BP Oil Spill And Business Ethics
“Ethics is the art of mutually agreeable tentative compromise. Insisting on absolute principles is, if I may be ironic, unethical.”- R. Solomon, “The One-Minute Moralist” (Perspectives in Business Ethics, Mcgraw-Hill 1998) In April 2010, British Petroleum’s (BP) Deepwater Horizon oil rig exploded, resulting in the biggest oil spill in the history of the USA. In what followed, different stakeholders responded in different ways, and were differently affected.
Deepwater Horizon was a drilling rig owned by Transocean, which was leased to BP from 2001 till 2013. The rig drilled the deepest oil well in history, which reached 10,683 m deep during September in 2009. The dramatic event happened in April 2010, when a blowout caused the rig to explode leading to a major catastrophe. More than 200 million gallons of crude oil was spilled into the Gulf of Mexico for a total of 87 days. The BP Deepwater Horizon oil spill, was considered the biggest oil spill in the history of the USA. The news of the disaster didn’t take long to spread worldwide, affecting America’s economy, political standing and environmental sustainability.
Stakeholder theory claims that the stakeholders of a company are any person, group or entity that a corporation has“benefited or burdened by its actions and those who benefit or burden the firm with their actions” and not just its direct owners (Steiner, 2012; Miles, 2012). The disaster of the BP Deepwater Horizon happened on the 20th of April in 2010, causing a $17.2 billion worth of environmental damage to the Gulf of Mexico. It killed 11 workers, 17 got injured and thousands of people got sickened by the chemicals released into the water. It affected mostly average, hard working people, including fishermen, clean-up workers, oystermen, shrimpers but also residents and vacationers.
The marine environment though, suffered the most, since the spill continued for over three months. The zones which were heavily affected, were the shores of Louisiana, Mississippi, Alabama, Florida and Texas. According to the Centre of Biological Diversity there were reported deaths of 82,000 birds, 25,900 marine mammals, 6,000 turtles, 10,000 fish dead and the rest were later found with lesions and sores increased up to 20% from 0.1% that was prior to the spill. BP is a corporation owning its own assets whilst having certain rights and responsibilities such as those of an individual, as an ‘artificial person’, under the control of the shareholders, but existing independently of them.
When it comes to the economic impact, it is still not fully known. Different stakeholders were economically affected both in an indirect and direct way; fishermen in the area, as well as hotels, restaurants, and other tourist associated businesses, felt the most immediate effect. The commercial production of fish decreased by 20% due to fishery closures (National Academy of Sciences) whilst in 2008, commercial fishermen in the Gulf harvested over 1 billion pounds of fish and shellfish (Cleveland, 2010). The safety of seafood accumulated from the Gulf is in question now, leaving the livelihood of Gulf fisherman in an insecure situation. With the heavy media coverage, adding images of the destroyed coastline along with tar balls regularly popping up on shore, the public’s and tourism’s positive perception in the Gulf of Mexico dropped. As a result, a year after the spill, rental reservations were still down by over 25% (Jones, 2011). Companies, especially those involving excursions into the water, such as scuba diving and sailing, are under constant question as to whether there is still oil in the water. Eilene Beard, a local business owner in Pensacola, FL, stated that people who call usually ask multiple times if she is sure that the water is safe. She believes that what is keeping tourists away is the constant uncertainty of the quality of the water (Jones, 2011).
All of these consequences, that have impacted, not only the society and its economy but also the environment, lead to the discussion as to whether a company can or cannot be held morally and socially responsible. According to Milton Friedman, “The Social Responsibility of business is to increase its profits”, which is exactly what BP’s representatives did. The board acted solely in the interest of the shareholders, not taking into consideration the rest of the stakeholders, leading to the “grey area” between legal and ethical matters. The managers and directors have a ‘fiduciary’ duty to protect the shareholders investment and act in their best interest, but is there a legal obligation towards other stakeholders or just an ethical one? Immediately after the rig incident, BP’s corporate culture was questioned and controversy was raised around its safety records, since the company seemed as if it was constantly trying to please its shareholders while “putting on the bench” important stakeholders ie; the Environment.
Tony Hayward’s response, the chief executive of BP, was considered clumsy and irresponsible leading the image of the company to disgrace. When asked about the incident in a BBC interview, he tried to shift the blame to the owner of the rig, Transocean, saying ‘This was not our accident. This was not our drilling rig. This was Transocean’s rig. Their systems. Their people. Their equipment”, although a few weeks later he added that ‘A number of companies are involved, including BP, and it is simply too early and not up to us, to say who is at fault.’. A few months later, Hayward gave an interview with the Guardian where he was asked about the amount of oil and dispersant that was flowing into the gulf, in which he responded ‘The Gulf of Mexico is a very big ocean. The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume”. Even though his answer was somehow logical, it left the crowd sceptical and made the company look like it was apathetic about the damage that was being done to the environment.
