OperationsThis_note_was_written_by_Professors_Michael_Pinedo

Operations

This note was written by Professors Michael Pinedo, Sridhar Seshadri, and Eitan Zemel, Department of Information, Operations, and Management Sciences, Leonard N. Stern School of Business, New York University, New York, NY 10012. Copyright  October 23, 2000. Revised 9/3/02. To order copies, call (212) 998-0280. No part of this publication may be reproduced without permission.

The Ford-Firestone Case

1. The Recall

In July 1998, Sam Boyden from State Farm Insurance received a call from a claims adjuster inquiring about Firestone tread separation. Sam began to research this issue and he found that there were 20 more such cases going back to 1992. All 21 cases involved Firestone ATX tires and 14 of them involved the Ford Explorer. He then sent an unsolicited e-mail to the National Highway Traffic Safety Administration (NHTSA) describing the 21 Firestone cases. In return, The NHTSA thanked him but did not follow up on the complaint. Sam Boyden proceeded to track the problem and during 1999 noticed another 30 such cases. He continued passing on the information to the NHTSA.

In February 2000, Houston’s KHOU TV station aired a segment on tread separation. The station's report on tire problems prompted several dozen people in Texas to report similar trouble to regulators. Immediately thereafter, the NHTSA began studying the problem of Firestone tires. In May 2000, after accumulating 90 complaints involving four deaths, the agency opened a formal investigation. The investigation encompassed all 47 million AT, ATX and Wilderness tires made by Firestone over the last decade (1990-2000). By the beginning of August 2000, the NHTSA had recorded 68 fatalities in rollovers of Ford Explorer SUVs caused by sudden tread separation of Firestone tires. All except two dozen of the complaints came in year 2000, even though the Explorer had been on sale since 1990 and a handful of lawsuits citing tire failures were filed as early as 1993. By August 16, 2000, the government data included public complaints of 52 deaths in Explorers that rolled over after Firestone tires failed, and five more deaths in Explorers for which the complaints did not mention whether rollovers occurred. By September 19, there were 2,200 complaints involving 103 deaths and more than 400 injuriesiii.

On August 9, 2000, Bridgestone-Firestone announced a recall of 6.5 million Firestone Wilderness, AT, ATX and ATX II P235/75R15 tires (15" tires). Firestone Tires included in the recall were installed as original equipment on Ford Explorer (model years 1991-2000), Mercury Mountaineer (model years 1996-2000), Ford Ranger (pick-up truck model years 1991-2000), Ford F-series Light Trucks (model years 1991-1994), Ford Bronco (model years 1991-1994), Mazda B- series (pick-up truck model years 1994-1996), and Mazda Navajo (model years 1991-1994). Firestone suggested a three-phase recall procedure since Bridgestone-Firestone did not have the production capacity to do it faster. In the first phase, customers in the southern most states (Florida, Texas) would get their tires replaced (most accidents had occurred in these states); the second phase consisted of the states Georgia, North Carolina, etc., and the last phase would deal with the northern most states, e.g., New York. The entire recall process was expected to take

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

more than 6 months. The Chief Executive Officer (CEO) of Ford, Jacques Nasser, thought that this recall format was too slow and unacceptable. He insisted that customers be allowed to replace their tires with tires from other manufacturers and that they be reimbursed for the costs by Firestone. Firestone agreed. In order to speed up the process, Bridgestone began to fly in tires from Japan and Ford idled one of its Explorer assembly plants for two weeks in order to free up more tires for the recall process. The recall was a major blow to Firestone, which was once one of the most admired corporations in the United States. It had planned to celebrate its 100th anniversary in year 2000 (a brief history of Firestone is given in Appendix A). 2. The Accidents

An analysis of federal data on deaths in tire-related accidents from 1990 to 1997 (the most recent year available) shows that 91 percent of the deaths of occupants in Ford Explorers involved rollovers. In comparison, "Only 28 percent of tire-related deaths in cars involved rollovers," said Leon Robertson, a retired Yale University epidemiologist who analyzed the data and who has worked over the years for plaintiff lawyersiii.

A typical rollover accident occurs when an Explorer is driven at a fairly high speed (55 mph

or faster) and suddenly a tire disintegrates. Before the driver has any chance to react, the vehicle rolls over. “The rollover typically occurs while the vehicle follows a straight line and is not going through a curve. The basic handling, center of gravity and all of the components fail when the tire tread begins to peel off, act in one direction, and (this) pulls the vehicle off its normal travel path.iv” “The insidious problem with this is that these tires fail without warning,” said Richard Baumgardner, head of Tire Consultants in Alpharetta, GA., who was a tire engineer at Firestone for 27 years. “There's no bulge, there's no bubble, there's nothing that the person can see until they're driving down the road at high speed and the tread starts peeling off” (see Figure 1).

Government data shows that while front as well as rear tires are subject to failure, rear tire

failures caused all but 2 of the 131 rollovers reported to regulators. Not all rollovers result in death. It is almost impossible to calculate the frequency of rollovers caused by tire failure for several reasons: no one knows for sure how many tire failures there are, the government does not collect the necessary data and tire makers are unwilling to share their data on their own brands.

According to tire consultant Dick Baumgardner the tires in question are, “four times more

likely to cause an accident on the rear tires as on the front. In the back, when the tire starts to fail, the driver is unable to control the pull of tire, whereas on the front, with power steering in most cases, they can control and respond to the pulling and pushing of the tire,” he said. “My feeling is that it's a combination of the vehicle and the tire. It appears that when the tire fails on a Ford Explorer, the vehicle's more likely to go out of control,” Baumgardner added. Mr. Baumgardner noticed another pattern. About 80% of the time, the accidents occurred after the failure of a rear tire, and about 50% of the time, it was the left rear tire that failed. Possible explanations why Ford Explorers’ left rear tire treads blew off more frequently than other tires’ treads are: ! The fuel tank is by left rear tire. ! Drive shaft movements tend to load the left, rather than the right rear tire.

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

! ‘Reflective energy’: Grass or gravel on the right hand side of the road keeps that side cooler than the concrete or asphalt on the left. High temperatures put more stress on a tirev.

After a significant amount of research, it appears that the primary cause of the tire malfunction is tread separation. Investigators have found it hard to identify the cause of malfunction on tread separation. Typically, after an accident the tire involved is completely shredded and it is difficult to determine whether the tread separation is spontaneous or caused by some other event, such as a puncture. However, in one accident in Saudi Arabia, the tire remained fully inflated after the tread separated and the vehicle rolled over. It was clear in that accident that the tread separation was not caused by a puncture. 3. Early Warnings?

The problem of tread separation was noticed much earlier in a number of countries, notably in Venezuela in 1997 and in Saudi Arabia in 1998. The Ford Motor Company acknowledged that in response to customer complaints in the past year it replaced Firestone tires on 46,912 of its sport-utility vehicles in the Middle East – including Saudi Arabia – and in Venezuela, Thailand and Malaysia. This was done as a ‘customer satisfaction issue’ in hot climates where the tires might be more vulnerable to problemsvi. Federal regulators in Washington were unaware of these overseas recalls, even though some U.S. and British government-operated Explorers were among those getting free new tires in the Gulf.

Why didn’t the overseas recall set off warning lights in the U.S.? Ford spokesman Mike

Vaughn said the company considered tire failures in the overseas markets a reflection of driving conditions unique to those countries and didn’t immediately suspect similar issues in the U.S. However, Ford appears to have been responsive to the complaints. Jon Harmon, a Ford spokesman, stated that when Ford learned of the problems overseas, it obtained some Wilderness tires from American customers who had driven them 30,000 to 40,000 miles, by giving them new tires in exchange. Ford engineers then drove them in Arizona in February, trying to duplicate the tire failures, but the tires did not fail. Mr. Harmon said that Ford concluded that the tires were fine and that the problem lay in how the tires were used overseas, particularly in Saudi Arabia.

It appears that Firestone was also aware of these overseas complaints. Firestone company

officials stated that all the tires they had been able to examine showed signs of under inflation, overloading, exterior damage from road debris, improper repair or other abuses. And that Firestone considers driving conditions in the Middle East to be ‘extreme and unusual.’ But they acknowledged that all tires produced by all manufacturers were subject to those conditions.

Ford consulted Firestone about the tire failures overseas. It says that it accepted Firestone’s

assurances that conditions in the Gulf were unique. However, it appears that there were still doubts within Ford. In January 1999, a memo shows that a Ford official questioned whether Firestone was hiding something “to protect them from a recall or lawsuit.” The memo, from Ford’s service manager for Saudi Arabia, reads, “We owe it to our customers and our shareholders to make our own analysis of the tires." A separate Ford memo recounts a plan to install higher-grade tires on new Explorers the company shipped to Saudi Arabia and to offer recent Explorer buyers the option of upgrading their original tires from Ford's World-wide

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

export divisionvii. Firestone balked at sending Explorer owners a letter, for fear that U.S. authorities would have to be notified and that the Saudi government would “react dramatically.”

Jacques Nasser, Ford’s CEO testified at a House subcommittee meeting hearing that even

after replacing tires in Saudi Arabia, Malaysia and Venezuela, Ford held off taking action in the United States in the previous year because its review of various databases assured the company – wrongly, as it turned out – that there was not a problem here. “We are a data-driven company,” he said. When asked by Representative Bart Stupak, a Democrat from Michigan, what information the company had to support its actions overseas, Mr. Nasser replied: “Anecdotal data.” He added, “There is no data in those countries.viii”

4. Issues Concerning Tire Design and Testingix

Tires are highly engineered products. Each company keeps its particular curing temperature, tread design and cocktail of rubber compounds a closely held trade secret. Tires can be made up of as many as 200 different materials, from rubbers to plastics to steel, amalgamated into more than 30 components. Some parts, like the tread or sidewall, are visible. Others, like the steel belts for reinforcement, or the butyl rubber interliners to keep air from leaking are on the inside. There are layers (called plies) of polyester, rayon and other materials. Most tires have high-tensile steel wires, called beads that keep tires seated against the metal wheels.

All tires are manufactured to specifications laid out by the Tire and Rim Association, a trade

group that decides the minimum and maximum amount of air the tire should hold and the size of car or load it should carry. The Department of Transportation, ‘DOT’ stamp that appears on tires is a certification that the tires conform to the association's standards and have passed its tests for resistance to puncture, endurance, stability and etc. According to William M. Hopkins, Goodyear's vice president for technical planning, “every manufacturer makes their tires compatible expressly so consumers can move between Brand A and Brand B and Brand C.” However, Ted Neuhaus, a tire consultant at Laser Technology Inc. in Norristown, PA believes that there are qualms today that cost pressures could have resulted in low quality: "The truck industry X-rays 100 percent of their tires, but the margins aren’t in passenger tires to be able to X-ray each one. “Now, though, the fear is that if it happened to one company, it could also happen to others.”

“Suresh Sethi, an executive at Modi, a tire equipment company in India, said that makers of autos and tires around the world were overly concerned about price and market share. Not enough thought had been given to safety, he said. “You buy a $30,000 vehicle,” he said, “and what does the tire cost? The companies were trying to save $1 per tire because $1 per tire adds up to a lot. That is responsible for this.”’x

One of the important components of a tire is the belt package; see Figure 2. Steel belted tires

were invented in the sixties. It was at that time a major breakthrough because it enhanced the durability of the tire significantly and also improved ride comfort. However, steel belted tires are hard to make. Steel and rubber are like oil and water. All the major tire companies have ongoing research on how best to join steel and rubber.

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

In Europe, some tire manufacturers have added extra nylon reinforcement to make tires more durable. Joan Claybrook, director of Public Citizen, the consumer rights group, has frequently suggested that American tire manufacturers do the same. But most American tire experts say the nylon does not add anything to tire performance. Goodyear has used such reinforcement in response to tread failures as recently as 1996, see Section 8.

Recent reportsxi speculate that the tread separation is due to a local separation between two layers of steel that is “almost explosive” in nature and that the separation is caused due to excessive heat. Dick Baumgardner, a tire expert, said the treads on certain of the recalled tires are too wide and the corners too squared off. With a wider tread, more rubber comes in contact with the pavement, which tends to heat up the tire. If the corners are squared off, there is more stress -- and again heat -- on the edges of the steel belts. The depth and width of the tread grooves also affect how heat is dissipated and, thus, temperature as well. Heat accelerates the breakdown of the bond between the steel belts, particularly if that bond already seems to be vulnerable to heat, as in the case of the recalled tires. Similarly, as Firestone's Greer Tidwell said that even when sitting still, the left rear tire on the Explorer experiences a greater weight load. The load on the tires can affect the temperature of the materials inside the tire, which Firestone measured with an internal thermometer. In the same vein, during those same tests, the company found that lower tire inflation generated excessive heat.

In testing, carmakers typically don’t provide a test car for the tire makers to use in their design process. Instead, the tire makers rely on their own knowledge of what type of tire works on what types of cars. Tire makers run their own in-house tests, or contract the testing to an independent lab. The tires are placed on machines that measure tread wear, durability, load capacity and air retention. Indoor labs run tires on a flat glass surface to mark the “footprint” of the tire. Road wheels, big circular-running tire-mounts that simulate moving tires on pavement, can run a tire for days to test how soon it will fail. The tires are also taken out of the labs and placed on cars to test real-road conditions, including inclement weather simulations. Tire companies then receive detailed reports about the performance of test tires, which they use to compare to performance expectations.

