The small U.S. agency that oversees offshore drilling doesn't write or implement most safety regulations, having gradually shifted such responsibilities to the oil industry itself for more than a decade.
Instead, the Minerals Management Service -- now caught up in the crisis of the Deepwater Horizon rig that for weeks has sent crude oil gushing into the Gulf of Mexico -- sets broad performance goals for the industry. Oil producers and drilling companies are then free to decide for themselves how to meet those goals, industry executives and former regulators say.
A Wall Street Journal examination of the MMS's track record found several instances of the agency identifying potential safety problems and then either not requiring follow-up or relying on the industry to craft a solution. In some cases, the industry didn't do its part.
The Journal also found that the safety record of U.S. offshore drilling compares unfavorably, in terms of deaths and serious accidents, to other major oil-producing countries. Over the past five years, an offshore oil worker in the U.S. was more than four times as likely to be killed than a worker in European waters, and 23% more likely to sustain an injury, according to International Association of Drilling Contractors data, which is adjusted for man-hours worked.
Asked about The Journal's findings on its safety record and practices, MMS officials said in an interview Wednesday that the agency plans to toughen its oversight. Any new regulations emerging from the current crisis "will be a prescriptive regulation," said Lars Herbst, head of the MMS' Gulf of Mexico region. He said the agency is unlikely to give the industry much latitude to decide how to make changes. "After this accident investigation is done, I would bet there won't be any performance-based regulation that comes out to address any problem that we may uncover," he said.
Mr. Herbst questioned the data on deaths, saying the number of working hours could be underreported in the U.S. That would make the U.S. fatality rate look higher.
The agency points out it does conduct numerous inspections. It leases 14 helicopters to ferry inspectors, often unannounced, out to the 3,800 drilling rigs and platforms in the Gulf of Mexico that it oversees. But the number of rigs inspected has fallen significantly in recent years, according to agency data, from 1,292 in 2005 to 760 by 2009.
Defenders of the agency say enforcement isn't its primary responsibility. Stephen Allred, who as Assistant Secretary of the Interior oversaw MMS from 2006 to 2009, said the agency does conduct spot inspections of oil rigs, and checks operators' compliance with safety procedures. However, "Their role is not to baby-sit" the operators, he said. The agency's primary task during inspections is to verify how much oil is being pumped, which is key to another MMS duty, maximizing payments the government receives for oil and gas rights from energy producers.
In one instance late last year, an oil company complained about the inadequacy of the agency's safety investigations. In November, ATP Oil & Gas Corp. sued MMS alleging it was incomplete in investigating a fatal accident at an ATP rig. The lawsuit, filed in federal court in Washington, D.C., alleged an MMS investigator misstated the accident's location, didn't interview the two eyewitnesses to the event, and told ATP to take corrective action within 14 days without identifying problems that needed to be fixed. The suit was settled in March, with ATP paying a $20,000 civil penalty, according to a company lawyer.
An MMS spokesman declined to comment. An MMS court filing gave denials of some ATP claims, including the matter of the accident's location.
Some former employees say that MMS, which was founded in 1982 and is part of the Interior Department, has a built-in conflict of interest: It is supposed to be a watchdog that halts drilling when it spots unsafe behavior. But it is also supposed to promote energy independence and to generate government revenue from drilling on government lands, including the outer continental shelf.
Of MMS's fiscal 2010 budget of $342 million, nearly half comes from the oil industry in the form of fees and rental receipts, known as "offsetting collections." That's one reason why collecting oil and gas royalties is emphasized at the agency, former and current officials say.
The U.K. -- home to one of the largest offshore-drilling industries in the world -- has taken a different regulatory approach. In 1998, after a fire aboard a North Sea platform killed 167 people, the U.K. separated its offshore safety-oversight agency from the revenue-gathering side.
After that change, the U.K.'s safety record improved. The improvements also came at a time of increased mechanization of rigs, which improved the safety of offshore drilling world-wide.
Told of The Journal's findings on MMS's track record, Sen. Bill Nelson (D., Fla.), a longtime opponent of drilling off his state's coast, castigated the agency. "If MMS wasn't asleep at the wheel, it sure was letting Big Oil do most of the driving," he said.
In the U.S., the MMS has been criticized for giving oil companies too much sway in the royalty area, not just regulatory oversight. A 2008 Interior Department Inspector General report faulted MMS for modifying royalty payment contracts in ways that "appeared to inappropriately benefit the oil companies."
U.S. oil-industry executives and current and former regulators say the U.S.'s self-regulatory approach has worked for many years. "There has been a very good record in deep water, up until the point of this accident," said Mr. Herbst of the MMS.
They also argue that offshore operations have become so complicated that regulators ultimately must rely on the oil companies and drilling contractors to proceed safely. "The regulator sets the frameworks, sets the guidance, monitors and inspects," said Elmer P. Danenberger III, the longtime head of the MMS's offshore regulatory programs, who retired in December. "But the regulator isn't conducting the operation."
Many questions remain about last month's sinking of the Deepwater Horizon, including why the rig caught fire, why fail-safe devices didn't work and why the industry wasn't better prepared for a spill of this magnitude.
