Sectoral Report Project

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SECTORAL REPORT

CONTENTS

1. Introduction

2. History of major oil spill events

y Volume and extent of oil spill

y BP Company and Past Problems

y The following reasons contributed to the spill

6. Problem Analysis

y Environmental Problems

y Economic Impacts

y Political Crisis

y BP Company Internal Problems



7.Discussion/analysis

8. Conclusion

9. Recommendations

10. Reference

INTRODUCTION

Deepwater Horizon, one of BP¶s drilling rigs, had a blowout on April 20th, 2010, which led to

the most serious oil spill disaster in the Mexico Gulf. Eleven workers were killed in the

explosion and fourteen people were injured. More than lakhs of oil barrelswent into the sea

during those days. As much as 68,000 square miles of sea were polluted. This incident causes

several tough problems including environmental, political, economic and legal. After finding the

spill of oil, BP took several methods to stem the oil flow. The most successful method was the

process of positioning a riser insertion tube into the wide burst pipe. According to BP, about 4.9

million barrels, or 185 million gallons of crude oil loss sustained.

Before going into the details of the present instant case it will give a proper light if we read the

earlier oil spill events happened.



History of Major Oil Spills:

TANKER LOCATION YEAR TONS OF

CR UDE OIL

BARRELS

K uwaiti oil fires K uwait 1991 136,000,000-

205,000,000

1,000,000,000-

1,500,000,000

K uwaiti oil

lakes

K uwait 1991 3,409,000-

6,818,000

25,000,000-

50,000,00

Lakeview

Gusher

United States 1910-11 1,200,000 9,000,000

Gulf war oil

spill

Iraq 1991 818,000-

1,091,000

6,000,000±

8,000,000

Deepwater

Horizon

United States,

Gulf of Mexico

2010 560,000-

585,000

4,100,000-

4,300,000

Ixotc Mexico, Gulf of

Mexico

1979 454,000-

480,000

3,329,000-

3,520,000



The following reasons contributed to the BP oil spill:

The cement and shoe track barriers ± and in particular the cement slurry that was used ± at the

bottom of the Macondo well failed to contain hydrocarbons within the reservoir, as they were

designed to do, and allowed gas and liquids to flow up the production casing;

The results of the negative pressure test were incorrectly accepted by BP and Transocean,

although well integrity had not been established;Over a 40-minute period, the Transocean rig

crew failed to recognise and act on the influx of hydrocarbons into the well until the

hydrocarbons were in the riser and rapidly flowing to the surface;

After the well-flow reached the rig it was routed to a mud-gas separator, causing gas to be

vented directly on to the rig rather than being diverted overboard;The flow of gas into the engine

rooms through the ventilation system created a potential for ignition which the rig's fire and gas

system did not prevent; Even after explosion and fire had disabled its crew-operated controls, the

rig's blow-out preventer on the sea-bed should have activated automatically to seal the well. But

it failed to operate, probably because critical components were not working.



BP oil spill analysis

1.Environmental Impact

BP¶s drilling wells below the Gulf of Mexico exploded and caused a disastrous oil spill,

thousands of barrels of crude oil flowed into the gulf every day, causing widespread pollution in

the Gulf of Mexico. The habitats of many bird species are threatened by this oil spill.

The ABC1listed the top ten most polluted areas from the oil spill:

1. Gulf Coast Least Tern Colony,

2. Lower Pascagoula River,

3. Gulf Islands National Seashore,

4. Breton National Wildlife Refuge,

5. Dauphin Island,

6. Fort Morgan Historical Park,

1American Bird Conservancy



7. Bon Secour National Wildlife Refuge,

8. Eglin Air Force Base,

9. Delta National Wildlife Refuge, and

10. Baptiste Collette Bird Islands.

It was not easy to stop the flow of oil from the damaged well. In May 2010, BP tried a new

method called ³Top K ill´. This method could reduce the pressure of the oil flow by pumping

heavy drilling mud at 40 to 50 barrels per minute, thus stopping the spill. Top K ill has been used

for other similar spills. But Top K ill failed after three days of attempt. In June 2010, the former

CEO of BP, Tony Hayward testified before the U.S. Congress. Tony Hayward stated that BP was

currently using Q4000, a multi-service vessel that could burn off the oil and gas it collects at the

surface of the gulf. The Q4000 vessel could prevent the oil from spreading, but it was only useful

in short term.

