking maternity leave, or otherwise cannot temporarily fill their position. This will help so that other full time employees don’t suddenly feel overloaded in their workload or so that the organization doesn’t fall behind but keeps functioning on schedule. The step-up-supervisors can be hired for specific projects. Step-up-supervisors can be brought in when there’s more work, and let go when there’s less work. Allowing for the work to ride along with your budget and not having to overpay for work that isn’t needed. Pros Enables business to adjust more easily and quickly to workload fluctuations. Step up supervisors fill the vacancies of the full time employees and they make the work flow smooth and it results in decreasing workload on the other employees Can quickly provide the organization with qualified staff. Maintains staffing flexibility With the popularity and staying power of flexible work arrangements, employers need to Page 20 of 25
stay current with the needs of today’s work force. Temporary work is just one of the ways that businesses can offer flexibility and at the same time better meet their own needs. Can evaluate worker without commitment Based on its evaluation or preferences, the organization can employ a step-up supervisor for a designated short term or, if desired, offer a full-time position. Hiring a step-up supervisor can also be a good way to continue getting work done while the organization searches for the perfect candidate for the particular job. Can save time and money The cost of hiring step-up supervisors is often cheaper than the cost of hiring permanent employees with benefits. In the short term, it is generally more cost-efficient to hire a step-up supervisor. For jobs that are expected to last six months or longer, it may pay to hire a full-time employee. Temporary employees can provide specialized skills to all types of industries Step-up supervisors are now employed in virtually every industry. Traditionally, companies sought Step-up supervisors for lower-skilled positions. Today Step-up supervisors increasingly include highly skilled individuals with a wide range of educational backgrounds and work experience. These individuals can tackle critical onetime projects that are limited in time and scope. Cons Training Needs Every time a step-up supervisor starts a new work assignment – no matter how skilled or unskilled – a certain amount of training is required in order for them to perform their assigned tasks to suit the specific needs of the organization. Of course, if the same stepup supervisor is brought back again, this might not be required. Morale Issues Morale and employee relations problems can arise when the organization has step-up supervisor’s working alongside permanent employees for months, doing the same work and putting in the same hours, but not receiving the same benefits as offered to the permanent employee. Safety Issues Certain types of jobs are inherently dangerous and require careful safety training. Studies show that frequency and severity rates of on-the-job injuries are significantly higher with step-up supervisors. No matter what a step-up supervisor’s experience is, care must be taken to see that dangerous tasks are performed safely. Never assume stepup supervisors are fully prepared to work unsupervised until the organization has taken the time to see that they can safely perform their work tasks. Legal Concerns Recent court decisions have highlighted the fact that businesses must be careful how they contract for step-up supervisors. There must be no doubt about the workers’ status and about the lack of eligibility for the benefits of permanent employees. And treat step-up supervisor with the same respect and care the organization would have for the permanent staff. Step Up supervisors in BP: It was found that during the blast in the Texas refinery, many of the supervisors were step-ups. The union alleged cost-saving measures were at the root of BP’s practice of over-using and keeping “step-up supervisors” in place for years at a time. The union had for long argued that this was one of the reasons for the accident. There the two basic reasons for these allegations (i) the step-up supervisor cost less to the organization which is the foremost goal of BP i.e., cost cutting. (ii) As they are temporary they does not have enough skills required for the job specially industries like oil. 4.
i.
Impacts of not adhering to Safety < TOP > Financial Impact Safety measures have implications for the finance function of the organization. Organizations cannot ignore safety measures - which means they have to have them in place even if it means incurring additional costs. On the other hand, if organizations Page 21 of 25
ii.
choose to ignore safety norms, then they may be forced to incur huge sums on compensation in the event of an accident or injury. Compensation for workmen injuries The Workmen's Compensation Act, 1923 provides for the payment of compensation to workers in the events of untimely death and injuries and disease. It is the responsibility of the employer to compensate financially when an employee is injured at the workplace. The amount of compensation depends on the nature of the injury as well as the employee's salary. The purpose of compensation is to provide financial security to employees and their family members. Man days lost Injuries at the workplace reduce man days for an organization which affects productivity, and subsequently the profits. To compensate for man days lost, organizations hire contract workers. Some organizations provide rehabilitation schemes to employees who wish to come back to work after they recover from injury. Operational Impact Lack of proper safety measures has a major impact on the day-to-day operations of an organization. Organizations may suffer losses due to plant shutdown, production loss, and employee turnover. Plant shutdown Let us consider that a group of 10 workers are allotted a job in an assembly line. One worker suffers a serious injury due to the lack of proper safety measures. If the management does not compensate the victim, other workers may strike, demanding medical aid, compensation for the victim, and proper safety measures to prevent accidents in future. They may have the support of all the workers in the assembly plant. If negotiations between the management and agitating workers are not successful, the workers may continue with the strike. If this continues for a long time, the organization may suffer losses and may be forced to close the plant eventually. Production loss Plant shutdown leads to production loss. Employees may be reluctant to work in a place that has no safety measures. This reduces the productivity of the organization. A drop in production is likely to have an adverse affect on the sales of the company which may have an impact on the profits. Employee turnover High employee turnover is most common in manufacturing organizations where workers handle heavy machinery. Organizations that neglect employee safety are bound to lose their people. Marketing Impact Employee safety and health influence an organization's image and goodwill. Issues like product safety and child labor also affect the marketing strategy of an organization. Image Employees and customers have a favorable impression of organizations that provide safety measures. People prefer to work for organizations that care about employee safety and security. Employees as brand ambassadors Some companies use employees as brand ambassadors. The purpose is to communicate to the public that employee welfare is the top priority to the organization. Goodwill Goodwill enables organizations to gain competitive advantage. Showing concern for their users and taking safety measures help organizations build trust and goodwill. The short-term measures taken by BP to deal with the accidents: •
Opt for outward recognition through promptly verbalized public acknowledgement that a problem exists: Acknowledge that people or groups of people, the environment, or the public trust is affected; and that something will be done to remediate the situation. The same Page 22 of 25
thing is done by BP too, this is clear from the statement of Robert Malone, president of BP (America), admitting that “what happened in Texas city was a tragedy and lot of lessons were learned from the incident which broke the values of BP”, BP formed an independent panel to review its corporate safety culture, safety management systems and corporate safety oversight at its US refineries. It has settled more than 1200 claims, including all the death related lawsuits. It ensured to improve safety and bring in a new corporate culture in all its five refineries in the US. BP had set aside US$1.6 billion to resolve all the lawsuits related to the Texas City refinery incident, and it has also announced that it has planned to spend US$1.7 billion annually until the end of 2010 to improve the integrity and safety of its refineries. •
Promptly ask for help and counsel from victims, government, and the community of origin - even from opponents: Directly involve and request the participation of those most directly affected to help develop more permanent solutions, more acceptable behaviors, and to design principles and approaches that will preclude similar problems from occurring.
Post-accident analysis: It had done a post accident analysis involving hundreds of companies, industries, and negative circumstances reveal a pattern of unhelpful behaviors that work against rebuilding or preserving reputation, trust, and credibility. Plan to learn: In situations similar to the BP-Texas Refinery incident, it is ideal for the organization to plan to learn as it executes its safety response and remedial actions. Besides, managers detest dealing with accidents, especially once the urgent issues have been identified. It's a critical part of any accident response process that a lessons learned approach be in place so that the institution can learn to remember the mistakes, the miscues, the successes, and the victories in real time - meaning contemporaneously with problem resolution. The public expects organizations to talk about and describe the lessons they learned from mistakes, errors, accidents, or negligent acts. Speaking publicly about lessons learned is a major corporate step toward obtaining public and employee forgiveness. Lessons learned approach: Successfully managing future safety plans often depends on the intentionally created institutional memory the public relations counselor brings to the managing executive's attention. The lessons learned approach teaches the organization how to forecast, mitigate, or perhaps even significantly reduce the likelihood of a similar situation occurring or reoccurring. On the whole, there is no doubt to say that Texas incident is a valuable lesson not only to BP, but to the entire industry. 5.
a.
Reasons for an organization to have an integrated and responsible approach to < TOP > governance, ethics and sustainability: Business Ethics: •
All business exists and operates within society and therefore they should contribute to welfare of society. To survive in the market, business should gain loyal customers and perform social responsibility. The managers of the biggest companies know as a business gets larger, the public takes more interest in it because it has greater impact on the community. Thus business, either big or small, must operate on ethical grounds and discharge their social obligation to survive in the long-run. Corporate Social Responsibility (CSR) is a concept whereby organizations consider the interests of society by taking responsibility for the impact of their activities on customers, suppliers, employees, shareholders, communities and other stakeholders, as well as the environment. CSR is the obligation of the organization to pump back certain portion of the profit they make from their business back to the society, purely on voluntary basis, without anticipating anything in return. Of course, in the long run it will automatically Page 23 of 25
yield its desired result in favor of the organization, but while carrying out CSR, this return should not be designed.
Corporate governance: Corporate governance involves taking care of all aspects and satisfying all the segments, in order to stay in the business, in order to have that cutting edge and to achieve the competitive advantage. In order to achieve this, it has tremendous tasks and responsibilities. The liberalization and de-regulation world over gave greater freedom in management. This would imply greater responsibilities. The players in the field are many. Competition brings in its wake weakness in standards of reporting and accountability. Market conditions are increasingly becoming complex in the light of global developments like WTO, removal of barriers/reduction in duties. The failure of corporate due to lack of transparency and disclosures and instances of falsification of accounts/embezzlement and the effect of such undesirable practices in other companies. Sustainability: •
b.
Sustainability means the capacity to endure as a group, by renewing assets, creating and delivering better products and services that meet the evolving needs of the society, delivering returns to our shareholders, attracting successive generations of employees, contributing to a flourishing environment and retaining the trust and support of our customers and the communities in which we operate. Consumers demand that goods and services be produced by socially and environmentally responsible companies. Bankers and investors evaluate companies and make decisions, considering both environmental risks and environmental market opportunities. Consequently, more companies are discovering the benefits of going beyond regulatory compliance, toward sustainability. Hence an organization should have an integrated and responsible approach towards business ethics, corporate governance and sustainability for effective organization. i. In the case of BP, we have seen that it had an adaptive culture. The organizational culture prevailing in BP in the mid-2000s was set from the top after Lord Browne took over at the helm. The importance of cost cutting and other operational efficiencies were ingrained in the culture of BP. The importance of personal safety was also clearly communicated which explained BP’s good personal safety record. This culture was responsible for elevating BP to a strong position in the industry. However, there seemed to be a disconnect between BP’s stress on process safety management and what was actually followed. While BP’s values did not necessarily stress on putting profit over safety, the dysfunctional aspects of BP’s culture ensured that there were more chances for safety lapses to occur. While the top management at BP might have stressed on the importance of safety, the message was clearly not effectively implemented by the rank and file. They perceived that cutting costs was more important and viewed repairing of worn out facilities and routine safety checks as additional costs. The problems were compounded as the culture at most of the US refineries was plagued by distrust between employees and supervisors, lack of open communication, conflict between employees and contract workers, etc. The reward structure of the company that rewarded people for getting “100 percent of the work done with 90 percent of the resources” also contributed to the safety lapses. This incident has major implication for how the top management needs to communicate its priorities to the workers at the lower levels and monitor it effectively. The positive thing for BP is that it has an adaptive culture, so changes necessitated by the safety lapses were not expected to encounter any resistance from the system. The statements made by the CEO-designate Tony Hayward, that BP would even deliberately slow down its growth to improve its safety culture, would send out a strong message to everyone at BP that safety is really important. The other investments made by BP toward improvement in safety infrastructure would go a long way in improving the safety record at BP. With regard to corporate social responsibility (CSR), an organization has to ensure Page 24 of 25
ii.
that its core business operations are not only profitable, but also benefit the external and internal stakeholders. The company must also ensure that its business operations are not at the cost of the safety of its employees or the society. If BP failed to provide adequate safety to its own employees, it would take the positive image it had built up as a result of its environment initiatives. The safety lapses at Texas City refinery and Purdhoe Bay resulted in loss of revenue and led to pollution of the environment. The Purhoe Bay spill affected the oil production of the US as a whole. It was also a serious jolt to Alaska’s revenue. The accident at Texas City refinery led to loss of life and injuries. If BP had conducted its core business in an efficient and safe manner, it would have demonstrated its responsibility to its own employees. Considering this, we can say that when it comes to corporate social responsibility, the first duty of any oil company is to run its operations efficiently and safely. Essential Governance Principles: A company should: 1. Lay solid foundations for management and oversight: Recognize and publish the respective roles and responsibilities of board and management. 2. Structure the board to add value: Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. 3. Promote ethical and responsible decision-making: Actively promote ethical and responsible decision-making. 4. Safeguard integrity in financial reporting: Have a structure to independently verify and safeguard the integrity of the company’s financial reporting. 5. Make timely and balanced disclosure: Promote timely and balanced disclosure of all material matters concerning the company. 6. Respect the rights of shareholders: Respect the rights of shareholders and facilitate the effective exercise of those rights. 7. Recognize and manage risk: Establish a sound system of risk oversight and management and internal control. 8. Encourage enhanced performance: Fairly review and actively encourage enhanced board and management effectiveness. 9. Remunerate fairly and responsibly: Ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined. 10. Recognize the legitimate interests of stakeholders: Recognize legal and other obligations to all legitimate stakeholders. 11. Corporate Governance Rating be made mandatory for listed companies
Thus by following the above probable guidelines for effective governance BP can adhere to the core values.
