Under the Willow Tree: Black Swan

When a major unexpected event with severe deleterious consequences occurs, those who were responsible for preventing it from happening, or were supposed to have seen it coming and have dome something about it, often give similar types of excuses for its occurrence. The typical excuse given is that the event that occurred was an event of such low probability or such low frequency that there was nothing really that could be done to prevent it or to foresee its occurrence.

There are several names given to such events... "Perfect Storms", "Once-in-a-million year event", "Outlier", "Freak Event"... all give the connotation that there was nothing that could have been done to prepare for it, and hence those who should have seen it coming should be absolved from any blame or responsibility since there is nothing they could have done in the first place.

There are a couple of notable events in recent history that have been attempted to be explained away as "perfect storms" or "outliers". These include events such as the Great Financial Crisis, which brought the entire US banking system to its knees, the Deepwater Horizon Oil Spill disaster, which is the single largest and most damaging oil spill in US history, and the recent stock market blip that resulted in the biggest intraday point drop ever in the Dow Jones Industrial Average.

In close examination, history will find that these events were actually results of Systemic Failures, rather than "outlier" events. The Great financial crisis was caused by systemic failure across the entire financial system - from excessively low interest rates by the central bank, to over-deregulation of the banking system, to overly lax lending by commercial banks, to greedy investment bankers. The Deepwater horizon spill was caused by executive decisions which put cost-cutting ahead of safety, by complacency and hubris.

Closer to home here in Singapore, Yaacob Ibrahim has attempted to explain away the recent flash floods as "intense storms" and "freak events." The most famous quote he has given Singaporeans is that floods of this magnitude happen "once in 50 years". In short, Yaacob Ibrahim is basically trying to say that the flooding is caused by outliers and perfect storms, not by a faulty drainage system.

Senator Edward Markey made the opening statement for the oil industry executives' testimony on Capitol Hill. As part of his opening statement, he made the following remarks:

For years, the oil industry swore this could never happen. We were told that technology had advanced, that offshore drilling was safe.

BP said they didn’t think the rig would sink. It did.

They said they could handle an Exxon Valdez-sized spill every day. They couldn’t.

BP said the spill was 1,000 barrels per day. It wasn’t. And they knew it.

Now the other companies here today will contend that this was an isolated incident. They will say a similar disaster could never happen to them.

And yet it is this kind of Blind Faith -- which is ironically the name of an actual rig in the Gulf -- that has led to this kind of disaster.

It so happens that I am reading a book called "The Black Swan", by Nassim Taleb. The coincidence couldn't come at a better time. Nassim Taleb in his book, describes these Black Swan Events as:

Firstly, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. ...

Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. ...

A small number of Black Swans explain almost everything in our world ...

Consider that many Black Swans can be caused and exacerbated by their being unexpected ...

Isn't it strange to see an event happening precisely because it was not supposed to happen?

The Black Swan concept seems to apply to BP's Deepwater Horizon disaster perfectly. For years such an accident was thought by BP and the oil industry to be unimaginable. BP thought they had all the technology, know-how and experience that a disaster of such magnitude was completely inconceivable.

BP's US chief Lamar McKay has told a Congressional panel that there has been "tremendous shock that such an accident could happen", during his preliminary address to the House energy and commerce committee.

Even the government agency tasked with oversight agreed with the oil industry, as Edward Markey further observed:

We now know the oil industry and the government agency tasked with regulating them determined that there was a zero chance that this kind of undersea disaster could ever happen.

When you believe that there is zero chance of a disaster happening, you do zero disaster planning. And the oil industry has invested nearly zero time and money into developing safety and response efforts.

In retrospect, we now know that BP should have seen it coming. Rigzone reports that the oil well had been described as a "nightmare" and that BP had taken safety shortcuts in order to cut costs, even having been warned of "severe" gas flow problems:

According to the letter from the panel, a BP drilling engineer told a colleague that the well had been a "nightmare well." But the same drilling engineer also emphasized the time and cost savings that would result from choosing the less-protective of two options for the casing in the well--using a single string of steel casing instead of hanging two steel liners, the letter said.

He also made a case for using six centralizers--devices to keep the casing centered--instead of the 21 called for by contractor Halliburton, according to the letter. In spite of warnings from Halliburton about a "SEVERE gas flow problem" stemming from the use of just six centralizers, BP went ahead, according to the letter, which was based on interviews with officials involved in activities on the Deepwater Horizon and documents provided to the committee

BBC also reports,

BP rejected Halliburton's recommendation to use 21 centralisers to make sure the casing ran down the centre of the well bore. Instead, BP used six.

In an e-mail on 16 April, a BP official involved in the decisions explained: "It will take 10 hours to install them. I do not like this."

Later on the same day, another official recognised the risks of proceeding with insufficient centralisers but added: "Who cares, it's done, end of story, will probably be fine."

"It appears that BP repeatedly chose risky procedures in order to reduce costs and save time and made minimal efforts to contain the added risk," the congressmen write.

"If this is what happened, BP's carelessness and complacency have inflicted a heavy toll on the Gulf, its inhabitants, and the workers on the rig," they say.

Indeed, in retrospect, it is clear that arrogance, complacency, and shortcuts are the reason that the disaster occurred. The disaster could have been avoided if BP and the oil industry were humble about their expertise and acknowledged that there were always risks of disasters happening at any time, and that maximum effort was required to minimise the risk of something going wrong. Indeed, BP has now paid the price for their arrogance.

Now that the Gulf of Mexico spill has occurred, everybody is questioning whether deep-sea drilling is safe at all, particularly Brazil, which is looking to exploit its Tupi oil field, the largest deep sea oil discovery in recent times.

Mr Lima says the accident in the Gulf of Mexico is a "general alert" to all countries with deep-water exploration off their coasts.

"Is it possible to drill in such challenging conditions with the confidence that everything is going to work fine? That's a very important question that we had to ask ourselves after the accident in the Gulf of Mexico," says Mr Lima.

"The fact that a serious company like BP was operating the field only makes this even more worrisome."

The oil industry's fundamental approach to deep-sea drilling will be changed forever, most likely with a deep seated paranoia and caution against any possible accident.

The Deepwater Horizon was previously outside the realm of regular expectations, because nothing in the past seemed to point to its possibility. However, its occurrence carried an extreme impact, all the more exacerbated by its being unexpected. Furthermore, in hindsight, we see that it occurred precisely because it was not supposed to happen.

The Deepwater Horizon Disaster is the Oil Industry's Black Swan.