This paper examines BP's strategic response to the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. It identifies two central challenges — financial and public relations — and analyzes how BP prioritized the protection of its core resources (oil assets and capital) over reputational concerns. Drawing on Milton Friedman's shareholder-primacy principle and the resource-based view of strategy, the paper contrasts BP's approach with Shell's response to the Brent Spar controversy in the 1990s. It concludes that while BP's strategy was ethically questionable, it reflected a calculated decision that protecting financial assets outweighed the costs of reputational damage in the American market context.
In April 2010, the Gulf of Mexico oil rig Deepwater Horizon, operated by British Petroleum (BP), suffered an explosion, sank to the bottom of the sea, and precipitated an oil leak that would take months to cap (Pagnamenta & Goddard, 2010). The disaster was costly for BP both financially and reputationally, and the company's responses did little to engender faith among the general public with respect to BP's ethics or its willingness to address the concerns of those whose lives were devastated by the disaster. The company's strategy throughout the course of the disaster — from the period prior to the incident through to its handling of the legal actions taken against it — drew the ire of many observers.
This paper analyzes BP's strategy, in particular with respect to its balance between public relations objectives and financial objectives. BP's approach appears to be internally consistent, which makes the strategy easier to discern. The strategy is analyzed in part using historical context, such as the Brent Spar battle between Greenpeace and Shell — another high-profile confrontation between the oil industry and the general public. Background discussion is provided first, followed by a more in-depth analysis of the issue from BP's perspective.
For BP, the Deepwater Horizon incident can be distilled into two main types of issues: financial and public relations. With respect to the financial issues, the incident not only cost BP billions of dollars in direct expenses related to the cleanup of the spilled oil, but also resulted in lost revenue from the Deepwater Horizon well itself. The company is guided by Milton Friedman's principle that its primary responsibility is to generate profit for its shareholders (Friedman, 1970). Thus, BP would have adopted a strategy of weighing its actions in the Gulf on a financial basis. There was a legal ceiling with respect to the money it could be required to pay to the US government for the cleanup, but the federal government was seeking to raise that ceiling. The incident could also cost BP — a foreign company — access to US-based oil fields in the future. There was therefore considerable financial incentive to act ethically in this situation, in order to protect the interests of the company's shareholders.
The second type of issue concerns public relations. In general, BP can reasonably be said to have failed on this front. Holt and McNulty (2008) argue that the public relations battle is almost as important as the economic battle. It is worth noting, however, that the reason the PR battle matters so greatly is because of its potential to impact the financial battle. BP faced difficult public relations conditions almost immediately — owing to multiple ill-considered statements by its chief executive and the company's relatively slow response to the crisis. That BP was later alleged to have cut corners on safety in order to increase profits also contributed to the development of negative publicity. BP suffered further reputational damage with respect to its legal strategy, which was designed to confuse plaintiffs, delay proceedings, and generally drag out the process of assigning and paying damages (Peel, 2010).
BP was faced with a number of alternative courses of action with respect to the different elements of its damage control strategy. These elements, however, would ultimately be guided by the company's overall strategic orientation. There are essentially three main options. The first is to focus on maximizing shareholder wealth in the long run. The second is to maximize the company's public relations standing. The third is to attempt to strike a balance between the two objectives in the hope that all stakeholders would be satisfied by a more even-handed approach.
The company needed to weigh the financial and public relations objectives associated with each of the options it faced. With respect to financial considerations, several factors demanded attention. The first was the sheer size of the costs involved. BP was forced to set aside a $20 billion fund for damages accruing from the disaster, in addition to the money spent on actual well-site damage control and cleanup of the oil spill. This amount threatened to grow larger if the US Congress rewrote the laws to give it stronger legal mechanisms for recovering cleanup expenses from BP. The up-front costs of the disaster were significant, but the potential downstream costs were equally significant, given the multitude of legal actions that would be brought against the company. The scope of the disaster would make such actions expensive to contest, and a loss in court could be potentially disastrous. The long-term impact risked wiping out the company's wealth; the short-term impact had already exerted a strong negative effect on its share price.
BP would have needed to estimate the potential financial costs associated with the Deepwater Horizon spill. Once those estimates were in place, the next step was to determine which course of action would produce the least negative outcome relative to the probability of each risk materializing. The company appears to have concluded that minimizing financial damages was the most important priority in its strategy.
From a public relations standpoint, Deepwater Horizon was a disaster for BP. Its name will inextricably be linked to the incident. Within the affected regions, BP-branded fuel stations were unlikely to survive under that name, and the company could also expect some loss of business elsewhere. BP also had an opportunity to improve its image with respect to corporate social responsibility by acting proactively to address the concerns of affected citizens and environmental groups advocating for the Gulf ecosystem. The company's approach, however, showed little but contempt for the people affected. The CEO famously stated that he wanted his life to return to normal — a remark that demonstrated utter disregard for the fact that eleven people were killed when the rig exploded and thousands more saw their lives and livelihoods devastated by the oil spill.
Had BP decided to maximize its public relations standing, it would have been more proactive not only in dealing with the aftermath of the spill but also in managing the legal fallout. The company's attempts to stall action portrayed it as arrogant and uncaring — prioritizing its bottom line at the expense of the people whose lives it had ruined. This approach mirrors to some extent the approach that Shell took with respect to the Brent Spar decommissioning, in which Greenpeace generated enough negative publicity to force Shell to reverse its decision to sink the rig at the risk of environmental catastrophe (Tsoukas, 1999).
"Comparing BP's approach to Shell's Brent Spar response"
"How resource-based thinking shaped BP's crisis strategy"
"Strategic logic evaluated against ethical concerns"
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