As CEO Hayward Remade BP, Safety, Cost Drives Clashed


Early on June 5, 2008, a piece of steel tubing ruptured on BP PLC’s vast Atlantis oil platform in the Gulf of Mexico. The tubing was attached to a defective pipeline pump that BP had put off repairing, in what an internal report later described as “the context of a tight cost budget.”

The rupture caused a minor spill, just 193 barrels of oil, but BP investigators identified bigger concerns.

They found the deferred repair was a “critical factor” in the incident, but “leadership did not clearly question” the safety impact of the delay. The budget for Atlantis—one of BP’s most sophisticated facilities— was “underestimated,” resulting in “conflicting directions/demands.”

As investigators were questioning Atlantis’ lean operation, top executives were praising it.

In an internal communication in early 2009, Neil Shaw, then-head of BP’s Gulf of Mexico unit, lauded Atlantis’ operating efficiency, saying it was “4% better than plan” in its first year of production. It was part of a success story that Mr. Shaw said had enabled BP to become the No. 1 oil producer in the Gulf.

The budget squeeze on one of the British oil giant’s most challenging projects underscores a tension at the heart of BP under Chief Executive Officer Tony Hayward.

Until the April 20 explosion of the Deepwater Horizon oil rig in the Gulf, Mr. Hayward repeatedly said he was slaying two dragons at once: safety lapses that led to major accidents, including a deadly 2005 Texas refinery explosion; and bloated costs that left BP lagging rivals Royal Dutch Shell PLC and Exxon Mobil Corp.

A Wall Street Journal examination of internal BP documents, legal filings, official investigations and reports by federal inspectors, as well as interviews with regulators, shows a record that doesn’t always match Mr. Hayward’s reports of safety improvements.

Since Mr. Hayward took over, BP has continued to spar with regulators over the same issues that got it into trouble before his tenure as CEO. Some of its refineries still get poor marks for safety. And four years after one of Alaska’s worst oil spills, BP’s pipelines there have continued to leak.

“They claim to be very much focused on safety, I think sincerely,” says Jordan Barab, deputy assistant secretary at the Occupational Safety and Health Administration. “But somehow their sincerity and their programs don’t always get translated well into the refinery floor.”

BP insists it has turned a page on safety. “BP’s absolute No. 1 priority is safe and reliable operations,” said spokesman Andrew Gowers. In the past five years, “significant effort and investment” have been devoted to improving safety, he said, and great progress has been made on all important metrics, with reduced injury frequency and fewer incidents involving equipment breakdowns.

Savings have been achieved through “reduced corporate overheads and a simpler corporate structure,” he said, not by economizing on safety. Indeed, extra dollars and staff have flowed into operations.

On Atlantis specifically, BP said it identified a problem with vibration in certain pumps but decided it “was not in itself a cause for safety or environmental concern,” and deferred repairing some pumps until the following budget year. ”

Mr. Hayward took the helm in May 2007, saying he would focus “like a laser” on safety and simultaneously improve BP’s operations.

In October 2007, he created a management system designed to enforce safety standards consistently across the organization.

Obstacles soon emerged. A 2007 internal document setting out the safety policy spoke of an industry shortage of engineers and inspectors that could endanger plans to implement new standards for inspecting and maintaining critical equipment. An internal presentation in May 2009 cited a shortage of experienced offshore workers and said more training was required to “maintain safe, reliable and efficient operations.”

The same month he revamped the safety structure, Mr. Hayward said he would streamline BP. An internal presentation to staff showed how problems such as less efficient operations had created a “growing gap between us and Shell.”

Over the next three years, Mr. Hayward shed 7,500 jobs and pruned costs—$4 billion in 2009 alone. Buoyed by soaring oil prices, BP made record profits of $25.6 billion in 2008. BP soon rivaled Shell as Europe’s most valuable oil company.

Mr. Hayward sought to move beyond BP’s troubled past. In October 2007, the company agreed to pay $373 million to settle charges arising from the Texas City blast, oil spills in Alaska and allegations that BP traders manipulated the propane market.

