MM 5009

Decision Making and Negotiation

Final Assignment
Class YP53A

Deepwater Horizon Explosion and Oil Spill Case

Negotiation between British Petroleum Company and US Government

By:
Oriega Ayudya

29115257

MASTER OF BUSINESS ADMINISTRATION

SCHOOL OF BUSINESS AND MANAGEMENT
INSTITUT TEKNOLOGI BANDUNG
2016

A. Introduction
This paper will be discussing about the deepwater horizon explosion and oil spill case that is
done by British Petroleum (BP) in the evening of 20th April 2010. It takes place in Gulf of
Mexico that is an ocean basin that is surrounded by the North American continent, Mexico, and
Cuba.
A gas release and subsequent explosion occurred on the Deepwater Horizon oil rig working on
the Macondo exploration well for BP in the Gulf of Mexico. Eleven people died as a result of the
accident and others were injured. The fire burned for 36 hours before the rig sank, and
hydrocarbons leaked into the Gulf of Mexico.
The accident involved a well integrity failure, followed by a loss of hydrostatic control of the
well. This was followed by a failure to control the flow from the well with the blowout preventer
(BOP) equipment, which allowed the release and subsequent ignition of hydrocarbons.

B. Body
I. Analysis of Issues
Description of Status Quo

The roles in this case are US Government as the one who will sue BP Company for their lack of
monitoring and environmental damage cause, and BP as the one who get sued and were asked to
pay the compensation money to the government as their penalty, the negotiation process will be
in form of the sum of the money that BP Company will give to the US Government.
In this following case, there are dilemmas that will be faced by the US Government and BP
Company. The BP Company wants to be responsible for their trouble and pay for the money, but
at the same time they want hold the money that they need to pay as low as possible, and the US
Government wants BP company to pay as high as possible and as soon as possible.
Company Profile of British Petroleum (BP)

BP plc, also referred to by its former name, British Petroleum, is one of the world's seven "super
major" oil and gas companies. It is a British multinational company, headquartered in London,
England, whose performance in 2012 made it the world's sixth-largest oil and Gas Company, the
sixth-largest energy company by market capitalization and the company with the world's fifthlargest revenue (turnover). It is a vertically integrated company operating in all areas of the oil
and gas industry, including exploration and production, refining, distribution and marketing,
petrochemicals, power generation and trading. It also has renewable energy interests in biofuels
and wind power.
BP's origins date back to the founding of the Anglo-Persian Oil Company in 1908, established as
a subsidiary of Burmah Oil Company to exploit oil discoveries in Iran. In 1935, it became the
Anglo-Iranian Oil Company and in 1954 British Petroleum. In 1959, the company expanded
beyond the Middle East to Alaska and in 1965 it was the first company to strike oil in the North

Sea. British Petroleum acquired majority control of Standard Oil of Ohio in 1978. Formerly
majority state-owned, the British government privatized the company in stages between 1979
and 1987. British Petroleum merged with Amoco in 1998, becoming BP Amoco plc, and
acquired ARCO and Burmah Castrol in 2000, becoming BP plc in 2001. From 2003 to 2013, BP
was a partner in the TNK-BP joint venture in Russia.
Its largest division is BP America in the United States. In Russia BP owns a 19.75% stake in
Rosneft, the world's largest publicly traded oil and Gas Company by hydrocarbon reserves and
production. BP has a primary listing on the London Stock Exchange and is a constituent of the
FTSE 100 Index. It has secondary listings on the Frankfurt Stock Exchange and the New York
Stock Exchange.
United States of America (USA)

The United States of America (USA), commonly referred to as the United States (U.S.) or
America, is a federal republic composed of 50 states, the federal district of Washington, D.C.,
five major territories, and various possessions. The 48 contiguous states and Washington, D.C.,
are in central North America between Canada and Mexico. The territories are scattered about the
Pacific Ocean and the Caribbean Sea. At 3.8 million square miles (9.9 million km2) and with
over 320 million people, the country is the world's third largest by total area (fourth largest by
land area) and the third most populous. It is one of the world's most ethnically diverse and
multicultural nations, the product of large-scale immigration from many countries.
The United States is a developed country and has the world's largest national economy by
nominal and real GDP, benefiting from an abundance of natural resources and high worker
productivity. Moreover, it ranks among the top 10 in the world in several measures of economic
well-being, including average wage, Human Development Index, and per capita GDP. While the
U.S. economy is considered post-industrial, the country continues to be one of the world's largest
manufacturers. Accounting for 34% of global military spending and 23% of world GDP, it is the
world's foremost military and economic power, a prominent political and cultural force, and a
leader in scientific research and technological innovations.
The US operations comprise nearly one-third of BP's worldwide business interests, and the US is
the country with the greatest concentration of its employees and investments. As of April 2014,
per the company website BP employs approximately 20,000 people in the US.
BP's major subsidiary in the United States is BP America, Inc. based in Houston, Texas, which is
the parent company for the BP's operations in the United States. BP Exploration & Production
Inc., a 1996 established Houston-based subsidiary, is dealing with oil exploration and production,
including Gulf of Mexico activities.
BP owns three petrochemical plants in the US, which produce approximately four million tons of
petrochemicals each year. Its petrochemical plant in Texas City, located on the same site as the
formerly owned Texas City Refinery, produces industrial chemicals including propylene and
styrene. BP's Decatur, Alabama and Cooper River, South Carolina petrochemical plants both
produce PTA, which is used in the production of synthetic fiber for clothing, packaging and