At this point, the carmaker essentially takes over testing to see how the new tire performs in

concert with the entire vehicle, see Figure 3. The testing includes driving the car around test tracks, attaching sensors in the car to test the noise the tire makes, making abrupt stops at high speeds to measure how the tire holds up, and seeing how the car grips the road while zigzagging around cones. Using feedback from the carmaker’s test, the tire manufacturer may tweak the tire. Several generations of prototypes are usually sent to the automaker for additional testing before the tire enters production. The carmaker has the last word on how the tire is used, though it is heavily influenced by the recommendations of the tire makerxii.

6. Tire Manufacturing at Bridgestone/Firestone

Bridgestone/Firestone produces the tires for the Explorer in various plants, namely Decatur

(IL), Wilson (NC) and Oklahoma City. Data shows that the rate of damage claims per million tires built in Decatur is more than double the rate for tires made in Wilson and nearly 10 times the rate of Oklahoma City, see Tables 1 and 2. An internal engineering review within the Decatur plant is underway. Bridgestone claims there was a problem with just 2 out of every 100,000 tires at its Decatur (IL) plant, which made the bulk of the problem tiresxiii.

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

Based on interviews with more than two-dozen current and former employees, some suspect

that a strike in the Decatur plant, poor process control and non-standard operating procedures could have led to tread separation. “The mystery that everyone is trying to crack, though, seems far less of a mystery in Decatur, where about 40 percent of the recalled tires were made, in a process that still depends largely on workers building tires by hand,XIV” see Figures 4 and 5.

In August, 2000 “when four former Decatur plant employees gave depositions1 criticizing

the plant’s operations, Firestone dismissed the accusations as those of disgruntled former employees. But now, other retired employees and workers still in the plant are saying similar things. Though many workers insist that they followed the rules and produced the best tires they knew how, several say that the rubber was allowed to sit too long, that solvents were used haphazardly to try to improve the rubber’s adhesive properties and that efforts to speed up the vulcanization process may have led to flawed tires. XIV”

After the strike the company started a schedule of 7 days a week and 12 hour shifts.

Production workers voiced complaints and maintained that with the new work schedule it was very hard to do good quality workxiv.

As mentioned earlier, a Firestone tire has two steel belts that are separated from one another

by a wedge. The suspicion is that a failure in a Firestone tire occurs in between the two belts. This is where the highest stresses in the tire occur. Many experts say that the critical bond between the steel and the rubber, aided by the use of brass and other material may be flawed. Investigators are trying to determine what solvents were used to aid the adhesive process. Workers at Decatur say they commonly ‘gassed’ or sprayed a chemical solvent on the rubber to make it tackier. Several workers say they were told to stop using the solvent in the ‘last’ year. “During the strike of 1994-1995 they were using it all the time” said Jared Thompson, a tire builder “because the quality of the material going from one department to another was not that good.” 7. History of Bronco II - Explorer

The Ford Explorer (and its sister the Mercury Mountaineer) is a very successful member of the Ford line-up. Since its introduction in 1990 Ford has sold 3.6 million Explorers. The profit margin on SUVs is significantly higher than on cars and according to some estimates each Explorer sold delivers a profit exceeding $5000.

The Explorer SUV is a descendent of the Ford Bronco II. The Bronco II had attracted in the 1980s already unfavorable publicity concerning its tendency to roll over. In 1988 the NHTSA had contacted Ford about statistical data that the Bronco II had led all its competitors in ‘first event roll-overs’ (roll-overs in which collisions with other vehicles or objects were not a contributing cause). In 1989 Consumer Reports published an attack on the Bronco's safety performance (the report included a photo of a Bronco with two wheels in the air as it made a sharp emergency turn at 42 mph). One of the reasons of this propensity to roll over lies in the

1 The article was written by a New York Times reporter based on interviews with more than two-dozen current and former employees of Firestone at the Decatur Plant.

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

heavy-duty ‘twin I-beam’ that Ford had employed since the sixties in its trucks and later in its SUVs. This required the company to mount its engines slightly higher than with other suspension systems and apparently that raised the height and center of gravity of the Ford vehicles.

In 1989, Ford engineers had documented that a prototype Explorer has a higher risk of rolling over when the tires are inflated at 30 psi. Therefore, they recommended as a partial antidote to the handling and ride-comfort problems a tire pressure of 26 psi.

Ford assembles its Explorers in two plants, namely Hazelwood (MO) and Louisville (KY). Until model year 1996 Ford equipped all its Explorers with Firestones. However, in model year 1996 Louisville equipped its Explorers with Goodyear and in model year 1997 it switched back to Firestones. Hazelwood, on the other hand, equipped its Explorers in model year 1996 with Firestones and in model year 1997 with Goodyear's. Table 3 displays the frequencies of tire related fatal accidents involving Explorers built at each factory by model year. From model year 1998 all Explorers were again equipped exclusively with Firestones. Notably, Goodyear was not used as a supplier from 1998 because Goodyear could not match Firestone's price.

In mid September 2000 Ford officials disclosed that the automaker and regulators had received complaints about possible defects in the Explorer's front sway bar. Ford and regulators stated that they have not heard of any serious crashes related to the bar. But this is the suspension component that limits how much the vehicle tilts from side to side while going around curves, and it is considered one of the most important components in preventing rolloversxv.

The Ford Explorer 2001 is completely redesigned. Many new features have been introduced to reduce its propensity of rolling over. 8. Is it just the Explorer Equipped with Firestone Tires?

Based on available aggregate data, an observer could conclude that the Explorer and the Firestone tires showed better than average performance with regard to safety. For example, in 1998, based on the U.S. Department of Transportation database the fatality rate per 100 million miles of vehicle travel is 1.6 for passenger cars, 1.3 for all compact SUVs and 1.0 for the Explorer2. Similarly, in 1999, NHTSA received reports of 240,000 light-truck rollovers. Those accidents were responsible for 10,000 of the 40,000 deaths on the nation’s roads. The Explorer averages 1,600 rollovers a year. According to Ward’s Automotive Reports, that is only six-tenths of a percent of total number, whereas Explorers account for 2% of the light-truck market. As a third example, approximately 9,500 people are killed every year in rollover crashes, a total that includes all causes and not just tire failure. According to the Institute for Highway Safety, among large SUVs, the Explorer registered 26 rollover fatalities per 1 million registered vehicles between 1995 and 1998. That compares with 34 for the GMC Jimmy and 45 for the Chevy T10. In the midsize category, the two-door Explorer ranked worse at 51, compared with 23 for the Jeep

2 In 1998, the fatality rate per 100 million vehicle miles of travel remained at its historic low of 1.6, the same as in 1997 and down

from 1.7, the rate from 1992 to 1996.

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

Grand Cherokee and 112 for the two-door T10 Blazer. By NHTSA’s count, Explorers with Firestones were involved in 101 deaths, but the fatalities occurred over a decade. Since seatbelts weren’t used in about two-thirds of those deaths, some could have been avoided if the drivers and passengers had buckled up.

Similar examples for Firestone tires: From 1990 through January 2000, NHTSA received 46 complaints about Firestone tires. Over the same period, the agency logged 970 complaints about Goodyear tires and 725 gripes about Michelins. (Goodyear and Michelin did have a much higher share of the tire market but the complaints are still out of proportion.) In fact, Goodyear has faced tread separation problems. Goodyear Tire & Rubber Co. announced on October 27, 2000, that it has told federal safety regulators that its light-truck 16-inch Load Range E tires have been linked to accidents involving at least 15 deaths and 125 injuries. There are about two-dozen lawsuits against the company. The lawsuits blame tread separation, virtually identical to the problems experienced by Bridgestone/Firestone. To study tread-separation problems, Goodyear officials acknowledged in a deposition testimony that spiraling liability claims caused the company to appoint a team of in-house experts in 1995. Goodyear made a design change to make the tires stronger, but it did not recall the older tires, millions of which are still on the road, including the popular Goodyear Wrangler AT and HT. Several teams of engineers, one called the Tread Throw Team, began studying the problem in 1996 and determined there was no defect. But to add a margin of safety to the tires, the company began adding the nylon layer. A company spokesman said the extra layer of nylon over the steel belts was added to make them more "robust." But he said this doesn't mean the tires were faulty without that added layerxvi.

These examples do not preclude the fact that utility vehicles had the highest rollover

involvement rate of any vehicle type in fatal crashes — 36 percent, as compared with 25 percent for pickups, 20 percent for vans, and 15 percent for passenger cars. Utility vehicles also had the highest rollover rate for passenger vehicles in injury crashes — 11 percent, compared with 6 percent for pickups, 4 percent for vans, and 3 percent for passenger carsxvii.

However, conversations with tire makers reveal that Firestone’s focus on the “small but

wide” 15-inch SUV tire at least partly explains why the reported accidents have been limited mostly to Ford vehicles. “.. the smaller the tire the higher is the stress.” Officials of other auto makers whose vehicles are equipped with tires similar to the Firestone models – General Motors Corp., Toyota Motor Corp. and Nissan Motor Co. – said the specifications for their tires in most cases differed from Ford’sxviii.

Ford has noted that there have been no reports of accidents or fatalities linked to tread separations among 500,000 Explorers made in the mid-1990s and equipped with Goodyear tires. Federal records show that through the end of ‘last’ year, there were only three tire-related deaths in 1996 and 1997 involving Ford Explorers equipped at the factory with Goodyear tires, compared with 26 such deaths involving Explorers from those two model years equipped with Firestone tiresxix. 9. What about Tire Pressure?

The tire maker and the carmaker gave slightly different advice to owners of Explorers that have the tires. Ford said the tires should be inflated to 26 to 30 pounds per square inch, and

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

Firestone said 30. And though Ford first heard reports of a problem in 1999, a top Ford executive complained that it had taken until late July 2000 for Firestone to turn over data on its warranty experience with the tires provided on new Fords. On September 23, the Ford Motor Company recommended that “owners of Ford Explorers sport utility vehicles inflate their tires to 30 pounds per square inch, instead of the 26 pounds that the automaker has recommended for the last 10 yearsxx.” Ford started posting maximum payload information on the door of SUVs in its 2001 models (NYT, 11/7/00). 10. What about the Customer?

For customers, there are several reasons why even higher gas prices won't likely damage the SUV momentum. As a group, SUV buyers tend to be wealthier than average; the vast majority of SUVs sold in the United States cost more than $25,000, and many can be considered luxury vehiclesxxi. In November 2000, consumer attention was being drawn to both the load bearing capacity of SUVs as well as the relatively high center of gravity of these vehicles. For example, local television stations in the New York area aired a segment documenting the load bearing capacity as well as the “correct way to load an SUV (not too high and well centered within the vehicle)”.

Some analysts mention that the SUV is designed for suburban driving. Most SUVs are tall and heavy for their size. Their portly weight and a high center of gravity are not conducive to handling around obstacles or other accident avoidance maneuvers. An SUV's road holding and acceleration figures are always inferior compared to a similarly sized/engined car. This means that the SUV is much less adept at avoiding accidents, which of course is the best means of preventing injury. Some SUV drivers have responded by claiming that it is not so much the vehicle you drive, but the abilities of the driver that truly matter for safety. This is partly true, but even the best driver can be unsafe if he doesn't have the right equipment. 11. Data and Experiments Prior to the Investigations

“In fact, out of the 14.4 million tires in the lines Firestone recalled, only about 80 have been involved in fatal crashes. We’ve got to remember how extremely small the numbers are here,” says AEI’s Calfee.xxii

In 1989 Ford enlisted an independent research lab (the Arvin/Calspan Tire research facility)

to measure the performance of 17 Firestone tires. The Calspan 1989 report said there were problems with the Firestone tires experiencing belt edge separation on five of the 17 test runs.

In 1990 Ford tested the Firestone tires on a vehicle that mimics the suspension and load

bearing capabilities of the Explorer. (The results were not disclosed.) This vehicle was a pickup truck; such a vehicle is also called a ‘mule’. The Explorer at that time was not ready for production. Testing on mules - simulated vehicles - seems to be an accepted practice in industry. The vehicle was run for 200 miles at a minimum of 90 miles per hour at ambient temperatures of 90 degrees Fahrenheit. The tire pressure on both front and rear tires were 26 psi.

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

In 1996 Firestone performed a test at its Decatur plant. During this experiment 239 tires were tested. The tires tested included prototypes as well as production run tires. There were 129 productions run tires. Of these productions run tires investigators said 15 failed (the company said 11 failed). Out of the failed tires, 6 tires had tread separations. The executive VP of Firestone stated in Congressional hearings that this was not that bad, because the tests were ‘very abusive’. But he did not say in testimony what the company did about the problem, other than test additional tiresxxiii.

The Ford Motor Company released documents showing that in 1997 Bridgestone/Firestone

began receiving numerous complaints of injuries and property damage involving certain Firestone tires that were not recalled until August 2000. Some of the recalled tires have rates of injury and damage claims up to 100 times greater than for tires not recalled, Ford disclosed today. Vehicle owners sent many of those claims to Bridgestone from 1997 to 1999, but the tire makers did not tell Ford, the company said. Ford’s new automobiles, particularly Ford Explorer sport utility vehicles, are equipped with two-thirds of the recalled tires. Bridgestone officials did not dispute Ford’s data but said the problem had not caught their attention until Ford began reviewing Bridgestone’s files in July 2000. The overall rate of complaints on tires from all Bridgestone factories has not been unusually high, and Bridgestone did not conduct the detailed review of tire quality by factory that Ford undertook, said Bob Wyant, Bridgestone’s vice president of quality assurancexxiv.

