Oil exploration is remarkably costly and risky. Even then in the late 1980’s, it was not uncommon to spend $1B on an exploration well, hoping to find oil based on the seismic data only to find it dry. At Shell, I was on a team that developed, for the time, a highly compute-intensive algorithm for imaging seismic data captured in complex subsurfaces. They literally bought us a Cray since running the algorithm might make a marginal difference in the success rate of exploration drilling.
Hence, I am not an oil industry basher, far from it. So I have been watching the BP, Deepwater Horizon gulf catastrophe with great interest. In this entry, I will share what I have gleaned from various news sources. (I have found the Wall Street Coverage very credible). So here is my net:
Recall, the blowout occurred shortly after capping an exploration well (a will drilled solely to confirm the presence of a oil resevior). The depth of the well, reported 18,000 ft, is no big deal. The depth of the water, 5000 ft, is far from the record of around 8000 ft. So the well itself was routine for the industry. So what happened?
BP had drilled many of these wells. In fact, ironically the blowout occurred while BP executives were celebrating their safety record. However, over the last few years have become profitable by building a very cost-conscious culture. Such a culture is likely to cut corners, repeatedly taking small risks in business operations. Such behavior may be rational if you believe the total liability is bounded. There is reason to believe BP’s liability is ‘capped’ at $75M. This culture seemed to be at work on the oil platform:
ignored several ‘inconclusive’ pressure tests before releasing the pressure on
- Apparently, they took the less costly procedure of removing the ‘drilling mud’ early before the final capping.
- They relied on the blowout preventers which have at best a 10% failure rate
- The preventer lacked an acoustic switch that for a mere $500,000 might have activated the preventer after the initial failure.
- There are other reports that the blowout preventer had a dead battery and failed seal.
I bet that BP managers routinely made the same decisions for years with no adverse outcomes. They were probably rewarded for this behavior. Such a culture makes such disasters inevitable over time. A great case study of such cultures is found in Diane Vaugh’s The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA. She studies the NASA culture that led to the decision to launch the shuttle that exploded on launch killing ‘the first teacher in space’ while tens of thousands of school children watched on television. The managers overruled the engineers who advised them that the temperature was out of spec for a launch. As she explains, the managers had gotten away with taking similar risks in the past and had decided to bow to political pressures and approve the launch.
So what they were thinking is something like, “These risks are no big deal and the savings matter.”
A key moral is that over time the unlikely becomes inevitable. Further, experience and past data lead to exactly the wrong behavior: they reward the risk taking, not the caution. Many have made exactly the same point about behavior of the financial firms during the financial meltdown.
Internalizing this moral and acting accordingly is key to our industry. Increasing, we will be building life critical, economic critical systems that are very complex, will operate over long periods, and whose failure could be catastrophic. There is no turning away from this inevitability. So, we all need to understand that cost savings must be balanced by a clear understanding of the overall risks of failure, their consequences and the real return of investment in failure avoidance. This of course takes some math. In particular, thinking about averages is not useful. That is topic of my next entry.