Musings: Building Sand Castles - BSEE's Regulatory Over-Reach
This opinion piece presents the opinions of the author.
On April 20, 2010, an explosion occurred on Transocean's Deepwater Horizon, a nine-year old semisubmersible drilling rig working to drill the first well on BP plc.'s Macondo prospect in the Gulf of Mexico. The explosion, resulting fire and eventual sinking of the rig set off a chain of events that unleashed the greatest oil spill in U.S. oil industry history. The Deepwater Horizon disaster resulted in the deaths of 11 workers, while 94 crewmen were rescued.
Two days after the explosion, an oil leak was detected from the well and industry and government officials shifted into high gear in an attempt initially to contain the spill and ultimately design a way to permanently seal the well. Numerous attempts were made to try to close the blowout preventer shear rams, pump drilling mud and cement into the well, place a containment dome over the well to catch the leaking oil and burning off some of the oil that rose to the surface. Other ideas were considered and discarded. Eventually a relief well was drilled that intersected with the original well bore and cement was pumped in to permanently plug the leaking well. On September 19, 2010, U.S. Coast Guard Admiral Thad Allen (ret.), the incident commander for the Macondo spill, declared the well "effectively dead" and of no future danger to the Gulf of Mexico.
The offshore oil and gas industry was disrupted not only by the disaster but also from the federal government's actions to shut down all offshore drilling until forced by the courts to allow shallow water drilling activity and eventually deepwater drilling to resume. Another impact of the Deepwater Horizon disaster was the revamping of the federal government's natural resource regulatory structure, taking the Interior Department's Minerals Management Service and breaking into three parts in order to eliminate conflicting missions – one (Office of Natural Resources Revenue) to manage the royalty and revenues derived from the nation's resources, another (Bureau of Ocean Energy Management) to manage the sustainable development of the nation's offshore resources, and the third (Bureau of Safety and Environmental Enforcement) to regulate safety and environmental oversight of offshore oil and gas activities.
The Bureau of Safety and Environmental Enforcement (BSEE) became actively involved in examining the causes of the Deepwater Horizon disaster, which has led to revisions to existing offshore safety and operating procedures. As part of the establishment of BSEE, the federal government announced it had the power (and duty) to regulate all companies involved in offshore resource activity, which was a significant extension of its regulatory power. Prior to this announced expansion of its regulatory scope, the MMS/BSEE only regulated through its contractual relationship with offshore operators (lessees). Offshore service companies conducting drilling, construction, transportation and maintenance activities on operated leases were regulated through Incidents of Non Compliance (INCs) sent to the lessee. Now, following the Deepwater Horizon accident and resulting Macondo oil spill, two service companies – Halliburton and Transocean - were issued INCs for the first time ever. The authority for BSEE to issue those INCs was derived from the regulators' broad interpretation of the scope of the agency's regulatory powers.
Beyond the question of issuing INCs was problem of BSEE not having offered rules for regulating offshore service company operations. There are strict procedures established under the Administration Procedures Act (APA) that stipulate how federal government agencies are to lay out new industry regulations, the right of industry participants to comment on the proposed rules, and for the federal government to consider these comments in any final rule-making activity. BSEE has yet to promulgate any rules, which would provide an opportunity for companies to comment, discuss and negotiate with the bureau before they become codified.
The latest development in this regulatory jurisdictional issue was the February 19th hearing in the United States District Court for the Eastern District of Louisiana where Judge Carl Barbier approved Transocean's Partial Consent Decree with the U.S. government. Transocean agreed to pay $1 billion in civil penalties for violations of the Clean Water Act and to take other remedial measures. Transocean has two years to pay the fine and to institute a series of operational safety and emergency response improvements on its rigs. This court-approved settlement resolves all other pending government agency enforcement actions and penalties against Transocean, including the four INCs issued by BSEE in October 2011 for the Macondo disaster. Those INCs (and HAL's INCs) had been on appeal with the Interior Board of Land Appeals.
The negotiated settlement requires Transocean to abandon its appeal of the INCs without an admission of liability for the claims in the INCs and for the U.S. government not to assess any civil or administrative penalties based on the INCs. Importantly, BSEE is not dismissing the INCs. This means that BSEE can claim that its first enforcement action against an offshore contractor successfully resulted in the issuance of INCs. The requirement that Transocean abandon its appeal avoids any judicial review of BSEE's action. The settlement terms raise the question of whether BSEE is concerned about its ability to withstand judicial scrutiny of the expansion of its regulatory authority.
According to a newsletter published by the Houston-based law firm Legge, Farrow, Kimmitt, McGrath & Brown, LLP, "This issue will likely remain unresolved until a court reviews BSEE's current attempts to directly regulate contractors, or until BSEE drafts appropriate regulations and submits them for notice and comment by the industry as required under the Administrative Procedures Act." We would agree with the first conclusion about the potential for a court review clarifying BSEE's authority. However, we doubt that BSEE has any intention of issuing draft regulations for the industry to comment on soon since it believes it already possesses all the authority it needs to issue INCs, even though service companies do not know the rules they must operate under. For this reason, the request by BSEE for comments about its draft safety culture policy statement offers the best opportunity for industry representatives to comment not only on the policy statement but also on other issues involving offshore regulation.
Offshore service company managements need to understand they now are regulated, but without any clear understanding of what the rules are they are operating under and will be judged against. Most energy executives think of industry regulation as that of utilities where government agencies oversee pricing, returns companies can earn and how they operate. In this case, the regulations are only dealing with how a company operates, but that can have a significant impact on financial returns. Operating in the dark is not a sound business strategy, and if it comes as a result of ignoring the opportunity to seek clarity then managers have only themselves to blame if they get caught in this Kafkaesque environment.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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