Health Problems

With the spread of the oil spill, health concerns heightened. The Louisiana state health officer

Jimmy Guidry stated that: ³This was more than a spill. This was theon-going leakage of a

chemical, and adding chemicals to stop the chemicals. We were feeling like we were in a

research lab".

By June 21, 143 oil spill exposure-related cases had been reported to the Louisiana Department

of Health and Hospitals (DHH) since the crisis began; 108 of those cases involved workers in the

oil spill clean-up efforts, while thirty-five were reported by the general public.



Not only had the first responders to the crisis felt physically uncomfortable, but the residents

living along the coast began to have the similar symptoms of dizziness or headaches. On the

other hand, mental health was another big concern. Many residents along the coast depend on

fishing or tourism for their life, which were severely damaged by the oil spill. They were

suffering from emotional damage of losing their jobs and homes.

To the long-term risks, there were concerns about the polluted seafood to human health.

Chemicals would have causedeffect in the food chain and could have become a threat to human.

We had no idea how long the whole circle would recover from this oil disaster, more

importantly, some potential damages to humans were gradual and invisible. It may still take a

long time to see the effect.

Since long time exposure to the toxic chemicals were causing various kinds of rashes, including

generalized skin irritation and "folliculitis´, the workers who were cleaning up the oil could have

faced some potential health problems.

2. Economic Impacts

The cost of cleaning up the oil spill and compensating the victims hadreached more than $20

billion2. BP needs to pay the people affected by the spill, but there have been so many people and

special interest groups being affected by the incident. In addition to cleanup, BP claimed that the

company paid $399 million to settle 127,000 claims by August 23, 2010.

2The Los Angeles Times



The oil spill also has long term economic impacts from a public standpoint. Because of the

pollution resulting from the oil spill, less people would travel to the Gulf Coast; the economy and

jobs in the Gulf Coast region would also be hurt. According to Family Travel Forum, BP has

funded a marketing program that helps attract visitors to the Gold Coast region. The local

governments also had to provide tax deductions in the affected area. The effects of the BP oil

spill on the Gulf Coast regarding traveling are likely to last about three years and cost the region

$22.7 billion. Those effects are long-term. The local government in the Gulf Coast Region has to

operate some marketing programs to attract visitors and businesses. The economic loss on

tourism of the region cannot be covered by the travel insurance, because the oil spill is a

manmade disaster instead of a natural disaster. Particularly, the cruise industry in the Gulf Coast

has been affected by the oil spill. In addition to loss of customers, the ships have to rearrange

their cruise schedules to avoid the contaminated area.3

There is also a potential effect on the seafood safety in the gulf area. The fishing business could

be harmed if consumers are not confident in the seafood products. As of June 8, 2010, the

National Oceanic and Atmospheric Agency (NOAA) prohibited fishing within 78,000 square

miles of the Gulf area. The prohibition helped to keep tainted seafood off dinner tables; as a

result, the seafood prices also went up. The retailers had to pay above-market price for seafood

from the Gulf Coast area. The BP oil spill had cost Louisiana fishing industry up to $172 million.

The fishing industry of Louisiana may lose $115 million to $172 million in gross revenue from

2011 to 2013. In addition, the projected range of job loss is 2,650 to 3,975 jobs .

3Happysteps Travel Blog, 2010.



