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The Times: BP is cautious because it can afford to be (“mirror image of Shell’s discomfort in the North Sea”)

EXTRACT: BP’s American troubles are almost a mirror image of Shell’s discomfort in the North Sea, where years of penny-pinching culminated in two deaths on Brent Bravo in 2003 when workers inspected a botched repair to a gas line.

THE ARTICLE

By Carl Mortished
August 09, 2006 
 
WOULD you continue to drive your car knowing that you had a slow puncture or a flickering warning light on the dashboard? For how long would you chance it and would you drive for four hours at speed on a motorway with your children in the back seat? People take such risks daily, but BP yesterday pulled the car over, called the AA and waited for a tow to the nearest garage.

The oil company had found spots of corrosion on pipelines at its Prudhoe Bay oilfield. Worrying, but not disastrous — four barrels of crude had seeped from one weak point — yet BP called a halt to production from more than 1,000 wells, removing at a stroke 8 per cent of America’s daily crude output. 
 
It is certainly an over- reaction and you might wonder if the police patrol car tailing BP’s vehicle might have some bearing on the company’s sudden caution. Over the past year BP has been under intense scrutiny for a series of industrial accidents in America, including a fire at a Texas refinery that killed 15 and an oilspill in Alaska in March, when BP was accused of negligence in maintaining its pipelines.

The Texas explosion and fire was shocking and the company’s own investigation revealed a catalogue of negligence, weak management and shoddy practice at the refinery. In the space of a year we seem to have moved from a lax approach to safety to obsession and the desire to eliminate all risk from a dangerous business. It would be naive to take Monday’s pronouncements at face value. BP is embarking on a lengthy negotiation with regulators in Alaska and Washington. In shutting the taps, BP has waved early its best card — precaution — in the expectation that soon the political wind will shift from environment to energy security. It’s a reasonable bet that at the first sign of a large hurricane brewing in the Gulf of Mexico, politicians will clamour for BP to reopen some wells at Prudhoe Bay, just as a precaution.

How should the precautionary principle be applied in oil and gas, one of the world’s more hazardous activities? BP’s American troubles are almost a mirror image of Shell’s discomfort in the North Sea, where years of penny-pinching culminated in two deaths on Brent Bravo in 2003 when workers inspected a botched repair to a gas line.

After the 1988 Piper Alpha disaster, Lord Cullen concluded in his inquiry that risk should be “as low as reasonably practicable”. Anecdotes from the oil industry suggest that during the 1998-2000 oil price collapse, cynicism had reached such a level at some companies that executives jokingly said that the test was not ALARP but ALACC — as low as currently convenient.

The problem is the correlation between business and regulatory cycles. Today BP is hounded by regulators, but we know that its coffers are full and it can well afford to replace every inch of pipe in Prudhoe Bay, even as it loses some $50 million in revenue per week from Alaskan barrels forgone.

BP will pander to the regulators. For a while, it will dot every “i” and over-engineer every repair. Problems will recur when the regulator tires of growling and the profits gush has died away. Where were these bloodhounds when the oil price plunged to $10 and BP and Shell were ruthlessly hacking at their costs? Lord Cullen’s words were wise. If we want power, we must take some risk. Commercial firms cannot be insensitive to business cycles, but regulators can and should.
 

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