Deepwater simulation

Deepwater Simulation Version 1.3.1

STUDENT HANDBOOK Version: January 18, 2016

Simulation Technologies © 2015 Wayne F. Buck

R2

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© 2015 Wayne F. Buck | R2 Simulation Technologies i

TABLE OF CONTENTS

1 | INTRODUCTION .................................................................................................................... 1

2 | BEFORE THE SIMULATION STARTS ............................................................................................. 2

3 | YOUR COMPANY .................................................................................................................. 2

Operational Assets 2 Financial Assets 3

4 | UNDERSTANDING OIL COMPANY OPERATING RISKS ....................................................................... 3

Blowout Risk 3 Worker Injuries and Fatalities 3 Inspections 3 Pollution and Environmental Damage 4

5 | MANAGING OIL COMPANY OPERATING RISKS .............................................................................. 4

Blowout Risk 4 Watching the Weather 4 Managing Your Rig to Reduce Blowouts 4 Managing Your BOP to Reduce Blowouts 5 Worker Injuries and Fatalities 6 Safety Inspections and Violations 7 Pollution and Environmental Damage 7

6 | OIL COMPANY FINES AND PENALTIES ......................................................................................... 7

Blowouts 7 Worker Injuries and Fatalities 7 Inspections 8 Pollution and Environmental Damage 8

7 | OIL COMPANY FINANCIAL MANAGEMENT ................................................................................... 8

Revenues 8 Expenses 8 Capital Expenditures 9 Pollution Control Equipment 9 Cash Position 9

8 | QUICK OVERVIEW ON HOW TO PLAY ....................................................................................... 10

9 | DETAILED INSTRUCTIONS ...................................................................................................... 10

Preparing to Play 10 Management Decisions 12 Management Reports 13

10 |THE DEEPWATER SIMULATION ONLINE .................................................................................... 14

Registering and Paying for Deepwater 14 Registering 14

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Payment 14 Your Deepwater Home Page 15 Checking the Simulation Calendar 15 Entering Rig Decisions 15 Round Results and Reports 16

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Deepwater Simulation Web Version 1.3

STUDENT HANDBOOK

1 | Introduction ...................................................................................................................................................

In the Deepwater Simulation you manage an oil production company operating in the Gulf of Mexico. Your company produces crude oil from a deep water oil well and sells it on the open oil market.

Your objective in the simulation is to outcompete your rival companies. During the simulation, you and your company will be faced with several ethical challenges. Your responses to these ethical challenges have the potential to affect your business success.

The purpose of the simulation is to provide an experiential learning opportunity to better understand the real-world ethical challenges faced by companies and managers as they make key business decisions. Just like managers in the real world, you will be forced to make trade-offs between short-term and long-term profits, worker safety, environmental impacts and social needs.

The Deepwater simulation was inspired by the oil spill in the Gulf of Mexico. In April 2010, BP was in the process of sealing an exploratory well in deep water fifty miles off the coast of Louisiana. The Deepwater Horizon, an exploration oil rig leased from Transocean, had found considerable quantities of crude oil nearly 13,000 feet under the seabed. In preparation for turning the well over to a production oil platform, management and workers made a series of mistakes. They lost control of the well. Critical backup control systems – including the blowout preventer – failed. Crude oil and natural gas surged up out of the well onto the rig and exploded, killing eleven and injuring many more. Over 200 million gallons of crude oil flowed into the Gulf during the three months it took to cap the well, creating the worst environmental disaster in U.S. history and damaging the Gulf economy at a cost of billions of dollars.

This simulation, while attempting a certain degree of realism, is in many respects not realistic and indeed is not intended to be. The purpose of the simulation is not to model actual offshore drilling operations or oil company management. Its purpose is to provide an experiential learning opportunity to better understand the real-world ethical and challenges managers face in making business decisions.

A deep water oil rig

© 2015 Wayne F. Buck | R2 Simulation Technologies 2

Disclaimers

This Handbook may contain errors and/or omissions. Definitive statements and clarifications about the simulation are available from R2 Simulation Technologies.

