Jun 142010

In our discussion of motivation, turnarounds and comebacks this month, we have an unfortunate real-life example to study in the April 20 British Petroleum oil spill cleanup in the Gulf of Mexico.

It has been hard for me to follow this story because I find it so immensely sad. The impact to the people of the Gulf Coast area, the wildlife, the ocean and land is simply awful.

For BP, this is a bet-the-company event. I can imagine the call to the company’s lawyers on the day of the disaster

“We have an oil spill we cannot control near one of the wealthiest and most litigious countries in the world. What do we do?”

If this situation happened to an American company, you would probably see a lot of legal maneuvering upfront to minimize liability. An American company might try to shift the responsibility for the incident to a subcontractor, file an insurance claim, or blame natural causes beyond their control. You might see a lot of curiously worded press releases saying something along the lines of “While we do not claim responsibility for what happened, we are providing clean-up assistance.”

At first, BP seems to have followed that strategy. It’s first press release after the incident seemed to put the blame squarely on Transocean, Ltd.

“BP today offered its full support to drilling contractor Transocean Ltd. and its employees after fire caused Transocean’s semisubmersible drilling rig Deepwater Horizon to be evacuated overnight, saying it stood ready to assist in any way in responding to the incident.”
-BP Press Release, April 21, 2010

Transocean Ltd. describes itself as “the world’s largest offshore drilling contractor.” Transocean seems to be putting the responsibility on their insurance company. Their press release of May 25, 2010 indicates:

“Transocean will honor all of its legal obligations arising from the Deepwater Horizon accident. . . In addition to its ongoing operating revenues, the company has insurance coverage applicable to the Deepwater Horizon, including insurance for the fair market value of the rig at the time of the accident. Other insurance is in place for claims asserted following the April 20 accident.”
-Transocean Press Release, May 25, 2010

BP’s press release of April 29, 2010 curiously provided details about who owns the oil well (called Mississippi Canyon 252 or MC252) involved in the oil spill.

“Preliminary estimates indicate that current efforts to contain the spill and secure the well are costing the MC252 owners about $6 million per day. This figure is expected to rise as activity increases. BP has a 65 percent interest in MC252.”
-BP Press Release April 29, 2010

It is unclear who owns the other 35% of MC252 but likely it is other profitable companies or investors.

You can see why this situation is a trial lawyer’s dream! There are so many deep pockets involved and the availability of money to pay damages is enormous.

Adding to the litigation issue is the issue of political intrigue. One week after the incident some media outlets began to blame President Obama for not handling the incident better, indicating that somehow the U.S. could have contained the disaster better. This May 1, 2010 article from the Washington Examiner, for example, refers to the situation as “Obama’s Katrina.”

The Washington Post indicates that it was not until President Obama began calling the incident the “BP Oil Spill” on May 2, 2010 that the American public began associating solely BP with the disaster.

You can imagine that a CEO would not be pleased to have an enormous environmental disaster named after his company. While perhaps the reflex response would be to again deny primary responsibility, BP responded to this public relations crisis in a slightly different way:

“The US government leadership here has been excellent since day one. I agree with the President that the top priority right now is to stop the leak and mitigate the damage. I reiterated my commitment to the White House today that BP will do anything and everything we can to stop the leak, attack the spill off shore, and protect the shorelines of the Gulf Coast.
-BP Press Release, May 2, 2010

The renaming of the spill to the “BP oil spill” in the mind of the American public seems to have changed BP’s strategy immensely. Three days later, on May 5, 2010 BP released $100 million to Florida, Alabama, Mississippi and Louisana. BP began documenting and detailing all efforts it was making to contain the oil spill and clean up the disaster.

BP also began setting up help lines and processes for individuals to file claims for damages. Whenever a company indicates that money is available to those who qualify it can expect a very large number of fraudulent claims. Take for example, the statistics BP released on its help lines:

“BP has also received 46,500 calls into its help lines, approximately 30 per cent of which have offered ideas to help the response or other assistance.”
-BP Press Release, May 13, 2010

How frustrating would it be to have to answer a telephone where 70% of the calls are perhaps angry people with no direct connection to the disaster just wanting to vent?

On May 17, BP released an additional $70 million in tourism grants to the same four affected states.

On May 24, 2010, BP announced a $500 million grant for a 10-year study of the environmental impact of the oil spill, with monies to be given to various entities, including U.S. universities. Likely this money is both generous and self-serving as subsequent litigation against BP will require answers to the questions about how much damage was actually caused by the spill.