In recent years, oil wells in the U.S. were more likely to go out of control -- as was the case with the Deepwater Horizon's blowout last month -- than in other countries. According to data from the International Regulators' Forum, a group of offshore regulatory bodies, the U.S. reported five major "loss of well control" incidents in 2007 and 2008, the most recent years for which data are available.
The five other countries in the forum that reported the data (U.K., Norway, Australia, Canada and the Netherlands) reported no such incidents. Last year, those five nations had roughly half as much drilling activity as the U.S.
Over the past decade, the number of MMS enforcement cases that resulted in penalties ranged from a high of 66 in 2000 to a low of 20 last year. A report by the agency's inspector general in 2000 found that it seldom referred safety or environmental violations to the Justice Department for criminal prosecution, even when it should have done so.
To explain its shift toward industry self-regulation, the MMS in a 2005 rule change pointed to a 1996 law that encouraged federal agencies to "benefit from the expertise of the private sector" by adopting industry standards. Mr. Herbst also pointed out that the MMS often has a seat on panels setting industry standards.
The Journal has identified instances in which MMS didn't follow through on potential safety problems that the agency had asked the industry to examine. In 2000, the agency asked the industry for advice on how to deal with problems with cement used to keep oil and natural gas from bubbling to the surface and exploding. A decade later, the industry is still working on its recommendations, according to the American Petroleum Institute. No regulations have been issued by the agency.
Another instance involves "blowout preventers," which are critical devices meant to shut down out-of-control wells. In 1998, the MMS solicited suggestions to improve the effectiveness of the devices but didn't heed them. It commissioned Per Holand, a Norwegian researcher, to study the reliability of the devices. In 2002, Mr. Holand recommended that blowout preventers should have two pipe-cutting devices designed to shut off a well, instead of just one, in case one didn't work.
His reasoning: The pipe cutters are designed to shear off and plug an out-of-control well pipe. But they don't always work if they strike one of the thicker joints, where two pieces of pipe fit together. Joints like these make up about 10% of the length of the drill pipe, meaning the cutters could fail as much as 10% of the time. A second cutter, however, could ensure that at least one of the two would be able to cut the pipe.
The MMS didn't act on Mr. Holand's recommendation. Mr. Holand said he wasn't surprised: Adding a second cutter costs money, and might make the device too heavy for some older rigs to carry.
In 2000, the MMS issued a safety alert saying it expects oil companies to have a backup system to activate blowout preventers if the main activation system fails. A spokesman for MMS says it relied on industry assurances that backup systems were in place, but did no formal survey. Last June, nine years after the safety alert, the MMS issued an almost identical safety notice, but to date has issued no rule requiring the back-up switches.
"I don't recall where that rule-making process ceased," Mr. Herbst said. "It is something that we're going to go back and look at. I don't know yet whether that played into this incident, but I can guarantee we will be looking at that again."
Industry consultants say there are drilling rigs now in the gulf that don't have an automatic "dead man switch," or a separate, remote-control on-off switch to activate the blowout preventer, because the MMS hadn't issued the rule requiring their use.
The Deepwater Horizon did have a "dead man switch," but it failed to activate the blowout preventer. The Deepwater Horizon lacked the separate, remote-control switch that's commonly used in Norway and Brazil.
In a decision that gave the industry greater control over regulatory oversight, MMS got out of the business of telling companies what training was necessary for workers involved in keeping wells from gushing out of control. About a decade ago, the agency turned this over to a trade group, the International Association of Drilling Contractors, according to Lee Hunt, president of the Houston-based organization. It represents offshore drillers such as Transocean Ltd., which owned and operated the Deepwater Horizon.
"There was a recognition that everyone has a vested interest in being as safe as possible," Mr. Hunt said.
The trade group now accredits training schools to teach rig workers how to avoid blowouts, he says. When MMS inspectors visit rigs, Mr. Hunt said, they give "oral examinations" to workers on oil-well control.
The MMS has received unwelcome attention for the behavior of employees assigned to a royalty-collection office in Denver, Colo. The Interior Department's inspector general concluded in 2008 that MMS employees there broke government rules and created a "culture of ethical failure" by accepting gifts from, and having sex with, industry representatives. Following the inspector general's report, the Interior Department took disciplinary action against more than a half dozen MMS workers, with punishments that ranged from a warning letter to termination.
Ethical problems also hit the offshore oil program. In 2009, Donald C. Howard, the former regional supervisor of the Gulf of Mexico region for MMS, pled guilty and was sentenced to a year's probation in federal court in New Orleans for lying about receiving gifts from an offshore drilling contractor. Mr. Howard declined to comment.
The industry has fought against attempts to return to more rigid rules. In a 2009 letter, the Offshore Operators Committee and the American Petroleum Institute, two trade groups, argued against proposed new, stricter rules governing safety and environmental compliance.
Mandated programs, it said, "quickly become paperwork exercises," not genuine improvements. The rules haven't been implemented. Mr. Herbst said the rules would supplement, not replace, existing rules.
(Ben Casselman, John R. Emshwiller and Guy Chazan contributed to this article.)
Copyright (c) 2010 Dow Jones & Company, Inc.
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