2 | Before the Simulation Starts ..................................................................................................................

Carefully read both this Student Handbook and any assigned background readings on the oil industry and/or the Gulf oil spill.

Carefully study the example prospectus. It gives you vital information about your operating assets, financial situation and operating environment. You will need this information in order to make good management decisions.

Your company's success will depend in part on your ability to anticipate changes in crude oil prices and weather in the Gulf of Mexico, particularly during hurricane season (June to December). Therefore, you should familiarize yourself with what analysts and oil industry experts expect to happen with crude oil prices over the next 3-5 months and with the official hurricane forecast.

3 | Your Company ...............................................................................................................................................

Operational Assets

Your company's initial operating assets include a lease to extract crude oil from under the ocean floor in the Gulf of Mexico, a deep water oil well and a production oil rig.

You hold a lease on a particular block of the ocean floor under the Gulf of Mexico, purchased by you from the Federal government at auction. This lease is what gives you an exclusive right to drill for oil on this block of the Gulf floor. You are required to pay the government royalties on the oil you produce.

Your company has already "completed" the well, which means it has drilled an exploratory well, found significant amounts of crude oil under the ocean floor, detached the exploration rig and connected a production oil rig to the well. You will be managing this production oil rig.

Your rig is floating in 5,000 feet of water, directly above the oil well on the ocean floor. The reservoir of crude oil is another 13,000 feet further down through solid rock. Your production well is attached to an undersea pipeline which carries the crude to land for sale to midstream aggregators and downstream refineries.

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You earn revenues by producing and selling your crude oil on the open market. (Note that the simulation uses actual oil prices to calculate revenues.) Operating an oil rig exposes you to risks, including accidents that could injure or kill workers. Your rig could also suffer a "blowout."1

Your company's challenge is to set production goals and manage your workers, operating expenses and risks to make a profit.

Financial Assets

Your company starts the simulation with significant financial assets (cash in the bank, which earns you interest) and liabilities (an outstanding commercial loan, on which you pay interest).

If you mismanage your oil company, you can go bankrupt and be forced out of the simulation. In the simulation, an oil company goes under when it is runs out of cash – that is, when it overdraws its bank accounts.

4 | Understanding Oil Company Operating Risks ..............................................................................

Producing crude oil from deep offshore waters is a dangerous business. Your company is exposed to several different kinds of risk.

Blowout Risk

Because of the pressures and temperatures involved, drilling for oil from deep inside the Earth risks a blowout. A well blows out when the crew loses control of the well and crude oil and natural gas, under extreme pressure (up to 12,000 psi) and at high temperatures (up to 400° F), burst up through the well into the rig on the surface of the Gulf. The force of the surging liquids is powerful enough to rip apart a rig, killing and injuring workers. In addition, crude oil and natural gas are highly flammable and the slightest spark will cause an explosion, potentially injuring and killing even more.

Worker Injuries and Fatalities

An offshore oil rig is a dangerous place to work. Even in the absence of a blowout, workers are at risk of injury and even death. Unsafe working conditions and poorly trained workers increase the chances of an accident.

Inspections

Your oil rig is subject to periodic inspection by government regulators. If safety violations are found, you will be fined. The probability of being cited for safety violations during an inspection is a function of the amount you spend on safety programs and the amount of oil you produce. The more spent on safety or the less crude produced, the lower the risk of a safety violation; the less spent on safety and the more crude produced, the higher the risk of a safety violation. 1 The noun (and adjective form of the noun) is spelled "blowout"(no space) while the verb is "blow out" (with a space between the

words). For example, "She's had two blowouts already, but I hope I don't blow out myself." The piece of equipment that should prevent a blowout is a blowout preventer or BOP.

