BP Manages Risk, Regulator Takes The Blame
The reticent Zug-based Swiss drilling company Transocean, who was involved in the Gulf accident, received one of the heaviest payouts of $560 million from insurance, making the loss highly profitable.
The rig was reported to be carrying a defective blowout preventer which was known by BP, its driller Transocean, as well as the regulators Mineral Management Service as it had been repaired more than once before. Operating such rigs are a calculated risk that oil majors traditionally take and manage with profit.
Apart from the adequate insurance the rig owner has taken, the supplier of the failed blowout device, Cameron International, has $500 million covered that will be very handy to cover any compensation claims. Oil spill damages are not normally covered by insurance, so the liberal equipment insurance by BP and equipment suppliers is used to provide the cash needed.
No wonder BP boss Tony Hayward was quick to offer to clean up the mess, as the total damages from the Gulf explosion is expected to be around $1 billion — well covered by insurance. By skillful management, BP has spread the risk and responsibility among its partners from the rig owners to regulators.
Don’t increase your cost by regulating us, “trust us,” says Hayward — the same “trust us” line he used during the first two days of the rig disaster to keep the US Navy and regulatory authorities away from the scene.
A state of art acoustic sensor as an early warning device, that is mandated by Norway and Brazil, was proposed by the regulator MMS for the rig in 2000. Three years later it waived the requirement on account of its high installation cost and doubtful effectiveness.
Additionally, it exempted BP from detailed environment impact analysis studies, reportedly due to several commercial profit sharing deals it has with BP and Exxon that helps generates an annual revenue of over $13 billion.
The Obama administration is now looking at splitting the organization into two parts to ensure that regulators do not get carried away with "business as usual" practices. But would it really solve the problem? Penalizing the oil companies with a “blacklisting due to negligence” punishment seems to be the only tool that will really stop the manipulation.