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Read the case carefully and answer the following questions: 1. a.
b.
What according to you could be the essential elements of a strong safety culture and in the light of these elements, discuss the failure of BP. Also, in your opinion, what should Tony Hayward do to counter the criticisms raised against BP’s process safety systems and 1 mark culture? ( 2 s)
3. The case refers to the expression “It-can’t-happen-here” and the concept of “Step-up supervisors” a.
Discuss, according to you, how an HR manager can deal with the “It-can’t-happen-here” 1 mark mentality which is widespread in an organization. ( 0 s)
b.
Discuss the rationale behind using “Step-up supervisors” in day-to-day operations.
1 mark ( 0 s)
5. a.
b.
Recent safety crises in BP refineries in Texas and Pudhore Bay in Alaska have turned the spotlight on core values such as governance, ethics and sustainability. Why did BP fail to live up to the expectations of superior core values? Also, discuss the probable guidelines for effective governance that should be put in place by BP for the adherence of the core 1 mark values. ( 0 s) BP: Putting Profits Before Safety?
"What BP experienced was a perfect storm, where aging infrastructure, overzealous cost-cutting, inadequate design and risk-blindness, all converged."1 – Carolyn Merritt, Chairman of the U.S. Chemical Safety and Hazard Investigation Board, 2 in 2006. “Based on its review, the Panel believes that BP has not provided effective process safety leadership and has not adequately established process safety as a core value across all its five U.S. refineries. *
The above case is prepared only for the purpose of examination and not to illustrate effective or ineffective performance of the company. The case contains factual information adapted to and combined with other information to enable analysis of the given topics. Page 1 of 25
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“Cost-cutting led to BP Refinery Fire, Report Concludes,” www.pbs.org, November 01, 2006. The US Chemical Safety and Hazard Investigation Board, headquartered in Washington, USA, is a federal agency that is responsible for conducting investigations of industrial chemical accidents in the US. “The Report of the BP US Refineries Independent Safety Review Panel,” www.bp.com, January, 2007. The UK Health and Safety Commission defines safety culture as “the product of individual and group values, attitudes, perceptions, competencies, and patterns of behaviour that determine the commitment to, and the style and proficiency of, an organisation’s health and safety management.” (Source: www.en.wikipedia.org) To help assure safe and healthful workplaces, US Occupational Safety and Health Administration (OSHA) has issued the Process Safety Management of Highly Hazardous Chemicals regulations which contain requirements for the management of hazards associated with processes using highly hazardous chemicals. “BP Safety Standards ‘Wholly Inadequate’,” www.inthenews.co.uk, January 16, 2007. Exxon Mobil Corporation, headquartered in Irving, Texas, USA, is the largest publicly traded integrated oil and gas company in the world. Royal Dutch Shell Plc., headquartered at The Hague, The Netherlands, is the world’s second largest oil company. “BP Surprises by Naming Successor for CEO Early,” www.taipeitimes.com, January 14, 2007. “Safety at Oregon’s BP Plant,” www.13abc.com, January 17, 2007. Sonja Franklin, “BP’s Browne Failed on Refinery Safety, Panel Reports (Update 5),” www.bloomberg.com, January 16, 2007. The Pipeline and Hazardous Materials Safety Administration is an agency under the US Department of transportation. In the pipeline industry, a pipeline inspection gauge (or pig) is a tool that is sent down a pipeline and propelled by the pressure of the product in the pipeline itself. It is the chief device used in pigging (maintenance of pipelines using pigs to perform various operations on a pipeline without stopping the flow of the product in the pipeline). “Oil Giant Told to Fix Pipelines after Alaska Spill,” www.msnbc.msn.com, March 23, 2006. A whistleblower is someone (most often an employee, former employee, etc.,) who provides information about an employer’s supposed misconduct. “As BP’s Hayward Takes Helm, His Priorities Should be Clear,” www.wsj.com, January, 2007. Amoco Oil Corporation was a global oil and gasoline conglomerate founded in 1889 by John Rockefeller. The company was initially incorporated as Standard Oil of Indiana which was formed from the break-up of Standard Oil Co. Burmah Oil Company was a British oil company which was founded in Glasgow, Scotland, in 1886. The company acquired the Castrol Company in 1966. After this acquisition, the company was called Burmah Castrol Plc. Valdez oil terminal, an oil port in Valdez, Alaska, was acquired by the British Petroleum Company from Chugach (it was the name of a native culture and group of people in the Kenai Peninsula and Prince William Sound regions of Alaska). Standard Oil was an American oil company also called Sohio. It was one of the successor companies to Standard Oil founded by John Rockefeller. BP took up a 25 percent stake in the company in 1969 and the remaining in 1987. In October 1973, members of the Organization of Arab Petroleum Exporting Countries including Egypt and Syria decided not to export petroleum to countries (like the US and other West European countries) that had supported Israel in its conflict with Syria and Egypt (Source: www.en.wikipedia.org). Selection Trust, a British based mining finance house, was formed in 1913 by Chester Beatty. The company mainly financed and developed mining operations worldwide. The company’s team of geologists and mining engineers were sent across the world to discover areas that could be explored for minerals. Atle Christer Christiansen, “Beyond Petroleum: Can BP Deliver,” www.fni.no, June 2002. Helios is the sun god in Greek mythology. The company thought that the upper case BP gave an imperialist impression. By shifting to ‘bp’ which was in lower case, the company wanted to project itself as a friendly company. Greenwashing is a term that environmentalists and other critics give to the activity of giving a positive public image to supposed environmentally unsound practices. TJ Aulds, “BP Refinery Manager No Stranger to Challenges,” www.galvestondailynews.com, January 30, 2007. “Safety at Oregon’s BP Plant,” www.13abc.com, January 17, 2007. Laurel Brubaker Calkins and Margaret Cronin Fisk, “BP Faces Growing Criminal Probe over Texas Refinery (Update 3),” www.bloomberg.com, January 29, 2007. The US Occupational Safety and Health Administration (OSHA) is an agency of the US Department of Labor. OSHA’s mission is to prevent work-related injuries, illnesses, and deaths by issuing and enforcing rules for workplace safety and health. John Porretto, “Report: Deadly Fire Followed BP Safety Failure,” www.jacksonholestartrib.com, January, 2007. Micheal Harrison, “Texas Report to Maul BP Management,” www.independent.co.uk, January 15, 2007. Katy Byron, “BP Chided in Report on Fatal Texas Fire,” www.money.cnn.com, October 31, 2006. “Safety at Oregon’s BP Plant,” www.13abc.com, January 17, 2007.
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Roger Shrives, “BP Condemned over Safety Standards,” www.socialistparty.org.uk, February 1, 2007. Katherine Torres, “Panel Finds BP Lacking in Safety Leadership,” www.occupationalhazards.com, January 17, 2007. Abrahm Lustgarten, “What Went Wrong at Prudhoe Bay,” www.money.cnn.com, August 21, 2006. David Robertson, “BP Failed to Learn from Mistakes, Panel Says,” www.business.timesonline.com, January 17, 2007. Sonja Franklin, “BP’s Browne Failed on Refinery Safety, panel Reports (Update 5),” www.bloomberg.com, January 16, 2007. “Alaska Hit by ‘Massive’ Oil Spill,” www.news.bbc.co.uk, March 11, 2006. The Exxon Valdez oil spill was the most devastating environmental disaster to occur at sea. On March 24, 1989, the oil tanker Exxon Valdez spilled its contents into the sea affecting 1,900 km of the Alaskan coastline. About 30 million US gallons (1US gallon = 3.785 litres) of crude oil were spilled, affecting the marine ecology as well as the lives of Alaskan fishermen. Exxon spent some US$2 billion cleaning up the spill, and a further US$1 billion to settle civil and criminal charges related to the case. In 1994, an Anchorage jury awarded the fishermen and affected communities US$5 billion in punitive damages. Exxon appealed against the ruling, claiming that the amount was excessive and unjustified. On December 2002, the damages were reduced to US$4 billion. As of March, 2007, Exxon had avoided paying the fine. “Oil Giant Told to Fix Pipelines after Alaska Spill,” www.msnbc.msn.com, March 23, 2006. “Prices Climbing after Oil Field Shutdown,” www.cnn.com, August 9, 2006. Wesley Loy and Richard Richtmyer, “Massive Repairs on the Slope,” www.adn.com, August 8, 2006. Abrahm Lustgarten, “What Went Wrong at Prudhoe Bay,” www.money.cnn.com, August 21, 2006. Nelson Schwartz, “BP was Warned,” www.money.cnn.com, October 2, 2006. Stephen Voss, Bloomberg News, “BP Oil Production Declines for Sixth Consecutive Quarter,” www.iht.com, January 10, 2007. RCM is a division of Allianz Global Investors. Nick Bevens, “Browne’s Exit Expected to Boost Lagging BP,” www.business.scotsman.com, January 16, 2007. Stephen Voss, Bloomberg News, “BP Oil Production Declines for Sixth Consecutive Quarter,” www.iht.com, January 10, 2007. TNK-BP is a leading oil company in Russia. It was formed in 2003 as a result of a merger between BP’s oil and gas assets in Russia and the oil and gas assets of the Alfa Access Renova group. (Source: www.tnk-bp.com). “BP Surprises by Naming Successor for CEO Early,” www.taipeitimes.com, January 14, 2007. “BP Surprises by Naming Successor for CEO Early,” www.taipeitimes.com, January 14, 2007. Royal London Asset Management is the wholly owned asset management subsidiary of The Royal London Mutual Insurance Society (Royal London), the second largest mutual life insurer in the UK. (Source: www.scottishlife.co.uk) “BP Surprises by Naming Successor for CEO Early,” www.taipeitimes.com, January 14, 2007. Simon Bowers, “BP Braced for Fallout as Safety Report Threatens to Implicate Board,” www.business.guardian.co.uk, January 15, 2007. Oppenheimer & Co. Inc., headquartered at New York, USA, is a leading investment boutique that provides financial services and advice to high net worth investors, individuals, businesses, and institutions. ING Group, headquartered in Amsterdam, The Netherlands, is a financial institution that offers banking, insurance, and asset management services Mike Elliott, “BP Chief’s Early Exit Ends Uncertainty,” www.stuff.co.nz, January 17, 2007. Liz Chong and Robin Pagnamenta, “BP Told to Expect More Departures after Texas Blast Report,” www.business.timesonline.co.uk, January 15, 2007. John M Biers, “Report Shows Downside of BP’s Refinery-light Strategy,” www.marketwatch.com, January 17, 2007. Katherine Torres, “Panel Finds BP Lacking in Safety Leadership,” www.occupationalhazards.com, January 17, 2007. David Robertson, “BP Failed to Learn from Mistakes, Panel Says,” www.business.timesonline.com, January 17, 2007. “Safety at Oregon’s BP Plant,” www.13abc.com, January 17, 2007. “BP Attacked over Plant Death Blast,” www.icsouthlondon.co.uk, January 16, 2007. “BP Safety Standards ‘Wholly Inadequate’,” www.inthenews.co.uk, January 16, 2007. The US Environmental Protection Agency (EPA) is an agency of the federal government of the US. It is charged with protecting human health and with safeguarding the natural environment: air, water, and land. Ciat Murphy, “Beyond Prudhoe: Why BP Should Go Back to Being an Oil Company,” www.money.cnn.com, August 15, 2006. Nelson Schwartz, “Can BP Bounce Back?” www.money.cnn.com, October 31, 2006. Arctic National Wildlife Refuge (ANWR) covers 19,049,236 acres (79,318 km²) in northeastern Alaska, in the North Slope region. It is endowed with rich natural resources. There was a controversy as to whether to allow drilling in the ANWR. Drilling was finally allowed in 2006. Aaron Smith, “BP ‘Fell Short’ on Pipeline, Execs Admit,” www.money.cnn.com, September 7, 2006. Nelson Schwartz, “BP was Warned,” www.money.cnn.com, October 2, 2006. William Marsh Rice University, located in Houston, Texas, USA, is a private, research university set up in 1912.