optical films. The Decatur plant also produces paraxylene and naphthalene decarboxylase. The
company's alternative energy operations based in the US include 16 wind farms.
Gulf of Mexico

The Gulf of Mexico is an ocean basin largely surrounded by the North American continent. It is
bounded on the northeast, north, and northwest by the Gulf Coast of the United States, on the
southwest and south by Mexico, and on the southeast by Cuba. The U.S. states of Texas,
Louisiana, Mississippi, Alabama, and Florida border the Gulf on the north, which are often
referred to as the "Third Coast" in comparison with the U.S. Atlantic and Pacific coasts, or
sometimes the "south coast", in juxtaposition to the Great Lakes region being the "north coast."
One of the gulf's seven main areas is the Gulf of Mexico basin.
Various biotas include chemosynthetic communities near cold seeps and nonchemosynthetic
communities such as bacteria and other microbenthos, meiofauna, macrofauna, and megafauna
(larger organisms such as crabs, sea pens, crinoids, and demersal fish and cetaceans including
endangered ones) are living in the Gulf of Mexico. The Gulf of Mexico yields more finfish,
shrimp, and shellfish annually than the south and mid-Atlantic, Chesapeake, and New England
areas combined.

II. Identification of Problems

Deepwater Horizon Explosion and Oil Spill

On April 20, 2010, the Deepwater Horizon oil platform, located in the Mississippi Canyon about
40 miles (64 km) off the Louisiana coast, suffered a catastrophic explosion; it sank a day-and-ahalf later. Although initial reports indicated that relatively little oil had leaked, by April 24, it was
claimed by BP that approximately 1,000 barrels (160 m3) of oil per day were issuing from the
wellhead, about 1-mile (1.6 km) below the surface on the ocean floor. On April 29, the U.S.
government revealed that approximately 5,000 barrels (790 m3) per day, five times the original
estimate, were pouring into the Gulf from the wellhead. The resulting oil slick quickly expanded
to cover hundreds of square miles of ocean surface, posing a serious threat to marine life and
adjacent coastal wetlands, and to the livelihoods of Gulf Coast shrimpers and fishermen.
The spill had a strong economic impact on the Gulf Coast's economy sectors such as fishing and
tourism, and it also had a significant impact on the Gulf of Mexico economy and ecosystem, as
well as a continuing financial, legal, and public relations burden for BP. After burning for two
days, the rig sank and caused the largest accidental marine oil spill in the history of the
petroleum industry, estimated to be between 8% and 31% larger in volume than the earlier Ixtoc I
oil spill.
Research discussed at a conference included preliminary results of an ongoing study being done
by the National Institute for Environmental Health Sciences indicating that oil spill cleanup
workers carry biomarkers of chemicals contained in the spilled oil and the dispersants used. A
separate study is following the health issues of women and children affected by the spill. Several
studies found that a "significant percentage" of Gulf residents reported mental health problems
such as anxiety, depression, increased risk of developing liver cancer, leukemia and other
disorders and PTSD. According to a Columbia university study investigating the health effects
among children living less than 10 miles from the coast, more than a third of the parents report
physical or mental health symptoms among their children.
Gulf of Mexicos Dead Zone