3. Political Crisis

It is not easy for the U.S. government to avoid potential catastrophic risks of offshore drilling

such as BP Deepwater Horizon oil spill in the Gulf of Mexico. Offshore drilling has the double-

edged political issues, containing both aspects of environmental risks and U.S. energy

independence opportunities.4

From the public and environmentalists, there has been harsh criticism for the

government role as well as BP in the Deepwater Horizon oil spill. Many polls conducted during

the oil spill showed that the public evaluated the Obama administration¶s handling of the oil

crisis as poor. According to an opinion poll conducted by Washington Post-ABC news in June,

69 percent of those polled showed negative evaluation on the federal government¶s performance

related to the oil spill and 81 percent considered the BP response as negative.

Confronting intense reactions from the public and news media, the Obama administration issued

Deepwater Drilling Moratorium on May 30, banning deepwater offshore drilling for 6 months.

This Obama administration¶s measure was clearly adverse to energy independence policy of the

U.S. government and conservative oil interest parties.

From the view of environmentalists, the Obama administration had the same stance as the Bush-

Cheney energy plan that was viewed as the opening of more offshore drilling . In July 2008,

George W. Bush¶s administration removed a 1990 executive order made by George H. W. Bush,

4McQuaid, 2010



banning offshore drilling, and on March 31, 2010 president Obama extended drilling offshore

area for oil and gas.

From the point of supporters of energy independency, especially energy interest groups,

Deepwater Drilling Moratorium is a critical threat. It could give them a sign that Obama¶s policy

for energy independency has been adversely changed. Due to this threat, one of Hornbeck

Offshore Services LLC, a company with financial interests in deepwater drilling had no choice

but to file lawsuit against K en Slaza, U.S. Secretary of the Interior.

After the explosion, the Obama administration tried to transform the energy industry by

enforcing higher-bared regulations and changing its scandalous energy-management

governmental organization. It replaced a scandalous agency, Mineral Management Service with

a Bureau of Ocean Energy Management. The new agency began to review the offshore drilling

from the view of environmental crisis and it ordered to put the cement caps on more than 4,100

inactive gulf wells. According to the spokeswoman of Interior Department, the Obama

administration is preparing new regulations for oil and gas industry¶s safety and environmental

practices to prevent such a catastrophic oil spill as the Gulf of Mexico from happening again

Although there is uncertainty about how the offshore moratorium litigation would be concluded

by the Court of Appeal, it may be that the Obama administration would eventually establish new

regulations for offshore drilling. However, enforcing new regulations to increase the safety and

environmental standards could have serious impact on U.S. energy independence. Furthermore,

Gulf Coast Leaders criticized that the moratorium could take jobs away up to 12,000 jobs as the

administration estimated.



4. BP Company Internal Problems

The U.S. Government has named BP the responsible party, and officials have committed to hold

the company accountable for all cleanup costs and other damage . Moreover, BP had faced

thousands of lawsuits on the environmental damage and related areas. In late July, 2010, Tony

Hayward resigned his CEO position in response to the oil spill issue.

On the financial aspect, BP has stated that it would harness all of its resources to battle the oil

spill, spending $7 million a day with its partners to try to contain the disaster . According to the

BP financial statement, BP agreed to create a $20 billion spill response fund administered by

K enneth Feinberg. For the fund's payments, BP will cut its capital spending budget, sell

$10 billion in assets, and drop its dividend. The only merit is that BP¶s tax fee would be

decreased dramatically due to the large amounts of compensation expense.

BP¶s public image was also severely damaged during the crisis. In the CBS survey, 70 percent

disapproved of BP's response, only 18 percent approved and 12 percent were undecided. Due to

the late reaction and the attempt to hide the spill volume, the public are not satisfied with BP¶s

performance in the crisis. BP has to deal with a lot of problems from inside and outside the

corporation, ranging frommanagement, financial and public relation standpoints.



DISCUSSION/ANALYSIS

1.Basic Considerations

Offshore oil spill problems such as the BP oil spill require at least three proper measures for:

resolving the environmental aftermath of oil spill such as clean-up, protecting worker¶s safety,

and compensating affected parties.