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While BP has an aspirational goal of “no accidents, no harm to people,” BP has not provided effective leadership in making certain its management and U.S. refining workforce understand what is expected of them regarding process safety performance.”3 – The Report of the BP US Refineries Independent Safety Review Panel, January 2007. “We will use this report to enhance and continue the substantial effort already underway to improve safety culture and process safety management at our facilities… I intend to ensure BP becomes an industry leader in process safety management and performance.” 4,5,6 – Lord John Browne, CEO, BP Plc., in January 2007. BP – GREEN OR MEAN? On January 16, 2007, the BP US Refineries Independent Safety Review Panel issued its report (popularly known as the Baker report) on its review of safety issues in BP Plc.’s (BP) refineries in the US. BP, the world’s third-largest oil and gas producer after Exxon Mobil Corp.7 (ExxonMobil) and Royal Dutch Shell8 (Shell), had been plagued by safety lapses in its facilities in the last couple of years.9 The panel was formed in October 2005, after The US Chemical Safety and Hazard Investigation Board (CSB) had uncovered many safety lapses at BP’s Texas City refinery during the investigation of an explosion that occurred on March 23, 2005, which had resulted in 15 deaths and 170 people being injured.10 CSB said that BP might have endangered its workers by compromising on process safety and because of its emphasis on cost cutting. Calling into question BP’s safety culture, CSB recommended that BP should form an independent review panel to review the safety of its five refineries in the US. The 11-member panel, which was headed by former US secretary of state, James A Baker III (Baker), was critical of BP’s safety culture and the leadership demonstrated by BP’s top management with regard to safety issues. The chairman of CSB, Carolyn W. Merritt (Merritt) agreed with this finding when she said, “Safety culture is created at the top, and when it fails there, it fails workers far down the line. That is what happened at BP.”11 The panel decried a sense of complacency regarding safety issues at BP’s refineries and BP’s emphasis on personal safety but lack of leadership on process safety issues. The panel lauded BP for co-operating with the review process and said that it did not find sufficient evidence that BP might have intentionally jeopardized the safety of its employees through its cost cutting measures. The panel outlined ten recommendations to BP and urged it to take this opportunity to become a leader in
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Heather Timmons, “Second-guessing of BP’s Departing Chief Begins,” www.iht.com, January 16, 2007. Nelson Schwartz, “BP was Warned,” www.money.cnn.com, October 2, 2006. “BP Attacked over Plant Death Blast,” www.icsouthlondon.co.uk, January 16, 2007. Sonja Franklin, “BP’s Browne Failed on Refinery Safety, Panel Reports (Update 5),” www.bloomberg.com, January 16, 2007. “BP Safety Standards ‘Wholly Inadequate’,” www.inthenews.co.uk, January 16, 2007. David Robertson, “BP Failed to Learn from Mistakes, Panel Says,” www.business.timesonline.com, January 17, 2007. TJ Aulds, “BP, Steelworkers Reach Agreement,” www.galvestondailynews.com, January 17, 2007. “BP CEO’s Pay Fell in 2006 Despite Strong Profits,” www.money.cnn.com, March 6, 2007. Nelson Schwartz, “Can BP Bounce Back?” www.money.cnn.com, October 31, 2006. “BP Seeks Part of Alaska Pipeline Reopened,” www.money.cnn.com, September 15, 2006. Jeannette J Lee, “BP Watchdog Check’s Prudhoe Bay Claims,” www.businessweek.com, February 7, 2007. Abrahm Lustgarten, “What Went Wrong at Prudhoe Bay,” www.money.cnn.com, August 21, 2006. David Ellis, “Safety Panel Slams BP over Refinery Blast,” www.money.cnn.com, January 17. 2007. Carl Mortished, “Opportunity for BP to Lead Industry on Safety Practices,” www.business.timesonline.com, January 18, 2007. Bear, Stearns & Co. Inc., is a leading global investment banks, and, securities trading and brokerage firms in the world. “Ahead of the Bell: BP” www.chron.com, January 16, 2007. Ed Crooks and Carola Hoyos, “BP Faces Fight to Please Investors,” www.ft.com, January 17, 2007. Investec, is a Johanessburg, South Africa-based international specialist banking group. Jane Wardell, “BP Looks to Restore Battered Reputation,” www.forbes.com, February 5, 2007. Carl Mortished, “BP Warns Safety Worries Will Hit Growth,” www.business.timesonline.co.uk, February 7, 2007. Jane Wardell, “BP 4th-quarter Earnings Fall 22 percent to 2-year Low; Cuts Growth Targets,” www.examiner.com, February 06, 2007.
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safety issues. The Texas accident was not the only safety lapse at BP. In March 2006, a huge oil spill was discovered in BP’s pipeline at Prudhoe Bay, Alaska, USA. The spillage was due to a corroded transit pipeline. Investigations found that BP had not been maintaining the pipeline properly. The Pipeline and Hazardous Materials Safety Administration12 ordered BP to review the leak detection system on the affected line as well as two other crude transit pipelines in Prudhoe. Critics were incensed by the fact that BP had last used a pipeline inspection gauge13 (pig) on the pipeline in 1998.14 This led to a criminal investigation by the US Attorney’s Office (in Anchorage, Alaska) into the leaks. On August 6, 2006, BP announced that it had discovered severe corrosion in its pipe and had decided to shut down the oil field indefinitely. This led to an outcry against BP by the public and some policy makers in the US. Safety measures at this oilfield had been neglected despite it accounting for 8 percent of the oil produced by BP. Critics alleged that BP had put profits before safety. On January 12, 2007, BP surprised analysts by announcing that BP’s CEO Lord Robert Browne (Browne) would relinquish his position at the end of July 2007. It announced that the head of BP’s exploration and production, Tony Hayward (Hayward), would succeed him. The growth of BP under Browne since the mid-1990s had been phenomenal. So experts were surprised by the move as Browne was expected to retire by the end of 2008. Analysts felt that the safety issues coupled with other problems, such as the investigation against BP’s US trading unit for market manipulation, declining production and share prices, were some of the factors that had contributed to Browne’s early departure. Still more damaging for the company was the fact that many critics had started questioning BP’s environment-friendly stance and its corporate culture. Under Browne’s leadership, BP had rebranded itself as an environment-friendly oil company. It had increased its investments in nonpetroleum alternative sources of energy. Unlike some of the other big oil companies, BP had acknowledged the problems of global warming. An advertising blitz that projected its new “green” image was also launched. The company renamed itself BP from its original British Petroleum and adopted a new logo and tag line “Beyond Petroleum”. Though the initiative earned BP a lot of accolades at the time, the incidents at Texas and Prudhoe Bay tarnished its reputation. Critics raised doubts about BP’s environment-friendly image and wondered how a company with such major safety lapses could make such a claim. They felt that BP’s drive for cost cutting were in conflict with its efforts to protect the environment. With the announcement of Browne’s early departure, some analysts hinted that BP might have developed an “unhealthy corporate culture” where cost cutting was given more priority than safety of the workers. The problems of BP were compounded when some whistleblowers15 provided information to the media which indicated that while the senior management was aware of safety lapses, they still chose to do nothing about them so as to keep costs under control. BP denied that it had put profits before safety. It said that it would implement the recommendations of the Baker panel and said that it had earmarked billions of dollars to improve the safety of its refineries and oilfields. However, some analysts still felt that much more was required. The Wall Street Journal noted, “Throwing money at the problem probably won’t be enough. BP’s culture needs to change, too. The oil giant became increasingly dominated by a “Yes, Lord Browne” culture.”16 Some analysts opined that BP would likely face significant challenges to gain back its reputation. They said that Hayward would need to focus on resolving safety issues as his top priority. In February 2007, Hayward announced that safety worries could hamper the growth of BP and it would give top priority to safety, even at the cost of growth. Some industry experts believed that BP might take this opportunity to become an industry leader in process safety management and performance. But others felt that BP should return to being an oil company rather than trying to go “Beyond Petroleum”. They felt that the prime duty of an oil company was to run its core business to a high standard. So, rather than “pretending” to stand for something other that petroleum, BP would be well served if it focused on improving its operational efficiencies. BACKGROUND NOTE BP was formed in 1998 as a result of the merger between British Petroleum and Amoco Oil Corporation17 (Amoco). However, the origin of BP can be traced back to 1901, when William Knox D’Arcy (D’Arcy), an Englishman, obtained a concession from the Shah of Persia to explore for oil in the Middle East. When D’Arcy failed to locate any oil deposits despite having incurred huge costs on his explorations, the Burmah Oil Company18 came to his rescue in 1905. In 1909, oil deposits were discovered in South West Persia, which marked the founding of the Anglo-Persian Oil Company Page 5 of 25
(APOC). During that time, Burmah Oil Company held 97 percent of the company’s ordinary shares. That changed in 1914, when the British government acquired a majority shareholding in APOC. In 1917, APOC acquired a division of the German-based Europaische Union which was under the control of the British government. From that time on, APOC started using ‘British Petroleum’ as its trade name. By the mid-1900s, the company had explorations in Africa, Canada, Europe, South America, and Indonesia/Papua New Guinea, and refineries in Europe and Australia. British Petroleum forayed into the US in the 1960s, after finding oilfields in Prudhoe Bay in Alaska, and the North Sea. In 1969, it acquired the Valdez oil terminal19 in Alaska and also acquired a 25 percent stake in the Standard Oil Company20 of Ohio (Sohio). In the 1970s, British Petroleum, like other oil firms was affected by the Middle East oil crisis21. But, the company survived the crisis due to its investments outside the Middle East countries and its diversification into other businesses such as minerals, nutrition, and petrochemicals. In 1980, British Petroleum acquired Lucas Energy Systems, which manufactured solar panels. This deal marked the company’s foray into the solar industry. A subsidiary was formed which later came to be called BP Solar. It also diversified further into minerals by acquiring Selection Trust22, a UK-based mining operations company. In the late 1980s, the company expanded into Colombia, the former Soviet Union, the Gulf of Mexico, Asia, and Africa. It also diversified into gas, power, and solar energy. In 1987, British Petroleum acquired Britoil, a UK-based oil exploration and production company. In the same year, the UK government sold off 31.5 percent of its shares in British Petroleum. The huge investments and accumulated debt resulted in losses for the company. In 1989, the company felt the need to change its image. Its ‘Shield’ logo was modified and changed to green. It adopted a new slogan “Now We’re Greener Than Ever” and painted all its assets green. Despite these measures, the company’s share price had declined during the early 1990s. It also faced pressure from external agencies to stop polluting the environment. In 1995, Browne became the CEO of the company. He realized that the company needed to change its policies and re-brand itself if it had to survive in the industry. In 1998, British Petroleum merged with Amoco. In 1999, BP adopted a new set of business policies based upon the best practices followed by both the companies. The company borrowed liberally from the environment-friendly policies framed by the erstwhile Amoco. In doing so, BP became the first company in the oil industry to emphasize the need for Health, Safety, and Environmental (HSE) performance. On March 11 2002, while giving a speech at Stanford University on climate change, Browne said it would be necessary to take preventive measures to face climate change. He also said BP would reinvent its energy business and would go ‘Beyond Petroleum’.23 BP believed that its HSE performance would be vital to its success in the countries where it operated. In 2002, BP underwent significant changes to project itself as a ‘green’ company. It changed its logo from a green shield to the white, green, and yellow sunburst logo of Helios24 (Refer to Exhibit I for the old and new logos of BP). The company also changed its name to ‘bp’, without any meaning being attached to the letters.25 It also adopted a new motto - “Beyond Petroleum”. Through these changes, BP strove to project its concern for the environment and its entry into renewable sources of energy. The apparent change in image and its business practices earned rich accolades for BP. But some of its critics remained unconvinced. They felt that it was hypocritical of an oil company like BP to project itself as ‘green’. Its promotional efforts to project its new image were also dismissed as “greenwashing”26 by some critics. As of 2006, the company operated in 100 countries with three major business segments: Exploration and Production; Refining and Marketing; and Gas, Power and Renewables. The company marketed its products under five brands: BP, Castrol, Arco, Aral, and AMPM. In 2005, BP’s revenues were US$245.48 billion with a net income of US$19.64 billion. (Refer Exhibit II for BP’s financial summary). TRAGEDY IN TEXAS On March 23, 2005, there was a devastating explosion at BP’s Texas City refinery, the third largest refinery in the US.27 This accident was one of the most serious workplace disasters in the US as it had resulted in 15 deaths and more than 170 being injured. The accident occurred when the workers started the refinery’s octane-boosting unit. Excess gasoline spilled into a vent system and ignited, setting off an explosion that was felt within a five-mile radius. The CSB sent an investigation team to the site on the day of the accident itself. The Texas City refinery blast was the biggest accident in BP’s history. It was also a severe dent to the image of BP. Page 6 of 25
