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PAC 28 – The Collapse of a Global Reputation BP and its condemned handling of the Gulf of Mexico oil spill

By Clément Paule

Translation: Brad Pizzimenti

Passage au crible n°28

On July 15th 2010, the engineers of the petroleum company BP (formerly British Petroleum) would be able to contain the leak of the Macondo wellhead 1500 meters below the ocean surface. Three months after the explosion and subsequent sinking of the Deepwater Horizon platform, the spilling of oil into the Gulf of Mexico appeared to be temporarily contained. According to the estimates of the IEA (the International Energy Agency), between 2.3 and 3.5 barrels of oil – between 365 and 715 million liters – had escaped into the sea after the accident. In addition, BP – who used offshore infrastructure and managed the resulting crisis alongside American authorities – had spent more than 4 billion dollars to mitigate the crisis. However, the final bill would be more than 37 billion, according to Credit Suisse Group. Other financial challenges, the petrol group had been made the object of myriad critiques brought by its incapacity to quickly contain the disaster.

Historical background
Theoretical framework
Analysis
References

Historical background

Formed at the outset of the 20th century in Iran, the APOC (Anglo-Persian Oil Company) was established as one of the major actors of a young industry. Nevertheless, the company, rebranded BP in 1954, was confronted in the 1960s with nationalizations occurring under Middle Eastern governments. At that time, the firm internationalized in order to explore new oil deposits, in particular in Alaska and the North Sea. Twenty years later, it was operating in more than one hundred countries and employed more than 100.000 people. Under its name, it was one of six oil super majors alongside Exxon Mobil, Chevron Corporation, Royal Dutch Shell, ConocoPhillips, and Total. Appearing at the end of the 1990s these conglomerates resulted from concentration of the industry, following price volatilities. It is within this context that BP invested massively in the American market and purchased successively the companies Sohio (Standard Oil of Ohio) in 1987, then Amoco (formerly Standard Oil of Indiana) and Arco (Atlantic Richfield Company) between 1998 and 2000. In this instance, this establishment, decided by Lord Brown, is embedded in a strategy based on innovation and, CEO between 1995 and 2007. The energy giant was then distinguished by its taking of several and varied risks: notably, for example, the series of ambitious accords signed in Russia or the promotion of alternative energy.

Under this logic, the development of offshore drilling is central to the concerns of the super major as the most accessible oil deposits are controlled by national companies. As it turns out, a fifth of global petroleum reserves are found in the ocean depths. A pioneer of this extraction technique, BP remains the number one oil producer in the Gulf of Mexico. This orientation has withstood successive US administrations – including the Obama administration – which has reduced restrictions on domestic drilling. In this regard, American power has tried to limit energy dependence, in particular in facing OPEC (the Organization of Petroleum Exporting Countries). The group was able to utilize reserves like Tiber – where the only announcement caused the 4% increase in the worth of the company in 2009 – for opening a new energy era.

Nevertheless, we can see that this technique could cause accidents having led to oil spills in the Gulf of Mexico. Witnessed in 1979 was the destruction of the Ixtoc I wells run by the Mexican state oil firm Pemex (Petroleos Mexicanos). More generally, the installations of BP in the United States were not spared these hazards. We see in 2006 the spill in Prudhoe Bay in Alaska, as well as the explosion of a refinery in Texas the previous year, rousing the attention of authorities and of American public opinion.

Theoretical framework

1. Stigmatization of a deviant actor. Inspired by the symbolic interactionism of Howard Baker, certain notions permit the rendering of delegitimization encountered by the petroleum group after the accident. Concentrating the criticism, BP made the object of a stigmatized, ambivalent work as much the part of its peers as the Obama administration.
2. The image and reputation of a transnational firm. The subject here evokes the intrication between the perception of the super major and its economic performance. Opposite states that suffer less – according to Jonathan Mercer – “reputation factor”, private operators are not disposed to objective legitimacy. There are thus more sensitive than state actors to changes in their image that can affect their survival.

Analysis

In the first place, it is suitable to recall disappointments of BP in the face of disaster. We mention the reverse subjected by its experts over the technical plan, with ineffective solutions and outmoded emergency plans. As well, the top kill procedure failed to stop the leak on 26 May; the organizational practices of the group appear, therefore, ineffective. These ineffective practices are combined with setbacks of unskilled communication. Tony Hayward, CEO of BP notably provoked several scandals related to minimization of the environmental impact of the incident. In fact, the company wasn’t able to put in place a crisis technology that was socially acceptable. That is what created a dissonance with an entrepreneurial image composed fundamentally of expertise and superior technology. And yet, this symbolic failure produced an economic and financial impact that caused the breakdown of the firm’s stock value. In fact, this was elevated by about 170 billion dollars in April 2010, according to the Forbes Global 2000 list where BP occupied 10th place. At the end of June, the result was divided in two, and the international rating agency, Fitch Ratings, had then downgraded the energy giant anticipating the accumulation of immense costs.

Moreover, the incapacity of BP to have an authoritative discourse over the handling of the crisis drew the development of sociotechnical controversies characterized by great uncertainty. Citing the increase of the estimations of the volume of the leak, initially 1000 barrels a day, reached today the figure of 60.000. Outside of this consideration, the competence of the petroleum company is disparaged equally by its competitors as by the American government. These final stakeholders are implicated in diverse degrees in the bleak handling and subsequent consequences of successive failures. In this environment, the market value of Exxon Mobil and of Total declined 15% because of the discrediting of BP. The tactics of stigmatization and of demarcation to highlight the deficiencies of a firm presented as adventurous and negligent of risks. We mention in this sense the hearing of 15 June before the American Congress, directors of ConnocoPhillips and Royal Dutch Shell who described an isolated incident attributable solely to the errors of BP. As for the American authorities, they have adopted a posture of moral entrepreneurs; the oil slick could become a political test 5 years after Katrina. Finally, the administration of the catastrophe came to be a game of survival of the company itself. Anyway, let us remember that the brutal fall of the company’s share price put BP under the menace of a hostile takeover bid in the face of bankruptcy. The group could certainly lean heavily on its consolidated resources in 2009 with 17 billion dollars of net gain. But it is also constrained to strategies of extraversion, soliciting Goldman Sachs for financial aid in the form of sovereign wealth funds – Qatari or Libyan – in light of a strategic association. Notwithstanding that, the impact of its position became permanently limited in the measure where the other super majors stretched to evade a hostile takeover described by the CEO of Total as an unethical operation. This ambivalent position can explain the fear shattering the already unstable economic order. It appears even more to raise common reaction against all tendencies of external regulation begun by the moratorium instituted by the Obama administration on all offshore drilling. This evokes again the question of regulation – pragmatic or normative – susceptible to define and sanction the deviance of private actors on the world stage.

References

Becker Howard, Outsiders. Sociologie de la déviance, (1963), trad. Métailié, Paris, 1985.
Crooks Ed, “BP – Anatomy of a Disaster – Part I, Cover Story” The financial Times, July 3 2010
Dobry Michel, Sociologie des crises politiques, La dynamique des mobilisations multisectorielles, 3e éd. Paris, Presses de la FNSP, 2009.
Mercer Jonathan, Reputation in International Politics, Ithaca, Cornell University Press 1996