On May 26, 2010, BP began providing more information about individual claims for damages:

“BP has established the claims process in accordance with the requirements of the Oil Pollution Act (“OPA”), which allows claimants to make a claim against BP as a designated responsible party. If a claim is not resolved and paid within 90 days, claimants can submit a claim against the Oil Spill Liability Trust Fund, and ultimately bring suit.”
-BP Press Release, May 26, 2010

On June 3, 2010, BP agrees to fund $360 million in the construction of six barrier islands in Louisiana. It does not sound like these barrier islands were their first choice of project.

“BP has been directed to pay for the construction by the federal government. Since the environmental implications of the projects are not fully understood, BP assumes no liability for unexpected or unintended consequences of these projects.”
-BP Press Release, June 3, 2020

On June 8, BP promises yet more money including the net profits of the sale of any oil recovered from the oil spill into a wildlife restoration fund.

What we mean is total revenue generated from the sale of collected oil minus payment of royalties (18.75%) to the US Government. The remaining amount would be considered net revenue. BP’s 65% share of the net revenue will be donated into the fund. (The remaining 35% of the net revenue will be paid to the co-owners of the leasehold interest.)
-BP Press Release, June 8, 2010

On June 10, BP’s share price dropped yet again and a lawsuit was filed by shareholders indicating that BP misrepresented its technological abilities to safely conduct its operations. BP’s shares are now down about 50% from where they were before the accident. Another $75 million was released to Florida, Alabama and Mississippi.

To date, over 51,000 claims have been submitted and more than 26,500 payments have been made, totalling over $62 million.

The cost of the response to date amounts to approximately $1.6 billion, including the cost of the spill response, containment, relief well drilling, grants to the Gulf states, claims paid, and federal costs.
-BP Press Release, June 14, 2010

These are tough times for BP. The money paid is but one factor. The amount of time it takes to process 51,000 claims for damages as well as respond to enormous numbers of lawsuits from both affected Gulf Coast residents as well as BP shareholders is a tremendous drain on the company’s energy and will be for years to come.

This is certain to be an event that tests the abilities of BP’s executive management team.BP’s Group Chief Executive is Tony Hayward, a Ph.D. geologist who has been with BP for 28 years. BP’s Group General Counsel is Rupert Bondy, a UK lawyer with a good amount of American legal experience, who has been with BP approximately 2 years. Steve Westwell, BP’s Executive Vice President, who has been with BP for 22 years, has the fun task of managing the media strategy.

What can we learn so far about disaster recovery from the BP response?

1. Organization. Organization seems to be a key factor in BPs response. Unified command teams were established. The entire front page of the BP website is dedicated to the Gulf Coast cleanup effort. State-specific websites have also been established. There are daily press releases, video feeds, hotlines and crews of volunteers on the ground. Statistics are being kept on claims made, calls answered, etc.

2. Balancing Human Needs with Legal Claims. BP also has a good read on public sentiment. You need to watch this video on their website about paying claims for damages. Hollywood casting could not have provided a more compelling spokesperson than Darryl Willis. Perhaps this will be the start of Mr. Willis’ executive career. It remains to be seen whether BP’s decision to be so open in its responsibility for the accident was a wise one but if the company manages to mitigate damages and resolve the open lawsuits more quickly, BP could set a new standard for executive management.

3. Goodwill Groundwork. While no one can anticipate or prepare exactly for an environmental disaster of this magnitude, BP did lay some important groundwork in the United States for the last several years building a reputation as an environmentally aware company. They produced wonderful television ads touting their efforts to conduct their business in the most eco-friendly way possible, including new technological innovations. While goodwill erodes quickly in a devastating accident like this one, I do think that people remember these messages and that these prior efforts have helped BP in its current public relations crisis.

What will happen to BP? It is not clear at this point. This could either be one of the biggest turnaround stories of the decade or a slow cash hemorrhage to bankruptcy. I am rooting for the former.

What are your thoughts on the BP situation? Please share in the comments.

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3 Comments to “Coming Back After a Disaster: Lessons from BP”

  1. avatar Erik Giberti says:

    69 million gallons in the gulf and counting, it’s time for action http://gulfspill.me

  2. avatar Lou says:

    Just get the leak stopped, capped, or whatever–NOW, please!

  3. avatar ruth says:

    You made no mention of the CEO’s lovely comment “I just want this over so I can get my life back”–where the Louisiana residents commented they just want their lives back too. Then he tried to apologize by saying he wasn’t a politician–but I believe that the CEO of a public company is a corporate politician of sorts! Especially of one of the largest oil producers in the world!

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