Deepwater Horizon damage control strategy

BP Deepwater Horizon

In April, 2010, Gulf of Mexico oil rig Deepwater Horizon, managed by British Petroleum (BP) suffered an explosion, sank to the bottom of the sea and precipitated an oil leak that would take months to cap (Pagnamenta & Goddard, 2010). The disaster was costly for BP both financially and reputationally, and the company’s responses have not engendered much faith among the general public with respect to BP’s ethics or its willingness to address the concerns of those whose lives have been devastated by the disaster. The company’s strategy throughout the course of the disaster from the point prior to the disaster to its handling of the legal actions taken against it, has drawn the ire of many observers.

This paper will analyze BP’s strategy, in particular with respect to its balance between the public relations issues and the financial issues. BP’s approach appears to be internally consistent, which makes the strategy easier to discern. The strategy will be analyzed in part using some historical context such as the Brent Spar battle between Greenpeace and Shell, which was another high profile issue between the oil industry and the general public. First, some general background discussion will be provided, followed by a more in-depth analysis of the issue from BP’s perspective.

Key Issues

For BP, the Deepwater Horizon incident can be distilled into two main types of issues, the financial and the public relations. With respect to the financial issues, the incident not only cost BP billions of dollars in direct expenses with respect to cleanup of the oil that was spilled, but also lost revenue from Deepwater Horizon and the oil from that well that ended up in the Gulf of Mexico. The company is guided by Milton Friedman’s principle that its primary responsibility is to generate profit for its shareholders (Friedman, 1970). Thus, BP would have adopted the strategy of weighing its actions in the Gulf on a financial basis. There was a legal ceiling with respect to the money it could pay to the U.S. government for the cleanup, but the federal government was seeking to raise that ceiling. The incident could also cost BP, a foreign company, access to U.S.-based oil fields in the future. Thus, there was considerable financial incentive to act ethically in this situation, in order to protect the interests of the company’s shareholders.

The second type of issue is with respect to public relations. In general, BP can reasonably be said to have failed with respect to public relations. Holt and McNulty (2008) the public relations battle is almost as important as the economic battle. It is worth considering, however, that the reason the PR battle is so important is because it has the potential to impact on the financial battle. For BP, the company faced difficult public relations conditions almost immediately because of the multiple ill-considered quotes of its chief executive and the company’s relatively slow response to dealing with the crisis. That BP was later alleged to have cut corners on safety in order to increase profits also played a role in the development of negative publicity. BP also suffered negative publicity with respect to its legal strategy, which was designed to confuse plaintiffs, delay proceedings and generally drag out the process of assigning and paying damages (Peel, 2010).

BP was faced with a number of different alternative courses of action, with respect to the different elements of the Deepwater Horizon damage control strategy. These elements, however, would be guided by the company’s overall strategy. There are essentially three main options. The first is to focus on maximizing shareholder wealth in the long-run. The second is to maximize the company’s public relations stature. The third is to attempt to strike a balance between the two objectives in the hopes that all of the different stakeholders will be satisfied by a balanced approach.

Analysis

The company needs to weigh the financial and public relations objectives of the different options that it faced. With respect to the financial objectives, there are a number of considerations that need to be taken into account. The first is size of the costs involved. BP was forced to set aside a $20 billion fund for damages accruing from the disaster, in addition to the money spent on the actual damage control of the well site and the oil spill. This amount threatened to become larger if the U.S. Congress re-wrote the laws to give it stronger legal mechanisms to recover cleanup expenses from BP. The disaster’s up front costs were significant, but the potential costs downstream were also significant, and related to the multitude of legal actions that would be brought against the company. The scope of the disaster would make such actions costly to fight and if the company lost potentially disastrous. The long-term impact would wipe out the company’s wealth; the short-term impact could have a strong negative impact on the company’s share price.

BP would have needed to engage in calculations of the potential financial costs associated with the Deepwater Horizon spill. Once it had estimates of potential damages, the next step for BP would be to make a decision as to which impact was going to be the least negative, relative to its risk of occurrence. The company appears to have taken the approach that minimizing financial damages was the most important consideration in its strategy.

For the company, Deepwater Horizon was a public relations disaster. Its name will inextricably be linked to the disaster. Within the affected regions, BP dealers are unlikely to survive under that name. The company could also expect some loss of business elsewhere. BP also had the opportunity to improve its image with respect to corporate social responsibility by acting in a strong and proactive manner to address the concerns of the citizens affected and environmental groups who advocate for the Gulf ecosystem. The company’s approach, however, has shown little but contempt for the people affected. The CEO famously stated that he wanted his life back to normal, showing utter disregard for the fact that eleven people were killed on the rig when it exploded and thousands more saw their lives and livelihoods devastated as the result of the oil spill.

If BP had decided to maximize its public relations, it would have been more proactive not only in dealing with the aftermath of the spill but also in dealing with the legal fallout. The company’s attempts to stall action portray the company as arrogant and uncaring, preserving its bottom line at the expense of the people whose lives it ruined. This approach mirrors somewhat the approach that Shell took with respect to the Brent Spars decommissioning. In that incident, Greenpeace was able to generate enough negative publicity for Shell that the company was forced to reverse its decision to sink the rig at risk of environmental catastrophe (Tsoukas, 1999).

It is an interesting study of contrasts between the approaches the two companies took, and highlights some of the market factors at work. Tsoukas argues that we have become a risk society in that firms will attempt to minimize the risk that they face in the external environment. Risk, it is worth noting, relates to volatility of earnings for most corporations, in particular downside volatility since nobody complains about upside volatility. Shell saw that its actions were generating substantial negative publicity in Europe. This publicity threatened to result in boycotts and lost sales for the company. The company realized that the negative public relations that were set to accrue would have long-term negative impacts on the company’s business in Europe.