BP went on to invest more than $1 billion upgrading the Texas City refinery. Earlier this year, it said its recordable injury rate there had declined every year since 2005, and that the refinery’s 2009 safety performance ranked among the industry’s leaders.

But OSHA, the federal overseer of workplace safety, tells a different story.

After a six-month inspection of the Texas City refinery last year, OSHA hit BP with an $87 million fine, the biggest in the agency’s history. About $57 million of what OSHA describes as “failures to abate” hazards similar to those that caused the 2005 explosion, which killed 15 people. BP has contested the fines and says it is now in “constructive” discussions with OSHA.

The agency had inspected a refinery in Toledo, Ohio, which BP now jointly owns with Husky Energy, in 2006, uncovering problems with pressure-relief valves. It ordered BP to fix the valves. Two years later, inspectors found BP had carried out requested repairs, but only on the specific valves OSHA had cited. The agency found exactly the same deficiency elsewhere in the refinery. OSHA ordered more fixes and imposed a $3 million fine.

“There was clear knowledge of these problems … and yet they hadn’t been addressed” in other parts of the refinery, said Mr. Barab.

BP’s Mr. Gowers said BP has “worked cooperatively with OSHA” to resolve problems at the refinery. BP said when OSHA imposed the fine that the Toledo refinery had made “measurable improvement in matters of process safety.”

OSHA’s Mr. Barab says because of BP’s safety record, the agency scrutinized it more closely than other refiners and imposed tougher penalties because it deserved “a bit more attention on refinery safety than anyone else.”

Thousands of miles to the northwest, BP was addressing safety issues on its Alaska pipelines. A corroded conduit sprang a large leak in 2006, fouling the tundra.

By the end of 2008, BP had invested $500 million to replace 16 miles of oil-transit lines at Prudhoe Bay, scene of the spill, and install a new leak-detection system.

But BP has continued to experience leaks. Last year, a civil filing by the state against BP said the company’s “poor maintenance practices” have resulted in several spills since 2006. For example, some 1,000 barrels of crude oil, water and gas mixture poured onto the tundra after a 2-foot gash formed in a pipeline in November 2009.

BP said that about a third of its Alaska capital budget of between $800 million and $850 million this year is for safety and integrity projects. It said that since 2006, it has tripled the number of pipeline-corrosion inspections, to more than 100,000 a year.

Relations with Alaska’s regulators remain strained, however. In September 2008, a high-pressure natural gas pipeline operated by BP ruptured, sending two segments of pipe flying 900 feet across the tundra. No one was hurt, but the official state report said the incident could have been catastrophic.

“We were able to tie it down to procedures that either were not in place or had not been fully implemented at BP in their management system,” said Allison Iversen, a coordinator at Alaska’s Petroleum Systems Integrity Office.

In February 2009, Ms. Iversen sent BP a letter saying it had failed to inspect the stretch of pipeline for more than a decade before it broke. A scheduled 2003 inspection was never performed because the pipe was covered in snow and the company never returned to do it. The state also said it was “deeply concerned with the timeliness and depth of the incident investigation” conducted by BP. It took four months to provide a report that other oil companies typically submit in two weeks.

BP said it is implementing a plan to address the backlog of pipeline checks and ensure any missed inspections are flagged.

In the Gulf of Mexico, BP hadn’t suffered a safety disaster until the Deepwater Horizon. But there had been concerns that one might occur.

An internal BP presentation from December 2007, early in Mr. Hayward’s tenure, noted that there had been 10 “high potential” incidents at BP facilities in the Gulf since the start of that year, including one December case in which a worker suffered an electric shock but survived. A common theme, the report found, was a failure to follow BP’s own procedures and an unwillingness to stop work when something was wrong.