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Pollution and Environmental Damage

Normal deep water oil production, even in the absence of a blowout, causes pollution and damages the environment. In addition to the inevitable crude oil leaks and spills, offshore oil rigs consume tremendous amounts of diesel fuel to power generators and operate equipment. Also, an offshore rig is serviced by a flotilla of ships and aircraft, each of which causes its own pollution.

5 | Managing Oil Company Operating Risks .........................................................................................

Because of your exposure to risks that threaten the lives of your crew and could heavily damage the environment and the livelihoods of the people living along the Gulf, risk management is a key aspect of managing your company.

Blowout Risk

Blowout risk is determined by several factors: the amount of oil produced, the operating condition of the rig and its equipment (which in turn is determined by production volume and spending on equipment maintenance and repair), the condition of the rig's blowout preventer (BOP) and weather.

If you do blow out, workers are likely to be injured and or killed. How many injures or fatalities your crew suffers depends on the severity of the blowout.

Watching the Weather

One important driver of blowout risk is the weather. Because offshore oil rigs need to operate as much as possible to recoup the huge capital investment required, they are built to operate in all kinds of weather. However, hurricanes (which are common in the Gulf, particularly in the Fall) are a different matter. If you continue to operate in the middle of a hurricane, you run a high risk of blowing out.

You have the option of "shutting-in" for any round. The chances of blowing out while shut-in, even in a hurricane, are not zero but are dramatically lower than continuing to operate through the storm. (Note that the simulation is tied to actual Gulf weather.)

Shut-in wells produce no oil, and hence earn no revenues. However, shut-in wells have only temporarily suspended production, so rig operators still incur operating costs and face accident risks and are subject to safety inspections that could result in fines.

Managing Your Rig to Reduce Blowouts

The weather cannot be controlled, and you cannot do anything about the location or depth of your well. But you can manage how much oil is produced and how much is spent on maintenance. The more crude oil you produce, the more wear and tear on the equipment; the more you spend on maintenance, the more that wear and tear is reversed.

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You may choose to ignore blowout risk, and to increase production without increasing maintenance, or even to decrease spending on maintenance, but the result is an increased probability that the well will blow out. To keep the chances of a blowout from increasing, increased production should be accompanied by increased spending on maintenance.

Each rig comes with a manufacturer's recommended production level – called the "baseline" level – and a baseline maintenance expenditure. These baselines are neither minimums or maximums. You can decide to produce or spend more or less. Part of the challenge of playing the simulation is to figure out how to balance the risks with the potential profit.

To help you manage blowout risk, the operating reports distributed after each round include a "Rig Operating Condition Index" (RECI). Initially, this indicator reads "100." Your rig's condition can decrease (even go below zero) or it can increase above 100. This number gives you a rough indication of the operating condition of the rig relative to the beginning of the simulation. Note that the RECI indicates the relative condition of your oil rig, that is the part of your equipment that floats on the surface of the Gulf. The RECI, in itself, tells you nothing about the condition of your equipment on the seabed – in particular, it tells you nothing about the condition of your blowout preventer (BOP), located 5,000 feet underwater.

The worse (lower) the RECI, the greater the chances of a blowout. The better (higher) the operating condition, the lower the chances of a blowout. Note that just because the chances of a blowout are high (due to a low rig condition, for example), there is still some chance that the rig will NOT blow out. And, conversely, there is a chance, albeit a small one, that even a rig with a very high operating condition will still blow out.

Managing Your BOP to Reduce Blowouts

Another source of blowout risk lurks under the water: your blowout preventer, or BOP. The BOP sits on the ocean floor, 5,000 feet underwater, where the pressure is over 2,000 psi and the temperature near freezing. Because the Rig Operating Condition indicator represents only the condition of your rig (that is, the part of your operation that is above water), you have very little information about the condition of your BOP. You do know that your BOP is rated by the manufacturer for a certain number of rounds of use at your rig's baseline production rate. (The service life of your BOP is determined by your instructor.) After the end of your BOP's rated service life, the chances of the BOP failing and causing a blowout increase with every round – and even sooner if you produce more than the baseline amount of oil.