Magoosh GRE

Study of the 2010 Deepwater Horizon BP oil spillage in the Mexican Gulf

| December 14, 2012

Introduction

The Topic:

This assignment highlights the incident of the Deepwater Horizon oil spillage in the Mexican Gulf which took place from April 2010, as well as a brief explanation of the financial consequences faced by BP. It also discusses the potential implications of this event regarding BP’s corporate governance regulations.

Explanation of the Event:

Deepwater Horizon was a deepwater mobile offshore drilling unit. The rig was so high in length and width that it could easily conduct its operations in deep waters. It was owned by Transocean Ltd. Then Transocean Ltd and BP had a leasing contract until 2013. BP planned to drill a well through this rig and it started the drilling process in February 2010.

In April 2010, a very big explosion in the Mexican Gulf was caused on the Deepwater Horizon which was recorded as the highest oil spill in the US history. The Deepwater Horizon was sunk deeply and the oil was continuously flowing into the Gulf of Mexico. According to R, Z (2010), 206 million gallons of oil was spewed. 

Around 126 workers were managed to be evacuated from the affected area, whereas 11 workers were missing who were later presumed to have passed away. Efforts were put in by BP to cap the well but unfortunately, it did not work out. In July 2010, BP had capped the well. However, it was too late since the incident occurred as the oil had flowed in large quantities to the ocean and it already had created the biggest environmental loss in the history.

Cleveland, C (2011) discusses that Since Transocean Ltd and BP were working under a contract for drilling the well, the government of the US considered BP to be responsible for the accident, and therefore, BP was accountable for paying all the cleanup costs which occurred due to the oil spill. BP agreed with the US government on accepting the responsibility of all costs.  Even if the costs are covered, it was analysed as the loss which had numerous negative effects on the entire globe.

Potential Implications on Corporate Governance:

Because of the emergence of the crisis regarding the Deepwater Horizon, the Corporate Governance of BP had to work and plan about the potential implications in an effective manner.

Through this incidence, BP Corporate Governance learned many lessons in terms of delivering environmental safety and fulfilling its commitments.

In order to respond well for the incident, the Corporate Governance of BP formed the Gulf of Mexico committee. The responsibility of this committee was to restore the losses that occurred in the Gulf of Mexico.

Following are some initiatives that were to be implemented after the incidence of Deepwater Horizon oil spillage:

Cleaning of the spill:

The BP board had to monitor the operations of the company in terms of capping the well. The management of the company kept the board in contact and thus, it provides updates to the board on a regular basis. Moreover, the board of BP has decided to continuously work on cleaning up the beaches as well as to work for the communities which are affected by this disaster.

Financial Claims

There have been seen many legitimate claims against BP, Therefore, the company is now meeting these claims as well as the company’s board is monitoring these claims. The board regarding Corporate Governance of BP has planned about establishing a trust fund and this has been approved with the consent of the White House. This step is going to be taken so that BP’s commitment for accepting all the claims occurring from the event can be proved to all its stakeholders.

Financial Liquidity

BP was unable to cap the well after this major event. It is due to this reason that the company faced a major loss in terms of its financial standing as well as it suffered negativity in financing because its credit-rating decreased instantly. BP (2010) reports that the company suffered huge financial uncertainties as it lost a huge amount of money in paying claims as well as in establishing a trust fund which cost around 20 billion dollars. Therefore, considering the Corporate Governance of the company, the BP board reviewed the company’s dividend policy. According to the current financial situation of BP after the Deepwater Horizon incident, the company has planned to cancel the dividends of its first quarter. Additionally, it made an announcement that in 2010, the second and third quarters of the year would have no interim dividends. Furthermore, the payments of dividends would be made in 2011.

The present financial situation of BP after the incident suggests that the cash resources available to the company are quite less now as compared to its earlier financial situations. Therefore, for having a stable financial position in the market, the board has reduced the level of spending on the capital of the company in 2010. However, the company’s corporate governance is also making sure that the stakeholders are aware of this.

Investigation by BP:

An investigation has been undertaken by the corporate governance of BP, for identifying the events which surround the unforgettable incident of the Deepwater Horizon. According to Gupta, S (2010), the oil is still there in the underwater in a large quantity. The company is also focusing on coming up with some really effective recommendations relating to the prevention of such accidental occurrences in future. BP produced a report after the conduction of the investigation, named The Deepwater Horizon Accident Investigation Report. This report from the BP included the recommendations for preventing the similar accident in any future situation.

