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What Do BP, New York Multifamily & Atlantic Yards Have In Common?

The road to the BP oil spill hell was paved with the opposite of good intentions. Two BP oil refineries account for 97% of all flagrant, or “egregiously willful” workplace violations. The Minerals Management Service, or MMS, a division of the Department of Interior, was supposed to be in charge of monitoring offshore drilling.

Before the Deepwater Horizon rig exploded on April 20, causing the ongoing spill, MMS officials scaled back tests on the well’s blowout preventer. MMS also postponed when those tests would be run at all. Under MMS rules, backups for blowout preventers have been encouraged but not required (“Regulation by suggestion,” as Democratic Senator Sheldon Whitehouse of Rhode Island put it).

The further rigs strayed from shore, the looser regulations got. Exemptions and loopholes allowed operations that were otherwise banned. The agency is the nation’s second largest source of revenue (after the IRS), pouring $13 billion annually into the U.S. Treasury from royalties on oil and other sources. (Hat Tip: Time)

Terry Barr, President of Samson Oil & Gas recites BP’s recklessness and bad acts, chapter and verse:

1) When cementing the production casing the cementing crew, which was being supervised by BP, had difficulty landing the top plug into the casing shoe. This was the first “red flag” because a satisfactory cement job to the production string is fundamental to the safe operation on a go forward basis. The fact that the cement job did not go as planned should have caused the testing operation that followed to be carefully scrutinized, it clearly was not.

2) As is normal practice, the integrity of the pressure tight seal was tested by pressuring up on the casing and observing the pressure response. If pressure bleeds off there is clearly a problem with the pressure integrity of the shoe, However, industry practice dictates that a positive test, that is no pressure drop, is not diagnostic, simply because the reservoir pressure is sufficient to retain the pressure being applied. A negative test is useful because it is diagnostic of a failed cement job. In this case the test was positive.

3) Again, as is normal industry practice a negative pressure test was run, with pressure released from inside the casing and the pressure response was measured. In this case evidence has been bought before the committee that there was a 1,400 psi pressure response. This response is highly diagnostic and is therefore the second “red flag” and at this point the BP supervisors should have concluded that they had what the industry calls a “wet shoe.” That is that the cement job had failed to form a seal at the casing around the reservoir which we know contains high pressure oil and gas.

4) At this point a decision should have been made to do a remedial cement job; this is an expensive operation, but having seen a 1,400 psi response, there was no choice.

5) The BP engineers then proceeded with the balance of the operation to temporarily abandon the well. This meant replacing the 14-pound-per-gallon mud that was in the wellbore with 8.5-pound-per-gallon sea water. The denser mud had been, up until this time, the primary pressure control and was keeping the hydrocarbons in place despite the lack of an adequate cement job at the casing shoe.

Given the two red flags that had been thrown up previously, one would have expected that as a precaution a cement plug would have been placed somewhere in the wellbore as a secondary pressure seal before this primary pressure control system (heavy mud) was evacuated from the wellbore. But at the very least the mud replacement operation should have been heavily scrutinized. Clearly it was not.

6) Evidence provided at the hearing, including the pressure data transmitted from the rig for the last two hours before the explosion, is diagnostic. At 8:20 p.m. on the day of the explosion the pressure data suggest there was a constant flow of sea water being pumped into the drill pipe that was displacing the heavier mud system which was the primary pressure control for the well. The rate going in was 900 gallons per minute, but the flow data of mud coming out was steadily increasing from 900 gallons a minute at 8:20 p.m. to a rate of 1,200 gallons per minute at 8:34 p.m. During this 14-minute period one can conclude that hydrocarbons were flowing and pushing more fluid from the wellbore than was being pumped in.

This is what this data is supposed to monitor, but the well flow evidence would appear to have been ignored, because at this point the BP rig supervisors should have gone to a well kill operation and started to pump heavy mud back into the well bore to restore the primary control mechanism. Instead the mud continued to be evacuated.

7) At 9:08 there was another piece of evidence that is very clear cut. The sea water pump was shut down presumably to check the well stability. However, with the pump shut down a pressure increase was seen in the standpipe (SPP). This pressure response has to be associated with the reservoir flowing hydrocarbons and again at this point kill operations should have been initiated by the BP engineers.

From 9:08 p.m. to around 9:30, despite the sea-water pump either running at a constant volume or shut-in, the SPP continued to increase; again this is evidence that the well is producing hydrocarbons and should have caused a kill operation to be initiated.

9) At 9:30 p.m. the seawater pump was again shut-in to presumably observe what the well was doing, and again there is a notable increase in the standpipe pressure.

10) At 9:49 the SPP showed a very large increase and the explosion followed—this is obviously the point at which the gas and oil reached the drill floor and found an ignition source.