To resolve the environmental problems:-

The underground tanks that are older than 12 years should be replaced to resolve the

environmental problems. These underground tanks would deteriorate more quickly than the

above-ground tanks because of the corrosion caused by water. Building double hulls is also an

essential method to prevent oil spills. Another way to clean up the oil spill is to hire a skimming

vessel. The oil skimming vessel can swallow the water and then separate the oil from the water.

According to Time News Feed, the vessel can skim about 21 million gallons of oil each day

However, there is a possibility that the water returned from the vessel can still be contaminated.

BP can also use dispersants to clean up the spill. Dispersants can disperse the oil from the surface

of water into the lower layers so that the oil would be dispersed into smaller concentration. This



method can keep the oil away from the beach, but there are debates over whether the dispersed

oil will cause more damage to the water.

To protect workers¶ safety:-

To protect its refinery employees, BP needs to make sure that all the refinery workers are

wearing proper protective equipment. It should also be considered to launch a new safety

training program for all the refinery workers. The training program should teach the refinery

workers how to work in a safe way. All of these procedures can help prevent any future oil spill

and workers¶ injuries or death.

Long-term tracking system to investigate the pollutant levels should be introduced to protect the

health of workers as well as the affected local residents. Since the BP oil spill problem is the

toughest case in oil spill history and there is no previous record for health impact in related area,

monitoring the pollutant levels can help to remind the residents and local government of the

environmental condition in the area.

To compensate affected parties:-

A compensation fund should be set for the people and businesses that have suffered from the oil

spill. The fund should be run by a third party organization. Disbursements will be given to the



qualified victims .The compensation fund will relieve some of the victims of the oil spill, but the

fund may not be able to cover all the eligible victims due to limited budget.

2. Possible Solution 1 ± BP Only

BP itself should be responsible for the cleanup cost and compensate to the affected parties,

including the fishing and tourism industries in Louisiana. Legally, the U.S. government has

named BP as the responsible party. Ethically, BP should take responsibility for its wrongdoings.

BP should take a series of actions to solve the problems and restore its image.

These actions should include:-

y Continue the cleaning activity of affected sea and beach areas. BP should hire more workers

and specialists to speed up the cleaning activity.

y Restore the environment of surrounding areas. It is important to establish a long-term tracking

system to record the pollutant levels of affected areas.

y Provide protective equipment and timely medical investigation for workers cleaning the oil.

This method is the most direct and useful method to protect the worker¶s health.

y Compensate the affected parties including the fishing and tourism industries.

y Accept the related claims from oil spill problems and accrue budget to react to the penalties

and compensations.



y Establish a long-term investigation system to observe the possible influence to residents and

the whole ecology system in that area.

The advantage of the first solution is that BP will restore its public image. Due to the ineffective

reaction at the beginning of the oil spill, BP has faced condemnation and protests from both the

public and mass media. If BP can take all the responsibility, the public may change their

judgment and BP¶s reputation may be restored.

Another advantage of this solution is that, the huge compensation would teach a lesson to both

BP and other oil companies, and force other oil companies to focus on safety. In recent years,

there have been similar offshore oil spills, but nobody has ever paid attention to the prevention of

such incidents.

The disadvantage of the solution is that, BP itself may not have professional skills, budgets, and

techniques to handle all the cleanup and environment recovery. The BP oil spill is one of the

most severe offshore oil spills in history, and the affected area and damage level are also

unprecedented. BP needs a large amount of investment and long-term treatment to resolve the

various problems caused by the oil spill. BP does not have professional specialists in

environmental protection and restoration areas.

The huge economic compensation may also be a burden that is too big to bear for BP. Even if BP

has the ability to handle these problems, the company may not be able to complete all its tasks



immediately. BP may miss the best time to clean up the affected area and make the situation

worse. The third disadvantage of the solution is that there are no related legal policies to prevent

similar problems from happening again.

