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
© 2015 Wayne F. Buck | R2 Simulation Technologies ii
Payment 14
Your Deepwater Home Page 15
Checking the Simulation Calendar 15
Entering Rig Decisions 15
Round Results and Reports 16
© 2015 Wayne F. Buck | R2 Simulation Technologies 1
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.
© 2015 Wayne F. Buck | R2 Simulation Technologies 3
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.
© 2015 Wayne F. Buck | R2 Simulation Technologies 4
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.
© 2015 Wayne F. Buck | R2 Simulation Technologies 5
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.