Under the US Occupational Safety and Health act of 1970, employers were responsible for providing a safe and healthy workplace for all their employees.28 This accident had resulted in over 1,700 lawsuits being filed against BP.29 A fine of US$21.3 million was imposed on BP by the US Occupational Safety and Health Administration30 (OSHA) as its investigations indicated that BP had committed more than 300 willful violations of its rules.31 The most devastating for BP was the CSB finding that BP had endangered workers in its bid to cut costs. In late October 2006, CSB revealed that although BP had known about problems at its Texas refinery before the explosion, it did not fix them. Merritt said that though the company improved working conditions and paid heed to personal safety (such as slips, trips and falls), “unsafe and antiquated equipment designs were left in place, and unacceptable deficiencies in preventative maintenance were tolerated”. It was reported that the Texas City refinery had had 23 accidents in its 30-year history before the accident in 2005.32 The report pointed out that between 1994 and 2005, there were eight incidents at the Texas City refinery (including two incidents of fire), which was a sign of severe problems.33 In 2004, in the twenty-third accident, a worker was burnt alive. Daniel Horowitz of the CSB, said, “There’s a lack of safety leadership in BP. There were inadequate resources for safety at their North American refineries. And there were broken safety systems.”34 It was reported that the site’s director had admitted that the refinery was held together by ‘Band Aid’ and ‘superglue’ for years before the tragedy occurred in 2005.35 CSB said that a lot of blame for the accident should go to the cost cutting measures adopted by BP. BP’s management had allegedly ordered a 25 percent saving on costs, and were frugal in sanctioning funds for the refinery. For these reasons, alarms and instruments were not replaced and leaking pipes were often patched up using temporary clamps and valves. On August 17, 2005, the CSB made a recommendation to BP requiring the company to set up an independent panel of experts to review safety at the company’s five US refineries.36 Though BP co-operated with the authorities and took full responsibility for the accident, it denied any wrongdoing. Robert Malone (Malone), president, BP (America), said, “Texas City was a tragedy; a lot of lessons were learned. And when I listen to the trader tapes there is no doubt in my mind, what happened may not have broken the law, but it broke our values. In my visiting facilities across the country and talking to employees and management though I cannot draw a systemic problem in BP America.”37 Following the recommendations of the CSB, BP formed an independent panel to review its corporate safety culture, safety management systems, and corporate safety oversight at its US refineries. On October 24, 2005, the formation of the BP US refineries independent safety review panel was announced.38 The 11-member panel headed by former US secretary of state, James A. Baker III (Baker) began investigations into the matter. The panel visited all the five BP refineries in the US. It conducted various anonymous employee surveys and also conducted public hearings. In addition to this, it reviewed technical documents and also interviewed the management and employees of private contracting firms who worked at the refinery. As many people awaited the panel’s report (‘the Baker Report’), BP settled more than 1,200 claims, including all the death related lawsuits. After Hurricane Rita in September 2005, BP closed the refinery for months to upgrade equipment and review safety practices.39 It also moved to improve safety and bring in a new corporate culture in all its five refineries in the US. BP had set aside US$1.6 billion to resolve all the lawsuits related to the Texas City refinery incident. ALARM IN ALASKA BP’s image was also affected in early 2006, when leaks were found in its oil pipelines at Prudhoe Bay, Alaska, the largest oil field in the US. On March 2, 2006, a BP worker discovered a large oil spill in western Prudhoe Bay. It was estimated that at least 267,000 gallons had spilled out, making it the largest oil spill on Alaska’s North Slope.40 The spillage was due to a corroded transit pipeline. The spillage brought back memories of the infamous Exxon Valdez Spill41 in Alaska, and led to a public outcry against BP. The Pipeline and Hazardous Materials Safety Administration found that there was “ineffectiveness of the leak detection system to identify the leak” in the Prudhoe Bay transit line. The inspection team found that the pipeline had several defects, including an area of the 0.375 inch wall that was worn thin by internal corrosion. The team believed that the leak might have passed unnoticed for at least five days before it was discovered. The safety agency ordered BP to review the leak detection system on the affected line as well as two other crude transit pipelines in Prudhoe Bay. Critics took exception to the fact that pipeline inspection gauges (pig) had been last used on the pipeline in Page 7 of 25
1998.42 Analysts felt that the incident would lead to more fines against BP. On August 6, 2006, BP announced that it had started a phased shutdown of the Prudhoe Bay oil field after it discovered severe corrosion and an oil leak in an oil transit pipeline. BP had to replace 16 of 22 miles of pipeline. Malone said, “We have now taken the decision to replace the main oil transit lines at Prudhoe Bay. This will be accomplished as part of our overall plan for ensuring the integrity of the field.”43 BP’s share price, already down because of the criminal investigation by the US Attorney’s Office (Anchorage, Alaska) into the leaks (of March 2006), was severely jolted by the company’s decision to shut down the oil fields. While BP’s production reduced on account of the closure, US production of oil experienced a decline of 8 percent. The economy of Alaska, which was dependent on taxes levied on the oil industry, was also expected to be impacted. BP said that it expected the oil fields to be reopened in January, 2007. The oil spill also attracted the ire of the US Congress. Congressman John Dingell criticized BP for its poor maintenance of the pipelines and called for a congressional investigation. He said, “It is appalling that BP let this critical pipeline deteriorate to the point that a major production shutdown was necessary. BP must take all steps necessary to repair or replace problem pipelines quickly, so the American consumer does not pay for BP’s laxity.”44 As of February 2007, BP was faced with another investigation into this incident, as Federal criminal investigators began probing charges that BP had substituted water for corossion-inhibiting chemicals since 1998. It was also probing allegations that BP’s staff were given written instruction against replacing deficient systems, pipes and components due to cost considerations. Replying to criticisms that BP was neglecting worker safety and maintenance to cut costs, Malone said, “I’ve visited a number of facilities and I not only test the management, I also get out on the shop floor. I have not had an employee tell me that they were concerned to raise a safety issue, or an employee tell me they would not hesitate to shut down an operation they thought was unsafe. On Prudhoe Bay; there has been an 80% increase on our spending on the corrosion management year over year since 2000. Our corrosion experts said they felt that they were spending the money that they needed.”45 He explained that BP didn’t use pigging to identify corrosion in its pipes as it felt that UT technology was a better alternative. Since that practice had led to the spillage, BP would use pigging in the future. In a testimony before Congress on September 12, 2006, Malone admitted that BP had “fallen short of the high standards we hold for ourselves” but denied that it was putting profits before safety and maintenance. For instance, BP said that at Prudhoe Bay the corrosion spend had actually increased since 2001 despite the decline in production. (Refer to Exhibit III for Prudhoe Bay: Corrosion spend versus production). OTHER PROBLEMS Apart from the safety lapses, BP also had to deal with several other problems. Its US trading unit was accused of artificially driving up the prices of propane in 2003 and 2004.46 In December 2006, US regulators threatened to press civil charges against BP after an investigation into allegations of market manipulation of the gasoline futures market. BP was also struggling to increase its production levels. On January 09, 2007, BP said that oil production had reduced for the sixth consecutive quarter due to the shut down of its facility in Alaska and delay in opening of new fields in the Gulf of Mexico. In fourth quarter of 2006, BP’s oil production had reduced by 5 percent over the same period of the previous year.47 Analysts were disappointed by the production performance of BP. Mark Lovett, head of British and European equities for RCM,48 said that though both Exxon and BP had the same production issues, ExxonMobil had “hugely outperformed” BP. The company’s share price was also on the decline. (Refer to Exhibit IV for a Chart of BP’s stock price movement). Analysts pointed out that in 2006, BP’s shares had under-performed the global energy sector by 16 percent, ExxonMobil by 23 percent and Royal Dutch Shell by 5 percent.49 BP also said that the opening of BP’s two production platforms, Atlantis and Thunder Horse, in the Gulf of Mexico had been put off until 2007 and 2008, respectively, due to equipment failure.50 BP, which had a strong position (due to its 50 percent stake in TNK-BP51) in Russia was also likely to face potential trouble as Russia’s president Vladimir Putin (Putin) pushed for nationalization of Russia’s natural resources. BP SPRINGS A SURPRISE AHEAD OF THE BAKER REPORT On January 12, 2007, BP announced that Browne would step down in favor of Hayward by the end of July 2007. Browne had been expected to stay until the end of 2008. Browne’s early departure came as a surprise as he had been credited with transforming BP into a major player in the industry Page 8 of 25
with a series of M&A deals. He had also given BP a new image as a company that was concerned about the environment, long before any of its competitors had done so. During his tenure BP’s profits and market capitalization had grown fivefold and its share price had increased by 250 percent.52 Many analysts felt that Browne’s departure was brought forward to preempt the Baker panel report that was expected to be critical of BP’s top management. BP’s chairman, Peter Sutherland (Sutherland), was reported to be very concerned about the negative fallout of the report. In announcing that Browne was leaving before the report was announced, the notion that Browne’s departure was a consequence of the negative external report could be avoided. Sutherland and other key officials were also concerned that some of BP’s top managers would be named in the report. This might require them to depose before authorities or even go to jail for negligence. Browne himself was reportedly fed up with the spate of bad news over the past couple of years, and wanted a “dignified departure”. Sutherland, who had hailed Browne as “the greatest British businessman of his generation”, said that since the decision regarding Browne’s exit and Hayward’s succession had already been made, it made better sense to opt for a handover in six months’ time rather than over a longer period.53 Robert Talbut, chief investment officer at Royal London Asset Management54 said that it made sense for BP to clarify the succession issue quickly if the company was concerned about the findings of the Baker report so that Browne could be left to deal with the disclosures. While some analysts saw the move to call forward the succession as a bold strategic move, others felt that market pressure was at the root of Browne’s early exit. In January 2007, it was reported that BP had lost around US$39 billion in market capitalization since August 2006.55 After the announcement of Browne’s early exit, BP share prices rose by 1.8 percent.56 Oppenheimer & Co., Inc.’s57 oil and gas analyst in New York, Fadel Gheit (Gheit), said that Hayward’s appointment boded well for BP. Jason Kenney (Kenny), oil analyst at ING58 in Edinburgh, said, “I see it as positive news. They had a difficult choice because there were a number of positive people who could have taken over the role. The fact that Tony Hayward has got it will enable BP to move forward, put the succession behind them and get on with the job.”59 Analysts expected a bigger shake up at the top management of BP after the Baker report came out, as there were indications that the report would be critical of BP’s top management. They felt that, in particular, John Manzoni, the head of refining and marketing, who was ultimately responsible for the Texas City refinery could be part of the reshuffle. “If the report is bad, then more people might have to leave. There is no doubt that sentiment has taken a big kicking. The oil and gas industry is a hazardous business – your reputation is your license to operate,” 60 said Kenny. THE BAKER REPORT On January 16, 2007, the Baker report was released at Houston, Texas. As expected, the Baker report was very critical of BP’s approach to process safety at its refineries in the US. The panel said that a lack of focus on manufacturing process safety on BP’s part contributed to the March 2005 accident in Texas. It said that BP had failed to give process safety the same emphasis that it gave to personal safety and environmental initiatives. The report said that the management should have paid more attention to earlier incidents, such as product chemical releases and fires at the plant. The Baker report also said that the top management at BP had failed, as they had apparently ignored concerns raised by lower-level employees. It noted that the role of top management in providing safety leadership was paramount, and BP’s top management was found wanting in this regard. It further said that BP failed to devote adequate resources to keep its operations safe. The panel found that refineries in BP did not get the same importance at BP as exploration. It was more of a “tolerated cousin” and was subjected to budget cuts.61 The panel said, “BP tended to have a short-term focus, and its decentralized management system and entrepreneurial culture have delegated substantial discretion to US refinery plant managers without clearly defining process safety expectations, responsibilities or accountabilities.”62 The report said that BP should have learnt from three similar incidents in BP’s Grangemouth refinery in Scotland in 2000.63 In fact, it severely criticized BP’s management for failing to learn from those past incidents. The report revealed that BP’s refinery at Toledo, Oregon, was actually worse than the Texas refinery with respect to safety. In 2006, the Toledo refinery was fined US$2.4 million for its unsafe operations, including the practice of keeping workers in vulnerable buildings near processing facilities and failing to prevent the use of non-approved electrical equipment.64 The panel found that in the Toledo and Whiting plants, there was mistrust between employees and the management. Communication was also a problem. For instance, in the Whiting refinery many work orders to Page 9 of 25