Internal documents produced during the congressional investigation in August-September 2000 from Bridgestone/Firestone show that officials of the company were briefed as early as February 2000 about rising warranty costs for the tires that the company retailed the previous month. The Congressional investigators’ documents also included charts prepared for the sales staff’s annual meeting in February 2000 that repeatedly and prominently mention the high cost of warranty claims for tread separation in light truck tires. Other charts analyzed patterns in tread separations and emphasized tires for light trucks, a category that includes the Ford Explorer. One of those charts, labeled “separations,” showed that the number of separations involving Wilderness tires, on sale since 1996, had risen 194 percent in 1999 from the level a year earlierxxv.

A State Farm spokesperson said that the insurer had repeatedly collected money from Firestone over the last three years (1996-99) after contending that manufacturing defects in the tires made the tire maker, and not State Farm, responsible for covering the cost of claims. Firestone paid the first of these claims, for $9,700, in October 1997, he said. As stated on page 1 of this case, State Farm had an inkling that there was a problem as early as 1998. The nation’s largest auto insurer said…that it had sent out an e-mail message to regulators in July 1998, alerting them that it had received 21 claims involving Firestone tire failures over the previous six and a half years. The insurer’s officials also mentioned the problem during a routine telephone discussion of pending safety issues with regulators a year ago, said Stephen Witmer, State Farm spokesmanxxvi.

“Yet, Claybrook, a former NHTSA administrator, concedes that the case against the Firestone-Ford combination remains unproven… ‘It is really hard to evaluate these statistics,’ she says.” (Business Week, October 16, 2000, Stan Crock.) Among the limitations of the federal database is that it records only vehicle type, not tire type. The data points to a problem with Firestone tires only because the vast majority of new Explorers were equipped with Firestone tires. Moreover, “fatals are investigated very thoroughly,” according to Stephanie Faul, a

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

spokeswoman for the American Automobile Association Foundation for Traffic Safety, but “Property damage crashes are hardly investigated at all.” One source for such data is insurance companies. Representative Billy Tauzin, the Louisiana Republican who presided at the congressional hearing, suggested that the government agency should make better use of insurance dataxxvii. 12. The Investigation after the Recall

Facing mounting complaints and the NHTSA investigation, Ford officials obtained data from Firestone on July 28, 2000 and spent eight days entering it into Ford's computers. Within several days, Ford had concluded that there was a problem with all Firestone ATX and ATX II tires of the P235/75R15 size, and with Firestone Wilderness AT tires of the same size that were produced in Decatur only. Firestone and Ford then decided on a recall. Ford's analysis of the data shows that:

For Wilderness AT tires from Decatur, the rate of injury and property damage claims was

more than 50 per million tires produced in 1996 and close to that level for tires produced in 1997. While there have been very few claims for Decatur-made Wilderness tires produced since 1998, these have not been on the road long enough for many claims to be received.

The claims rate was far higher for ATX tires, all of which are being recalled in the P235/75R15 size regardless of where they were produced. For factories other than the Decatur plant, the rate approached 100 claims per million tires for tires produced from 1993 to 1995. At the Decatur plant itself, the claims rate soared to between 350 and 650 claims per million ATX tires produced in 1994, 1995 and 1996. There have been virtually no claims for any of the recalled tires in New York, New Jersey and Connecticut, with almost all problems occurring in hotter states. The claims rate for Wilderness tires made in Decatur began to fall in 1997 and is now virtually equal to the claims rate for Wilderness tires made elsewhere. But Bridgestone is recalling all Wilderness tires made in Decatur since 1996 as a precautionxxviii.

It thus turns out that the rate of damage claims per million tires built in Decatur was more

than double that rate for the tires made in Wilson and nearly 10 times the rate of Oklahoma City, see Tables 1 and 2.

Federal data show that the rate of fatal accidents involving tires grew faster on Explorers than on other SUV's in the late 1990's and that the 1996 model year was particularly bad for these types of accidents. Other data from two Ford factories that build Explorers show that when either factory used Firestone tires instead of Goodyear tires, it had more tire-related fatalities, see Table 3.

In September 2000, Firestone hired a professor from the University of California at Berkeley, Sanjay Govindjee to investigate the problem. On October 18 Dr. Govindjee presented his first

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

report. According to Dr. Govindjee small cracks develop inside the tires in a narrow strip of rubber known as the belt wedge which runs between the edges of the two steel belts. Over time, these cracks grow and spread through to the entire layer of rubber between the steel belts - known as the skim layer - eventually leading to the separation of the tread and the upper steel belt from the rest of the tire. Dr. Govindjee writes: “All evidence to date points to a slowly developing fatigue crack that propagates through the belt wedge material and then subsequently into the belt skim between the steel belts.” 13. Crisis Management and Congressional Hearings The initial reaction of Bridgestone/Firestone to the investigations was cautious:

“Officials at Bridgestone/Firestone could not immediately be reached for comment, but the company defended the tires earlier this week, saying properly inflated and maintained they are ''among the safest tires on the road. (New York Times Company Aug 5, 2000)'' “Firestone's parent company, Nashville, Tenn.-based Bridgestone/ Firestone, and some other suppliers are still selling the tires and expressed confidence in their safety. (Houston Chronicle, Aug 5, 2000)”

Ford on its part threw the entire blame on Firestone: “It is a tire problem, not a vehicle

problem.” Ford backed up this conclusion with data comparing Goodyear tires and Firestone tires. Firestone admitted that it had made some bad tires in the past, but that Ford is also partly to blame since the Explorer has a propensity to roll over. Moreover, that Ford should recommend the tire pressure that Firestone recommends, which is 30 psi and not 26 psi. (In mid September 2000 Ford officially changed its recommendation regarding the tire pressure and announced that it was recommending 30 psi).

Once the congressional investigations were announced, the Japanese CEO, Masatoshi Ono immediately agreed to appear before Congress (despite not being fluent in English). Nasser initially did not plan to appear. However, one week before the hearing Nasser changed his mind and scheduled an appearance. Some members of Congress believe that Ford was not straightforward with Congress about test data. First, Ford never told Congress that its 1990 tests were done with a mule rather than an Explorer; Congress found out only through a third party that the vehicle was not an Explorer (afterwards Ford stated that the tires in such test “think that they are mounted on an Explorer”). Second, in the Ford documents a memo was found stating that no written reports should be made with regard to test results concerning the Explorer and/or its tires and when such experiments were made it was imperative that always a Ford employee is present.

After the initial reactions by Bridgestone/Firestone, both Mr. Kaizaki and Bridgestone/Firestone’s top executive, Ono, came under criticism for not responding more quickly and forcefully to consumer fears in the U.S.. Bridgestone CEO Masatoshi Oni stepped down on Oct. 10, 2000, and the Firestone subsidiary named John Lampe chairman of the operation that made the recalled tires.

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

In contrast, Ford’s handling of the crisis has drawn praise in the press. It was widely reported how Ford mobilized over a 1,000-person team to handle customer calls and to investigate the cause of the problem. 14. Impact on the Two Firms

The recall has proved to be extremely costly to Firestone. Industry experts say SUV tires typically cost auto makers about $40 each, indicating that the wholesale cost of four replacement tires and a spare could come to $200 a vehicle. However, product-liability lawyers estimate that the tire maker could face damages and legal costs of $1 billion or morexxix.

Acknowledging that sales had fallen after the recall, Bridgestone/Firestone Inc. announced on October 17, 2000 that it would lay off, indefinitely, 450 workers at its factory in Decatur, IL, and would close the Decatur factory and two other plants for two to four weeks. Furthermore, CNW Marketing/Research in Bandon, Ore., found in a survey after the recall that the number of people considering Firestone for replacement tires dropped to 4 percent from 21 percent of all people surveyed before the recall. On the other hand, Goodyear has seen its numbers rise to 54.8 percent from 37 percent, and Michelin to 36.5 percent from 18 percent. Recent “sales of Firestone replacement tires for cars and light trucks fell about 40 percent in the United States in September and October compared with a year earlier, Kaizaki, the president of the Bridgestone Corporation said. He also told reporters that the company had raised the expected cost of the recall by nearly 29 percent, to $450 million.” (Sales of Replacement Firestone Tires Post 40% Decline, NYT, November 13, 2000)

To compound its woes, Firestone's inventory of unsold tires was 50 percent larger than usual

at the end of October 2000, partly because of the slower sales but also because the company stockpiled tires in summer 2000 in preparation for a possible strike by union workers that did not take place. In addition, the company has found saddled itself with large numbers of tires in smaller sizes as more Americans chose vehicles that use larger tiresxxx. 15. Changes in the Future As was nicely summarized in an article in the Business Week the challenges ahead arexxxi: ! For Firestone to identify the root cause of the failures of its ATX and Wilderness AT

tires ! For Ford to restore confidence in the overall Ford name and in particular its popular

Explorer. ! To limit the financial fallout from lost sales and settlements in product liability suits. ! To regain the momentum that earned Ford a reputation as the best-run Detroit

automaker.

Ford had repeatedly said during the first week of August 2000 that it would continue to use tires made by Firestone. Then according to a Reuters' release on September 28, Ford Motor Co.

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

said that a majority of its new 2002 Explorer sport utility vehicles will come equipped with Michelin tires. Michelin of France was scheduled to get 55 percent of the business when the contracts were signed in 1997; well before Firestone's tire problems came to light.

In fact, beyond the Explorer, Ford will begin offering consumers the option of choosing tires on all its vehicles. Ford Chief Executive Jacques Nasser said at the Paris Auto Show that, beginning with the new Explorer, customers would gradually be able to choose an alternative to Firestone tires on many new vehiclesxxxii.

It is worth noting that Ford sold the Explorer with Firestone tires (the consumer did not have a choice). Ford establishes the specifications for the tires and the supplier has to meet the specifications. Usually if a part in a vehicle breaks, a consumer typically will not go to the supplier, but will file a complaint with the car company. However, according to Ford a tire is not just any part. The tires have their own identity and the warranty is covered by the tire manufacturer and not by Ford. This practice has not changed.

Ford has also started posting the maximum load bearing capacity of the SUV on the door of the SUV and made changes in the vehicle design. It still appears to have retained the smaller wheel size of 15”.

Bridgestone/Firestone might have to suspend operations at its Decatur, IL, factory, which produced a high percentage of the tires involved in the tread-separation accidents, if improvements have to be made to equipment or facilities there. Moreover, Firestone officials didn’t rule out the possibility of a permanent shutdown of the Decatur plant, noting that such a decision would depend on how Firestone tire sales perform in the wake of the crisisxxxiii. The Congress & the Regulators

Congress passed a legislation that requires auto companies that replace motor vehicle parts in a foreign country for safety reasons to notify American regulators and would require tire manufacturers to give regulators data on warranty claimsxxxiv.

Moreover, regulators have noticed that the standards used for SUV certification are a bit outdated. Many of the complaints involving the Firestone tires, which were certified to the off- road standard, involved incidents that occurred during highway driving where the minimum speed is 55 miles an hour. A federal official, Mr. Kratze said that he was studying a requirement that off-road tires and possibly heavy-duty tires meet the same standards as car tires, and that all of these tires pass a test of at least 100 miles an hourxxxv.

Because of the crisis, regulators have also started to publish rollover ratings. To devise these new rollover ratings, safety regulators calculated stability scores for many models through the 1998 model year. The method for calculating the ratings – comparing the width between a vehicle’s tires to the height of its center of gravity – is controversial. Automakers complain that it does not take into account the electronic stability systems now available on a few luxury models, nor does it reflect seat belt use, the best way to avoid dying or being paralyzed in a rollover crashxxxvi.

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

Discussion Questions.

1. Draw a fishbone diagram that shows all the factors that play a role in the overall quality and safety of the Explorer.

2. Do you think Ford used a Pareto analysis when they were trying to identify the problem?

Explain why and how.

3. Do you think there is a problem with the design of the tire and/or the design of the Explorer? Do you think there is a problem with the quality control in the production process?

4. What type of quality control processes do you think should be in place in the production

process?

5. How would you design a regular (stress) testing program of tires that are coming of the line?

6. How would you design (with perfect hindsight) a testing program for SUVs?

7. What would you do if you were management of Ford in 1998 (when the first complaints

came from overseas), 1999 (when the number of claims in the U.S. started to go up), and in 2000 (before and after the recall)?

8. What would you do if you were management of Firestone in 1998 (when the first

complaints came from overseas), 1999 (when the number of claims in the U.S. started to go up), and in 2000 (before and after the recall)?