Dead zones, also called hypoxia areas, are caused by nutrient runoff from agricultural and
other human activities in the watershed and are highly affected by river discharge and nitrogen
loads. These nutrients stimulate an overgrowth of algae that sinks, decomposes, and consumes
the oxygen needed to support life in the Gulf. Dead zones are a major water quality issue with an
estimated total of more than 550 occurring annually worldwide. The Gulf of Mexico dead zone is
the second largest human-caused hypoxic area in the world.
The importance of having continued and sustained coastal observations are foundational in
helping us better understand the size and impacts of the Gulf dead zone. This information
ultimately informs the best strategies to reduce the size and the impacts of the dead zone, which
will help improve the sustainability and productivity of our coastal economy, said Holly
Bamford, Ph.D., assistant NOAA administrator for the National Ocean Service performing the
duties of the assistant secretary of commerce for conservation and management.
The largest previous Gulf of Mexico dead zone was in 2002, encompassing 8,497 square miles.
The smallest recorded dead zone measured 15 square miles in 1988. The average size of the dead

zone over the past five years has been about 5,500 square miles, nearly three times the 1,900
square mile goal set by the Hypoxia Task Force in 2001 and reaffirmed in 2008.
The hypoxic zone off the coast of Louisiana and Texas forms each summer threatening the
ecosystem that supports valuable commercial and recreational Gulf fisheries. NOAA-funded
research in the past decade shows hypoxia results in habitat loss, displacement of fish (including
shrimp and croaker) from their preferred areas, and a decline in reproductive ability in some
species.

Stakeholder Position Explanation

Based on the companys balance sheet in 2009, BP Company only have asset in cash and cash
equivalent of 170.3 million US Dollar and the amount of the money that the company willing to
pay for their cause is between zero and 120 million US Dollar, that means the company want to
press their spending for this cause as low as possible and the maximum money they can pay is
120 million dollar if they want the company to still operates.
And what the US Government asks the company to pay is maximum 210 million dollar because
the US Justice Department contends that BP committed gross negligence and willful misconduct,
which BP contests, and is seeking the stiffest penalties possible. The case was carefully watched,
because a ruling of gross negligence would result in a four-fold increase in Clean Water Act
penalties.
The penalty will be consist of compulsory maximum of 100 million US Dollar for the
environmental damage and public health, the other compulsory fixed 20 million US Dollar will
be converted into a trust fund, that will be used to compensate victims of the oil spill, and also a
non-compulsory maximum of 90 million US Dollar to compensate the society who lost their jobs
because of the spill. The US Government also give alternatives for the company to take care of
their own problem with the society with the written report and government supervision, but still
paying the trust fund into the government.
The priority list that the US Government asks to the company is stated in the table:
Priority Number
Event
1
Clean the oil spill
2
Compensate society that lose their job
3
BP Company pay the trust fund
The US government will have to shut down BP Company if the company didnt pay the penalty
or providing solutions for their own problem in two years, and letting go one of the biggest
source of money for the country, letting more than 20.000 people unemployed, etc based on
previous chapters that will make the countrys economic level drops. (Referenced to exhibits US
Economy Growth Forecast)
(Question 1) Calculate the possible negotiation agreement between BP Company and US
Government.
(Question 2) Make all the best scheme/scenario that will be happen if there is no agreement
met between BP Company and US government while BP Company wants to
keep the company running. (References at exhibits)

III. Recommended Solutions

(Question 1)

BPa : BP Companys Aspiration Price. The price that BP Company wants to pay in
order to have a way out from this issue.

USr : US Government Reservation Price. The minimum price that the US Government
will get from the negotiation with BP Company, any amount below this price will make
US Government shut down BP Company.

Bpr
: BP Company Reservation Price. The maximum price that BP Company willing
to pay for the cause. Any amount exceeding this price BP Company cannot have a way
out from this issue.

USa : US Government Aspiration Price. The price that US Government want to get as
close as possible because of the law and society wellbeing.

Shown figure above is the Zone of Possible Agreement (ZOPA) for the two stakeholders, BP
Company and US Government. BP Company wants to hold the deal below 120 million USD,
while US Government wants the deal to be as much as 210 million USD. By determining ZOPA,
we can analyze how much is the possible price for the problem to be solved.

(Question 2)
The second option, if there is no agreeable sum of money between BP Company and US
Government. We need to have analysis of all possible outcomes.
First, we need to list down what are the things that BP Company must fulfill.
1. Paying the compulsory trust fund, 20 million USD
2. Paying the penalty of environmental damage, 100 million USD, or find own way to solve
the problem

3. Paying the compensation money to the society, 90 million USD, or find own way to solve
the problem

Then, we need to calculate the cost of all possibilities.

