Saturday, July 31, 2010

Annoyed at the Press Over Macondo (and Ecuador)

Disclaimer: I have worked in the oil industry 30 years. I started with Western Geophysical, moved to Texaco, and now work for Chevron. I have no specific knowledge of BP, the Macondo well, or Ecuador. The views expressed on this blog are my own personal views and do not necessarily represent those of my employer.

I am not defending BP. It looks like here were several errors in human judgment leading up to the blowout. These errors were probably caused by people who did not understand their fields well enough to really understand the riskiness of what they were doing, and whose judgment was tainted by pressures to cut costs. BP seems to have had a really defective culture (See Bob Lewis' column on cost cutting and risk) (see also this article from Fortune magazine) during the regime of Lord Browne (who racked up record numbers by taking greater and greater risks). Tony Hayward was apparently in the process of turning that around. Sadly, he was not able to turn it around fast enough.

And good god, I'm not defending Hayward either. His picture will go in my illiustrated dictionary under "ham-handed."

I am bothered by some of the misinformation coming out of the media however. The claims that the oil industry does not care about the environment and does little to protect it are really grating, because it is far from reality. Here is an interesting view of how Shell's well design differs from BP's.

It is easy and facile to look at a single incident, or even a string of incident over time and draw generalizations. Look at Ixtoc, Valdez, Macondo, Ecuador (don't even get me started on Ecuador, the press coverage has been tremendously one-sided, and really, the government of Ecuador is the bad guy in that one. Just take a few minutes to read Chevron's perspective on Ecuador.) But look at the overall record. Look at the amount of oil produced every day. The organizational capability represented in the real record is unprecedented.

And by the way, most oil companies have long-term incentive plans based on stock or stock options. A single BP-like incident would wipe out much of the personal wealth of those on the plan. Macondo, like Valdez, will be a touch point for a generation of petroleum engineers--"we don't want another Macondo..."

The oil industry, especially over the last 10 to 15 years has placed tremendous emphasis on safety and the environment. I'm sure the the Exxon Valdez was one of the main drivers of that. From what I have seen though the emphasis has been much more on prevention than remediation. Safety is a constant watchword and is drilled into people's heads, even in office environments. (Every bathroom in Chevron's corporate HQ has reminders to wash your hands after using the facilities, and you should have seen these guys changing a light bulb in one of our conference rooms--orange cones, the whole works). Field operations are even stricter.

Again, this accident was preventable. It is apparent that BP had some weaknesses in the Macondo completion design. But put that aside for a minute. If you do something enough times, even though you think you have all the angles covered, even if your judgment is not tainted, eventually, something will happen that is completely unexpected. You get hit with a black swan. When dealing with forces of nature, things go bad really fast. It can happen to anyone.

Society's Response
This BP thing is really similar to what happened with steroids in baseball. We all enjoyed watching these superhuman people hitting homer after homer, after seeing them put on 40 lbs in the off-season. We went to the park and cheered, and pretended that it was the vitamins and weightlifting. Then we were shocked, shocked that it was "the cream" and "the clear."

We see the same thing today with the Macondo well. For years, regulators and nature have been pushing oil companies further offshore into ever more technically challenging environments. The industry has drilled 14,000 wells in deep water without a serious blowout like Macondo. We (society) pretended that there was no risk of pollution (out of sight, out of mind), while we wallowed in more abundant domestic energy than would have been available otherwise. Now we're shocked that the statistics have caught up with us.

The other thing that's happening is the attention a single disaster gets vs the day to day problems going on. We have all seen it. 9/11 was a horrific event--3000+ people died in one fell swoop. It mobilized our nation into two wars, plus huge changes on the home front. Likewise, a single plane crash, killing 300 people causes great angst, concern, and regulatory changes. Yet every year, 15,000 people die in alcohol-related traffic accidents, 40,000 total traffic fatalities. We are taking measures to cut it down, but look at the death toll. Why aren't we spending a trillion dollars or two to cut down on those deaths?

