August 15, 2012, may mark a new day for the offshore oilfield service industry as the Bureau of Safety and Environmental Enforcement (BSEE) issued two actions that are reshaping the regulation of oil and gas operations in U.S. waters. One action was an Interim Policy Statement that expressly announced new policy to hold oilfield service companies jointly and severally liable with the lessee/operator when performing any activity that is subject to regulation. The second action was issuing the Final Rule for Offshore Drilling Safety, which follows on the Interim Final Rule issued last October and that had been subject to public comment. The Final Drilling Safety Rule reiterated BSEE's claim for extending its jurisdiction to oilfield service companies.
We have been covering the evolution of this regulatory expansionary effort by BSEE and its previous iteration, the Minerals Management Service (MMS). BSEE is extending federal regulation of offshore operations beyond the contractual relationship between the lessee/operator and the federal government to all the oilfield service companies who work offshore. You can read our coverage of this issue in our March 27, 2012, and April 10, 2012 issues of the Musings. In the past, or pre-Macondo era, federal offshore regulation involved the lessee/operator who was responsible for all operations and any resulting problems involving the activities of the oilfield service companies.
The rationale for this extension of regulation came as a result of the Deepwater Horizon disaster and the resulting Macondo well blowout and oil spill. One response was the government's reorganization of the MMS, creating the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), which was later split into two organizations, one focusing on managing offshore assets and the other on offshore operations and safety. Michael Bromwich, former Inspector General of the U.S. Department of Justice and a partner in a global law firm, was named to head the new organization. In a speech at the 2011 Offshore Technology Conference, Secretary Bromwich set out two policies – one for regulation of offshore permitting and the other expanding offshore regulation to oilfield service contractors. His prepared comments contained the following statement about the second objective: "We have completed our review of the issue and have concluded that in fact we have broad legal authority over all activities relating to offshore leases, whether engaged in by lessees, operators, or contractors. We can exercise such authority as we deem appropriate." (Emphasis added) He cited the fact that all prior regulation that had been limited to lessees/operators was designed to keep a clear line of regulation, but now the agency believed it could also pursue contractors for violations of regulations, too. The foundation for this regulation expansion was the belief, expressed by Secretary Bromwich at the 2010 fall conference of the National Ocean Industries Association that the long offshore safety record of the oilfield service industry was really due to luck. Philosophically, regulation becomes the only way to ensure that the industry's safety record will be maintained rather than just counting on luck. After the Deepwater Horizon disaster, the service industry required tighter regulation because the country could no longer rely on the industry's operational luck.
The BSEE Interim Policy Statement claims to be an internal document and lists the standards and procedures the agency will attempt to follow when issuing citations for oilfield service company violations. The problem is that the standards and procedures are based on discretionary decisions made by the agency's personnel. Their decision is supposed to be based on "serious violations of BSEE regulations," but what does that mean? To consider a violation, BSEE employees are to consider four factors: the type of the violation; the harm (or threat of harm) resulting from the violation; foreseeability of harm (or threat of harm); and the extent of the contractor's involvement in the violation(s). Under each of the four factors are a series of other considerations. But the key point is that offshore oilfield service companies are now subject to regulation in which they have not had any input into the establishment of the rules the companies must now live with. By avoiding the usual rule setting process, the service companies have been deprived of the opportunity to state their case about what should be regulated and how the regulations should operate. Now the companies are subject to ex post facto decisions and actions by government inspectors. Possibly a more troubling consideration is that the Final Drilling Safety Rule reiterated BSEE's claim for extending its jurisdiction to the offshore oilfield service companies. By being included in the final rule, BSEE's jurisdiction may supersede the Interim Policy Statement and its claim to be only an internal document.
Offshore oilfield service company managements need to understand that they are now regulated in a different way than ever before. This regulation carries obligations that impact company operations, including securities filings if it is publicly-owned, insurance coverage, regulatory compliance plans, financing covenants and customer contracts. Welcome to the new world of offshore regulation!
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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