Case 7.5 BP and the Deepwater Horizon Explosion: Safety First? ; and BP and the

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Case 7.5 BP and the Deepwater Horizon Explosion: Safety First? ; and

BP and the Deepwater Horizon Explosion: Safety First? Background and Nature of Market BP PLC is a holding company with three operating segments: Exploration and Production; Refining and Marketing; and Gas, Power, and Renewables. Exploration and Production’s together with pipeline transportation and natural gas processing. Refining and Marketing includes oil supply and trading, as well as refining and petrochemicals manufacturing and marketing, including the marketing and trading of natural gas. BP is also involved in low- carbon power development, including solar and wholesale marketing and trading (BP Alter- native Energy). BP has a presence in 100 countries and employs 96,000 people in these countries. It has nearly 24,000 retail service stations around the world, and its stations sell coffee made from fair-trade beans. It is the second largest oil company in the world and one of the world’s ten largest corporations. Until 2007, BP had been a perennial favorite of nongovernmental organizations (NGOs) and environmental groups. For example, Business Ethics named BP the world’s most admired company and one of its top corporate citizens. Green Investors named BP its top company because of BP’s continuing commitment to investment in alternative energy sources. BP lists its social and community policy as follows: Objectives • • • • To earn and build our reputation as a responsible corporate citizen To promote and help the company achieve its business objectives To encourage and promote employee involvement in community upliftment To contribute to social and economic development BP has been recognized for its work in helping AIDS victims in Africa. BP Alternative Energy was launched in 2005 and anticipates investing some $8 billion in BP Alternative Energy over the next decade, reinforcing its determination to grow its businesses “beyond petroleum.” In July 2006, BP and GE announced their intention to jointly develop and deploy hydrogen power projects that dramatically reduce emissions of the greenhouse gas carbon dioxide from electricity generation. Vivienne Cox, BP’s Chief Executive of Gas, Power, and Renewables, said, on announcing the joint venture, “The combination of our two compa- nies’ skills and resources in this area is formidable, and is the latest example of our intent to make a real difference in the face of the challenge of climate change.”8 There were issues that belied BP’s good-citizen status. In 2001, BP admitted that it had hired private investigators to collect information on Greenpeace and The Body Shop. Also in 2001, its annual meeting created a stir when a shareholder proposal to stop the erection of a pipeline in mainline China was defeated when the board of direc- tors opposed the proposal. BP’s political donations were also a controversial and newsworthy subject until it abandoned the practice with the following statement: In early 2002 the company Chairman, Lord Browne, announced that it will no longer make donations to political parties anywhere in the world. In a speech to the Royal Institute of International Affairs, Browne, [sic] said “we have to remember that however large our turnover might be, we still have no democratic legitimacy anywhere in the world.... We’ve decided, as a global policy, that from now on we will make no political contributions from corporate funds anywhere in the world.” However, BP will continue to parti- cipate in industry lobbying campaigns and the funding of think-tanks. “We will engage in the policy debate, stating our views and encouraging the development of ideas—but we won’t fund any political activity or any political party,” he said. In response to a question, Browne said that over the long term donations to political parties were not effective.

Discussion Questions

1. Discuss the ethical, negligence, and environmental issues you see in this case.

2. BP had rented the rig from Transocean for $500,000 per day. Transocean had been recognized by the U.S. government for its safety record.45 Can companies distance themselves from liability and responsibility through the use of contractors? What are the risks of using third-party contractors?

3. Discuss how BP got into the position in which it found itself in late 2006 and what might have prevented the spill, the financial fallout, and the loss of reputation. Be sure to factor in the financial implications of any decision made during the period from 2001 to 2006.

4. What was the impact of the emphasis on cost cutting on BP’s culture? What was the impact on the company’s performance?

5. Evaluate the social responsibility positions of BP in light of the refinery explosion and the pipeline issue. What can companies learn from the BP experience?

6. Applying the regulatory cycle, what do you see happening with regulation in offshore drilling and the refinery and drilling portions of the oil and gas business?

7. When does OSHA assess criminal penalties? When does the Clean Air Act require criminal penalties? Wouldn’t workers’ comp cover the employees for the deaths and injuries? Why is there civil litigation?

