BP's [Oily] Black Swan Event

The cleanup continues.  This is truly BP’s black swan supply chain event, as discussed in my earlier post.  New technologies with complex solutions are underway, while the press has a field day.  The Governor of Louisiana is stating that “we will continue to keep our boot on their neck”.  That is surely going to help the cleanup effort tremendously.  Meanwhile, CNN announced this morning that there is a “Boycott on BP”, which one interviewee emphasized is due to “US consumers will not tolerate illegal activity.”

Let’s see, which law are we talking about?  All of Horizon’s permits, licenses, and subcontractors were in order.  People were trained, equipment was certified, and all safety and OCEA and EPA requirements were in compliance.  Maybe it’s the law that “Oil and gas  companies must foresee all possible problems that can occur in a complex, deepwater exploration rig, and prevent unexpected and impossible to predict technical failures from occurring.”…Oh yeah, that law…

The fact is, that there is increasing pressure on US federal and state authorities to “do something”.  We all know how that will work out.  The head of the Coast Guard in Monday’s WSJ announced that “we do NOT want the federal government stepping in”…who would replace BP – the US Army Corp of Engineers?  Who is best positioned to contain and solve this issue – one of the world’s largest oil and gas company, or a group of federal bureaucrats?

One of the major areas where US government officials CAN help is in enablign local communities and private industry to put in solutions that will both contain and address the issue. This was best stated in an interview on CNN at 6 AM this morning, the mayor of the local town in Louisiana emphasized that shrimpers, hotel and vacation resort operators, and oil and gas companies are the three largest sources of revenue and jobs.  These are the groups that are “in this together”, and must solve the problem together.  However, he also complained of the long lines and delays in getting government permits that is causing the bulk of the delays in activity at the moment.

Let’s see – the last time the federal government stepped in to solve a problem was Hurricane Katrina.  Let’s look back at one of my early posts on this subject from back then:

The events that occurred can be viewed from many different perspectives, but as supply chain professionals, it is useful to view this through the lens of current research on supply chain disruptions.  A recent research study we completed (see link) frames the discussion on supply chain disruptions around three elements.  The three critical components to a risk management program include: (1) the ability to discover that a disruption has occurred, (2) the ability to effectively recover from the disruption and (3) supply chain design strategies for resilience. From the moment a major supply chain disruption occurs, a series of events is triggered that as a whole defines the relative maturity of a company’s supply chain risk management system. 

It is useful to consider the events following Katrina’s landfall within the context of these elements.

Disruption Discovery: When a disruption occurs, the speed at which the problem is discovered becomes critical.  Management of this element requires that executives understand the types of disruptions present in global supply chain systems and develop methods for discovering disruptions in a timely responsive fashion.  This element also requires developing an understanding risk exposure and detecting when risk events are about to occur, or have occurred. 

            The national weather service was certainly aware of Katrina, and broadcast this to all of the parties involved.  However, a major problem was that people in New Orleans and Biloxi were not made aware of the potential impact of the storm.  Prior to landfall, many people stayed behind because they were not mandated to stay.  The city’s evacuation plan – initially praised for evacuating 80% of the metropolitan’s area’s 1.4 million residents – failed to empty many of its most vulnerable residents without cars and elderly in low-lying neighborhoods.  On the other hand, consider the case of Hurricane Hugo, when the National Guard went door to door and forced people to evacuate.  There was simply no option at that point.  Further, the hospitals had not developed a plan to evacuate the sick and elderly, and they were made to stay behind.   Few if any provisions had been made ahead of the storm to position heavy equipment and critical materials for engineers to use in repairs if levees breached, some officials say (Wall Street Journal, September 1, 2005). 

Did BP act quickly?  They most certainly did.  Tony Heyward was on-site the next day, and activity has been going non-stop since the incident.

Disruption Recovery: Executives put in “stop gap” measures to quickly recover from the disruption, and prevent it from impacting their operations, or worse yet, their major customers.  This element of management involves developing methods for supply chain disruption recovery both in proactive (anticipatory) and reactive modes. 

Here again – the plans were lacking.  Walter Baumy, chief of the engineering division for the Army Corps of Engineers said that “There was a plan in place for handling a breach but the city has never seen an event like this.” (Wall Street Journal, Sept. 1, 2005). 

FEMA’s response to the storm was slow.  As people watched with horror the events in the Superdome, and as a large percentage of police officers for the city of New Orleans walked off the job, the response of the National Guard was too little too late.  As shown in the figure, quick response to a disruption can often curb the major costs associated with the problems, and a response plan which is quick can ensure this.  However, there needs to have been some “war gaming” discussions prior to the impact – it is now clear that these elements were not in place.

            Even more alarming was the fact that FEMA and the Army Corps of Engineers had failed to prepare the levees for a “worst case” scenario.  The Corps has known for years that this was a high probability event.  A publicly funded study in 2002 concluded that a slow-moving Category 3 hurricane would flood the “bowl of the New Oleans north of the Mississippi River, locally known as the East Bank.”  Katrina was a category 4.  An article in Civil Engineering magazine indicated that the region was ill-prepared and that the original levee system was based on “rudimentary storm modeling that, it is now realized, might underestimate the threat of a potential hurricane.”  Local leaders and US Army Corps of Engineers disagreed over which agency had responsibility for managing or repairing the levees, and were sniping at each other as water continued to pour over at least two breaches in the city’s defenses.  Further, many of the major refineries, and systems of pipelines beneath the gulf had not been prepared for a storm of this magnitude, although the probability of it occurring was certainly clear. 

Did BP make every effort at recovery?  As noted in my prior post, they are still in the process, using every technical solution they can come up with.

            Supply Chain Redesign: Executives, once they recover from the disruption, learn from the event and take steps to redesign their supply chains to minimize the probability that the problem will occur again, or better yet, eliminate the possibility of it ever occurring again.  This involves the development of tools for dynamic management of supply chain systems and redesigning/re-optimization of the supply chain. In systems such as supply chains, optimization cannot be a single static model. Rather, tools which adjust with the dynamic nature of supply chain events are needed. These tools should have global enterprise scope for enterprise redesign considerations, and need to provide solutions in real-time or near-real time.  (It should be noted that that for the most part, current network optimization models in use are optimized for a “snapshot” in time and provide the optimal solution for the current operating and economic environment. What is needed is a set of tools that can track changes in the supply chain and work under a variety of operating and economic environments.)

The wake of the storm will call for a complete redesign of the supply channels through the gulf.  The storm has the potential to do some real damage to the flow of point through the ports and refinery system and to the flow of goods up the Mississippi.  The vulnerability of the nation’s economy to Louisiana and Mississippi is not apparent, as the Gulf accounts for 30% of the nation’s oil production and 20% of natural gas production.  It isn’t clear if this happened in the past.  But most certainly, there is a need to review procedures, policies, and opportunities to ensure that this doesn’t happen again!

It is not clear that this was done in 2005.  But most certainly, the entire oil and gas industry must partner with academic thought leaders, regulators, and others to ensure this doesn’t happen again.  Mitigation plans, contract management, and other issues must be addressed..

WOW – I can’t believe this was written in 2005.  And here we are today. There is no question that oil and gas companies, regulators, governments, and local communities are all in this together.  Deep offshore drilling is a challenge, but there are no short-term easy fixes to alternative energy in the near term.  These groups need to work together to find solutions that enable quick response, mitigation planning, prevention, and long-term impacts.  Let’s avoid the finger pointing, and get to work on this now.