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

APPENDIX A: Firestone

Extracted from: Donald N. Sull “The Dynamics of Standing Still: Firestone Tire & Rubber and the Radial Revolution” (Business History Review 73 (Autumn 1999): 430-464. Copyright 1999 by The President and Fellows of Harvard College.) The US tire industry provides a striking example of market dominance lost in the face of aggressive foreign competition and technological change. After French tire manufacturer Michelin introduced radial tires in the late 1960 most US tire makers suffered costly setbacks while trying to close the technological gap and lost significant market share. Of the five original firms in the 1930s by 1988 only Goodyear remained an independent tire company. In the span of three years, foreign firms have acquired Firestone, Uniroyal, B.F. Goodrich and General tire each a household name for half a century (since 1930s). In the early 1970’s Bridgestone of Japan began exporting radial tires to the US. In the decades prior to the introduction of radial tires, Firestone Tire and Rubber was viewed by some observers as the best managed US tire company. Firestone’s crash involvement in radials contributed to quality problems with the Firestone 500 radial tire, which resulted in the costliest recalls in history, and delays in closing bias tire plants (older technology plants) brought the company closer to bankruptcy than any of its competitors. Firestone’s formula for success during the 1930s-1960s involved several initiatives, including maintaining a clear focus on its core tire market, close tracking of strategic and tactical moves of its competitors, fierce rivalry due to long-standing rivalry and close geographic proximity with its four main rivals, “a bias for action” i.e., doing something rather than overanalyzing, incremental design changes that could create a product differentiation but not overly tax its manufacturing facilities, a bottom-up capital budgeting process, emphasize family value, and maintain the best relationship with Ford and its loyal dealers. The ties that bound the two companies were knotted more tightly when Harvey Firestone’s granddaughter married William Clay Ford, Henry Ford’ grandson. The radial tire has almost completely replaced bias tires over a span of 33 years, i.e., since 1967. Following Goodyear’s lead Firestone’s initial response was to introduce the belted bias tire. The belted bias tire could be manufactured with minor modifications of existing equipment. In fall 1972, however, the auto industry switched to radials. In December 1972 Firestone decided to manufacture radial tires using modified bias equipment. This allowed them to meet automakers requirements quickly and match their competition. It also contributed to quality problems with the tire’s steel cords, which failed to adhere to the rest of the tire. In 1978, the company agreed to a voluntary recall of 8.7 million Firestone 500 tires at a cost of $150 million after taxes -- an action that constituted the largest consumer recall in US history. Despite the losses in their bias plants Firestone’s managers closed only a single plant in the seven years after their entry into radials. Sull writes, “Reluctance to harm the interests of employees and host communities offers a more persuasive explanation of Firestone’s managers delays in plant closure. (p. 446)” In the early eighties, the newly hired CEO, John Nevin, announced that Firestone would close five of its 17 North American plants. He also terminated or sold several overseas tire subsidiaries. This resulted in 24,000 workers leaving the payroll. This also resulted in

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

immediate turnaround of the company. In this process, Nevin dismantled the bottom-up investment process, and took steps to dissolve historical relationships with customers and employees. He also instituted a pay-for-performance culture versus the implicit contract of loyalty for lifetime employment that had prevailed. However, Firestone faced a tough market and had to improve ongoing performance to survive. Sull concludes, “In this Nevin failed.” Firestone liquidated most of its non-tire business related portfolio, retaining only domestic passenger tires and company controlled retail outlets. Nevin introduced a top-down capital budgeting process. After the initial turnaround, Firestone lagged the tire industry returns during 1981-1988 by 15.9 percent and the S&P by 15.1 percent. In March 1988 the Japanese tire maker Bridgestone offered $80 per share for Firestone, which was a 167 percent premium over the stock’s 1987 closing price.

Bridgestone Annual Report 1999 for the America’s reports “Continuing growth in North American sales. Further gains in market share. Rising productivity in manufacturing operations. We are becoming a true industry leader in the Americas. We posted generally strong sales in the Americas in 1999. In dollars, sales at our companies in the region were up 1.5%, to $7.6 billion, and production volume increased 3.4%, to 610,000 metric tons of rubber, reflecting solid demand. Growth in unit volume in North America offset a downward trend in prices there and slumping demand in Latin America. Yen-denominated sales were down 11.7%, to 865.2 billion yen, due to the appreciation of the Japanese currency. Earnings were flat in the Americas. Our operating profit there was unchanged in dollars, at $543 million, and slipped 13.5% in yen, to 61.9 billion yen. Among the factors that affected earnings adversely were start-up costs at our plant in Aiken County, South Carolina; market turbulence in Latin America; and weakening tire demand in the agricultural and mining sectors. We increased our market share in North America in 1999 in both the replacement market and the original equipment market. Our North American operations are approaching a market share of 20%, and we have become the continent's second-largest supplier of tires. That is in keeping with our goal of being No. 1 or at least a strong No. 2 in every large market. Continuing gains in productivity have strengthened our competitive position greatly in the Americas, but we need to become more productive still. As in Japan and other regions, we are working to reduce non-operating time 50% at our plants in the Americas. And we are well on the way to attaining that goal. Trends and Topics Our North American business in passenger car tires is about three-fifths replacement tires and two-fifths original equipment tires. In the replacement market, we promote our tires through diverse channels, including 1,550 company-owned stores, our Family Channel network of some 13,000 independent dealers, and supply arrangements with national mass merchandisers. In original equipment tires, our North American business includes close working relationships with the leading automakers and with leading manufacturers of large trucks, mining and civil engineering equipment, agricultural machinery, and commercial aircraft.

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

In the aftermarket We raced to keep up with demand in the replacement market in 1999. Our products have captured the attention of North American consumers in premium-grade and middle-market tires alike. The Firestone FT70c, for example, has been the market pacesetter in upscale tires, thanks to superior handling on both wet and dry surfaces. Our multibrand strategy--centered on the Bridgestone, Firestone, and Dayton brands--raised our market profile further in 1999. Sales were up for all three brands and also for our Road King and private-label house brands. Years of awareness building have earned a faithful following for the top-of-the-market tires that we offer under the Bridgestone brand. Meanwhile, aggressive product development and strategic marketing have re-established the Firestone name as a vigorous brand in premium-grade tires, as well as in large-volume, middle-market tires. And we have built the Dayton brand into a formidable contender in value-oriented tires. In original equipment Demand for original equipment tires continued to grow in 1999 in the booming North American automobile market. A notable trend was the shift to larger, 16- and 17-inch rim sizes. Our success in expanding production capacity in those sizes helped us capture an increased share of the market. Ford Motor Company is our oldest customer in North America, where we mark the 100th anniversary of the Firestone brand in 2000. We also have become a major supplier to General Motors Corporation, which recently honored us with its Supplier of the Year award for the fifth consecutive year. As a major supplier to leading European automakers, we have developed business with the North American operations of those automakers, too. We also supply tires to nearly all the Japanese-owned vehicle plants in North America. In truck and bus tires, we expanded our North American sales volume and market share further in 1999 in cooperation with our growing network of dealers. The role of the dealer is especially important in truck and bus tires. Large fleet operators, for example, require continuous, nationwide support in road service, maintenance, and retreading, as well as consultative marketing. We have strengthened our position in fleet sales by equipping our dealers to support fleet customers effectively. That includes supplying the dealers with the best truck and bus tires in the industry. Retreadability is a crucial indicator of lifetime cost performance in truck and bus tires. And our products continue to rank at the top in third-party surveys of retreadability."

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

figure 5 continued

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

i Federal Officials Say They Will Toughen Standards for Tires. Keith Bradsher. New York Times, Aug. 17, 2000

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

ii Firestone Announces Production Cutbacks in 3 Plants, By Keith Bradsher, Detroit, New York Times, Oct. 17, 2000. iii Tire Deaths Are Linked To Rollovers. By Keith Bradsher. New York Times, Aug. 16, 2000. iv Firestone Tires Probed in 46 Roadway Deaths: Safety: The case escalates quickly as more complaints pour in. The manufacturer says the tires are safe, but offers replacements. The LA Times, LA, CA, Aug 8 2000, Edmund Sanders and Terril Yue Jones. v More Tires on Ford Vehicles Could Be Recalled by Timothy Aeppel, Stephen Power, and Norihiko Shirouzu, the Wall Street Journal, Sept. 19, 2000. vi More retailers pull 3 Firestone tires from stock. Safety of ATX, Wilderness brands under scrutiny. Lorrie Grant. USA Today, Arlington, Aug 7, 2000. vii Firestone Plans Sweeping Recall of Tires -- Millions of Ford Vehicles Could End Up Affected Amid reports of Death, N. Shirouzu and K. Lundegaard, The Wall Street Journal, Aug 9, 2000 and “Last August, Ford started offering its Saudi Arabian customers free replacement tires, amid complaints about tread separation. And earlier this year, Ford expanded that campaign to customers in five countries.” USA Today, Arlington, Aug 10, 2000. viii In Testimony, Firestone Says Ford is to Blame by Matthew L. Wald, The New York Times, Sept. 22, 2000. ix Tire Technology Has Bred Consistency and Compatibility. By Claudia H. Deutsch. New York Times, Aug.11, 2000. x In Akron, the Talk is About Treads by David Barboza, The New York Times, Sept. 13, 2000. xi Firestone Finds More Problems In One Line and Left Rear Tire Wall Street Journal; New York, N.Y.; Nov 7, 2000; By Clare Ansberry xii How Rubber Meets the Road by Robert Guy Matthews, The Wall Street Journal, Sept. 8, 2000. xiii Bridgestone May Restaff its U.S. Unit by Phred Dvorak and Michael Williams, the Wall Street Journal, Sept. 19, 2000. xiv Firestone Workers Cite Lax Quality Control by David Barboza, The New York Times, Sept. 15, 2000. xv Ford Raises Recommended Tire Pressure by Keith Bradsher, The New York Times, Sept. 23, 2000. xvi Goodyear Tells Regulators of Tire Failures; Autos: Tread problems have been linked to 15 deaths. Firm says accidents could be attributed to 'outside factors.' The Los Angeles Times; Los Angeles, Calif.; Oct 27, 2000; Davan Maharaj; and Goodyear Delayed Improving Tires On Light Trucks Wall Street Journal; New York, N.Y.; Nov 2, 2000; By Timothy Aeppel. xvii Business Week 10/16/00, Tire Recall not expected to affect SUV sales, August 12, 2000, Jim Suhr, Associated Press, Traffic Safety Facts 1998, National Highway Traffic Safety Administration, National Center for Statistics & Analysis, Research and Development, 1998. xviii Firestone Plans Sweeping Recall of Tires --- Millions of Ford Vehicles Could End Up Affected Amid Reports of Deaths, the Wall Street Journal, by Norihiko Shirouzu and Karen Lundegaard, August 9, 2000. xix Bridgestone May Restaff its U.S. Unit by Phred Dvorak and Michael Williams, the Wall Street Journal, Sept. 19, 2000. xx Ford Raises Recommended Tire Pressure by Keith Bradsher, The New York Times, Sept. 23, 2000. xxi SUV Sales Still on Course, Justin Hyde, The Associated Press, March 31. 2000. xxii Business Week, October 16, 2000, Stan Crock. xxiii In Testimony, Firestone Says Ford is to Blame by Matthew L. Wald, The New York Times, Sept. 22, 2000. xxiv Ford Says Firestone Was Aware of Flaw In Its Tires by 1997. By Keith Bradsher. New York Times, Aug. 14,2000. xxv Documents Show Firestone Knew of Rising Warranty Costs by Keith Bradsher, The New York Times, Sept. 8, 2000 xxvi Federal Officials Say They Will Toughen Standards for Tires. By Keith Bradsher. New York Times, Aug. 17,2000. xxvii Link Between Tires and Crashes Went Undetected in Federal Data Matthew L. Wald and Josh Barbanel, The New York Times, Sept. 8, 2000 xxviii Ford Says Firestone Was Aware of Flaw In Its Tires by 1997. By Keith Bradsher. New York Times, Aug. 14, 2000. xxix ‘They Just Don’t Have a Clue How to Handle This’ by Irene M. Kunii and Dean Foust, Business Week, Sept. 18, 2000. A Bridgestone/Firestone top executive stressed, however, that only a fraction of Bridgestone/Firestone’s sales would be directly affected by the recall – at most $1.3 billion of the company’s

The Ford-Firestone Case Professors Pinedo, Seshadri, Zemel

$5.6 billion in U.S. tire sales. Bridgestone May Restaff its U.S. Unit by Phred Dvorak and Michael Williams, the Wall Street Journal, Sept. 19, 2000. xxx Firestone Announces Production Cutbacks in 3 Plants, By Keith Bradsher, Detroit, New York Times, Oct. 17, 2000. xxxi A Crisis of Confidence by Joann Muller, David Welch, Jeff Green, Lorraine Woellert , and Nicole St. Pierre, Business Week, Sept. 18, 2000 xxxii Michelin Tires for Most New Explorers by Ben Klayman, Thursday September 28. xxxiii Bridgestone May Restaff its U.S. Unit by Phred Dvorak and Michael Williams, the Wall Street Journal, Sept. 19, 2000 xxxiv House Passes Bill on Tire and Car Defects by Matthew L. Wald, the New York Times, October 11, 2000 xxxv Federal Officials Say they Will Toughen Standards for Tires. By Keith Bradsher. New York Times, Aug. 17, 2000. xxxvi Safety Agency Will Rate Vehicles for Rollover Tendencies by Keith Bradsher, The New York Times, Oct. 3, 2000

10-110 Rev. April 3, 2012

This case was prepared by Christina Ingersoll (MBA Class of 2010) and Cate Reavis, Manager, MSTIR, under the supervision of Professor Richard M. Locke. Professor Locke is Deputy Dean of the MIT Sloan School of Management, Head of the MIT Department of Political Science, and the Class of 1922 Professor of Political Science and Management. This case was prepared as part of the MIT Sloan Ethics, Values and Voice Module.

Copyright © 2011, Richard M. Locke. This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.