8. The judge’s opinion on the moratorium contained this discussion of the government’s use of a report by experts on offshore drilling: Much to the government’s discomfort and this Court’s uneasiness, the Summary also states that “the recommendations contained in this report have been peer-reviewed by seven experts identi- fied by the National Academy of Engineering.” As the plaintiffs, and the experts themselves, point-experts charge it was a “misrepresentation.” It was factually incorrect. Although the experts agreed with the safety recommendations contained in the body of the main Report, five of the National Acad- emy experts and three of the other experts have pub- licly stated that they “do not agree with the six month blanket moratorium” on floating drilling. They envi- sioned a more limited kind of moratorium, but a blan- ket moratorium was added after their final review, they complain, and was never agreed to by them. A factor that might cause some apprehension about the probity of the process that led to the Report. The draft reviewed by the experts, for example, recommended a six-month moratorium on explora- tory wells deeper than 1000 feet (not 500 feet) to allow for implementation of suggested safety measures. The Report makes no effort to explicitly justify the moratorium: it does not discuss any irreparable harm that would warrant a suspension of opera- tions, it does not explain how long it would take to implement the recommended safety measures. The Report does generalize that “[w]hile technolo- gical progress has enabled the pursuit of deeper oil and gas deposits in deeper water, the risks associated with operating in water depths in excess of 1,000 feet are significantly more com- plex than in shallow water.”46 Evaluate the ethics of the Secretary of Interior regarding the representations of what the experts concluded.

9. Evaluate Mr. Hayward’s parting statement and his views on accountability.

Case 7.11 Boeing and The Recruiting Of The Government Purchasing Agent”; and

Kodak, the Appraiser, and the Assessor: Lots of Backscratching on Valuation This tale of a sort of sting operation required participation from business, government, and a professional. John Nicolo was a real property appraiser who did appraisal work for Eastman Kodak, Inc. (Kodak) at the request of one of Kodak’s now-former employees, Mark Camarata, who served as Kodak’s director of state and local taxes while employed there. Charles Schwab was the former assessor for the town of Greece, New York, an area that included Kodak headquarters. Kodak is both the largest employer and the lar- gest property owner in the town of Greece. According to the indictments in the case, Schwab made reductions in Kodak’s real property tax assessment. Those reductions, according to calculations completed by Nicolo and Camarata, saved Kodak $31,527,168 in property taxes over a fifteen-year per- iod. But Schwab did not make those reductions as a matter of assessor policy, fond feel- ings for Kodak, or the goodness of his public servant heart. He made those reductions at the behest of the other two in exchange for payment. Nicolo’s fee from Kodak, arranged according to a percentage of the amount he was able to save the company, was to be $7,881,798 (about 25 percent of Kodak’s projected tax savings). After being paid over $4,000,000 of his fee from Kodak, Nicolo paid Camarata $1,553,300 for his role in hiring him and then paid Schwab $1,052,100. The essence of the arrangement was that the appraiser agreed to split the tax savings fee with the assessor in exchange for the reduc- tion and with the Kodak employee in exchange for hiring him. The group also managed to involve companies that were buying property from Kodak. For example, in 2004, ITT bought one of Kodak’s buildings in its industrial park as Kodak was downsizing. Immediately upon its acquisition of the building, ITT got an assessment from Schwab that quadrupled the value of the building for purposes of tax assessment. Mr. Camarata referred the ITT officers to Mr. Nicolo, who then talked Mr. Schwab into reducing the assessment value. However, unbeknownst to ITT, the whole scenario had been set up by the group, according to trial testimony. Schwab reduced the assessment value, and Nicolo split his fee with Camarata and Schwab. Camarata entered a guilty plea to various federal fraud charges and agreed to coop- erate with federal authorities in their prosecution of the other two of the property tax triumvirate, who have been charged with fifty-six counts of fraud, money laundering, and other federal crimes. Mr. Camarata faced a possible penalty of twenty years, but was sentenced in 2009 to two years because of what U.S. Federal District Judge David Latimer described as follows: “Your cooperation with the government was immediate and complete. Without your testimony, I think the verdict might have been much more difficult for the government to accomplish ... your help was the linchpin for the govern- ment’s case.” Mr. Camarata was ordered to pay $10 million in restitution as part of his federal pro- secution, but the total amount he will owe remains unclear because of federal income taxes owed, civil damages to Kodak and ITT, and taxes owed to the city based on the undervaluations. Following an eleven-week trial, Mr. Nicolo was sentenced to twelve years in federal prison. He requested home confinement due to health issues and alleged threats and beatings by prison officials, but was denied the request. When Kodak learned of the schemes, it immediately entered into discussions with the town of Greece for the reappraisal of its properties. Kodak also filed suit against Camar- ata and others seeking reimbursement from them for the fees that were paid as part of the scheme. The federal government has been working to sell off property belonging to Mr. Nicolo and others. In 2013, a federal court ordered Mr. Nicolo’s lakefront property, estimated to be worth $500,000, to be sold by auction. The federal and local government have already recovered $10 million from Mr. Nicolo. Kodak received $7.8 million of the amount recovered as its settlement in the case.