I'm not looking for sympathy for me or for BP. The oil industry has done well over the last 15 years. But with a few exceptions, and those exceptions are generally due to individual people not company policy, it has done well by improving safety and taking great measures to care for the environment.

Ecuador Notes:The following is from a response to a post in NY Times. I believe this response is much more accurate and representative than the original post.

Orlando, Fl
June 5th, 2010
10:40 am

I am an Ecuadorian citizen who has worked extensively on health and education projects in the Amazon rainforest, precisely around those oil fields mentioned by Mr Herbert.

Mr Herbert is grossly missinformed. Let me explain.

Yes, the Ecuadorian Amazon has been polluted by oil for decades. But the bulk of that pollution doesn't belong to Texaco but to the Ecuadorian government. Everything began in the late 1960s, when Texaco began drilling in the Ecuadorian Amazon, and reached a tipping point in 1972, when Texaco found oil and began exporting it. Sensing unprecendented amounts of money in the oil business, Gen. Guillermo Rodríguez Lara, the Commander of the Armed Forces, launched a coup against the civilian president and took power. Immediately, he created CEPE -Ecuadorian State-run Oil Company. But CEPE was just a paper company with zero technical, financial, or commercial capabilities. So, Gen. Rodríguez Lara took over Texaco. From 1972 through 1992, Texaco worked for CEPE: two thirds of oil revenues went to CEPE, one third went to Texaco.

"CEPE never cared about the people. The environment was not even a concept. The only important thing was that Ecuador was living an oil boom. Moreover, the Ecuadorian government -a series of military dictatorships- actively promoted massive deforestation and settlement in the Amazon jungle. Any citizen willing to cut the trees and grow coffee or bananas was given a 125-acre piece of jungle. Roads and bridges were built. Hundreds of thousands of people flocked to the region. Yes, Texaco dumped toxic materials in the jungle during those years... always under CEPE's watch. The military left power in 1979, but democratically-elected governments have kept the same policies in place ever since.

"In 1992, the CEPE-Texaco consortium expired. Texaco left the country. Suddenly, the government of Ecuador had to take over Texaco's operations. CEPE's name was changed to Petroecuador. Without Texaco, Ecuador's oil industry began a slow, steady decline. The government, now the proud owner of 100 percent of the national oil industry, spent every dollar of revenue, and deprived the industry of necessary money for maintenance and investment. Aging oil fields, tanks, pipelines, soon began to decay. Spills became commonplace.

"The 1990s was a period of environmental awareness. As oil spills increased, so did expenses in remediation, and of course, litigation. People began to view oil companies as a reliable source of income. Pipelines were routinely sabotaged by local people who immediately sued for compensation.

"It's in this context that some American environmental lawyers convinced some Ecuadorian local groups to sue Texaco. The plaintiffs want Texaco to pay those groups some $30 billion in compensation for health and environmental damages.

"How did they reached the $30 billion figure? It's impossible know how many cases of cancer have occurred in the region: the Ecuadorian health care system doesn't even have accurate birth records, not to mention cancer diagnoses. It's impossible to know whether cancer cases are due to oil pollution or the huge amounts of chemicals employed in the deforestation-settlement program. So, the plaintiffs used an original formula: they estimated the number of birds, rodents, fish, and other animals killed in the region over the past four decades -no matter if that happened by oil spills, deforestation, or road construction- and multiplied it by the black-market price of each species. (This is no joke)

"The number of supposedly affected individuals doesn't exceed 1,000. If they win, they could get about $30 million each. Half that money would go to those American environmental lawyers who had the idea of the lawsuit in the first place. Isn't it great?

Ecuador's story is one of unbridled development, without any care or goverment oversight of living conditions or sanitation (outside of the oil company camps). People who were actually indigenous to the region had their lives overturned. Even if there had never been one drop of oil produced, disease would have increased. In virtually every place in the world where traditional diets have been displaced by western diets, disease has increased. The Ecuadorian government took most of the profits and had majority control of the operation. CEPE/PetroEcuador is the bad guy in this scenario, not Chevron/Texaco.