BP and the Deepwater Horizon Disaster of 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

When he woke up on Tuesday, April 20, 2010, Mike Williams already knew the standard procedure for jumping from a 33,000 ton oil rig: “Reach your hand around your life jacket, grab your ear, take one step off, look straight ahead, and fall.”1 This would prove to be important knowledge later that night when an emergency announcement was issued over the rig’s PA system. Williams was the chief electronics technician for Transocean, a U.S.-owned, Switzerland-based oil industry support company that specialized in deep water drilling equipment. The company’s $560 million Deepwater Horizon rig was in the Gulf of Mexico working on the Macondo well. British Petroleum (BP) held the rights to explore the well and had leased the rig, along with its crew, from Transocean. Of the 126 people aboard the Deepwater Horizon, 79 were from Transocean, seven were from BP, and the rest were from other firms including Anadarko, Halliburton, and M-1 Swaco, a subsidiary of Schlumberger. Managing electronics on the Deepwater Horizon had inured Williams to emergency alarms. Gas levels had been running high enough to prohibit any “hot” work such as welding or wiring that could cause sparks. Normally, the alarm system would have gone off with gas levels as high as they were. However, the alarms had been disabled in order to prevent false alarms from waking people in the middle of the night. But the emergency announcement that came over the PA system on the night of April 20 was clearly no false alarm.

1 Testimony from Michael Williams, The Joint United States Coast Guard/The Bureau of Ocean Energy Management, “FUSCG/BOEM Marine Board of Investigation into the marine casualty, explosion, fire, pollution, and sinking of mobile offshore drilling unit deepwater horizon, with loss of life in the Gulf of Mexico 21-22 April 2010,” Transcript, July 23, 2010, pp. 24-25.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 2

Moments after the announcement, Williams was jolted by a nearby thud and a hissing sound, followed by the revving of one of the rig’s engines. Before he knew it, there were two explosions forcing him and other crew members to abandon ship by jumping into the partially flaming ocean.2 Of the 126 workers on board the Deepwater Horizon, 17 were injured, including Williams, and 11 were killed. The rig burned for 36 hours, combusting the 700,000 gallons of oil that were on board, leaving a trail of smoke over 30 miles long. The Deepwater Horizon sank on April 22, taking with it the top pipe of the well and parts of the system that were supposed to prevent blowouts from occuring.3 As of 2010, the Deepwater Horizon disaster was the largest marine oil spill ever to occur in U.S. waters. By the time the well was capped on July 15, 2010, nearly five million barrels of oil (205.8 million gallons) had spilled into the Gulf of Mexico. Federal science and engineering teams revised their estimates on the rate of oil flow several times, and in August they concluded that between April 20 and July 15, 53,000-62,000 barrels per day spilled into the Gulf,4 an amount that was equivalent to a spill the size of the 1989 Exxon Valdez every four to five days.5 Before the Deepwater Horizon disaster, the Exxon Valdez held the record for the largest spill in U.S. waters.

It was surprising to many analysts how such a disaster could happen, particularly involving a company like BP, which publicly prided itself on its commitment to safety. It did seem clear that, in an effort to close up the Macondo well, several key decisions were made, each involving multiple stakeholders and trade-offs of time, money, safety, and risk mitigation. The public debate began immediately on whether the result of these decisions indicated operational or management problems on the rig, and whether these problems were endemic to the oil industry, or resided within BP itself. To help answer these questions, several task forces were formed to investigate the root causes of the disaster and who among the various players involved with the Macondo well bore responsibility for the disaster and for its resolution.

British Petroleum

The company that would become BP was founded in 1909 as the Anglo-Persian Oil Company (APOC) shortly after Englishman William Knox D’Arcy struck oil in Iran after an eight-year search. In its early years, profitability proved elusive for APOC and, in 1914, Winston Churchill, who was head of the British Navy and believed Britain needed a dedicated oil supply, convinced the British government to buy a 51% stake in the nearly bankrupt company.

2 The Joint United States Coast Guard/The Bureau of Ocean Energy Management, “FUSCG/BOEM Marine Board of Investigation into the marine casualty, explosion, fire, pollution, and sinking of mobile offshore drilling unit deepwater horizon, with loss of life in the Gulf of Mexico 21-22 April 2010,” Transcript, July 23, 2010, pp. 10-14. 3 U.S. House of Representatives Committee on Energy and Commerce, “Chronology of Deepwater Horizon Events,” June 15, 2010. 4 Campbell Robertson and Clifford Kraus, “Gulf Spill is Largest of Its Kind, Scientists Say,” The New York Times, August 3, 2010. 5 Calculation based on a spill size of 10.8 million gallons for the Exxon Valdez. Justin Gillis and Henry Fountain, “New Estimates Double Rate of Oil Flowing Into Gulf,” The New York Times, June 10, 2010.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 3

The British government’s majority ownership of BP lasted until the late 1970s when the government, under Prime Margaret Thatcher, a proponent of privatization, began selling off its shares in an attempt to increase productivity in the company. When the government sold its final 31% share in 1987, BP’s performance was floundering. The company’s performance continued to decline as a newly private company; in 1992, BP posted a loss of $811 million. Nearing bankruptcy, the company was forced to take dramatic cost cutting measures. Things started to improve measurably in the mid-1990s. With a streamlined workforce and portfolio of activities, BP’s new CEO began implementing an aggressive growth strategy, highlighted by mergers with rivals Amoco in 1998, and ARCO (the former Atlantic Richfield) in 2000. Along with focusing on growth, BP began repositioning itself. In 2001, the company launched the new tagline “Beyond Petroleum” and officially changed its name to “BP.” The associated green branding campaign indicated that BP wanted to be known as an environmentally-friendly oil company. Over the next decade, the company launched an Alternative Energy division and was, for a time, the world’s largest manufacturer of solar cells and Britain’s largest producer of wind energy. BP invested $4 billion in alternative energy between 2005 and 2009.6 BP’s total company investment over the same time period was $982 billion.7

In May 2007, Tony Hayward, who had been chief executive of Exploration and Production (BPX), replaced John Browne as CEO. Hayward marked his appointment with a speech pledging to “focus like a laser on safety issues, put the brakes on growth and slash production targets.”8 Hayward was able to improve corporate performance, in part, by dramatically shrinking the Alternative Energy division and further reducing headcount at both managerial and lower staff levels.9 Between 2006 and 2009, BP’s workforce fell from 97,000 to 80,300.10 In addition to cutting four levels of management, Hayward also spoke publicly about his desire to transform BP’s culture to one that was less risk averse. He believed that too many people were making too many decisions leading to extreme cautiousness. “Assurance is killing us,” he told U.S. staff in September of 2007.11 Despite Hayward’s concern about the company’s risk averse culture, in a relatively short period of time, BP had transitioned from a small, state-sponsored company to one of the six largest non-state- owned oil companies in the world and, in the month before the Deepwater Horizon disaster, the largest company listed on the London Stock Exchange. The transition required numerous mergers

6 “BP Sustainability Reporting 2009: Alternative Energy,” BP Publication, April 15, 2010. 7 BP annual financial statements: 2007 and 2009. 8 Tony Hayward, “BP 2008 Strategy Presentation,” BP Publication, February 27, 2008. 9 Ibid. 10 BP.com archive information on employment, for 2006 data; “BP at a Glance” from BP.com, accessed October 10, 2010 for 2009 data. 11 Graeme Wearden, “BP to Take Axe to Management,” The Guardian, September 25, 2007.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 4

and acquisitions, and strict cost cutting measures. Along the way, BP’s organizational structure was also dramatically transformed.

Organizational Strategy

BP in the late 1980s comprised several layers of management in a matrix structure that made it difficult for anyone to make decisions quickly. In some cases, simple proposal changes required 15 signatures. At the same time, the company was overleveraged and its overall performance was suffering.12 Robert Horton, who was appointed CEO in 1989, started a radical turnaround program in an effort to cut $750 million from BP’s annual expenses. He removed several layers of management and slashed the headcount at headquarters by 80. Horton also intended to increase the speed of managerial decision-making and, thereby, the pace of business in general. Horton transformed hierarchically structured departments into smaller, more flexible teams charged with maintaining open lines of communication.13

Horton transferred decision-making authority away from the corporate center to the upstream and downstream business divisions. While deep cuts were made to capital budgets and the workforce, employees at all levels were encouraged to take responsibility and exercise decision-making initiative. In 1992 David Simon was appointed CEO replacing Robert Horton. Simon continued Horton’s policy of cost cutting, especially in staffing.

The biggest changes during this period occurred in BPX, which was led by John Browne. Building upon his predecessors’ efforts, Browne, who envisioned creating a spirit of entrepreneurship among his staff, extended decision-making responsibilities to employees at more levels in the organization. Under the new strategy, decision-making authority and responsibility for meeting performance targets was no longer held by BP’s regional operating companies, but by onsite asset managers.14 Asset managers contracted with BP to meet certain performance targets and extended this practice among all employees working on a given site. Employee compensation was tied to asset performance and the overall performance of the site. The model, which was known as an “asset federation,” was later applied across the company after Browne took over as CEO in 1995.

One tradeoff with the asset federation model was that because each site manager managed their “asset” autonomously and was compensated for its performance, there was little incentive to share best practices on risk management among the various BP exploration sites.15 There were also downsides to a system in which a centralized body had little oversight over the setting of performance targets, particularly in an industry where risk management and safety were essential to the long-term success of an oil company. And BP had had its shares of safety breaches.

12 John Roberts, “Organizing for Performance: How BP Did It,” Stanford Business, February 2005. 13 “BP After Horton,” The Economist, July 4, 1992. 14 Each physical well site was called an asset and the site managers were “asset managers.” 15 David Apgar, “Time to Break BP Up,” The Globalist, June 22, 2010.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 5

Safety Issues at BP

In the mid-2000s, disaster struck BP twice within a 12-month period. The first happened on March 23, 2005 when an explosion at BP’s Texas City Refinery killed 15 people and injured another 180, and resulted in financial losses exceeding $1.5 billion. BP commissioned James Baker, a former U.S. secretary of state and oil industry lawyer, to write an investigative report on the Texas City tragedy. One of the key findings highlighted in the Baker Report was that the company had cut back on maintenance and safety measures at the plant in order to curtail costs, and that responsibility for the explosion ultimately rested with company senior executives.16

Another concern outlined in the report was that while BP had emphasized personal safety and achieved significant improvements, the company “has mistakenly interpreted improving personal injury rates as an indication of acceptable process safety, creating a false sense of confidence.”17 The report goes on to state the following:

The Panel’s refinery-level interviews, the process safety culture survey, and some BP documents suggest that significant portions of the U.S. refinery workforce do not believe that process safety is a core value at BP. As many of the refinery interviewees pointed out, and as some BP documents and the process safety culture survey seem to confirm, one of the reasons for this belief is that BP’s executive and corporate refining management have not communicated a consistent and meaningful message about the importance of process safety and a firm conviction that process accidents are not acceptable. The inability of many in the workforce to perceive a consistent and meaningful corporate message about process safety is easy to understand given the number of “values” that BP articulates:

• BP’s 18 “Group values,” only one of which encompasses health and safety—the

company’s broad, aspirational goal of “no accidents, no harm to people, and no harm to the environment.”

• Four “Brand values,” which BP claims, “underpin everything we do”: being performance driven, innovative, progressive, and green.

None of these relates to safety.

These messages to the BP workforce on so many values and priorities contribute to a dilution of the effectiveness of any management message on process safety. This is consistent with a recent observation from the organizational expert that BP retained under the 2005 OSHA settlement relating to Texas City: There appears to be no one, over-arching, clearly-stated worksite policy at Texas City, regardless of respondents’ answers. The BP stated policy on health and safety, “no

16 James Baker et al., “The Report of the BP U.S. Refineries Independent Safety Review Panel,” January 2007. pp. 82-85. 17 Ibid, p. 72.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 6

accidents, no harm to people and no damage to the environment” is not widely known at Texas City and points to a weak connection between BP Texas City and BP as a corporation. Safety communication is viewed more as a function of particular individuals in Texas City versus a BP- wide commitment.

Until BP’s management, from the Group Chief Executive down through the refinery superintendents, consistently articulates a clear message on process safety, it will be difficult to persuade the refining workforce that BP is truly committed on a long-term basis to process safety excellence.18

In March 2006, as The Baker Report was being written, a second disaster struck BP, this time in Alaska’s Prudhoe Bay, where more than 200,000 gallons of oil poured into the bay from a corroded hole in the pipeline, making it the largest oil spill in Alaska.19 Inspectors found that several miles of the steel pipe had corroded to dangerously thin levels. Alaskan state regulators had been warning BP since 2001 that its management procedures were out of alignment with state regulations, and that critical equipment needed to be better maintained.

BP took several actions in response to The Baker Report and other reports, including one that was overseen by John Mogford, a senior group vice president of safety for BPX, on its safety. According to Appendix F, a supplement to The Baker Report, these actions included:

• Leadership visibility. John Browne, BP’s group chief executive, met with the company’s top 200 leaders to stress BP’s commitment to safety and communicate his expectations regarding safety. Members of the new Safety and Operations organization visited BP’s U.S. refineries and gave presentations regarding the importance of process safety and the importance of the Mogford Report recommendations. Additionally, BP senior managers have attended town hall meetings with employees to discuss safety issues. The chief executive, Refining and Marketing, conducted meetings for all U.S. refining employees, and the president of BP America conducted meetings and sent written communications to BP America employees regarding safety issues.

• Review of employee concerns. BP appointed retired United States District Judge Stanley Sporkin to hear and review BP employee concerns.

• Auditing. The Safety and Operations organization is creating an enhanced audit function, including additional audit personnel and a number of external hires. BP has listed audit- finding closure as one element of a six-point plan for sustained development. The new audit group is developing enhanced audit protocols to better assess actual operations against applicable standards.