Discussion Questions

1. Was anyone really hurt by this? Didn’t Kodak benefit?

2. Why do we worry about an agreement by an asses- sor to reduce the assessed value? Couldn’t he have done that anyway, regardless of receiving payment?

3. Does the method for paying appraisers on a con- tingency basis encourage this type of involvement by government officials?

4. Why do you think the three (possibly five) decided to engage in the scheme? Do any thoughts for your credo come from your observations about what happened? After his guilty plea and agreement to coop- erate, Mr. Camarata’s fellow defendants referred to him as a “liar and thief.” What lesson do you learn from this reaction and interaction?

Explanation / Answer

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1. Discuss the ethical, negligence, and environmental issues you see in this case.

BP oil spill resulted in a massive and permanent damage to the environment, sea life and irreparable damage to the lives of the people. In order to minimize the operational costs and maximize their ernings from the rig, they put all the security procedures and policies at the back burner. Due to this, there was massive loss of human lives and entire sea ecosystem was destroyed because of their negligence. The impact of the spill was visible after many more months and resulted into deaths of many aquatic animals and fishes. The livelihoods of many were destroyed. After this accident and negligence, government came uo with many steps to stop such recurrences. In order to prevent such massive and irreversible damages, government has learnt its lessons and brought multiple new regulations to prevent such incidents happening in the future. It has come up with the following steps so that no such incident happens in the future:

2. BP had rented the rig from Transocean for $500,000 per day. Transocean had been recognized by the U.S. government for its safety record.45 Can companies distance themselves from liability and responsibility through the use of contractors? What are the risks of using third-party contractors?

Companies cannot shirk responsibility and cannot pass the blame on third parties and contractors. There are risk management and contingency plans that companies need to prepare in order to deal with such situations and ordeals. The companies must create a framework to check and monitor the third party operations so that all the safety precautions are followed and standard operating procedures are taken care of. These are the risks of using third-party contractors and all companies must take a measured approach in managing and controlling their operations.

3. Discuss how BP got into the position in which it found itself in late 2006 and what might have prevented the spill, the financial fallout, and the loss of reputation. Be sure to factor in the financial implications of any decision made during the period from 2001 to 2006.

BP’s excessive focus on reducing and cutting costs led them to this situation. If the BP team have given any consideration to suggestions and advises by Transocean and their own staff, they could have averted this situation. During this time, BP was running a program on optimizing costs and there was pressure on management to reduce their spending wherever possible. This resulted into dilution of the safety and equipment standards and they chose to follow sub-optimized processes and safety guidelines. Any investment in this area to beef up the security protocols and fees to the third party service providers could have done them good and averted this massive disaster.

4. What was the impact of the emphasis on cost cutting on BP’s culture? What was the impact on the company’s performance?

Due to excessive emphasis on reducing cost, the staff became very conscious of investing or spending on even mandatory infrastructure to safeguard the rig. The employees started cutting corners and tried to squeeze the third party contractors. So, they did not heed to the safety advises given by them and only focused on reducing the cost. It did save BP some money but it all got negative when the spill happened that led them to a approximate ~ $20 BN penalties and so many law suits. Their brand took a massive hit forever and lost many contracts to rigs.

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