“As we enter the last two weeks of 2007, we are experiencing an unprecedented frequency of serious incidents in our operations,” Richard Morrison, vice president for Gulf of Mexico production, wrote in an email to staff. “We are extremely fortunate that one or more of our co-workers has not been seriously injured or killed.”

Mr. Morrison listed five near-miss incidents in November and December, including one in which natural gas escaped from a pipe aboard BP’s Pompano platform, threatening an explosion.

BP said it wouldn’t comment on this or any other internal communications, and declined to make Mr. Morrison available.

Meanwhile, company officials continued hammering home the message on costs. Mr. Shaw, the Gulf of Mexico head, made the point at a meeting for top managers in Phoenix in April 2008. His aim, according to an internal BP communication, was to instill a “much stronger performance culture” in the organization, based on strictly managing costs and “this notion that every dollar does matter.” BP declined to make Mr. Shaw available for comment.

A former BP engineer who retired last year said the Gulf of Mexico operation under Mr. Shaw became focused on meeting performance targets, which determined bonuses for top managers and low-level workers alike. The engineer says even small costs got targeted: BP no longer provided food at lunch meetings, and eliminated the fruit bowls that were offered as part of a healthy-living drive a few years earlier.

In a statement, BP said its cost-cutting should be seen in the context of the sharp fall in oil prices in 2008, which squeezed all oil companies’ profits. BP says executives are judged on the safety record of their units, not just on financial or production criteria.

The month after the Phoenix meeting, Mr. Shaw told his staff that efficiency was improving in the drilling and completing of wells.

The number of days it took to drill 10,000 feet was 6% below plan. Idle time had fallen to 24% of total rig days, from 34% in 2007. In May 2009, he said in another memo that BP’s output in the Gulf had reached a record 500,000 barrels a day, a year ahead of schedule.

The improvements continued. According to an internal presentation on Gulf drilling performance dated April 13 of this year—a week before the Deepwater Horizon blast—BP’s estimate for 2010 capital spending on wells in the Gulf fell by $221 million to $2.03 billion.

Some goals were more elusive. A safety steering committee worried that the “Total Recordable Incident Rate”—normally measured as total number of incidents resulting in injury or illness for every 200,000 man-hours worked—was higher than it should be.

The rate was 0.97 for the Gulf drilling unit, over the target of 0.62, say minutes of an August 2009 meeting. “In order to meet the target will need some zero months,” the minutes say.

BP declined to comment on the memo’s specifics but said it showed the company “continually evaluating the safety of its operations.”

Some think the cost drive affected safety. Workers had “high incentive to find shortcuts and take risks,” says Ross Macfarlane, a former BP health and safety manager on rigs in Australia who was laid off in 2008. “You only ever got questioned about why you couldn’t spend less—never more.” BP vigorously denies putting savings ahead of safety.

At a strategy update for investors this March, BP targeted large savings in its drilling operations. BP spends nearly $4 billion a year drilling oil wells. Management said it could slash $500 million off that figure by improving efficiency.

In that regard, the Gulf of Mexico well being drilled by the Deepwater Horizon was an outlier. Deepwater Horizon was the least efficient of the rigs working for BP in the Gulf: A BP chart showed at least 44% of its rig days were nonproductive, a much higher figure than any other vessel.

That pushed up costs, putting Horizon $29 million over budget for 2010, the largest deficit in BP’s Gulf fleet.

BP says the amount of down time wouldn’t have directly affected total spending on Deepwater Horizon, which was operating under a long-term, fixed-rate contract.

The April 20 explosion on the rig raised questions among congressional investigators about whether BP had cut costs too much. BP denies cost-consciousness played any role in the tragedy.

In a different context, BP had questioned the impact of its cost-cutting in the Gulf. After the 2008 incident on the Atlantis platform, BP’s internal report warned of lax safety oversight and tight budgets.

It concluded: “A key question to ask, especially with apparently minor and disconnected defects, is ‘What’s the worst thing that could happen?'”

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Stuart H. Smith is an attorney based in New Orleans fighting major oil companies and other polluters.
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