3. Possible Solution 2 ± Government Only

Second possible solution to solving oil spill problems is that the federal government as well as

the local government related to oil spill areas should take most of the responsibility for BP oil

spill problems from taking precautions to prevent them to dealing with aftermath such as clean

upand compensation. Government has not only the authority to give licenses to operate a new

offshore drilling to oil and gas companies but also the responsibility to screen qualified

companies that can ensure safety and environmental protection.

To take precautions for environment and safety protection, the government should have the oil

and gas industry under its tight supervision through stricter regulations and standards for

environment and safety. Oil companies themselves have little ability to handle environmental

and safety risks associated with offshore drilling through their internal voluntary control system.

The history of oil spill proves that the industry¶s control systems have not worked effectively. BP

has repeatedly brought about other oil spill accidents caused many deaths and injuries of workers

and serious damages to environment.



An advantage to having federal and local governments solve most of the problems caused by the

oil spill is that it can completely prevent offshore oil spill problems such as the BP oil spill from

occurring again. The U.S. government can permanently ban any offshore drilling in the U.S.

coastal areas. In addition, as global warming activists advocate, the U.S. can turn its efforts and

investment into developing alternative energy sources that have little environmental harm such

as solar energy or electrochemical cell.

The most obvious disadvantage is that the amount of oil and gas products will be drastically

reduced by the strict government regulations including offshore drilling moratorium policy. The

regulation will push up the prices of oil and gas and shrink the entire U.S. economy.

Another disadvantage is that a large amount of budget is required to take precautions and deal

with all the oil spill aftermath. Then, government should raise taxes to secure the budget.

Increasing taxation would face a resistance from tax payers, resulting in disapproval to

government¶s policy. In addition, government may have less professional knowledge about the

operation of exploring and producing oil and gas. More importantly, if government takes the

responsibility of dealing with the aftermath of this oil spill including clean-up and compensation,

oil companies would neglect environment and safety issues and pursue only profit over safety

and environment protection.

4.Possible Solution 3 ± Cooperation between BP and governments



The third solution is that BP seeks collaboration with the federal and local governments and

conducts an internal investigation. The advantage of this solution is that, with the help of

government, the whole clean up and make-up process will accelerate. The faster BP handles the

problem, the less damage it will make to the environment.

Another advantage of this solution is that, the investigation to the root cause of the issue will

help BP prevent such kind of disasters from happening again. The third advantage of this

solution is that it will also prevent BP from bankruptcy thus maintaining the benefits of the

shareholders. In another word, the third solution protects both the company and its shareholders¶

interest and prevents the collapse of the giant oil company. Moreover, the internal investigation

will also help BP¶s management to better control and manage the company.

The disadvantage of the solution is BP will have to face the conflicts of interests with the

government during the cooperation. As a company, profit is its greatest concern; however the

government cares most about the public¶s satisfaction. BP may have to sacrifice some of its

benefit during this cooperation.



CONCLUSION

Oil spills always bring serious impacts on human life and the environment. Among the major oil

events, BP oil spill has been recorded as one of the most disastrous event in the U.S. Its damages

to the environment are so significant that they should be dealt not only by the BP Company but

also by the U.S government.

First of all, BP is itself responsible for cleaning up environmental impacts and compensating

people damaged economically. It should take appropriate measures to ensure its workers¶ safety

and solve the residents¶ health problems caused by oil spill as well as provide necessary

equipment to clean up oil spill. When considering the huge clean-up costs and damage to

company¶s image, BP should create a new business atmosphere that executives and employees

put safety ahead of profit and, establish a strict internal control system for quality and safety.

The U.S. government is also responsible for the oil event. Energy independency policy of the

U.S. government, promoting oil and gas companies to expand their deepwater offshore drilling

since Bush-Cheney energy plan, might be a root cause of the oil spill. The U.S. government



should have enforced a strict regulation system including security verification procedure and

restricted offshore drilling only to the qualified companies. Although the Obama administration

has been confronting intense criticism for its response to the oil spill from both environmental

groups and energy independency advocates, it should transform energy industry by enforcing

higher-bared regulations and changing the related governmental organization and regulatory

agencies.