18 Ibid, p. 61. 19 Abrahm Lustgarten and Ryan Knutson, “Reports at BP over Years Find History of Problems,” Washington Post, June 8, 2010.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 7

• Resources for plant, equipment, and systems. BP has announced that it has earmarked $7 billion over the next four years to upgrade all aspects of safety at its U.S. refineries and to repair and replace infield pipelines in Alaska. The company has also announced $300 million in funding and significant external input for process safety management renewal in refining.

Though some of these changes were company-wide, many were specific either to Texas City or the refinery operations within BP.20 Still, BP executives clearly realized that when it came to safety, there was room for improvement.21 Between June 2007 and February 2010, 97% (829 of 851) of the willful safety violations by an oil refinery handed down by the Occupational Safety and Health Administration went to two BP-owned refineries in Texas and Ohio.22

The Macondo Well Project

The Macondo Prospect was located 52 miles south of the port of Venice, Louisiana in the Gulf of Mexico. At nearly 5,000 feet below sea level, the well demonstrated great potential for extracting oil, but was also somewhat hazardous. Natural gas levels were high in the reservoirs, which made drilling challenging.23 Drilling in deep water and ultra-deep water24 started to become economically profitable and technically feasible on a large scale in the mid-2000s, due to higher world prices for crude oil and improvements in drilling technology. The number of deep water rigs in the Gulf of Mexico increased from just three in 1992 to 36 in 2008.25 Because of the complexities of deep water operations, creating a productive deep water oil field was extremely expensive compared to shallow water oil drilling. But the potential payoff was enticing. A well producing in shallow water might yield a few thousand barrels of oil a day. By contrast, deep water wells could yield more than 10,000 barrels per day.26

BP acquired the rights to the Macondo Prospect from the U.S. Minerals Management Service in March of 2009.27 As the oil industry regulator, the MMS issued permits to oil companies wanting to drill on U.S. land or in U.S. waters. In exchange, it received royalty revenue from oil companies. BP was the principal developer and operator of the prospect and held a 65% financial share in the project.28 While BP maintained operational decision-making authority, Transocean employees, who performed the majority of the work on the rig, had some decision-making authority over operations

20 Baker Report Appendix F – BP post Texas City Measures. p. F-1. 21The BP U.S. Refineries Independent Safety Review Panel, 2007. 22 Pierre Thomas, Lisa A. Jones, Jack Cloherty, and Jason Ryan, “BP’s Dismal Safety Record,” ABC World News, May 27, 2010. 23 http://www.deepwaterinvestigation.com/external/content/document/3043/856507/1/7-23-10.pdf p. 70. 24 “Ultra-deep water” is considered water 5000 or more feet below sea level. 25Lesley D. Nixon et al, “Deepwater Gulf of Mexico 2009: Interim Report of 2008 Highlights,” OCS Report (New Orleans: U.S. Department of the Interior Minerals Management Service Gulf of Mexico OCS Region), May 2009. 26 Fred H. Bartlit, Jr., Chief Counsel, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling. Macondo Gulf Oil Disaster Chief Counsel’s Report 2011, February 17, 2011. 27 “Macondo,” SUBSEAIQ, (http://www.subseaiq.com/Data/Project.aspx?project_Id=562) accessed October 10, 2010. 28 BP’s financial partners for Macondo were Texas-based Anadarko Petroleum Corporation which owned a 25% share, and MOEX Offshore 2007, a unit of Japan-based Mitsui, which owned a 10% share.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 8

and maintenance. BP started drilling the Macondo well in October of 2009. Drilling, however, was interrupted in the aftermath of Hurricane Ida. BP commenced drilling on February 3, 2010 leasing Transocean’s Deepwater Horizon rig.29 Transocean charged BP approximately $500,000 per day to lease the rig, plus roughly the same amount in contractor fees.30 BP originally estimated that drilling the Macondo well would take 51 days and cost approximately $96 million. By April 20, 2010 the rig was already on its 80th day on location and had far exceeded its original budget. 31

The Deepwater Horizon Rig

The Deepwater Horizon rig came with a long list of maintenance issues. In September 2009, BP conducted a safety audit on the rig, which was in use at another BP drilling site at the time. The audit identified 390 repairs that needed immediate attention and would require more than 3,500 hours of labor to fix.32 It was later learned that the Deepwater Horizon had not gone to dry-dock for nine years previous to the disaster and never stopped working at any point between the September 2009 audit and April 20, 2010.33 As Transocean’s Chief Electronics Technician Mike Williams experienced, the crew had to be adept at developing workarounds in order to maintain the function of the rig. Williams was responsible for maintaining the Drilling Chairs — the three oversight computers that controlled the drilling technology. These computers, operating on a mid-1990s era Windows NT operating system, would frequently freeze. If Chair A went down the driller would have to go to Chair B in order to maintain control of the well. If somehow all three chairs went down at once, the drill would be completely out of control.34 Williams frequently reported the software problems and the need to have them fixed.35

Despite the hazards of the Macondo well site, the known maintenance issues on the rig, and the setbacks that had caused the project to be over budget, BP felt confident that it had found oil. However, since the Deepwater Horizon was an exploratory vessel, the crew was under orders to close the well temporarily36 and return later with another rig to extract the oil.

29 “Macondo,” SUBSEAIQ, (http://www.subseaiq.com/Data/Project.aspx?project_Id=562) accessed October 10, 2010. 30 Ben Casselman and Russell Gold, “BP Decisions Set Stage for Disaster,” Wall Street Journal, May 27, 2010. 31 BP, GOM Exploration Wells Me 252 #1 - Macondo Prospect Well information (Sept 2009) (BP-HZN-CEC008714) (http://energycommerce.house.gov/documents/20100614). 32 Robbie Brown, “After Another Close Call, Transocean Changed the Rules,” The New York Times, August 16, 2010. 33 Ibid; Testimony from Michael Williams, The Joint United States Coast Guard/The Bureau of Ocean Energy Management, “FUSCG/BOEM Marine Board of Investigation into the marine casualty, explosion, fire, pollution, and sinking of mobile offshore drilling unit deepwater horizon, with loss of life in the Gulf of Mexico 21-22 April 2010,” Transcript, July 23, 2010, p. 153. 34 Ibid, pp. 42-44. 35 Ibid, pp. 98-102. 36 “Temporary abandonment” is the industry term for temporarily closing but not plugging a well.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 9

Anatomy of a Disaster

While the process of closing a well is always complex, closing the Macondo well proved particularly so due to competing interests of cost, time and safety, as well as the number of people and organizations involved in the decision-making process. (See Exhibit 1.) As one example, 11 companies37 played a role in the construction of the casing38 for the Macondo well, all with different responsibilities for various aspects of setting the well. Halliburton, for instance, was responsible for cement-related decisions, although many of these decisions were contingent on decisions made by BP managers on well design. Adding to the complexities of decision making on the Deepwater Horizon was the fact that many of BP’s decision makers for the Macondo well had only been in their positions for a short time before disaster struck. See Figure 1.

Figure 1 Deepwater Horizon Chain of Command

Note: Exhibit 2 is a corrected version based on court testimonies that includes full names and titles.

Source: BP as presented at the hearings of the US Coast Guard and the Interior Department’s Bureau of Ocean Management, Regulation and Enforcement, August 26, 2010.

As the Deepwater Horizon Disaster was dissected in various public forums, questions arose as to whether, in concert with the chaotic mix of decision makers, three key decisions on closing the Macondo well played a role in the downing of the 33,000 ton oil rig. (U.S. Congressional Representatives Henry Waxman and Bart Stupak called out these decisions in a letter dated June 14, 2010 to BP CEO Tony Hayward just days before his testimony before the Subcommittee on Oversight and Investigations. See Exhibit 3.)

37 BP, Weatherford, Hydril, Allamon, Blackhawk, Halliburton, Schlumberger, Sperry, M-I SWACO, Nexen, and K&B. 38 Casing is the lining of the drilled well hole. Ensuring a sound casing is essential to preventing any oil or gas leakage and maintaining the well as a resource for future oil production.

Name Title Days/Months in Position

Patrick O’Bryan VP, Drilling and Completions, Gulf of Mexico

3 months

David Rich Wells Manager 6 months

David Sims Drilling Operations Manager

18 days

Robert Kaluza Well Site Leader 4 days Greg Walz Drilling

Engineering Team Leader

18 days (took David Sims’s previous position)

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 10

Well Casing

Deep water wells are drilled in sections. The process of deep water drilling involves drilling through rock at the bottom of the ocean, installing and cementing casing to secure the well hole, then drilling deeper and repeating the process. On April 9, 2010, the crew of the Deepwater Horizon finished drilling the last section of the well, which extended 18,360 feet below sea level and 1,192 feet below the casing that had previously been inserted into the well.39 During the week of April 12, BP project managers had to decide how best to secure the well’s final 1,192-foot section. One option involved hanging a steel tube called a liner from a liner hanger on the bottom of the casing already in the well and then inserting another steel liner tube called a “tieback” on top of the liner hanger. The liner/tieback casing option provided four barriers of protection against gas and oil leaks getting into the well accidentally. These barriers included the cement at the bottom of the well, the hanger seal that attaches the liner to the existing casing in the well, the cement that secures the tieback on top of the liner, and the seal at the wellhead.40 The other casing option, known as “long string casing,” involved running a single string of steel casing from the seafloor all the way to the bottom of the well. (Both options are depicted in Figure 2.) Long string casing provided two barriers to the flow of gas up the annular space that surrounded the casing: the cement at the bottom of the well and the seal at the wellhead. Compared to the liner tie-back option, the long string casing option took fewer days to install. Figure 2 Diagram of a Liner Diagram of a Casing String

Note: A liner completion incorporates a short casing string, hung off from a predetermined point in the intermediate casing string. This provides several benefits, including reduced material cost and greater flexibility in the selection of completion components in the upper wellbore area.

Note: Pipe is run into the wellbore and cemented in place to protect aquifers, to provide pressure integrity and to ensure isolation of producing formations.

Source: Schlumberger.

39 BP, PowerPoint Presentation, Washington Briefing, Deepwater Horizon Interim Incident Investigation, May 24, 2010. 40 Briefing by Tommy Roth, Vice President of Cementing, Halliburton, to House Committee on Energy and Commerce Staff (June 3, 2010); Halliburton, PowerPoint Presentation, Energy and Commerce Committee Staff Briefing (June 3, 2010).

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 11

The decision about which casing design to use changed several times during the month of April. A BP Forward Plan Review from mid-April 2010 recommended against using long string casing because of the inherent risks of having fewer gas barriers. But internal communications within BP indicated the company was actually leaning towards using the long string casing option. On March 25, 2010, Brian Morel, a BP drilling engineer, emailed Allison Crane, a materials management coordinator for BP, that choosing long string casing “saves a lot of time ... at least 3 days…” On March 30, he emailed Sarah Dobbs, the BP completions engineer, and Mark Hafle, another BP drilling engineer, that “not running the tieback ... saves a good deal of time/money.”41 On April 15, BP estimated that using a liner instead of the long string casing “will add an additional $7 - $10 million to the completion cost.”42 A few days after BP completed the first version of its Forward Plan Review, the company released a revised version which referred to the long string casing option as “the primary option” and the liner as “the contingency option.”43 Like the earlier version of the Forward Plan Review, this version acknowledged the risks of long string casing, but considered it the “best economic case and well integrity case for future completion operations.”44

Centralizers

In closing up the well, BP was responsible for cementing in place the steel pipe that ran into the oil reservoir. The cement would fill the space between the outside of the pipe and surrounding rock, allowing a more uniform cement sheath to form around the pipe, while preventing any gas from flowing up the sides. Centralizers are special brackets that are used to help keep the pipe centered.

To help inform decision-making on the well pipe centralization, BP hired Halliburton, the cementing contractor, to run technical model simulations and cement lab tests. Jesse Marc Gagliano was the Halliburton account representative for BP. He worked in BP’s Houston office and was on the same floor as the BP Macondo well management team of John Guide, who was part of the operations unit, and Brett Cocales, Brian Morel, and Mark Hafle who were part of the engineering unit.45 Gagliano also worked with the Halliburton crew members on the rig to advise them on logistics and ordering products. One of Gagliano’s chief responsibilities was running the OptiCem model, a multi-factor simulation designed to help predict potential gas flow that might interfere with getting a good cement job on a well site. The OptiCem model, considered highly reliable, took data inputs from BP engineers and 41 http://energycommerce.house.gov/documents/20100614/BP-March30.Email-string.costs.less.than.tieback.pdf. 42 BP, Drilling & Completion MOC Initiate (Apr. 15, 2010) (BP-HZN-CEC021656). 43 http://energycommerce.house.gov/documents/20100614/BP-Production.Casing.TA.Options-String.Again.Best.Option.pdf. 44 Ibid. 45 http://www.deepwaterinvestigation.com/external/content/document/3043/903579/1/USCGHEARING%2024_Aug_10.pdf Ibid; Testimony from Jesse Marc Gagliano, The Joint United States Coast Guard/The Bureau of Ocean Energy Management, “FUSCG/BOEM Marine Board of Investigation into the marine casualty, explosion, fire, pollution, and sinking of mobile offshore drilling unit deepwater horizon, with loss of life in the Gulf of Mexico 21-22 April 2010,” Transcript, August 24, 2010, p. 242.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 12

evaluated the likely effectiveness of various well designs. As he explained in his testimony before The Joint United States Coast Guard/Bureau of Ocean Energy Management, Regulation and Enforcement hearing, “It is a model. It is as good as the information you put into it. So the more accurate information you have, the more accurate the output will be.”46 After running the model, Gagliano discovered that if BP used only six centralizers, as was planned, the risk for gas flow problems was quite significant. He found that at least 21 centralizers would be needed to significantly lower the risk.47 Though nothing was written down, court testimony revealed that on April 15, Gagliano had discussed the modeling results with Morel, Hafle, Cocales, and Greg Walz, BP’s drilling engineering team leader, in their Houston office. During their discussion, Gagliano expressed concern that the OptiCem results indicated a very high risk that the cement job would encounter “channeling.”48 BP’s Morel, however, questioned the reliability of the results because some of the earlier outputs related to compression factors in the well were different than what the crew engineers measured onsite.49 According to Gagliano, the group spent much of the morning trying to figure out the best way to use the centralizers they did have. After their meeting, a series of emails were exchanged, leading off with one from Morel at 4:00pm on Thursday, April 15.

