BP Crisis Rational Analysis: What BP Did Not Perform?
Jun 8th, 2010
Now it’s time to test the Risk and Crisis Evaluation Methodology we published back in 2008 on the BP Gulf of Mexico spill. We originally presented the methodology in our book (F. Oboni & C. Oboni, Improving Sustainability through Reasonable Risk & Crisis Management, 2007).
Risk and Crisis Evaluation Methodology
Let’s start with the probability of the spill. At Riskope we:
- are not oil experts, so can only assume that this accident, that various voices in the media declared as “almost impossible”, had a probability of occurrence of one in a million or less.
- mean the probability of the event before it occurred, as defined by some experts (BP’s or third party).
- will not discuss the technical details leading to that value. We just assume it as the reasonable numeric translation of the upper bound probability of an “almost impossible” event.
1. As per foreseeable public relation consequences, a large magnitude spill scenario, following our simplified methodology (refer to the link above) would have certainly fallen in the “intolerable” are of public relation consequences.
2. As per the physical consequences, even if a company “rosy scenario” attitude would have lead to ignore possible casualties on the platform, long range biological and environmental effects, damage to the fishing industry, but had just used past large spills from, say the mining industry, the scenario would have lead to easily estimating direct losses and close indirect consequences at least 1B$, may be more.
3. A loss of share values in the order of 30% could also have been foreseen, as a minimum and, based on other industrial accidents, the maximum loss possibly going, if bankruptcy is avoided, as high as 90%. Past cases have also shown that duration of the share value loss can go as long as a decade.
Risk display, not in a 4×4 or 5×5 risk matrix
If we place now the “upper estimate” probability (one in a million is expressed numerically as 10-6) and the 1B$ “minimum estimate” loss on the probability-cost diagram (See red bubble starting at 1B$ at the bottom right of the Figure)
Results of a ERM study with the BP “minimal” bubble added
and compare the values with a “generalized large company” tolerance curve we have been using for the 2008 study, we can see that the scenario is intolerable even with these rough and oversimplified assumptions.
Let’s put it this way: when we encounter cases like this one (and we do in our practice while performing quantitative risk assessments for our clients) we certainly ask our clients to go way more into the details of the analysis.
Was there an explicit tolerance curve to compare risks to?
Of course, one can also assume that BP’s own tolerance curve (did they develop one?) is/was so much higher than the one we used (because BP is such a powerhouse) that the risk would have turned “tolerable” in their analysis. However, we do not know if they did perform an explicit/formal one.
To that we will answer that in this paper we have let aside many physical potential consequences (see above) and purposely neglected to add to the physical losses the reputational ones to express a bare minimal estimate of losses which would be difficult to argue against. If you go back a few paragraphs you will see that the public relation costs were deemed intolerable to start with, let alone all other ethical and human implications of such a catastrophic scenario.
Reality is now showing costs of consequences that are easily hiking well above 10B$.
Reality is now showing costs of consequences that are easily hiking well above 10B$. History will tell if the company emerges alive from this crisis. We note that banks emerged because of governmental bailouts. Will BP “dirty and oily business” be bailed out because of strategic vital importance? Or because many institutional investors (pensions) count on the company’s dividends?.
We know that, of course, the large flow oil spill in the Gulf o Mexico scenario is not the only one a large company has to consider when defining their mitigative prioritizations.
For example, the figure we are using using shows the result of a large company ERM study, which resulted in defining fourteen scenarios that were lying over tolerance (see How to Rationally Prioritize Risks).
Methods exist to properly prioritize risks and bring large industries into tolerable areas without breaking their financial backs.
One last consideration. Regulators can use the same type of rational reasoning to ensure that rules and guidelines are reasonable and cover areas that really matter to the public and our environment.
In 2007/2008 we presented a book and a paper with a Generic Phased Crisis Model and a Simplified Model of Public Reactions. One can use these to evaluate crises acceptability. We stresses the fact that such a simplified approach was fine to evaluate crises at a rather crude screening level. Finally, we noted that there are still companies that do not perform Enterprise Risk Management (ERM). Furthermore, among those who perform it, some use overly crude systems that blur reality either in too dark or too rosy tones.
In this blogpost we:
- stressed that the future lies in using Risk to weigh decisions, rather than just guiding mitigation.
- showed a simplified form of Quantitative Risk Assessment applied to world-wide famous cases. Furthermore we explained what useful metrics to measure the “Enterprise disservice” of a company can be. For example, the Share Value drop, which, of course, compounds with direct and indirect costs of such a crisis. We also explained that other metrics are possible. In this case, for example: Loss of habitat (km2); Loss of species (biodiversity, number of species); Loss of human lives (number of casualties); One can actually derive any complex metric for example by using “multiple portfolio” analysis.
- wrote that it is possible to derive a priori Estimates of the probability of the disservice. Of course, in terms of “framing ranges” by using simplified approaches from our book. An example has also been published (See Example).
Finally we compared the risk. In other words we compared the probability and consequences of a mishap to a “large company” risk tolerance curve. The idea was to show how significant the crises/risks were/had been for the paper’s case.
One last question
Was BP, like many other players world-wide, a victim of the syndrome we described in this post?.
Will humans ever change?
Tagged with: Acceptability, alternative, Analysis, assessment, catastrophe, compliant, Conflict, cost, crises, decision, economic, Financial, operational, risk, sustainability, tolerance
Category: Consequences, Hazard, Mitigations, Probabilities, Risk analysis, Risk management, Tolerance/Acceptability