replace damaged parts had not been attended to for more than a year. There was also high tension between union and contract workers. The panel was critical of BP for using a large number of contract workers in its refineries. This problem of a large contract workforce was attributed in part to the high turnover of regular workers in its refineries. BP’s Cherry Point, North Carolina, refinery was rated the highest in safety among the company’s five US refineries. Though there were some safety issues at this refinery too, overall, the report found a good safety culture at Cherry Point refinery, with a “very positive, open and trusting environment.” The panel also endorsed the elevation of Cherry Point’s former plant manager, Rick Porter, to the new position as vice president in charge of safety oversight. In his new role, Porter would look after the safety practices at BP’s refineries worldwide. The panel said that there were “instances of a lack of operating discipline, toleration of serious deviations from safe operating practices, and apparent complacency toward serious safety risks at each refinery” - but it could not find sufficient reason to believe that BP had intentionally endangered the life of its workers due to cost cutting measures.65 The panel made ten recommendations (Refer to Exhibit V for the 10 recommendations of the Baker panel). The panel made it clear that these recommendations were not for BP alone, but for all other companies as well. The panel said, “We are under no illusion that deficiencies in process safety culture, management, or corporate oversight are limited to BP. Other companies and their stakeholders can benefit from our work. We urge these companies to regularly and thoroughly evaluate their safety culture, the performance of their process safety management systems, and their corporate safety oversight for possible improvements.”66 The report also complimented BP for co-operating with the investigation and noted that many of its recommendations were already being implemented by BP. It also noted that safety culture at the Texas City refinery and the Whiting refinery were improving. After the accident in Texas, BP focused on bringing a new corporate culture to the refinery. Keith Casey, who was the head of the refinery in January 2007, said that he was in a position to call up Malone, Hayward or Browne, if he had any issues. The top management also called him up to know if any help was required. But problems seemed to be far from over. As of end-January 2007, BP was facing intense scrutiny from federal investigators for possible criminal environmental and safety violations at its Texas refinery. The lawyers suing BP said that the US Environmental Protection Agency67 (EPA) had joined a federal investigation that had been started in October 2006 by the US attorney in Houston. It was reported that the federal investigators were looking for evidence that could be used to bring criminal charges against the higher levels of management at BP’s refinery in Texas as well as the top management of BP. CRITICS QUESTION BP’S “GREEN” IMAGE AND CULTURE The Baker report was a big blow to BP’s reputation and a major embarrassment for BP’s top brass. The safety lapses at BP coupled with the findings of the Baker report led many to question BP’s integrity as well as its corporate culture. Some wondered whether the oil and gas behemoth built by Browne was “fundamentally flawed”. The announcement of Browne’s early departure was viewed by some as an admission of its flawed practices. Investors and analysts started to question the underlying structure that gave rise to such business practices in BP. In hindsight, some analysts said the problem in the refineries stemmed from Browne’s July, 1999, bold strategic decision to reduce refining capacity by a third to counter weak profit margins – a move that was widely appreciated by industry experts at the time. Browne’s strategy of re-branding BP as a “green” company had earned the company a lot of laurels. Its advertising blitz in the 2002 had differentiated it from other oil and gas majors. In 2005, BP was named the Financial Times’ “most respected energy company” and Fortune’s “most admired company in Britain”. BusinessWeek had ranked it in the second position in “the greenest company of the decade”.68 Analysts felt that BP did well to earn that image in an industry where corporate ethics were challenged by the very nature of the business – extracting crude oil, burning of fossil fuel, dealing with repressive regimes, etc. With the safety issues exposed since 2005, some critics raised doubts as to whether BP was indeed as environment-friendly as it had projected itself. They wondered how a supposedly environment-friendly company could allow accidents such as the Texas City refinery and Prudhoe Bay to occur. They noted that within the span of one year, BP had suffered both the worst refinery accident in the US and the worst oil spill in the history of the North Slope. Senator Dianne Feinstein, said, “I have always respected BP, and I met John Browne and respected him. I thought finally there was an oil company that has a sense of conscience. I no longer think that.”69 Some critics felt that BP’s projection of itself as a “green” company and its foray into renewable Page 10 of 25
energies, backed by the ad campaigns were nothing more than a PR gimmick. They pointed out that its actual investment in alternative resources was very small when compared to its investment in exploration and refining, and also in relation to its profits. Moreover, it was BP that had aggressively lobbied for the opening up of the Arctic National Wildlife Refuge70 to drilling. Critics contended that if BP had spent as much on maintenance of its facilities as it had on advertising and lobbying for tax cuts, it could have averted these major disasters. Some even said that ‘BP’ stood for a company with “bloated profits” that failed to fix “bad pipelines”.71 Critics said it was BP’s excessive emphasis on cost control that had led to these environmental problems. An employee of BP, who had worked in both Prudhoe Bay and Texas, had said, “The mantra was, Can we cut costs 10 percent? There was an it-can’t-happen-here mentality on the part of middle management. The values are real, but they haven’t been aligned with our business practices in the field. A scream at our level is, if anything, a whisper at their level.”72 Amy Jaffe, associate director of William Marsh Rice University’s73 energy program, said that there was a “disconnect between the public emphasis on environmental sustainability” and actual practice at BP.74 Analysts felt that BP had failed to communicate what was more important – cutting costs, or safety and protection of the environment. Since the company rewarded its employees for cutting costs rather than for steps to protect the environment, they clearly thought cost-cutting was more important. BP workers and union representatives interviewed by Fortune in 2006 revealed that BP might have known about the problems in both Texas City refinery and Prudhoe Bay well in advance. Fortune also obtained a 2002 letter written by an employee to the management predicting the “catastrophe” waiting to happen at Prudhoe Bay. Some insiders had said that BP’s culture was marked by extreme pressure to keep costs down, even if routine maintenance and safety were neglected in the process.75 This made it more likely for mishaps to occur. Some analysts also questioned the corporate culture of BP. Some critics felt that Browne’s legacy, so effective for the 1990s, was no longer relevant. BP had to move beyond the “Yes, Lord Browne” culture that had developed internally. BP’s organizational structure was decentralized - broken down on geographical lines. While this structure was good for cost cutting and mergers, some felt that BP had to change its organizational structure and opt for a structure on functional lines similar to that of ExxonMobil. A few industry experts had also criticized BP for looking at non-oil alternatives, saying that it would distract BP from its core business. Some analysts felt that if it had concentrated on being an excellent oil company, the accidents might not have occurred. ExxonMobil was cited as an example of an oil company that despite all the criticisms levelled against its business practices, had a much better safety record. DAMAGE CONTROL AT BP Soon after the Baker report was released, BP said that it would implement its recommendations. Browne said that the findings of the report were consistent with its own findings and were in fact already being implemented in BP’s refineries. Browne also said that it would take time to bring about big changes in a large organization and that still a lot needed to be done. Browne said, “Many of the panel’s recommendations are consistent with the findings of our own internal reviews. As a result, we have been in action on many of their recommendations for a year or more. Our progress has been encouraging but there is much more to do.”76 He assured the panel that BP would use these insights to become an industry leader in process safety management and performance. He announced that BP planned to spend US$1.7 billion annually until the end of 2010 to improve the integrity and safety of its refineries.77 Browne said that the company had earmarked US$200 million to pay for external audits from industry experts.78 Even before the report was released, BP had announced that it would invest US$1 billion in the Texas City refinery.79 BP also entered into an agreement with United Steelworkers, the union which represents 4,300 BP employees in the US, to help improve the safety culture within the company. The union and the company would henceforth work together on a joint safety initiative focusing on the 10 recommendations made by the Baker report. Kim Nibarger, the union’s safety and health representative, said that it would push for a voice about who could be appointed to supervisory roles in individual units. It intended to prevent the use of “step-up supervisors”. “Step-up supervisors” were hourly employees who filled up for regular supervisors in their absence. It was found that during the blast in the Texas refinery, many of the supervisors were step-ups. The union alleged costsaving measures were at the root of BP’s practice of over-using and keeping “step-up supervisors” in place for years at a time. The union had for long argued that this was one of the reasons for the accident. However, with the settlement, the union felt that BP was finally moving away from a Page 11 of 25
“blame-and-denial game” that it said BP had played for close to two years. 80 Browne pointed out that the panel had concluded that the errors were made in good faith. He said that BP never put profits before safety. He felt that part of the BP’s problem stemmed from its rapid growth, a series of mergers, and turnover among the management. He also denied that the report had anything to do with his decision to relinquish his position at the helm. BP also ruled out any reshuffle of its top management. Browne also declined from commenting on his legacy, which was at the threat of being tarnished due to the safety-related incidents. It was reported that Browne’s pay in 2006, decreased by 28 percent despite of the BP posting a 15 percent rise in profits compared to 2005.81 In 2005, too there was a decrease in his salary and bonus which was attributed to ‘qualitative factors’ such as the lack of safety leadership in light of the refinery accident. Regarding the spill at Prudhoe Bay, Malone said that BP’s decision to shut down the facility was evidence of the fact that it had learnt from the Texas City refinery tragedy. “The reason we closed the field was to prevent something from happening. That’s very important to remember,”82 he said. After taking over as the president of BP, American operations, shortly after the spill, Malone had established an open line of communication with the top bosses in London. The company had earmarked an additional US$550 million to improve the integrity of its 1,500 miles of pipes, along with wells and gathering centers. The inspection team was also increased to more than 100 people compared with less than 50 people deployed earlier. The company also planned to invest around US$195 million on maintenance of Prudhoe Bay by 2007.83 Reacting to the allegations that BP had substituted water for more expensive chemical agents used to prevent corrosion in BP’s Prudhoe Bay pipelines, BP said that it had put a team in place to thoroughly investigate this allegation. In January 2007, Chuck Hamel, a long-time critic of the oil industry had levelled this allegation, which he said was based on the evidence provided by an oilfield employee. A BP spokesperson said, “Whenever issues are raised by employees or folks like Mr. Hamel, we always look into them. We take these issues very seriously.”84 BP also clarified that its safety lapses in Texas City refinery and Prudhoe Bay should not be held against its efforts toward protecting the environment. Malone said, “I understand if people want to say, “How can you have something like this happen and you are supposedly a green company?” … But we’re investing heavily in alternative energy, and we are putting our money where our mouth is.”85 Reacting to the critics’ comment regarding BP’s corporate culture, Browne said that the issues at Texas and Prudhoe Bay didn’t reflect an unhealthy corporate culture; rather it was indicative of BP’s “strength of character” as it had subjected itself to a meticulous review. OUTLOOK Analysts felt that BP was already on the “right track” as far as its safety culture was concerned. 86 They expected BP to spend generously on process safety experts, health and safety auditors, process engineers, etc.87 Expenditure on equipment was also expected to rise. Some experts felt that the order from the top was to spend – and this time as before, the employees would fall in line and obey. Some analysts felt that it would be a tough task for anyone to fit into Browne’s shoes. But on the positive side, Browne was leaving behind a “strong and well-positioned” oil company. Bear Stearns & Co. Inc.,88 analyst Nicole L. Decker, wrote, “Lord Browne hands over a company that is extremely well-positioned to compete in the future, in our opinion. Recent incidents aside, BP’s performance under Lord Browne has been remarkable.”89 BP also had a strong and diversified energy portfolio. Though Hayward, the CEO-designate, had been shielded from dealing with the Baker report in the initial days, analysts felt that he would soon have to deal with the issues raised by the report. Experts felt that Hayward would focus on improvement in safety as a top priority. Hayward was also reportedly in favor of keeping safety ahead of costs. In an email leaked from the company’s intranet, in December 2006, he was critical of BP’s cost cutting measures and reportedly questioned BP’s emphasis on “more for less” and trying to do “100 percent of a job with 90 percent of the resources.”90 Analysts felt that a change in BP’s corporate culture was another key priority. They also said that just spending money on this issue might not be sufficient. Another priority would be to ensure that BP’s production increased. Some analysts felt that Hayward should continue to maintain BP’s leadership in developing alternative energy resources. Hayward also needed to stand up strongly to Putin who wanted to nationalize the natural resources of Russia, a BP stronghold. Some analysts also did not rule out more extreme measures in the future, such as a merger with Shell, or BP breaking up into two smaller companies. As BP worked toward restoring its reputation in the market, there were many challenges ahead of it. Investec91 analyst Tony Eccles said, “BP’s management must step up to the plate. We believe a ‘business as usual’ approach will not be acceptable to a skeptical market.”92 On February 7, 2007, Page 12 of 25
