Sunday, June 06, 2010

Is this any way to run an oil rig?

The New York Times has a long article on the extent of ownership and control on the Deepwater Horizon oil rig. A snippet:
More than five weeks before disaster, the rig was hit by several sudden pulsations of gas called “kicks” and a pipe had become stuck in the well. The blowout preventer, designed to seal the well in an emergency, had been discovered to be leaking fluids at least three times.

Dealing with these problems required teamwork, a challenge to the throng of different companies with responsibilities on the rig. Of the 126 people present on the day of the explosion, only eight were employees of BP. The interests of the workers did not always align.

In testimony to government investigators, rig workers repeatedly described a “natural conflict” between BP, which can make more money by completing drilling jobs quickly, and Transocean, which receives a leasing fee from BP every day that it continues drilling.

Halliburton was also on hand to provide cementing services, while a subsidiary monitored various drilling fluids. A different company provided drilling fluid systems, another provided technicians to operate the remote-control vehicles that are they eyes of the rig crew deep underwater, and yet another provided the well casing.

Amid this tangle of overlapping authority and competing interests, no one was solely responsible for ensuring the rig’s safety, and communication was a constant challenge.
One comparatively tiny example of the problems created:
Steve Bertone, the chief engineer for Transocean, wrote in his witness statement that he ran up to the bridge where he heard Captain Kuchta screaming at a worker, Andrea Fleytas, because she had pressed the distress button without authorization.

Mr. Bertone turned to another worker and asked him if he had called to shore for help but was told he did not have permission to do so. Another manager tried to give the go-ahead, the testimony said, but someone else said the order needed to come from the rig’s offshore installation manager.
Misfeasance, malfeasance, or merely the benefit of 20-20 hindsight? As long as nothing catastrophic happened, it may be that hiring a drilling contractor rather doing drilling in-house is the responsible thing to do. The problem is that when something catastrophic happens you need the command and control that only comes with ownership. The question then becomes what's the responsible organizational design given that there is a probability of a catastrophic event?

Torts in theory should put the incentives in the right place to act responsibly. We cannot say that catastrophic ought never to happen, but we can say that the one who caused the damage should be held accountable -- and the question of intent is irrelevant. Further, BP is the accountable party. If BP wants to sue its contractors that's another matter.

One clear reason to say "in theory" is the difficulty of limited liability. Moral hazard exists if there are events so catastrophic that the damages exceed the ability of the firm to pay -- the firm does not do enough to lower the probability of those events and/or reduce the damage should they occur.


Blogger Seabee said...

Not a lot has been said about it in the frenzy of BP bashing, but the share prices of all the companies involved have plummeted.

There's also the question, as there was with the financial meltdown, of the responsibility of governments in protecting their electorate with regulations and oversight.

12:02 PM  
Anonymous Bush Mechanic said...

Almost all drilling operations are conducted by specialised service companies. It usually works. Even the oil company representatives and wellsite geologists are often themselves contractors

If you want to see what an oil company could do when it was fully in charge of operations check out the Sea Crest (That ain't no cyclone) or Piper Alpha (Mustn't stop production).

The current blowout is still far from being the largest and it won't be. In the early 1900's there were USA land based blowouts with wells flowing for months.

Lakeview, 1910, initial flow from the gusher was 18,800 barrels per day. The peak flow during the gusher was estimated to be 90,000 barrels per day. The large flow created a creek of crude oil running downhill from the well site. It was uncontrolled for 18 months.

5:38 PM  
Blogger BuJ said...

excellent post.. thanks itoot for publicising!

the Curse of the SubContractor!!

it's a pity that the environment is paying dearly

11:31 PM  
Anonymous said...

I think everybody ought to browse on it.

9:28 PM  

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