Tony Hayward’s responses and comments led to vilifying a single person, in contrast to corporate laws where a company is independent of its shareholders and acts independently of its members and the choice of actions, whether right or wrong, are on account of the organizational structure and the direction of predetermined goals. After much investigation, it was proven that there had been many chronic safety lapses. Only a few months later, the White House reported that the accident could have been avoided had the company had better management and communication with the Macondo well partners. ‘The series of decisions that doomed Macondo evidenced a failure of management, and good management could have avoided a catastrophe,’ said William Reilly, the co-chair of the investigation. The blame was on all three companies associated with the event, BP, Halliburton Co, and Transocean Ltd, but mostly on BP, since the methods they were using to cut costs were not safe, and increased the risk of dangers in such an environment. Such information leads us to believe that BP followed a traditional approach to CSR rather than a contemporary, with a “Not my responsibility” attitude that focused solely on profit. BP did not own or operate the well, but owned the drilling rights and was, therefore, largely the sole firm held responsible for cleanup efforts.
Considering that we live in an oil – driven society we need companies like BP to provide it, and given that British Petroleum happens to be one of the biggest oil companies operating worldwide, it connects the link between the effect of the accident on its shareholders and the global economy. Allowed by the technological advance to proceed in this business along with the political interest from multiple countries to getting oil, BP can safely be presumed that it is a globalized corporation. It has diminished the necessity of a common and shared territorial basis for social, economic, and political activities, processes and relations (A. Crane, D. Matten, Business Ethics, Oxford, 3rd edition, 2010). Having stakeholders as well as shareholders all around the globe, BP’s mishap has affected the economy, the oil market shares and much more. With globalization come several issues: cultural issues, legal issues and accountability issues.
Till the 14th of July in 2016, the company had already paid $61.6 billion in clean-up costs, penalties. A few months later, on the 5th of September, a federal judge described BP as “grossly negligent” and was fined the amount of $18 billion under the Clean Water Act. The Gulf fishing and tourism industries were then producing $3.5 billion to $4.5 billion a year, whereas it cost the company $4 billion to clean up the plight and another $5 billion in penalties. As a result of this corporate disaster, alike firms’ stock prices can be affected by changes in investors’ assessments of the probability of increased regulatory costs, and similar disasters by/for other firms on a global level. Corporate disasters can result in increased government regulation. Investors are aware that stricter rules can increase a firm’s operating costs, which can have a negative impact on the firm’s value (Heflin, 2017). Firms incur political costs to fight proposed legislation and to participate in the policy-making process (Watts and Zimmerman 1986).
The market was closed when the spill occurred. BP’s shares had closed that day at $60.48. The stock price slid almost continuously for the next three months with only small price rebounds or upticks. BP’s stock price hit the low on June 25, 2010 at $27.32. Prices of BP have since increased over the two years at a reasonably small rate and have generally trade between the mid to high $40’s. The tragedy on April 20, 2012 has cost BP shareholders dearly. Besides the huge decline in market value, BP suspended its common stock dividend for almost two years.
The BP spill likely increased investors’ expectations of greater oil and gas regulations. News of increased regulations for the oil and gas industry began surfacing soon after the spill and continued for the ensuing year. Interior Secretary Ken Salazar detailed plans to overhaul the Minerals Management Service (MMS), which manages the natural gas, oil, and other mineral resources on the US outer continental shelf (www.mms.gov). Salazar announced the creation of an Outer Continental Shelf Safety Board, charged with tightening oversight of industry equipment testing (US Department of the Interior, 2010a).
In a press conference on May 27, 2010, President Barack Obama announced new operating requirements for offshore energy companies as a result of a 30-day safety and environmental review. The President issued several other directives, such as continuance of a six-month moratorium on new deep-water drilling permits and suspension of permits for 33 deep-water exploratory wells underway in the Gulf of Mexico (Obama, 2010). Additionally, the White House announced its support for replacing the $75 million oil-spill liability cap with unlimited liability (Obama, 2010b). In May 2011, President Obama announced measures to speed oil production, but the article also notes, “New safety requirements put in place since the BP spill also have delayed drilling in Alaska” (Superville and Cappiello, 2011). Following the BP spill, some stakeholders called for increased disclosure from oil companies regarding risks and safety measures.
In Exxon Mobil’s annual shareholders’ meeting on May 26, 2010, shareholders demanded increased disclosure about the risks involved in its oil sands projects. Investors called for more information on the social, environmental, and legal challenges associated with the projects (Tait, 2010). This suggests that following the BP spill, investors became more concerned regarding the environmental risks of potentially hazardous production projects. Moreover, Senator Robert Byrd proposed an amendment to a financial regulatory reform bill that would require companies with “risky workplaces”, such as coal mining and oil rig companies, to disclose to the SEC significant health and safety conditions that might affect the company’s operating results (Byrd, 2010). Investors’ increased expectations of both increased regulation and possible accidents at other oil companies reduced the oil company’s equity values by reducing expected future net cash flows. Increased regulation likely increases cash outflows (e.g., to implement new procedures, acquire new equipment, pay fines when unsuccessful, etc.). An accident results in cash outflows for cleanup, penalties, and potentially lower cash inflows (production downtime, lost customers, etc.).
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