BP Aspiration
BP Reservation
US Reservation
US Aspiration

0 M USD
118 M USD
20 M USD
210 M USD

Option 1 (pay all the penalty to the government)

Trust Fund (20 M USD) + Environmental Damage (100 M USD) + Compensation money (90
M USD)
= 210 M USD
Invalid, its above the BP Companys reservation price

Option 2 (pay all the penalty to the government and find own way for compensation
money)
Trust Fund (20 M USD) + Environmental Damage (100 M USD) + Some way (y)
= 120 M + y USD
Invalid, its above the BP Companys reservation price

Option 3 (pay all the penalty to the government and find own way for environmental
damage)
Trust Fund (20 M USD) + Some Way (x) + Compensation money (90 M USD)
= 110 M + x USD
Still possible

Option 4 (pay only the trust fund, find own way for environmental damage and
compensation money)
Trust Fund (20 M USD) + Some Way (x) + Some Way (y)
= 20 M + x + y USD
Still possible

The next thing to do, we need to calculate all the x and y in order to know which one is the
possible course to be taken.
Option
Manual Human
Machine Vacuum
Dispersant Liquid

Village Name
A
B
C
D
Total

Cleaning Cost (y)

Year
3
2
1
Affected Village
Populatio
n
1080
714
1044
282
3120

Cost
10
25
65

Total
30
50
65

House Hold =
Population / 3
360
238
348
94
1040

Compensating Society Cost

Pay Full to
Government
90
Money
0.04
Equipment
0.01
Total Money Compensating Society Cost (x)
0.04 * 1040
Total Equipment Compensating Society Cost (x)
0.01 * 3120
*all numbers are in Million USD
*the data here refers to the exhibits
Option 3 (110 M + y)

Y = Men Power (manually) | Invalid, government asks the maximum is 2 years

Y= Machine Vacuum | 110 M + 50 M = 160 M| Invalid, its above BP Company

reservation price

Y = Dispersant Liquid | 110 M + 65 M = 175 M | Invalid, its above BP Company

reservation price

Option 4 (20 M + x + y)

X = Machine Vacuum, Y = Pay Full to Government | 20 M + 50 M + 90 M = 160 M |

Invalid, its above BP Company reservation price

X = Machine Vacuum, Y = Pay Money | 20 M + 50 M + 41.6 M = 111.6 M | Still

possible

X = Machine Vacuum, Y = Pay Equipment | 20 M + 50 M + 31.2 M = 101.2 M Still

possible

X = Dispersant Liquid, Y = Pay Full to Government | 20 M + 65 M + 90 M = 175 M |

Invalid, its above BP Company reservation price

X = Dispersant Liquid, Y = Pay Money | 20 M + 65 M + 41.6 M = 126.6 M | Invalid,

its above BP Company reservation price

X = Dispersant Liquid, Y = Pay Equipment | 20 M + 65 M + 31.2 M = 116.2 M Still

possible

C. Conclusion
Based on what we discuss on the previous chapters, the conclusion that we can get is that if the
BP Company wants to accommodate their reservation price to get out from this situation, BP
Company need to choose option 4.
First they need to pay the compulsory trust fund for 20 million USD, then they choose whether
choose machine vacuum to neutralize the environmental damage and pay compensation money
to society in cash with total of 11.6 million USD or pay the compensation money to society in
equipment with total of 101.2 million USD and it all takes 2 years to be accomplished. And even
BP Company can choose to use dispersant liquid to dissolve the oil and pay the compensation
money to the society in the form of equipment with total of 116.2 million USD, and it all takes 1
year to be accomplished.
Another alternative solution for this issue is to negotiate, we all already know the ZOPA of both
parties, and it is between 20 million USD and 120 million USD. The BP Company can try to
persuade US Government in a supportive negotiation situation to reach an agreement that can
result in win-win solution for both parties, even environment and societies.
BP Company cannot run from this issue because they already caught made a mistake, violate a
law, and they still need to operate the company to get income. Also, the US Government cannot
aggressively push their aspiration price to this issue because BP Company plays a major role in
both US Economic growth and nationals employment rate.

D. Exhibits
1. Cost of Cleaning Oil Spill
Option
Manual human scooped up oil
Machine vacuum sucking
Deploy oil dispersant liquid

Duration
3 year
2 year
1 year

Cost / year
10 Million USD
25 Million USD
65 Million USD

2. Cost of Compensating Society

Option
Pay the penalty to the government in full
Compensate the society by our self in money*
Giving fishery and agriculture equipment*
*already includes operational cost

Cost
90 Million USD
40 Thousand USD per household
10 Thousand USD per head

3. List of Affected Villages

Name of Village Number of Population*
A
1.080
B
714
C
1.044
D
282
*one household consist of 3 people in average

4. United States Economic Growth Forecast

5. United States Unemployment Rate

6. BP Companys Year to Year Income in Million (cash or cash equivalent only)

Year
2005
2006
2007
2008
2009

Income Profit
96.9
115.6
133.8
151.7
170.3

Growth From Previous Year

+18.7
+18.2
+17.9
+18.6