Internal initiatives of BP:

After the accident, there are some internal initiatives made by BP’s management. These initiatives also include the new possible learning for the improvement of the risk processes within the company. One of the initiatives is the development of an entirely new division of safety and risk. Additionally, one more initiative by the company includes dividing one business, i.e.

Exploration and Production segment into three different divisions i.e. Exploration, Development and Production. Dividing a single operation into three different functions means that it will further promote the development in terms of expertise and risk management for the long run.

Rebuilding the Reputation:

The trust and credibility of BP for its stakeholders is affected a lot after the company held responsible for the huge environmental and societal loss. It can take years to rebuild that trust. Therefore, the corporate governance has started playing an active role in bringing back the reputation of the company which existed before the incident. However, no matter how efficiently the company focuses on rebuilding the previous reputation of BP, it seems quite impossible that it manages to stand out once again in the market facing other similar companies in the industry. Now it has to pay for it as well as wait for a long time to face the world again.

BP’s Business Strategy

Because of the incident of Deepwater Horizon, the board of BP is reviewing its strategy and made changes in it as following:

The events in the Gulf of Mexico led the board to undertake a review of strategy. Led by the group chief executive and his team, the board attempted to address the key challenge of how to regain shareholder value and address core issues, including:

• To focus on BP’s operations geographically

• To manage BP’s risk more effectively

• To focus on BP’s core competency

• To reset the portfolio of BP

Conclusion

In April 2010, the Globe faced a disaster in the Mexican Gulf which was ranked as the one which caused the highest loss for the environment, society, as well as the economy in the US history, i.e. Deepwater Horizon oil spillage.

Analysing the event from JSEAFORD (2010),the brand image of BP has been suffered to a great extent, negatively affecting its financial position as well as the shareholder value and the reputation and credibility among its stakeholders.

BP having a recognition of being a global company, have the positioning in the minds of people that it is a company which does not care much about the planet if it has to make profits. This perception can be justified from the fact that according to The New York Times (2011), BP took steps which actually saved their own time for working through the rig and just did not care about the dangers involved in those steps.

Additionally, for global organisations to achieve success, it is essential for them that they should build a mindset in the organisational culture about focusing not only on profits, but it is quite significant to focus equally on the planet as well as its people. This indicates that an organisation can only prosper and earn its desired profits if it aligns the wellbeing of the environment and the people living in the society, as they also are the stakeholders of the organisation’s business. Without aligning the business with environment and society means that the company is just running its business on selfish terms. Thus, the BP incident shows that the environmental and societal concerns were not present in the scenario, which resulted into extremely negative consequences.

However, concluding from The Economist (2011), environmentalists say that the consequences are so negative that the surroundings as well as the people living and working near the affected place are going to recover after many more years.

List of References

BP (2010) BP Annual Report 2010 [online] available at <http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/IC_CG10_board_performance_report_2010.pdf> [24th March 2011]

Cleveland, C (2011) The Encyclopedia of Earth [online] available from http://www.eoearth.org/article/Deepwater_Horizon_oil_spill?topic=50364 [24th March 2011]

Gupta, S (2010) Gulf spill: Is the oil lurking underwater? [online] available from <http://www.newscientist.com/article/dn19345-gulf-spill-is-the-oil-lurking-underwater.html> [24th March 2011]

JSEAFORD (2010) The Impact of the Deepwater Horizon Oil Spill [online] available from <http://jseaford.wordpress.com/2010/09/30/the-impact-of-the-deepwater-horizon-oil-spill/

> [24th March 2011]

R, Z (2010) Gulf Oil Spill: BP Oil Well Is Now Dead [online] available from < http://morichesdaily.com/2010/09/gulf-oil-spill-bp-oil-dead/> [24th March 2011]

The Economist (2011) What lies beneath [online] available from <http://www.economist.com/node/16160853/comments> [24th March 2011]

The New York Times (2011) Gulf of Mexico Oil Spill (2010) [online] available from <http://topics.nytimes.com/top/reference/timestopics/subjects/o/oil_spills/gulf_of_mexico_2010/index.html> [24th March 2011]

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Category: Business, Free Essays