BP modified its oil production forecasts downwards and said that safety worries would hit its growth prospects in the near future. Hayward said, “We have further increased our focus on safety and operational integrity and will in some cases deliberately slow the pace of our activity in order to improve safety and efficiency.”93 The company revealed that it was facing a shortage of skilled manpower. It also said that it would increase its capital expenditure in 2007 to US$18 billion from US$15.9 billion in 2006.94 While the debate regarding whether BP should be viewed as an environment-friendly company continued, some analysts opined that BP would be well served if it focused less on its supposedly “green” image and focused instead on what it was actually supposed to do – improve operational efficiency and create wealth for its shareholders. Ciat Murphy, assistant managing director, Fortune, wrote, “It’s too soon to know what has been going wrong and why, but it’s worth pointing out that when it comes to corporate social responsibility, the first duty of any oil company is to run its oil operations to a high standard … Instead of trying to be the non-oil oil major, BP would be better served by trading in the sunflower ethos for a steely-eyed rigor in running its core business. Because in the end, the best thing it can do for the environment is to be a good oil company, not to pretend it is something else.” Exhibit I The Old and New Logo of BP
The Green Shield Logo
The Helios Logo
Source: www.answers.com. Exhibit II BP’s Financial Summary (In US$ Billion) 2005 2004 Total Revenue 245.48 196.60 Gross Profit 57.24 48.45 Operating Income 32.18 25.75 Net Income 19.64 17.09 Source: www.finance.google.com. Exhibit III Prudhoe Bay: Corrosion Spend Versus Production
Page 13 of 25
2003 168.51 40.72 18.78 12.94
Source: www.bp.com. Exhibit IV Chart of BP’s Stock Price at the New York Stock Exchange
Source: www.uk.finance.yahoo.com. Note: Stock price is in US$. Exhibit V The 10 Recommendations of the Baker Panel 1.
Process Safety Leadership: The Board of Directors of BP, BP’s executive management (including its Group Chief Executive), and other members of BP’s corporate management must provide effective leadership on and establish appropriate goals for process safety. Those individuals must demonstrate their commitment to process safety by articulating a clear message on the importance of process safety and matching that message both with the policies they adopt and the actions they take.
2.
Integrated and Comprehensive Process Safety Management System: BP should establish and implement an integrated and comprehensive process safety management system that systematically and continuously identifies, reduces, and manages process safety risks at its US refineries.
3.
Process Safety Knowledge and Expertise: BP should develop and implement a system to ensure that its executive management, its refining line management above the refinery level, and all US refining personnel, including managers, Page 14 of 25
supervisors, workers, and contractors, possess an appropriate level of process safety knowledge and expertise. 4.
Process Safety Culture: BP should involve the relevant stakeholders to develop a positive, trusting, and open process safety culture within each US refinery.
5.
Clearly Defined Expectations and Accountability for Process Safety: BP should clearly define expectations and strengthen accountability for process safety performance at all levels in executive management and in the refining managerial and supervisory reporting line.
6.
Support for Line Management: BP should provide more effective and better coordinated process safety support for the US refining line organization.
7.
Leading and Lagging Performance Indicators for Process Safety: BP should develop, implement, maintain, and periodically update an integrated set of leading and lagging performance indicators for more effectively monitoring the process safety performance of the US refineries by BP’s refining line management, executive management (including the Group Chief Executive), and Board of Directors. In addition, BP should work with the CSB and with industry, labor organizations, other governmental agencies, and other organizations to develop a consensus set of leading and lagging indicators for process safety performance for use in the refining and chemical processing industries.
8.
Process Safety Auditing: BP should establish and implement an effective system to audit process safety performance at its US refineries.
9.
Board Monitoring: BP’s Board should monitor the implementation of the recommendations of the Panel (including the related commentary) and the ongoing process safety performance of BP’s US refineries. The Board should, for a period of at least five calendar years, engage an independent monitor to report annually to the Board on BP’s progress in implementing the Panel’s recommendations (including the related commentary). The Board should also report publicly on the progress of such implementation and on BP’s ongoing process safety performance.
10.
Industry Leader: BP should use the lessons learned from the Texas City tragedy and from the Panel’s report to transform the company into a recognized industry leader in process safety management. The Panel believes that these recommendations, together with the related commentary in Section VII, can help bring about sustainable improvements in process safety performance at all BP US refineries.
Source: “The Report of the BP US Refineries Independent Safety Review Panel,” www.bp.com, January, 2007. END OF QUESTION PAPER
Suggested Answers Integrated Case Studies - II (MB3J2) : January 2009 1.
a.
i.
Safety culture < TOP > Safety culture is a term often used to describe the way in which safety is managed in the workplace, and often reflects “the attitudes, beliefs, perceptions and values that employees share in relation to safety”. Organizations with a positive safety culture are characterized by communications founded on mutual trust, by shared perceptions of the importance of safety and by confidence in the efficacy of preventive measures. The safety culture of an organization acts as a guide as to how employees will behave in the workplace, where their behavior will be influenced or determined by what behaviors are rewarded and acceptable within the workplace. With respect to BP, the employees Page 15 of 25
ii.
b.
i.
were more of a follower type i.e., they adhered to the decisions made by the top management. They were exhibiting their behaviors based on the rewards announced by the company. Since the company rewarded its employees for cutting costs rather than for steps to protect the environment, they clearly thought cost-cutting was more important. Process safety vs. personal safety The area of process safety focuses on preventing fires, explosions and accidental chemical releases in chemical process facilities through an effective alarm system. Personal safety, comparatively, focuses on injuries such as slips, trips, falls, struckby incidents and strains. In general, process safety focuses on workplace safety, and personal safety focuses on worker safety. In BP though the top management improved the working conditions of the employees and paid heed to personal safety (such as slips, trips and falls), unsafe and antiquated equipment designs were left in place, and unacceptable deficiencies in preventative maintenance were tolerated with respect to process safety. The alarms and instruments were not replaced and leaking pipes were often patched up using temporary clamps and valves that resulted in a lapse on process safety. BP emphasized personal safety over process safety but did not ensure that its management and workforce understood what was expected of them regarding process safety. Process Safety Management (PSM) PSM applies to most industrial processes containing 10,000+ pounds of hazardous material. It is the proactive and systematic identification, evaluation, and mitigation or prevention of chemical releases that could occur as a result of failures in process, procedures, or equipment. BP had been obsessed with personal accident statistics, the catalogue of trips, falls and road accidents, while failing to focus on the safety of core industrial processes within its US refineries. BP’s programs for analyzing process hazards did not ensure adequate identification and rigorous analysis of those hazards. Their corporate safety management system did not ensure timely compliance with internal process safety standards and programs for managing process risks, nor did it ensure timely implementation of external good engineering practices that could improve process safety performance. Essential elements of a safety culture: While many different models of safety culture have been proposed, some essential elements have been identified as organizational indicators of safety culture. These include the organization’s commitment to safety, the involvement of operational supervisors in safety-related activities, the formal safety system of the organization, and the organization’s informal safety system. •
Organizational Commitment. It refers to the degree to which an organization’s senior management prioritizes safety over production in the decision-making process and allocates adequate resources to safety. In particular, an organization’s commitment to safety is reflected by three major components, safety values expressed by senior management, safety fundamentals such as training requirements, manuals and procedures, and equipment maintenance, and going beyond compliance in giving priority to safety in the allocation of company resources. Role of senior management in safety at BP: Criticisms on BP’s senior management by some whistleblowers that in spite of being aware of the safety lapses, they still chose to do nothing about them so as to keep costs under control. This indicated that adequate resources were not allocated to safety by the senior management of the company thus showing that it prioritized costcutting in comparison to the more serious issue of safety. BP also faced criticism that preventing fires, explosions and accidental chemical releases in chemical process facilities through an effective alarm system was not incorporated into management decision-making and also did not effectively define the level of process safety knowledge or competency required of senior management, refinery personnel, and contractors and that the management was not held accountable for process safety. Page 16 of 25
•
Operational Personnel. This factor refers to the degree to which those directly involved in the supervision of employees’ safety behavior are actually committed to safety and reinforce the safety values espoused by senior management (when these values are positive). These include the involvement on the part of supervisory and “middle” management at an organization on safety issues. Commitment of the supervisory level employees at BP: With respect to the commitment of the supervisory level employees, BP was criticized for using step-up supervisors as a practice for cost-saving. At the time of the Texas incident the company had many step-up supervisors who could not commit themselves to safety and reinforce the safety values espoused by senior management as they are not the regular employees. The union had for long argued that this was one of the reasons for the accident.
•
The formal and informal safety system. It refers to the processes for reporting and addressing both occupational and process safety hazards, including rewards and punishments for safe and unsafe actions and the manner in which such rewards and punishments are instituted in a just and fair manner. It also focuses on the authorization and employee involvement aspects in safety decision making, including empowerment, delegation of responsibility for safety, and encouraging commitment to the organization. With respect to BP, though it maintained a formal safety system it was not effective, which was very important for an oil company. With respect to the employees involvement in the safety decision making, BP did not encourage a culture of employee involvement in the decision making process. However, on the issue of delegation of responsibility for safety, though BP has delegated substantial discretion to US refinery plant managers, the process safety expectations, responsibilities or accountabilities were not defined clearly. BP’s work culture did not feature any informal safety system, which involves active involvement of the workforce in the safety process voluntarily.