RECOMMENDATIONS

We believe that cooperation between BP and the governments can solve the problems more

effectively. Below are some of the actions BP may take to prevent such incident from happening

again and to compensate the oil spill victims with the help of the governments.

1. Take precautions to ensure workers safety and health.

BP should provide necessary equipment to protect the safety and health of the workers. For

example, workers should be instructed to wear protective gloves, clothing or goggles when they

are cleaning up or dealing with the oil. Periodic and regular physical exam be offered to the

workers.

2. Provide medical treatment in the long term

Federal government and health organization should cooperate with BP and local government to

provide immediate aid and help in the health care. Since the potential health risks are still



unknown to people, and the pollution influence is wide and time lasting, local government and

BP alone may have limited ability to deal with this problem. Federal Government and health

organization should also participate in the aim project. The aid includes not only necessary fund

but also some technical support. And the health care program should compose physical care as

well as mental health to help the residents and workers recover from the damage.

3. Set up long-term tracking system to investigate the pollutant levels.

Since the BP oil spill problem is the toughest case in oil spill history, and there is no previously

record or tracking for health influence in related area, setting up a long-term tracking system is

needed. Although the cost will be high, the tracking for pollutant levels can help to remind the

residents and local government of the living environment along the polluted area. Furthermore, it

can make preparation for further problems and prevent the larger health damage.

4. Compensate for affected parties.

BP is responsible for compensating the people and businesses that have suffered from the oil

spill. The compensation fund should be run by a third party organization that has experience

dealing with compensation issues. Disbursements will be given to the qualification.

The independent administrator of the fund should approve compensation claims by relying on

the state and federal laws. The claimants need to prove a connection between the oil spill and the

damages they have suffered. The fund administrator should set a deadline for the claims and

develop a geographic map of the Gulf that will help evaluate claims in terms of proximity.



There can be five types of claims. The first type includes any individual or company that has to

pay for preventing oil from damaging their property. Other types include parties suffered from

property damages, loss of profits, being unable to use natural resources that were damaged

because of the oil spill, and physical injury or death.

5. Implement immediately new strict standards for safety and environment protection.

Obama administration should enforce their new rules for offshore drilling operation without

hesitation. At the same time, current voluntary safety and environmental standards system of

the industry should be converted to a mandatory system, because many oil spill cases happened

under the industry voluntary system have proved that the internal voluntary system for safety and

environment protection didn¶t work effectively. Furthermore, the U.S. government should enact

laws that limit offshore drilling operation only to the companies that meet the new standards.



REFERENCES

Baker, J.A., Levenson, N., Bowman, F., Priest, S., Erwin, G., Rosenthal, I., Wilson, L.D. (2007).

THE REPORT THE BP U.S. REFINERIES INDEPENDENT SAFETY REVIEW PANEL. BP.

Retrieved October 15, 2010, from

http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/SP/STAGING/local_as

sets/assets/pdfs/Baker_panel_report.pdf

Beder, S. (2002). BP: Beyond Petroleum? University of Wollongong. Retrieved October 15,

2010, from http://www.uow.edu.au/~sharonb/bp.html

BP leak the world's worst accidental oil spill. (2010). London: Telegraph. Retrieved October 15,

2010,from. http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7924009/BP-

leak-the-worlds-worst-accidental-oil-spill.html.



BP Oil Spill Cost Rises To $11.2 Billion, Company Pledges Revenue From Gulf Wells For

Claims Fund. (2010). Retrieved October 15, 2010, from

http://www.huffingtonpost.com/2010/10/01/bp-oil-spill-cost-rises-t_n_746562.html

BP Oil Spill's Economic Impact on Gulf Travel = $22,700,000,000. (2010, July 24). Retrieved

October 15, 2010, from http://www.familytravelforum.com/share/blogs/14335-Oil-Spills-

Economic-Impact-Gulf-Travel-22700000000.html

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