A few hours after Morel sent his email, Walz wrote a lengthy email to Guide, the Macondo well operations manager, expressing his concern about using just six centralizers. 46 Ibid. p. 273. 47 Ibid, p. 296. 48 Channeling occurs when you do not get a full circulation of cement to displace the drilling mud. Some of the mud will be left behind. In any place where there is mud left in place, it will prevent a proper cement bond. This problem would appear in a cement bond log. To solve the problem, a tool is sent down the well pipe to puncture the pipe and insert additional cement. 49 http://www.deepwaterinvestigation.com/external/content/document/3043/903579/1/USCGHEARING%2024_Aug_10.pdf; Testimony from Jesse Marc Gagliano, The Joint United States Coast Guard/The Bureau of Ocean Energy Management, “FUSCG/BOEM Marine Board of Investigation into the marine casualty, explosion, fire, pollution, and sinking of mobile offshore drilling unit deepwater horizon, with loss of life in the Gulf of Mexico 21-22 April 2010,” Transcript, August 24, 2010 p. 296.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 13

Guide responded to Walz’s email early in the afternoon on Friday, April 16, expressing concern about the decision made by his supervisor, David Sims, to order additional centralizers.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010

Draft: October 13, 2010 20

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 14

When asked in court why he would ever question the OptiCem model’s results, Guide responded, “There were several reasons, first of all, it’s a model, it’s a simulation, it’s not…the real thing. From past experiences sometimes it’s right and sometimes it’s wrong. And I also know in this particular case…they made reference to having to tinker with it to try to get some of the results that were reasonable.”50 Meanwhile, Morel had gotten 3D profile information on the well hole, which indicated that it was actually very straight: 6/10ths of a degree off of vertical. In an email to Cocales, Morel questioned Gagliano’s recommendation to use more centralizers. He believed doing so could slow down the process of sealing and cementing the well.51

Based on the information about the straightness of the well hole, Cocales believed that despite the OptiCem model’s results, additional centralizers would only add a small additional measure of safety.52 In his reply to Morel, Cocales indicated he was in agreement with Guide.

As it turned out, the additional centralizers that Sims gave the green light to order were a “slip-on” variety that took more time to install on a pipe, and were considered risky because of fears they might come off during installation and get stuck in the casing above the well-head.53 As a result, Guide and 50 http://www.deepwaterinvestigation.com/external/content/document/3043/856503/1/7-22-10.pdf, p. 69. 51 http://www.deepwaterinvestigation.com/external/content/document/3043/903599/1/USCGHEARING%2027_Aug_10.pdf, p. 27. 52 Ibid, pp. 27, 249-250. 53 Ibid, p. 191.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 15

Walz decided not to use any additional centralizers. Gagliano later learned of their decision from another Halliburton employee who was on board the Deepwater Horizon.54 In his witness testimony to The Joint United States Coast Guard/Bureau of Ocean Energy Management, Regulation and Enforcement hearing in July 2010, Guide revealed that no one had considered postponing or putting a stop work order on the cement job until centralizers of the right kind were located.55 On April 18, two days after Guide and Walz decided not to use the additional centralizers, Gagliano sent the formal report of the OptiCem results as an email attachment to the Macondo well management team. Page 18 of the report included the following observation: “Gas Flow Potential, 10.29 at Reservoir Zone Measured Depth, 18200.0. Based on the well analysis of the above outlined well conditions, this well is considered to have a SEVERE gas flow problem. Wells in this category fall into Flow Category 3.”56 However, the text of the email that Gagliano sent to the BP managers on April 18 did not say anything about the hazards of the Macondo well. Cocales and Guide later testified that neither had read page 18 – both had merely skimmed the report for the information they were most interested in.57

Circulating Mud and the Cement Bond Log

The whole process of cementing an oil well is notoriously tricky. A 2007 study by the MMS found that cementing was the single most significant factor in 18 of 39 well blowouts in the Gulf of Mexico over a 14-year period.58

Before cementing a well, it is common industry practice to circulate the drilling mud through the well, bringing the mud at the bottom all the way up to the drilling rig. This procedure, known as “bottoms up,” allows workers to check the mud to see if it is absorbing gas leaking in. If so, the gas has to be separated out before the mud can be re-submerged into the well. According to the American Petroleum Institute, it is cementing best practice to circulate the mud at least once.59 In the case of the Macondo well, BP estimated that circulating all the mud at 18,360 feet would take anywhere from six to 12 hours. According to the drilling logs from Monday, April 19, mud circulation was completed in just 30 minutes.60

In concert with the decision to do a partial circulation, BP managers chose not to run a test called a “cement bond log” to check the integrity of the cement job after it was pumped into the well, despite Gagliano’s warnings of potential channeling. Workers from Schlumberger had been hired to perform a cement bond log if needed,61 but on the morning of Tuesday, April 20, about 12 hours before the 54 http://www.deepwaterinvestigation.com/external/content/document/3043/903579/1/USCGHEARING%2024_Aug_10.pdf, p. 333. 55 http://www.deepwaterinvestigation.com/external/content/document/3043/856503/1/7-22-10.pdf, p. 363. 56 http://www.deepwaterinvestigation.com/external/content/document/3043/903599/1/USCGHEARING%2027_Aug_10.pdf, p. 23. 57 Ibid; http://www.deepwaterinvestigation.com/external/content/document/3043/856503/1/7-22-10.pdf, p. 271. 58 Chris Morrison, “Gulf Oil Spill: Who’s to Blame? BP, Halliburton and the Feds are All Implicated,” CBS Interactive Business Network, May 3, 2010. 59 Ben Casselman and Russell Gold, “BP Decisions Set Stage for Disaster,” Wall Street Journal, May 27, 2010. 60 http://energycommerce.house.gov/documents/20100614/BP-Daily.Operations.Report.4.18.10.pdf. 61 http://energycommerce.house.gov/documents/20100614/Schlumberger.MC.252.Timeline.pdf.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 16

blowout, BP told the Schlumberger workers their services would not be needed.62 According to Schlumberger’s contract, BP would pay a cancellation fee equal to 7% of the cost of having the cement bond log and mechanical plug services completed. See Figure 3.

Figure 3 Costs and Cancellation Costs for Schlumberger’s Services

Equipment and Labor Estimated Cost if Performed Actual Cost upon Cancellation Cement bond log $128,258.77 $10,165.43 Mechanical plug $53,075.06 $1,870.01

Source:http://energycommerce.house.gov/documents/20100614/Schlumberger- Cost.of.Completing.Cement.Bond.Log.v.Canceled.Contingency.pdf

BP and the engineers on site had used a decision tree, a system of diagnostic questions to define future actions, to determine whether they would need to perform a cement bond log. (See Exhibit 4.) BP ultimately followed their own decision tree accurately, but when reviewed in court, it was pointed out that there could have been channeling in the well pipe during the cement job. Channeling was considered highly likely given that far fewer centralizers were used than what the OptiCem model had recommended. Such mud-cement channeling would not have been picked up in the diagnostic tests listed in BP’s decision tree.63 In fact, the only way to accurately diagnose a bond failure due to channeling was with a cement bond log.64 However, when asked in court about the decision not to run a cement bond log despite seeing a loss return of 3,000 barrels of drilling mud,65 Mark Hafle, one of BP’s drilling engineers, responded that the model he had from Halliburton indicated that the cement job should be fine.66 He also went on to explain that a cement bond log would be done at some point on this well, but that it was usually done pre-production:

So, that cement bond log is an evaluation tool that is not always 100% right. There’s many factors that can affect its quality. It’s not a quantitative tool. It does not tell you the exact percentage of cement at any given point. … It’s a tool in the engineering tool box that has to be used with a bit of caution. But if it shows there’s no cement two or three years from now when we come to do the completion we will do a remedial cement job on that casing.67

Fallout from the Disaster

The impact of the Deepwater Horizon explosion and the subsequent Macondo well oil leak was devastating on a number of fronts, the most obvious being the death of 11 crew members and the injuries sustained by another 17.

62 Ibid. 63http://www.deepwaterinvestigation.com/external/content/document/3043/903579/1/USCGHEARING%2024_Aug_10.pdf, p. 270. 64 Ibid, p. 271. 65 A “loss return” happens when the amount of spacer fluid (drilling mud in this case) expected to be displaced by the well cement is not returned to the rig, indicating a leak somewhere in the well hole system. 66 Mark Hafle’s testimony before the Coast Guard Joint Commission, May 28, 2010, p. 46. 67 Ibid, p. 96.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 17

The environmental damage from the oil spill was extensive, with 25 national wildlife refuges in its path.68 Oil was found on the shores of all five Gulf States,69 and was responsible for the death of many birds, fish, and reptiles. The total amount of impacted shoreline in Louisiana alone grew from 287 miles in July to 320 miles in late November 2010.70 Unlike conditions with the Alaskan Exxon- Valdez oil spill, the contaminated Gulf shoreline was not rock but wetland. Grasses and loose soil, a perfect sponge for holding oil, dominated wetland ecosystems. The spill also occurred during breeding season for pelicans, shrimp, and alligators, and most other Gulf coast species. Ecologists anticipated that entire generations of these animals could be lost if they were contaminated with oil.71 In terms of direct economic damages, the sinking of the Deepwater Horizon rig represented a $560 million loss for Transocean and Lloyds of London, the insurance company which had unwritten the rig.72 The unprecedented loss of an entire semi-submersible rig was predicted to change underwriting policies for all oil rigs. As one underwriter noted, “It’s never happened that a semi could burn into the sea and completely sink. Now underwriters have to include that as a risk. That’s probably $10,000 to $15,000 more per day in rig insurance. They’ll make it up by charging more on a per-rig basis.”73 BP’s price tag for the lost oil — five million barrels at the average market crude oil price (for April 20, 2010 through July 15, 2010) of $74.81 per barrel74— was $374 million. In addition, if a federal court ruled that the company was grossly negligent, BP could face up to $3.5 billion in fines, or $4,300 per spilled barrel.75 Of course the company’s losses didn’t end there. On April 15, five days before the disaster, BP’s stock was trading on the NYSE at $60.57 and on June 25, it hit a 14-year low of $27.02.76 In addition to the frustration felt by shareholders and the public at large that the company had failed at several attempts to stop the leak, they were also unimpressed with BP’s PR strategy, citing skepticism over the company’s offer to pay fishermen if they signed a waiver promising not to sue the company.77 Alongside those companies directly involved with the Macondo well project, the Deepwater Horizon disaster affected the oil industry as a whole. On May 28, 2010, Secretary of the Interior Ken Salazar issued a moratorium on all deep water oil drilling in U.S. waters.78 The purpose of the moratorium was to allow time to assess the safety standards that should be required for drilling, and to create

68 Standard and Poor’s Industry Surveys: Oil & Gas, Production and Marketing. August, 2010. 69 Juan A. Lozano, “Tar Balls in Texas Mean Oil Hits All 5 Gulf States,” The Associated Press, July 6, 2010. 70 Bowermaster, Jon, “Measuring the extent of oil spillage,” Gadling, November 29, 2010. 71 David A. Fahrenthold and Juliet Eilperin, “Scientists Watch for Environmental Effects of Gulf of Mexico Oil Spill,” Washington Post, May 1, 2010. 72 “Chilean Earthquake and Deepwater Horizon,” Lloyds Press Release, May 26, 2010. 73 Ford Gunter, “An Explosive Situation,” Porfolio.com, April 28, 2010. 74 Calculated based on data from U.S. Energy Information Administration, “Petroleum Navigator,” (http://www.eia.doe.gov/dnav/pet/) accessed October 10, 2010. 75 Joshua Schneyer, “Special Report: Civil Fine in Gulf Spill could be $4,300 barrel,” Reuters, May 26, 2010. 76 http://www.google.com/finance?q=NYSE:BP note that these are stock prices on the NYSE. LSE values were different, but followed a similar trend. 77 Anne C. Mulkern, “BP’s PR Blunders Mirror Exxon’s, Appear Destined for Record Book,” New York Times, June 2010. 78 Jonathan Tilove, “Deepwater Drilling Moratorium Report Delivered to Interior Secretary,” Nola.com, October 1, 2010.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 18

strategies for dealing with wild wells79 in deep water. Government analysts estimated that about 2,000 rig worker jobs were lost during the moratorium and that total spending by drilling operators fell by $1.8 billion. The reduction in spending led to a decline in employment—estimates indicated a temporary loss of 8,000 to 12,000 jobs in the Gulf Coast80—and income for the companies and individuals that supplied the drilling industry. The moratorium also reduced U.S. oil production by about 31,000 barrels per day in the fourth quarter of 2010 and by roughly 82,000 barrels per day in 2011. This loss, however, was not large relative to total world production, and was not expected to have a discernable effect on the price of oil.81 The moratorium, originally intended to last until the end of November, was lifted in mid-October 2010.82 The economic losses also extended to the thousands of coastal small business owners including fishermen, shrimpers, oystermen, and those whose livelihood depended in whole or in part on fishing or tourism. The tourism industries in Alabama, Louisiana, and Florida were particularly hard hit. Ironically, analysts had previously predicted that tourism in the Gulf region, which was devastated by Hurricane Katrina in 2005, would return to pre-Katrina levels in 2010.83 Between the energy, fishing, shrimping, and tourism industries, the Gulf region lost an estimated 250,000 jobs in 2010.84 In anticipation of the economic aftershocks that would be felt from the oil spill, BP pledged to compensate those individuals whose livelihoods would be affected. On June 16, 2010, in agreement with the U.S. government, the company established the Gulf Coast Claims Facility (GCCF), an escrow fund of $20 billion to pay for the various costs arising from the oil spill. GCCF staff evaluated the claims of companies and individuals who suffered demonstrable damages from the oil spill. The fund was also intended to pay municipalities, counties, and state organizations for lost tax revenue or additional clean-up costs.85 Kenneth Feinberg, who led the September 11 Victim Compensation Fund, was appointed to oversee the GCCF. By February 28, 2011, the GCFF had received over 500,000 claims, and 170,000 people and businesses had been paid over $3.6 billion. Some people accused the facility of not acting quickly enough to process claims and make payments. In response, the GCCF increased transparency of the system and hired staff in the Gulf to answer questions from applicants in person.86 The GCCF was scheduled to remain in place until August 2013.87