Communication – Effective communication between management and the workforce is an indicator of a positive safety culture. However, the employees at BP were not empowered with a positive, trusting, and open environment with effective lines of communication with their management. This also resulted in lapse on the part of BP’s management in communicating the safety values to the supervisory level workforce. Performance evaluation, corrective actions and audit system—BP’s use of injury rates to measure process safety performance hindered their perception of process risk, which created a false sense of confidence that process safety risks were adequately being addressed. Assuming the nature and possibility of accidents as a result of poor safety management, it is important for BP or any organization in this industry to adopt an appropriate performance indicator and also develop audit system for ensuring the success of safety management practices. Although they tracked some metrics relevant to process safety, they didn’t understand or accept what these data indicated about the risk of a major accident. BP did not have effective root cause analysis procedures to identify systemic causal factors; therefore, corrective actions only addressed immediate or superficial causes rather than the true root cause, which could contribute to future accidents. BP’s process safety audit system relied on internal auditors that focused primarily on compliance and legal issues rather than safety performance or assessing against industry best practices. They also failed to track process safety deficiencies to completion. BP’s “bottom-up” reporting system allowed refinery-specific data to be aggregated and lost as it moved up the reporting chain. Executive management either did not receive refinery-specific information’s regarding process safety deficiencies or didn’t effectively respond to the information it received.Therefore, the safety culture at BP’s five U.S. refineries was not unified and was fraught with a lack of operating discipline, tolerance of serious deviations from safe operating Page 17 of 25
practices, and complacency toward serious process safety risks. ii.
The following steps can be taken up by Tony Hayward to counter the criticism: •
BP’s image had been severely affected by the safety lapses. The priority for Tony Hayward (Hayward) would be to take action on improving the company’s image. In addition to the money being invested on safety initiatives, Hayward should also address the cultural aspects that led to these safety lapses. As the person at the helm, he should work toward making BP a leader in process safety management. His rhetoric such as, - “We have further increased our focus on safety and operational integrity and will in some cases deliberately slow the pace of our activity in order to improve safety and efficiency” – would go a long way in showing the company’s emphasis on safety to the various stakeholders, especially the employees. The communication has also been perceived as credible as it was well known that Hayward had been critical of BP’s excessive emphasis on cost cutting in the past. But equally important for Hayward would be to show decisive action and let the public know about the corrective action being taken quickly and clearly. 2.
At the very outset, it should be noted that oil and automobile companies are the favorite < TOP > targets of any environmentalist group. The very nature of their business (i.e., extracting and burning fossil fuels) put them at loggerheads with the environmental activists. When such companies try to project an environmental-friendly image, they bear significant risk, as allegations of being hypocritical and greenwashing are leveled against them. In 2000 the transnational oil giant BP Amoco rebranded itself as “BP: beyond petroleum.” The rebranding was part of an effort to portray BP as an energy company, not just an oil company: one that incorporated solar energy in its portfolio and was willing to move away from oil. BP replaced its logo with a vibrant green-white-and-yellow sunburst named after Helios, the ancient Greek sun god. The logo was meant to connote “commitment to the environment and solar power” and promote the new BP “as the super major of choice for the environmentallyaware motorist.” This was not the first time BP had revamped its logo and appearance to improve its environmental image. In 1989, as British Petroleum, it underwent a similar makeover. At a cost of about 100 million it shortened its name to BP, redesigned its logo and refurbished its petrol stations to promote a greener, more socially responsible image. David Walton, head of public relations, said BP’s image was “a major commercial and political asset. Like any asset, it has to be managed and looked after.” The dramatic break with other oil companies on the issue of global warming provided a useful diversion as well as a much-needed refurbishment for a reputation under attack on human rights grounds. In 1997, amid favorable publicity about its stance on global warming, BP’s share price and profit rose. Only the logo is green Certainly BP’s record of environmental protection has been no better than other oil companies’. In 1991 it was cited as most polluting company in the US based on EPA toxic release data. And in 1992 Greenpeace International named it one of Scotland’s two largest polluters. Nor has it become a model company since its apparent environmental conversion in 1997. In 1999, it was charged with burning polluted gases at its Ohio refinery and agreed to pay a $1.7 million fine. In July 2000 BP paid a $10 million fine to the EPA and agreed to reduce air pollution coming from its US refineries by tens of thousands of tons. BP’s existing and proposed activities in Alaska have worried indigenous people and environmental groups. “Between January 1997 and March 1998, BP Amoco was responsible for 104 oil spills in America’s Arctic,” according to US PIRG research. In 1999 BP admitted illegally dumping hazardous waste at its “environmentally friendly” oil field in Alaska and was fined $500,000 for failing to report it. It paid $6.5 million more in civil penalties to settle claims associated with the waste’s disposal. BP has invested heavily in solar power and introduced a program to reduce its own greenhouse gas emissions. But despite its investment in solar energy, the company remains committed to ever-increasing production and usage of oil and gas. And while BP has promised to reduce its own emissions, it does not accept the need to reduce Page 18 of 25
those arising from the products it sells. Browne argues the company’s contribution is relatively small: “If one adds up the emissions from all of BP’s operations and from all the products we sell, it comes to around one percent of the total emissions from human activity.” Yet this is a huge amount for one company to be responsible for, and certainly a more important contribution than that of BP’s own operations. By 1999 BP’s emissions were greater than those of Central America, Canada or Britain, according to Corporate Watch. And BP’s recent acquisitions mean the company is now thought to be responsible for about 3 percent of worldwide greenhouse emissions. BP continues to explore for oil, often in environmentally sensitive areas such as the Atlantic Frontier, the foothills of the Andes and Alaska. BP’s North Star project involves the first undersea pipeline in the Arctic, and the Army Corps of Engineers calculates that “the total probability of one or more large oil spills is approximately 11 percent to 24 percent” during its 15-year lifetime. BP has emphasized its solar investments while being attacked for its Arctic exploration. In March 1999 it launched its “Plug in the Sun” program based on its investment in solar energy and the installation of solar panels on gas stations around the world. Its ads said, “We can fill you up by sunshine” but it was still gas people were putting in their cars. For this program it was awarded a Green wash Award by Corporate Watch. In a similar satirical vein, Greenpeace USA gave CEO Browne an award for the “Best Impression of an Environmentalist.” An investment in image It seems BP is investing more in image than environment. Would a company spend hundreds of millions of dollars in solar investment just to enhance its reputation? Well, BP has already spent that much just on its “beyond petroleum” rebranding. Research and preparation cost $7 million; BP planned to spend $200 million between 2000 and 2002 rebranding its facilities and changing signs and stationery and another $400 million on advertising its gasoline and pushing the new logo. In the end, despite BP’s rhetoric about social responsibility, triple bottom lines and enlightened self-interest, profits seem to count most. An oil company might invest in solar energy and admit that global warming should be prevented, but it will do all it can to ensure it can go on drilling for fossil fuels and expanding its markets for them. However, BP’s investments in alternative sources of energies, its “green talk” and advertising campaigns resulted in many people believing that BP was indeed committed to being a environment-friendly company. But the safety lapses at Texas City refinery and Purdhoe Bay renewed the debate on whether BP could claim to be an environment-friendly company at all. The main argument for this was that an environment-friendly company would never have allowed such accidents to occur. BP’s critics dismissed its investments in alternative energy resources as a mere gimmick. While there is no doubt that big lapses had occurred at BP, it would not be justified to discount BP’s investments in alternative resources. It should also not be forgotten that when other companies like ExxonMobil chose to trivialize the threat of global warming, BP was the first company to accept it. It should also not be forgotten that BP is an oil company and extracting oil is its core business. It cannot be expected to leave its line of business to project itself as an environment-friendly company. 3.
a.
It can’t happen here mentality: < TOP > The attitude of giving advices and suggestions is common among employees and employers, but events point clearly to the fact that both the management and employees are aware of the safety lapses prior to the occurrence of mishap. Why is it so that the preventive steps were not taken, the issue is not taken with serious consideration when it was spotted for the first time and no is willing to change. The answer is the attitude on both sides, which is the “it -can’t- happen- here” mentality among employees and to an extent, employers. Reason: The source of this attitude may be tradition, or an ideology which succeeded in gaining supremacy in competition with other ideologies. Ill effects: •
Such attitude offers no scope for improving and upgrading the available body of Page 19 of 25
knowledge. It cannot admit direct observation as evidence because in case of a conflict the authority of dogma would be undermined. It must confine itself to applying the doctrine of every individual. The greater the coercion employed to maintain “it can’t happen here” attitude in force, the less likely it is to satisfy the needs of the human mind. Human beings, over the years, aren't terribly original in their behavior and thinking. History really does repeat itself, as has happened countless times throughout the ages. We all have this "it can't happen here" mentality. But it is happening, and we don't see anything at all on the horizon to stop it. If something doesn't radically change, this is going to make the situations much worst than before. Yet carelessness with information and failure to take available precautions contributes to such incidents as BP. No company is immune to the threat of safety lapse. Failure to take sufficient preventative measures is widespread, and following a safety lapse or incident, most companies will invest in the very preventative technologies and programs that might have helped avoid the incident in the first place. BP scenario: The same thing happened with BP, it is not that it lacks proper infrastructure and preventive measures, they were there, but the problem is that they were just on paper only. When it came to the practical implementation of those measures the company has clearly failed, and this failure is caused not just by the management alone, even the casual attitude or “it cant happen here“ mentality among the employees also contributed towards havoc. While industry experts agree companies need to start assuming they will someday suffer a safety lapse and must have a plan in place to soften the blow, they note that it's still possible to prevent a breach with some common-sense preventive measures. Measures to overcome this kind of mentality:
b.
• The only way to over come this behavioral hurdle is the continued effort to educate people regarding these risks and how important it is to not have an ‘it can’t happen here’ mentality. Design of safety programs including safety training, should be behaviorally motivated. Moreover both management and employees should keep the fact in their mind that this is not an overnight process, it needs to be addressed with at most care and sincere efforts on either sides. Experience bears no relationships with work injury indicating that a less experienced worker is equally likely to be injured as an experienced worker. It implies that experience though helps workers in understanding the physical hazards; however, avoiding the imminent danger is much more behavioral. Addressing variables like negative affectivity, job dissatisfaction, and risk taking behaviors are therefore crucial in avoiding accident/injuries. Step-up-supervisors: Step-up-supervisors can fill vacancies when the organization’s full time employees are vacationing, taking maternity leave, or otherwise cannot temporarily fill their position. This will help so that other full time employees don’t suddenly feel overloaded in their workload or so that the organization doesn’t fall behind but keeps functioning on schedule. The step-up-supervisors can be hired for specific projects. Step-up-supervisors can be brought in when there’s more work, and let go when there’s less work. Allowing for the work to ride along with your budget and not having to overpay for work that isn’t needed. Pros Enables business to adjust more easily and quickly to workload fluctuations. Step up supervisors fill the vacancies of the full time employees and they make the work flow smooth and it results in decreasing workload on the other employees Can quickly provide the organization with qualified staff. Maintains staffing flexibility With the popularity and staying power of flexible work arrangements, employers need to Page 20 of 25
stay current with the needs of today’s work force. Temporary work is just one of the ways that businesses can offer flexibility and at the same time better meet their own needs. Can evaluate worker without commitment Based on its evaluation or preferences, the organization can employ a step-up supervisor for a designated short term or, if desired, offer a full-time position. Hiring a step-up supervisor can also be a good way to continue getting work done while the organization searches for the perfect candidate for the particular job. Can save time and money The cost of hiring step-up supervisors is often cheaper than the cost of hiring permanent employees with benefits. In the short term, it is generally more cost-efficient to hire a step-up supervisor. For jobs that are expected to last six months or longer, it may pay to hire a full-time employee. Temporary employees can provide specialized skills to all types of industries Step-up supervisors are now employed in virtually every industry. Traditionally, companies sought Step-up supervisors for lower-skilled positions. Today Step-up supervisors increasingly include highly skilled individuals with a wide range of educational backgrounds and work experience. These individuals can tackle critical onetime projects that are limited in time and scope. Cons Training Needs Every time a step-up supervisor starts a new work assignment – no matter how skilled or unskilled – a certain amount of training is required in order for them to perform their assigned tasks to suit the specific needs of the organization. Of course, if the same stepup supervisor is brought back again, this might not be required. Morale Issues Morale and employee relations problems can arise when the organization has step-up supervisor’s working alongside permanent employees for months, doing the same work and putting in the same hours, but not receiving the same benefits as offered to the permanent employee. Safety Issues Certain types of jobs are inherently dangerous and require careful safety training. Studies show that frequency and severity rates of on-the-job injuries are significantly higher with step-up supervisors. No matter what a step-up supervisor’s experience is, care must be taken to see that dangerous tasks are performed safely. Never assume stepup supervisors are fully prepared to work unsupervised until the organization has taken the time to see that they can safely perform their work tasks. Legal Concerns Recent court decisions have highlighted the fact that businesses must be careful how they contract for step-up supervisors. There must be no doubt about the workers’ status and about the lack of eligibility for the benefits of permanent employees. And treat step-up supervisor with the same respect and care the organization would have for the permanent staff. Step Up supervisors in BP: It was found that during the blast in the Texas refinery, many of the supervisors were step-ups. The union alleged cost-saving measures were at the root of BP’s practice of over-using and keeping “step-up supervisors” in place for years at a time. The union had for long argued that this was one of the reasons for the accident. There the two basic reasons for these allegations (i) the step-up supervisor cost less to the organization which is the foremost goal of BP i.e., cost cutting. (ii) As they are temporary they does not have enough skills required for the job specially industries like oil. 4.
i.
