Thursday, June 17, 2010

BP’s Egregious Conflict of Interest is Wreaking Havoc on the Gulf

(June 8, 2010)

For every barrel of “free oil” discharged into the Gulf, the Clean Water Act establishes fines of at least $1,100 per barrel, and possibly as high as $4,300 per barrel, if the discharge is the result of gross negligence. These fines, and BP’s overall financial liability, have been skewing BP’s actions throughout the first 50 days of this crisis, necessitating action from other oil companies to stop the leak.

The Entrenched Conflict of Interests

BP’s dual roles – as the financially responsible party and as the principal party that is trying to stop the leak – have been on a collision course. BP’s financial liability has been directing its judgment throughout its many attempts to stop the free flow of oil. The result is a conflict of interest of monumental proportions and extreme consequences. BP’s inherent conflict of interests emphasizes the need to sideline BP, and instead turn to a combined effort of the other major oil companies to develop strategies and get the work done.

Obviously, the Federal government itself cannot do the undersea work to contain the leak, since the Federal government does not engage in undersea oil drilling and remediation, nor own the necessary equipment. Initially, the government reasonably relied on BP to solve the problem, partly based on the “you break it, you fix it” maxim, and partly based on the assurances that BP gave in its filings for permits, in which it claimed to be prepared to contain any leaks. But now that BP’s conflict of interests has eroded trust, and has been incapable of stopping the leak, it is time to call upon other oil experts to implement a fix.

Oil Discharge Estimates & Its Consequences

Initially, it was BP that claimed that the leak was allowing just 5,000 barrels of oil per day (BPD) to flow into the Gulf. That estimate was grossly inaccurate, and has been supplanted by much higher estimates from multi-party evaluators in recent weeks. It has been widely perceived that the earlier estimates had been deliberately deflated by BP in order to minimize its liability.

The earlier minimalistic estimates damaged the Gulf profusely, and cost its residents dearly. Had the initial estimates been even close to realistic, then the attempted solutions would have been gauged and scoped to meet that challenge. Instead, the containment dome, top hat, junk shot, hot tap, and top kill were developed as remedies to a much smaller problem than what actually existed. These stopgap measures were not sufficient to curtail a flow of 20,000 to 25,000 BPD, nor withhold the force that propelled such volume. They were destined to fail, or, at best, have only minimal impact.

Oil Dispersants Also Disperse The Truth

BP’s use of dispersants has been especially misguided and troubling. As the name implies, dispersants merely disperse the problem, spreading the oil around more broadly to minimize its appearance and mitigate its impact on any single location. In so doing, dispersants expand the area that is harmed by toxic oil, such that the Gulf is now confronting “a massive collection of smaller spills” and “an aggregation of hundreds or thousands of patches of oil that are going a lot of different directions” (Admiral Thad Allen, June 7, 2010).

The more sensible approach would have been to do the opposite. BP should have done – and could still do – everything possible to limit the reach of the oil, concentrate it, apply coagulants to the oil to make it gel or solidify, and then collect it from the water’s surface before the oil could dissipate and infect marshlands and beaches. But BP’s conflict of interest came into play again. Collecting the gelled or solidified oil would have communicated the volume of oil that was leaking from the wellhead, establishing BP’s liability.

The Conflict of Interest Spawned Bad Options

In light of the leak’s actual volume and the force behind it, efforts to plug the leak (e.g., top hat and junk shot) and smother it (e.g., top kill) were misguided. From the start, BP should have aimed to capture the oil, preventing it from infecting the Gulf habitat and the shoreline, and even retaining it as useable petroleum product. But BP did not do so, ostensibly because that would have illuminated the volume of oil jettisoned into the Gulf prior to the onset of the effective capture, and impacted its liability.

BP should have disclosed the leak’s actual volume and its early work should have been to place a wide-mouthed vertical pipeline over the point(s) where oil was escaping, tighten the mouth at some point below the escape point, and run the pipeline up to the water’s surface. A vacuum could have been created at the water’s surface to stimulate the upward flow of the oil, just like when using a straw in a carton of milk. The oil that spewed into the Gulf in recent weeks could have been channeled into tanker-vessels, presenting a win-win-win solution. But BP’s conflict of interest gave priority to not exposing the volume of oil involved.

The Containment Cap’s Math Doesn’t Add Up

The latest efforts to capture the oil have exposed BP’s aversion to transparency. Over the past two days, it has been reported that 11,000 BPD of oil have been captured by the latest containment cap, estimated to be 40% to 80% of the total leak. There are also aspirations to soon capture 20,000 BPD, which is acknowledged to be still less than the total flow (optimistically estimated as 90% of the total flow). However, the aspiration to collect 20,000 BPD indicates that the current capture of 11,000 BPD is only, at best, about half of the total flow (not up to 80% of the total, as BP still claims). This rudimentary math – comparing the current and anticipated barrel estimates with the corresponding percentage estimates – makes it obvious that BP is still not willing to acknowledge that the actual volume of the leak is higher than its publicized estimates. Again, BP’s conflict of interests is driving its lack of transparency and distorting its conduct.

What Is Meant By “All Legitimate Claims”?

If it were not amply clear that financial liability is the primary driver of BP’s actions and decisions, one would find confirmation in BP’s consistent mantra that it will pay all “legitimate” claims. That word raises questions about which metric BP will use to determine legitimacy. Will BP try to be the arbiter of what it determines to be legitimate? Will BP submit to guidelines from a Federal government office? Will BP insist upon the legitimacy of a claim being determined by court verdicts, following extensive litigation? BP should be required to immediately clarify – in very tangible, effective, operational language – what it means by “legitimate” so that claimants can have guidance, and so that federal, state, and local governments can influence that interpretation, or challenge it, if necessary.

Disaster Spawns Opportunity

As appalling as it may be to acknowledge it, the Gulf oil leak will probably not be the last of its kind. Off-shore oil drilling occurs in many parts of the world, by many companies. Although the Gulf calamity will hopefully encourage stricter regulation and enforcement to prevent any other tragedies of this type, it certainly is possible that more deep-sea leaks might occur. The companies that devise effective solutions to our current problem will instantly become the world leader in oil crisis response services. Since it is clear that BP has no special knowledge in this domain (based on its scattershot tactics, none of which has been effective), this is an opportunity for US oil companies to devise a solution and develop the competency to address future problems of this type, regardless of where on the globe they may occur. Although it is a skill set that will hopefully never need to be deployed, US pre-eminence in addressing tragedies of this type would further solidify our nation’s leadership in environmental remediation services.

Most importantly, by immediately convening a group of US oil companies, their combined expertise would be more likely than BP alone to develop a solution that completely stops the Gulf leak. Naturally, the US companies’ joint operations to stop the leak must be fully financed by BP, as it would be a very legitimate claim.

Eliminate BP’s Conflict of Interests

BP absolutely must remain the financially responsible party. But it should not continue to be the principal actor in stopping the leak. It is now obvious that BP does not have the capacity to fully stop this leak on its own, and that its conflict of interests is affecting both its options and its judgment along the way.