Smart Pigs, but Dumb BP Execs: Does changing the report make the problem go away?

"Oil giant wants to rescind memo on corrosion," The Anchorage Daily News (ADN) carried an AP story today that reports that British Petroleum (BP) wants to revise an internal report they commissioned from Booz Allen Hamilton which found that "'[B]udget pressure' leads company managers to discontinue corrosion prevention programs at Prudhoe Bay." And no one has disputed that the corrosion led to the large pipeline leak and oil spill March 2006.

"The report examined the causes of the leaks, including how management decisions contributed to the incidents. One conclusion was that BP decided to save money by cutting the use of devices called "smart pigs" that detect weaknesses in pipelines.

"The incriminating documents and e-mails suggesting cost-cutting at BP surfaced earlier this month, according to the Fairbanks Daily News-Miner. BP officials had previously denied any role cost-cutting might have played in the leak or the partial shutdown.

"Your own report clearly contradicts this assertion," U.S. Rep. John Dingell, D-Mich., who chairs the House Energy and Commerce Committee, and Rep. Bart Stupak, D-Mich., chairman of the subcommittee on oversight and investigations, wrote in a letter to Malone on Friday.

"In meetings with congressional staff, BP officials said they planned to remove lines from the report reading, "Budget pressure eventually led to de-scoping some projects and deferring others. For example, the plan to run a smart pig in the (Oil Transit Lines) was dropped in 2004 and 2005."

So, as I read this, they want to get rid of the lines that say their budget cutting led to the spill. Now, presumably there could be some legitimate challenge to the conclusion that Booz Allen Hamilton made, but BP isn't talking until the Wednesday Congressional hearing.

Most of the reports online seem to get there facts from Fairbanks News Miner, Reuters, and The Wall Street Journal. They all basically report the same things. The House subcommittee members and staff have seen the Booz Allen report and the Friday letter to BP from the committee. Presumably they or the legislators themselves are the sources of the information.

Upstreamonline adds "Sources familiar with the full report told Reuters this week the document blamed cost cutting at BP following two mergers for decimating internal controls over operations."

Jim Carlton at the Wall Street Journal adds that:

"The congressmen also disclosed in the letter that they had recently uncovered a Feb. 5, 2003, email from BP which they say suggests the company planned to pig the very lines that failed. However, they said, those plans appear to have been nixed by superiors. The email contains an "Authorization for Expenditure" that the congressmen said appears to be a proposal to "install permanent pig launching and receiving facilities" in several places, including transit lines where the spills later took place. But the expense request appears to have been turned down, they added, since it included a notation: 'rejected...for approval.'

"BP officials declined comment, saying those were "matters of interest" at Wednesday's hearing. Booz Allen officials weren't immediately available.

"Cost cutting has also been brought up as a possible link to a March 2005 explosion at a BP refinery in Texas City, Texas. BP officials have said they believe budgetary decisions didn't play a critical role in the accident, which killed 15 people and injured 180."

Either BP (1) really feels that the Booz Allen report is in error or (2) they want to disavow that the spill was due to negligence on their part. From what little is available, the second option seems a lot more likely.

So, why does this matter? I can think of a couple of possible implications. Some specific to the case, some more generalizable to longer term issues.

Specific BP implications:

1. One possibility is that BP is looking at potential lawsuits ahead and doesn't want their own internal documents saying that they could have prevented the spill if they hadn't been so cheap. (BP's 2005 annual net profit was $19 billion.) Not only are they exposed for the 2007 spill in Prudhoe, but also, according to the WSJ article, for the Texas fire that killed 15 people.

2. Alaskans were chagrined to learn that BP was claiming the money spent cleaning up the March 2006 oil spill as a business expense on their state taxes, thus lowering their tax liability. A May 8, 2007 press release from the House Labor & Com. Committee of the Alaska Legislature House says this about House Bill 128:

"In light of the recent events we, the Legislature, must work to close any loop holes we find in PPT." Rep. Kurt Olson (R-Soldotna), the bill's prime sponsor said. "The ability of producers to write off expenses incurred due to their own improper maintenance is a prime example. "When a producer makes the choice to cut corners on maintenance, the people of Alaska should not be made to pay." The bill , as of May 5, 2007, would be retroactive.

If this bill passes, and given the very recent scandals in Juneau concerning big oil's influence on the legislature, and the PPT (Petroleum Profits Tax) specifically, there's a good chance it will, BP would obviously not want internal studies 'admitting' their own improper maintenance becaue of cutting corners.

More General Implications

1. Enron told Arthur Anderson to get them better accountants when the accountant assigned to Enron raised questions about their accounting methods. Enron claimed the accountant was stuck in the old school and simply didn't understand the new world they were working in. They probably believed that, but they were also concerned that changing the way they reported their finances would negatively affect their stock. Anderson, not wanting to jeopardize one of their most successful clients, complied. When Enron eventually collapsed, Anderson went down with them. It's nice to see that Booz Allen wrote a report that did not reflect well on their client. But it looks like BP is playing Enron here by disavowing their own hired experts' conclusions.

2. What does this say about the ability of large corporations to deal with bad news that might expose them to liability? If having it in writing from your own hired consultant sets up a company for a lawsuit, it's better not to write it down, or even ask the question in the first place. One option, that I'm sure already exists in practice, is to recognize the company's own attempts to honestly deal with a problem and give some credit when determining penalties. For companies that don't even study the problem or have white washed reports, the penalties would be greater. Perhaps consulting firms have different reputations and you hire one kind if you want a white wash and another kind of firm if you want honest, even if painful, feedback.