79 A wild well was a well that had blown out of control and was leaking gas, water or oil. 80 “Estimating the Economic Effects of the Deepwater Drilling Moratorium on the Gulf Coast Economy,” Economics and Statistics Administration of the United States Department of Commerce, September 16, 2010. 81 Ibid. 82 Mark Guarino, “Deep-water Drilling Moratorium Lifted: why neither side is happy,” Christian Science Monitor, October 12, 2010. 83 Charisse Jones and Rick Jervis, “Oil Spill Takes Toll on Tourism on Gulf Coast,” USA Today, June 25, 2010. 84 Standard and Poor’s Industry Surveys: Oil & Gas, Production and Marketing, August, 2010. 85 Rig workers who lost their jobs as a result of the government moratorium on deep water drilling were not covered by the $20 billion fund. These workers were compensated by a separate $100 million fund. 86 Kenneth Feinberg, “Update on the BP claims compensation process resulting from the Gulf of Mexico oil spill,” Foreign Press Center, Washington, D.C., February 28, 2011. 87 Ibid.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 19

Conclusion

As of early 2011, investigations into the actual causes of the Deepwater Horizon disaster were ongoing, and the various parties involved in the Macondo well project were engaged in a highly publicized finger pointing exercise. The three major decisions on closing the Macondo well involving the well casing, the number of centralizers used, and the decision not to perform a cement bond log may have contributed to the conditions that caused the well to blow out. Regardless of what the ultimate causes are found to be, the conditions on the Deepwater Horizon, and the culture and organizational architecture of BP and its relationships with its contractors is worth examining. Each of the three decisions discussed above, as well as decisions on how to convey dangerous model results and earlier decisions about how best to structure incentive systems, may have played a role in the outcome. Throughout the decision making process, we see some actors who were advocates of caution over cost, for fixing problems even when inconvenient. Yet court testimony indicates that the three key decisions, and perhaps others as well, came down on the side of cost-reduction and expediency, over caution.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 20

Exhibit 1 Companies Involved with Deepwater Horizon Rig

Source: Reuters, Hoovers, the companies as published in Daniel Chang and Jennifer Lebovich’s “Gulf Oil Spill Overview,”

McClatchy Newspapers, May 15, 2010.

Exhibit 2

BP World's third largest oil company, headquartered in London; project operator with a working interest in the well; hired Transocean's rig to drill the well.

Transocean World's largest offshore drilling operator, based in Switzerland and Houston; owned an operated the rig.

Cameron Houston-based manufacturer of oil and gas industry equipment; provided the rig with a blowout preventer -- a devise designed to stop uncontrolled flow of oil or gas -- but the part apparently failed to operate.

Halliburton Oilfield services company based in Houston and Dubai; provided several services to the rig, including cementing on the well to stabilize its walls.

Hyundai South Korean company is the world's largest shipbuilder; built the Deepwater Horizon, completed in 2001.

Anadarko Anadarko, a large, independent, Texas-based petroleum company; has nonoperating interest in the well.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 21

Exhibit 3 Excerpt of Letter to BP CEO Tony Hayward

On June 14, 2010 Chairmen Henry A. Waxman and Bart Stupak sent a letter to Tony Hayward, Chief Executive Officer of BP, prior to his testifying before the Committee, detailing the questions the investigation has raised about BP decisions in the days and hours before the Deepwater Horizon explosion. Mr. Tony Hayward Chief Executive Officer BPPLC I St. James's Square London SWI Y 4PD United Kingdom June 14, 2010 Dear Mr. Hayward:

We are looking forward to your testimony before the Subcommittee on Oversight and Investigations on Thursday, June 17, 2010, about the causes of the blowout of the Macondo well and the ongoing oil spill disaster in the Gulf of Mexico. As you prepare for this testimony, we want to share with you some of the results of the Committee's investigation and advise you of issues you should be prepared to address.

The Committee's investigation is raising serious questions about the decisions made by BP in the days and hours before the explosion on the Deepwater Horizon. On April 15, five days before the explosion, BP's drilling engineer called Macondo a "nightmare well." In spite of the well's difficulties, BP appears to have made multiple decisions for economic reasons that increased the danger of a catastrophic well failure. In several instances, these decisions appear to violate industry guidelines and were made despite warnings from BP's own personnel and its contractors. In effect, it appears that BP repeatedly chose risky procedures in order to reduce costs and save time and made minimal efforts to contain the added risk.

At the time of the blowout, the Macondo well was significantly behind schedule. This appears to have created pressure to take shortcuts to speed finishing the well. In particular, the Committee is focusing on five crucial decisions made by BP: (I) the decision to use a well design with few barriers to gas flow; (2) the failure to use a sufficient number of "centralizers" to prevent channeling during the cement process; (3) the failure to run a cement bond log to evaluate the effectiveness of the cement job; (4) the failure to circulate potentially gas- bearing drilling muds out of the well; and (5) the failure to secure the wellhead with a lockdown sleeve before allowing pressure on the seal from below. The common feature of these five decisions is that they posed a trade- off between cost and well safety.

Well Design. On April 19, one day before the blowout, BP installed the final section of steel tubing in the well. BP had a choice of two primary options: it could lower a full string of "casing" from the top of the wellhead to the bottom of the well, or it could hang a "liner" from the lower end of the casing already in the well and install a "tieback" on top of the liner. The liner-tieback option would have taken extra time and was more expensive, but it would have been safer because it provided more barriers to the flow of gas up the annular space surrounding these steel tubes. A BP plan review prepared in mid-April recommended against the full string of casing because it would create "an open annulus to the wellhead" and make the seal assembly at the wellhead

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 22

the "only barrier" to gas flow if the cement job failed. Despite this and other warnings, BP chose the more risky casing option, apparently because the liner option would have cost $7 to $10 million more and taken longer.

Centralizers. When the final string of casing was installed, one key challenge was making sure the casing ran down the center of the well bore. As the American Petroleum Institute's recommended practices explain, if the casing is not centered, "it is difficult, if not impossible, to displace mud effectively from the narrow side of the annulus," resulting in a failed cement job. Halliburton, the contractor hired by BP to cement the well, warned BP that the well could have a "SEVERE gas flow problem" if BP lowered the final string of casing with only six centralizers instead of the 21 recommended by Halliburton. BP rejected Halliburton's advice to use additional centralizers. In an e-mail on April 16, a BP official involved in the decision explained: "it will take 10 hours to install them. ... I do not like this." Later that day, another official recognized the risks of proceeding with insufficient centralizers but commented: "who cares, it's done, end of story, will probably be fine."

Cement Bond Log. BP's mid-April plan review predicted cement failure, stating "Cement simulations indicate it is unlikely to be a successful cement job due to formation breakdown." Despite this warning and Halliburton's prediction of severe gas flow problems, BP did not run a 9- to 12-hour procedure called a cement bond log to assess the integrity of the cement seal. BP had a crew from Schlumberger on the rig on the morning of April 20 for the purpose of running a cement bond log, but they departed after BP told them their services were not needed. An independent expert consulted by the Committee called this decision "horribly negligent."

Mud Circulation. In exploratory operations like the Macondo well, wells are generally filled with weighted mud during the drilling process. The American Petroleum Institute (API) recommends that oil companies fully circulate the drilling mud in the well from the bottom to the top before commencing the cementing process. Circulating the mud in the Macondo well could have taken as long as 12 hours, but it would have allowed workers on the rig to test the mud for gas influxes, to safely remove any pockets of gas, and to eliminate debris and condition the mud so as to prevent contamination of the cement. BP decided to forego this safety step and conduct only a partial circulation of the drilling mud before the cement job.

Lockdown Sleeve. Because BP elected to use just a single string of casing, the Macondo well had just two barriers to gas flow up the annular space around the final string of casing: the cement at the bottom of the well and the seal at the wellhead on the sea floor. The decision to use insufficient centralizers created a significant risk that the cement job would channel and fail, while the decision not to run a cement bond log denied BP the opportunity to assess the status of the cement job. These decisions would appear to make it crucial to ensure the integrity of the seal assembly that was the remaining barrier against an influx of hydrocarbons. Yet, BP did not deploy the casing hanger lockdown sleeve that would have prevented the seal from being blown out from below.

These five questionable decisions by BP are described in more detail below. We ask that you come prepared on Thursday to address the concerns that these decisions raise about BP's actions.

The Committee's investigation into the causes of the blowout and explosion on the Deepwater Horizon rig is continuing. As our investigation proceeds, our understanding of what happened and the mistakes that were made will undoubtedly evolve and change. At this point in the investigation, however, the evidence before the Committee calls into question multiple decisions made by BP. Time after time, it appears that BP made decisions that increased the risk of a blowout to save the company time or expense. If this is what happened,

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 23

BP's carelessness and complacency have inflicted a heavy toll on the Gulf, its inhabitants, and the workers on the rig.

During your testimony before the Committee, you will be asked about the issues raised in this letter. This will provide you an opportunity to respond to these concerns and clarify the record. We appreciate your willingness to appear and your cooperation in the Committee's investigation. Sincerely, Henry A. Waxman, Chairman, Committee on Energy and Commerce Bart Stupak, Chairman, Subcommittee on Oversight and Investigations

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 24

Exhibit 4 BP’s Cement Bond Log Decision Tree

Source: Casewriter.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 25

Appendices

Appendix 1 Petroleum Value Chain

Source: Casewriter.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 26

Appendix 2 Macondo Well Design Diagram with Predicted Problem Sites

Source: BP. Deepwater Horizon Accident Investigation Report Appendix C. September 8, 2010.

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 27

Appendix 3

Source: http://media.nola.com/2010_gulf_oil_spill/photo/six-steps-that-doomed-the-rigjpg-bd73481b6f076ab0.jpg

BP AND THE DEEPWATER HORIZON DISASTER OF 2010 Christina Ingersoll, Richard M. Locke, Cate Reavis

Rev. April 3, 2012 28

Appendix 4 BP Organizational Chart 2007

Source: Prepared for the Chemical Safety Board Final Investigation Report for the Texas City Disaster, March 20, 2007.

Please write the paper based on the case minimum 6 pages body only.

Structure, Organization, Ease of reading, Grammar: 2.5 Points

· This Assignment had a very, very specific structure. Identify 2-4 issues. Come up with solutions for those issues and summarize them briefly. Provide a table with Pros and Cons for each, and wrap it all up with an overall (but brief) recommendation – what could have been done to help prevent this disaster from a PM perspective. DID YOU FOLLOW THIS STRUCTURE?

· Did you follow the advice given in the lectures and From Your Instructor about the format?

· Did you follow rules of English grammar, spelling, and syntax? Did you fix errors pointed out via Word’s editing capabilities (e.g. squiggly blue or red underlined text)?

Content: 8 Points

· Is it clear from reading your assignment that you read the case and understood what happened that led up to the Deepwater Horizon explosion?

· Did you ‘dig deeper’? Some people identify very technical issues – did you find the underlying reasoning that may have driven decisions to go a certain way technically?

· Did you keep your writing concise and to the point? Part of the intent of this assignment is an exercise in expressing important ideas in as efficient a way as possible.

· Was there a logical flow from your Issue Identification to your Proposed Solutions, to your Pros and Cons and to your conclusion?

· If you did have ‘extra’ information to exhibit, did you put it in an Appendix rather than in the body of the text? Again, the focus is on a concise, crisp presentation of your arguments.

References and resources: 1.5 Points

· Did you provide several relevant references that helped make your points? Of course you can use the main MIT/Sloan case as a reference, but did you reach out and find out more about the Deepwater Horizon from other sources?

Other things to consider:

· Did you add value from your own professional and/or personal experience?

· Did you make appropriate use of figures and tables in an appendix? Don't substitute quantity for quality here - one good, relevant, and meaningful small table is worth 100 randomly inserted graphs and charts.

· Did you really take on the viewpoint of a project leader here, and consider the way the team was motivated, the way the different stakeholders communicated (or didn’t), the culture of the different companies?

The next following page is the example

blog7

Get help from top-rated tutors in any subject.