For BP, that risk is not as great in the United States. There were calls for boycotts of BP, but Americans are less likely to concern themselves with such matters. Negative publicity is less likely to turn into negative long-term impacts on earnings in the United States, something that BP would be aware of following the lack of significant harm to Exxon in the wake of the Exxon Valdez disaster. BP even had the support of Louisiana’s Republic governor Bobby Jindal in the wake of the accident, apparently afraid of losing a few jobs despite the obvious lack of thousands of jobs as a result of the accident. For BP, support from many quarters in American society gave the impression that even strong negative publicity was unlikely to have lasting effects. This stands in contrast to the situation faced by Shell in Europe in the 1990s. As a result, BP took a different strategic path than Shell did.

Strategy Formation

For BP, strategy is based around the resource-based view. This view holds that the company’s resources, and its ability to capitalize on those resources, is the key to success. For BP, the primary resource that it has consists of its oil properties. Another important resource is the wealth that the company has with which to develop those resources. For BP, this necessitates a strategy that emphasizes the maintenance of those finances and those oil assets. The company’s brand is an important resource, but not as important as its oil and its money. BP can easily re-brand its gas stations, or get out of retail and sell to other oil companies, none of which will hold BP’s Deepwater record against it. The brand, therefore, has only limited value. This is doubly so in the United States, where consumers are less likely to uphold a boycott of a company over the long run, and where the price elasticity of demand for gasoline is much lower than in Europe.

The result of this is that BP’s strategy is guided by the desire to maximize the company’s two most important resources of oil and money. The latter is particularly important when the legal stalling process is considered. BP’s stalling has resulted in the company facing significant negative publicity, but it has allowed BP to retain more of its money in the short-term. In addition, now that the company knows that it needs to generate more free cash flow, it can focus on doing that while the process is being stalled. Additionally, if stalling costs the company $20 or $30 million but saves the company $500 million, then the effort is very much worthwhile.

The hit that BP takes on its reputation is unlikely to cost as much money as the cost of legal action stemming from the Deepwater Horizon incident. BP knows this, and has based its strategy on the protection of its most important assets. Reputation is not one of them, illustrating that BP more closely subscribes to Friedman’s view of corporate social responsibility than the more modern view that most firms take, which emphasizes right behavior in the face of adverse outcomes. BP is instead focused on protecting the financial interests of its shareholders above all else, and has apparently calculated that doing so involves stalling legal action and minimizing the cleanup effort.

Conclusions

Holt and McNulty (2008) argue that the Brent Spar situation was largely reflective of Greenpeace having a stronger understanding of the discursive environment than Shell, and therefore being able to outflank the oil company in a publicity battle. Shell risked losing symbolic capital, the authors contend, and that is what compelled them to act. While Shell was slow to learn, it did eventually determine that there was a high cost associated with the sinking of the Brent Spar platform, and that was likely to be more costly than the proposed action.

The situation with BP is different for a couple of reasons. The first and most important is that it is reasonable to assume that for the most part BP did understand the discursive environment. With the exception of the company’s foot-in-mouth victim CEO, the company appears to understand that its actions are going to be viewed negatively, and is engaging in relatively little spin with respect to that discourse. It is worth noting that in the Deepwater Horizon situation, the opposition is less galvanized, consisting of a wide range of groups with a wide range of interests. BP as the enemy is the only commonality between them and the number of issues are myriad, contrary to the situation that Shell faced. BP seems to understand this and is taking advantage of the situation. Shell was also faced with a financial decision that was close enough to make the company reconsider. Shell did not act on the basis of its symbolic capital, but rather acted to protect its economic interest. BP is taking the same approach, but the damage control calculus that BP used determined that its symbolic capital was worth relatively little in terms of financial capital. The rewards of its chosen strategy outweigh the risks.

There is considerable outrage, and rightfully so, about BP’s actions and attitudes throughout the process of dealing with the aftermath of Deepwater Horizon. However, the company’s moves have been more or less calculated. It understands the relative importance of its different resources to long-term success, and has formulated a strategy that is designed to maximize those resources, even if other resources such as reputation must face a cost in order to preserve those more important resources.

BP’s strategy therefore is a strong one, at least from a resource-based perspective. From an ethical perspective, there is a case to be made against BP, but the issue is whether or not BP’s managers have undertaken the strategy that is in the best long-term interests of the company. It is believed that BP has done that, and will continue to do that if it pursues its current aggressive tack towards its disparate opposition.

Works Cited:

Friedman, M. (1970) The social responsibility of business is to increase its profits. New York Times Magazine. Retrieved May 1, 2011 from http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html

Holt, R. & McNulty, T. (2008) Securing the license to act: a foundational capability. Journal of Strategy and Management 1 (1) 72-92.

Pagnamenta, R. & Goddard, J. (2010). Pollution disaster as Deepwater Horizon oil rig sinks into sea. The Times. Retrieved May 1, 2011 from http://www.timesonline.co.uk/tol/news/environment/article7105649.ece

Peel, M. (2010). Opposition grows to BP’s strategy. Financial Times. September 15, 2010. In possession of the author.

Tsoukas, H. (1999). David and Golaith in the risk society: Making sense of the conflict between Shell and Greenpeace in the North Sea. Organization. Vol. 6 (3) 499-528.

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