BP’s Deepwater Horizon oil spill and the need for Human Rights Impact Assessments

Three years after the collapse of the financial system, triggered by the credit default of thousands of american households, and three months after the collapse of BP Deepwater Horizon oil rig, the never-ending question of how to internalize externalities could not be more at stake. The big question raised by these events (or chain of events) is how to ensure that risk management systems, both at company and society level -meaning by the financial market through its various forms: ensurance, derivatives, securities etc…-, make sure that low-probability events such as the explosion of the Deepwater Horizon drilling platform are properly factored in. Or, in other words, that the costs of these contingencies are rationnaly allocated to the risk-owners and not transfered de facto to society as a whole.

John Sherman, in its column Whose risk is it? Viewing corporate catastrophe through a human rights lens and Raymond M. Brown in BP Executives’ Human-Rights Miscalculation: Have They Bet the Company? help to answer this question by advocating for a widespread use of Human Rights Impact Assessments, an extended version of Environmental Impact Assessments or Management Systems (EMS), by the corporate world.

The traditional ways for companies to address risk are to bear the risk, to avoid it, to reduce it, to share it, to shift it, to pool it, to hedge it, or to diversify it away. Choosing among these tools raises few ethical implications for voluntary transactions, like contracts between businesses. However, such concerns may arise when companies lead others to assume risks that they aren’t aware of and haven’t agreed to bear. Selling toasters that can to burst into flame, selling toxic financial assets whose failure can trigger a global recession, and drilling in deepwater with no capacity to deal with the consequences of a runaway leak, are examples of subjecting others to risks without their knowledge or consent. By taking into account the human rights dimension of such risks, and engaging with those who may be harmed by such risks, companies can address this potential ethical problem.

… and take stock of the huge costs incurred by disputes between corporations and stakeholders today’s economy:

Viewed wholly from a shareholder perspective, the risks of infringing on human rights can cost a company big money, and so should be included in any company risk analysis. As the SRSG noted in his 2010 report to the UN Human Rights Council, a study of the oil and gas industry found that the risks to exploration from disputes between oil explorers and external stakeholders has been growing much faster than the technical risks of getting oil out of the ground. And one oil and gas company estimated that over a two-year period, it lost US$6.5 billion in value from such ‘above ground’ disputes with communities. These disputes can cause disruption and delay in financing, construction, and operations, greatly distract senior leaders’ attention, swiftly ruin a company’s reputation, and lead to the loss of its legal and social licence to operate. And that list doesn’t include the obvious risk of litigation, which is hugely expensive and distracting regardless of who wins.

BP’s repeated allegations of negligence in the matter of Health&Safety, since the Texas Refinery (2005) until the Deepwater Horizon catastrophy (2010), fuels the theory that BP executives deliberately assumed unreasonable risks in order to cut costs and save time, thereby giving a tangible example that proves a contrario the potential cost of incomplete risk management:

Ironically, BP itself was an early and successful user of human rights impact assessments, or HRIAs (for its its Tangghu LNG plant in Indonesia, for example), but did not use such a tool to assess the potential impacts of its deepwater drilling in the Gulf from the perspective of those whose rights would be violated by a runaway spill

… The theory that BP executives deliberately assumed unreasonable risks in order to cut costs and save time has already been advanced in several quarters, including in a preliminary report of the House Commerce Committee by its chairman, Henry Waxman. The charge has been echoed by the populist voice of Kindra Arnesen, a fisherman’s wife from Louisiana, whose criticism inspired BP to bring her inside its councils and to observe its deliberations. She has publicly alleged that BP talked—during its cleanup and emergency-response phase—of cutting clean-up costs and of assembling clean-up workers temporarily for “balloon and pony” shows when the media or high-ranking political officials visited key sites.

… What should the informed executive take away from the BP spill? Clearly, the massive debacle that BP now faces on all flanks could have been avoided or minimized by institutionalizing HRIAs enterprise-wide in the due-diligence process, including projects in economically developed hosts. To be sure, it would have shone light on disaster preparedness. The costs of an HRIA in contrast to BP’s massive expenses from the harm it has done simply pale by comparison. In the process of avoiding comparatively small costs, or perhaps just through miscalculation, BP has made itself inimical to all stakeholders—investors, customers, employees, inhabitants, government and regulators.

In support of those who argue that ‘negligence’ was the main factor in BP’s accident, here is a summary of New York Times article Oil Rig’s Owner Had Safety Issue at Three Other Wells published in August 2010:

Transocean, owner of the Deepwater Horizon oil rig that exploded in the Gulf of Mexico in April 2010, reportedly commissioned a safety risk analysis of its Houston headquarters and four Gulf of Mexico rigs, including Deepwater Horizon, just one month before the oil spill. This confidential report allegedly indicates that problems were found in all rigs, including potential causes of the explosion. The report allegedly highlights problems with the ballast system, the practice of deferring maintenance to save money, dozens of equipment deficiencies, and fear of reprisal for reporting safety issues. The report found that these problems “may lead to loss of life, serious injury or environmental damage”. One of the investigated rigs is reportedly leased by BP to dig the relief well and stop the spill.

In sum, BP’s experience seems to illustrate the need for a better understanding by corporations of their interactions with their environments, including environmental matters but also human rights issues, as they relate to the anticipation of worst-case-scenarios.

A Human Rights Impact Assessments necessarily makes explicit tensions between parties like BP and inhabitants, but the process allows coexistence based on the evaluation of worst-case scenarios (eg, ‘What if the rig explodes?’) and the rank ordering of rights combined with substantive remediation plans and processes. A Human Rights Impact Assessments would have erased the widening gap between BP’s business interests and the destruction of industries, livelihoods and the environment.

The benefits of the Due Diligence approach to keep human rights on the radar, is being advocated for by John Ruggie, UN Special Representative for Business and Human Rights:

“[I have] maintained that the widening gaps between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences, were unsustainable. These governance gaps … provide the permissive environment for wrongful acts by companies of all kinds without adequate sanctioning or reparation.”

If the Double Standards theory, exemplified by the discrepancy between Shell’s practices in the Nigeria’s Niger Delta and in developped countries, support the assumption that human rights are sufficiently protected in Western countries and that Impact Assessments should be restricted to Environmental Management Systems (EMS) or Assessment- then I hope that BP’s story will shed a different light.

Olistik Team