Mr. Hayward and BP have taken the position that this tragedy is all about a fail-safe blow-out preventer (BOP) failing, but in reality the BOP is really the backup system, and yes we expect that it will work. However, all of the industry practice and construction systems are aimed at ensuring that one never has to use that device. Thus the industry has for decades relied on a dense mud system to keep the hydrocarbons in the reservoir and everything that is done to maintain wellbore integrity is tested, and where a wellbore integrity test fails, remedial action is taken.

This well failed its casing integrity test and nothing was done. The data collected during a critical operation to monitor hydrocarbon inflow was ignored and nothing was done. This spill is about human failure and it is time BP put its hand up and admitted that.

Now what does any of this have to do with New York multifamily?

When there is no daylight between regulators and the regulated, at worst, people and the ecosystem die. At “best,” those in power get to play by a different set of rules than everyone else. They get more opportunities to make more money and amass more power. As Joan Rivers says, “It’s not who you know, it’s whom you know.”

Behold Exhibit A: 166-01 Linden Blvd., an 8-story, 267-unit apartment complex in Jamaica, Queens. (Curiously, NYT omits the address of the property in its lengthy story.)

Today’s NYT reports that Rev. Floyd H. Flake’s Greater Allen African Methodist Episcopal Cathedral of New York sold the project for $14 million to a for-profit partnership.

So what, right?

Want to guess the identity of one of the four partners? The Rev. Edwin C. Reed, who was then the church’s former chief financial officer, two real estate developers, Peter G. Florey and Leonard T. D’Amico, and — wait for it — Flake.

So what again, right?

Since the complex provides moderate- to low-income housing, it also receives City money. The Flake quartet gets to split a $1.1 million fee for overseeing renovation work at the project. They also decide alone how much to pay themselves for their services from the $4.3 million in cash after expenses that the city expects the property to produce through 2018.

This was not an arm’s length transaction. The sellers were also the buyers, and they’re pocketing government money as a result.

The sale was approved in late 2006 by the office of the state attorney general, which was then led by Eliot Spitzer, who had just been elected governor. The lawyer who filed the papers with Mr. Spitzer’s office was at the time also serving as a consultant to Mr. Spitzer’s campaign and the treasurer of the campaign of Mr. Spitzer’s running mate, David A. Paterson, the current governor.

Why would the Flake quartet receive such largesse?

Flake, a former United States representative, has remained a political force in New York as the church has expanded under his leadership to some 20,000 parishioners and an annual budget, including subsidiaries, of $34 million.

Flake’s endorsements are highly coveted. They appear to deliver a large bloc of votes, a feat that a dwindling number of folks can still claim to achieve in New York. Among the magicians: unions, Stuy Town tenant leaders, and Hasidim.

Here’s the kicker: the Flake quartet achieved the same result as someone who slips the maitre d’ a C-note to get a good table before everyone else. How?

The final approval for their purchase came from a court in Queens. Five hours after it was filed, the nearly 600-page petition was signed by both a judge and, serving an administrative role, the clerk of the court, Gloria D’Amico, the mother of D’Amico, one of the partners.

That alone was worth making D’Amico partner, no? (Too cynical?)

And where did the Flake quartet get their funding?

The purchase required no cash investment from the partnership, and it was not open to bidding from others. The deal, which included plans for the renovations, was financed with $21.3 million in loans and cash from government programs intended to pay for the rehabilitation of apartment buildings for low-income elderly people.

Not open to bidding from others? So no one had a chance to bid more for the building, let alone with their own money.

What does this remind us of?

Atlantic Yards.

Forest City Ratner got to purchase the MTA-owned property for $100 million (and he only put $20 million down). No other developer or organization had an opportunity to bid on the space, even though MTA’s bylaws required it.

The Flake quartet may operate the Jamaica apartment complex flawlessly. Forest City Ratner may construct a complex that improves downtown Brooklyn. But they both had an unfair advantage to get to that point.

They didn’t jump the line.

There was no line.

BP was supposed to have regulatory lines in the sand that it was not supposed to cross.

It did so repeatedly with no significant repercussions.

Indeed, these actions make it easier for “the little folks” to rationalize their increasing strategic defaults on homes, properties, and bills.

It’s no accident that a corporate culture is directly attributable to the actions or neglect of the people at the top. If they encourage corruption and arbitrarily enforce rules, the workplace becomes a cesspool of sharks.

A solution:

1) Increase accountability for small and large wrongdoers alike.

2) Heighten transparency, and expose wrongdoing to sunlight.

3) Increase the space between regulators and the regulated.

Easier said than done, right?

But if you can measure it, you can fix it.

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