Impacts of not adhering to Safety < TOP > Financial Impact Safety measures have implications for the finance function of the organization. Organizations cannot ignore safety measures - which means they have to have them in place even if it means incurring additional costs. On the other hand, if organizations Page 21 of 25
ii.
choose to ignore safety norms, then they may be forced to incur huge sums on compensation in the event of an accident or injury. Compensation for workmen injuries The Workmen's Compensation Act, 1923 provides for the payment of compensation to workers in the events of untimely death and injuries and disease. It is the responsibility of the employer to compensate financially when an employee is injured at the workplace. The amount of compensation depends on the nature of the injury as well as the employee's salary. The purpose of compensation is to provide financial security to employees and their family members. Man days lost Injuries at the workplace reduce man days for an organization which affects productivity, and subsequently the profits. To compensate for man days lost, organizations hire contract workers. Some organizations provide rehabilitation schemes to employees who wish to come back to work after they recover from injury. Operational Impact Lack of proper safety measures has a major impact on the day-to-day operations of an organization. Organizations may suffer losses due to plant shutdown, production loss, and employee turnover. Plant shutdown Let us consider that a group of 10 workers are allotted a job in an assembly line. One worker suffers a serious injury due to the lack of proper safety measures. If the management does not compensate the victim, other workers may strike, demanding medical aid, compensation for the victim, and proper safety measures to prevent accidents in future. They may have the support of all the workers in the assembly plant. If negotiations between the management and agitating workers are not successful, the workers may continue with the strike. If this continues for a long time, the organization may suffer losses and may be forced to close the plant eventually. Production loss Plant shutdown leads to production loss. Employees may be reluctant to work in a place that has no safety measures. This reduces the productivity of the organization. A drop in production is likely to have an adverse affect on the sales of the company which may have an impact on the profits. Employee turnover High employee turnover is most common in manufacturing organizations where workers handle heavy machinery. Organizations that neglect employee safety are bound to lose their people. Marketing Impact Employee safety and health influence an organization's image and goodwill. Issues like product safety and child labor also affect the marketing strategy of an organization. Image Employees and customers have a favorable impression of organizations that provide safety measures. People prefer to work for organizations that care about employee safety and security. Employees as brand ambassadors Some companies use employees as brand ambassadors. The purpose is to communicate to the public that employee welfare is the top priority to the organization. Goodwill Goodwill enables organizations to gain competitive advantage. Showing concern for their users and taking safety measures help organizations build trust and goodwill. The short-term measures taken by BP to deal with the accidents: •
Opt for outward recognition through promptly verbalized public acknowledgement that a problem exists: Acknowledge that people or groups of people, the environment, or the public trust is affected; and that something will be done to remediate the situation. The same Page 22 of 25
thing is done by BP too, this is clear from the statement of Robert Malone, president of BP (America), admitting that “what happened in Texas city was a tragedy and lot of lessons were learned from the incident which broke the values of BP”, BP formed an independent panel to review its corporate safety culture, safety management systems and corporate safety oversight at its US refineries. It has settled more than 1200 claims, including all the death related lawsuits. It ensured to improve safety and bring in a new corporate culture in all its five refineries in the US. BP had set aside US$1.6 billion to resolve all the lawsuits related to the Texas City refinery incident, and it has also announced that it has planned to spend US$1.7 billion annually until the end of 2010 to improve the integrity and safety of its refineries. •
Promptly ask for help and counsel from victims, government, and the community of origin - even from opponents: Directly involve and request the participation of those most directly affected to help develop more permanent solutions, more acceptable behaviors, and to design principles and approaches that will preclude similar problems from occurring.
Post-accident analysis: It had done a post accident analysis involving hundreds of companies, industries, and negative circumstances reveal a pattern of unhelpful behaviors that work against rebuilding or preserving reputation, trust, and credibility. Plan to learn: In situations similar to the BP-Texas Refinery incident, it is ideal for the organization to plan to learn as it executes its safety response and remedial actions. Besides, managers detest dealing with accidents, especially once the urgent issues have been identified. It's a critical part of any accident response process that a lessons learned approach be in place so that the institution can learn to remember the mistakes, the miscues, the successes, and the victories in real time - meaning contemporaneously with problem resolution. The public expects organizations to talk about and describe the lessons they learned from mistakes, errors, accidents, or negligent acts. Speaking publicly about lessons learned is a major corporate step toward obtaining public and employee forgiveness. Lessons learned approach: Successfully managing future safety plans often depends on the intentionally created institutional memory the public relations counselor brings to the managing executive's attention. The lessons learned approach teaches the organization how to forecast, mitigate, or perhaps even significantly reduce the likelihood of a similar situation occurring or reoccurring. On the whole, there is no doubt to say that Texas incident is a valuable lesson not only to BP, but to the entire industry. 5.
a.
Reasons for an organization to have an integrated and responsible approach to < TOP > governance, ethics and sustainability: Business Ethics: •
All business exists and operates within society and therefore they should contribute to welfare of society. To survive in the market, business should gain loyal customers and perform social responsibility. The managers of the biggest companies know as a business gets larger, the public takes more interest in it because it has greater impact on the community. Thus business, either big or small, must operate on ethical grounds and discharge their social obligation to survive in the long-run. Corporate Social Responsibility (CSR) is a concept whereby organizations consider the interests of society by taking responsibility for the impact of their activities on customers, suppliers, employees, shareholders, communities and other stakeholders, as well as the environment. CSR is the obligation of the organization to pump back certain portion of the profit they make from their business back to the society, purely on voluntary basis, without anticipating anything in return. Of course, in the long run it will automatically Page 23 of 25
yield its desired result in favor of the organization, but while carrying out CSR, this return should not be designed.
Corporate governance: Corporate governance involves taking care of all aspects and satisfying all the segments, in order to stay in the business, in order to have that cutting edge and to achieve the competitive advantage. In order to achieve this, it has tremendous tasks and responsibilities. The liberalization and de-regulation world over gave greater freedom in management. This would imply greater responsibilities. The players in the field are many. Competition brings in its wake weakness in standards of reporting and accountability. Market conditions are increasingly becoming complex in the light of global developments like WTO, removal of barriers/reduction in duties. The failure of corporate due to lack of transparency and disclosures and instances of falsification of accounts/embezzlement and the effect of such undesirable practices in other companies. Sustainability: •
b.
Sustainability means the capacity to endure as a group, by renewing assets, creating and delivering better products and services that meet the evolving needs of the society, delivering returns to our shareholders, attracting successive generations of employees, contributing to a flourishing environment and retaining the trust and support of our customers and the communities in which we operate. Consumers demand that goods and services be produced by socially and environmentally responsible companies. Bankers and investors evaluate companies and make decisions, considering both environmental risks and environmental market opportunities. Consequently, more companies are discovering the benefits of going beyond regulatory compliance, toward sustainability. Hence an organization should have an integrated and responsible approach towards business ethics, corporate governance and sustainability for effective organization. i. In the case of BP, we have seen that it had an adaptive culture. The organizational culture prevailing in BP in the mid-2000s was set from the top after Lord Browne took over at the helm. The importance of cost cutting and other operational efficiencies were ingrained in the culture of BP. The importance of personal safety was also clearly communicated which explained BP’s good personal safety record. This culture was responsible for elevating BP to a strong position in the industry. However, there seemed to be a disconnect between BP’s stress on process safety management and what was actually followed. While BP’s values did not necessarily stress on putting profit over safety, the dysfunctional aspects of BP’s culture ensured that there were more chances for safety lapses to occur. While the top management at BP might have stressed on the importance of safety, the message was clearly not effectively implemented by the rank and file. They perceived that cutting costs was more important and viewed repairing of worn out facilities and routine safety checks as additional costs. The problems were compounded as the culture at most of the US refineries was plagued by distrust between employees and supervisors, lack of open communication, conflict between employees and contract workers, etc. The reward structure of the company that rewarded people for getting “100 percent of the work done with 90 percent of the resources” also contributed to the safety lapses. This incident has major implication for how the top management needs to communicate its priorities to the workers at the lower levels and monitor it effectively. The positive thing for BP is that it has an adaptive culture, so changes necessitated by the safety lapses were not expected to encounter any resistance from the system. The statements made by the CEO-designate Tony Hayward, that BP would even deliberately slow down its growth to improve its safety culture, would send out a strong message to everyone at BP that safety is really important. The other investments made by BP toward improvement in safety infrastructure would go a long way in improving the safety record at BP. With regard to corporate social responsibility (CSR), an organization has to ensure Page 24 of 25
ii.
that its core business operations are not only profitable, but also benefit the external and internal stakeholders. The company must also ensure that its business operations are not at the cost of the safety of its employees or the society. If BP failed to provide adequate safety to its own employees, it would take the positive image it had built up as a result of its environment initiatives. The safety lapses at Texas City refinery and Purdhoe Bay resulted in loss of revenue and led to pollution of the environment. The Purhoe Bay spill affected the oil production of the US as a whole. It was also a serious jolt to Alaska’s revenue. The accident at Texas City refinery led to loss of life and injuries. If BP had conducted its core business in an efficient and safe manner, it would have demonstrated its responsibility to its own employees. Considering this, we can say that when it comes to corporate social responsibility, the first duty of any oil company is to run its operations efficiently and safely. Essential Governance Principles: A company should: 1. Lay solid foundations for management and oversight: Recognize and publish the respective roles and responsibilities of board and management. 2. Structure the board to add value: Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. 3. Promote ethical and responsible decision-making: Actively promote ethical and responsible decision-making. 4. Safeguard integrity in financial reporting: Have a structure to independently verify and safeguard the integrity of the company’s financial reporting. 5. Make timely and balanced disclosure: Promote timely and balanced disclosure of all material matters concerning the company. 6. Respect the rights of shareholders: Respect the rights of shareholders and facilitate the effective exercise of those rights. 7. Recognize and manage risk: Establish a sound system of risk oversight and management and internal control. 8. Encourage enhanced performance: Fairly review and actively encourage enhanced board and management effectiveness. 9. Remunerate fairly and responsibly: Ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined. 10. Recognize the legitimate interests of stakeholders: Recognize legal and other obligations to all legitimate stakeholders. 11. Corporate Governance Rating be made mandatory for listed companies
Thus by following the above probable guidelines for effective governance BP can adhere to the core values.
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