Musings: New EU Offshore Drilling Rules May Slow Future Activity

Musings: New EU Offshore Drilling Rules May Slow Future Activity

Two weeks ago, the European Parliament and the Council that represents European Union governments reached a political agreement on the European Commission's legislative proposal on the safety of offshore oil and gas activities in the European Union. The formal approval of the policy will occur in coming months. The proposal for a tightened and uniform offshore regulatory structure was first floated in 2011 in response to the 2010 Macondo well accident and resulting oil spill. Initially, the idea was that the best of the current offshore regulations from member countries in the European Union would form the basis of regulation and that all European Union members would adhere to them. There was much pushback from the U.K., which probably has the strictest offshore safety system and rules in place.

One significant concession made by the European Union in its proposal was to make the implementation in the form of a Directive rather than a Regulation. This provides that the individual members have the discretion of how to put the new rules in place. The third point of the 10 point program refers to the safety case that each operator must complete. For the U.K., the concern was that its established safety cases would need to be redone at great expense for the operators and disruption in their regulatory process. In other words, they saw this as a paper-pushing exercise that would divert time and effort from the actual safety inspection work of their country's inspectors. Now that each member country will be responsible for implementing the rules and guidelines, all the existing safety cases for each offshore drilling and producing installation will not need to be redone.

Offshore operators will be required to report to the European Union regulators all major accidents overseas in which they have been involved in order to enable key safety lessons to be studied. At the same time these operators working in European Union waters will be required to demonstrate that they are applying the same policies for preventing major accidents overseas as in their European Union operations. The challenge to all these regulations is how they will allow safety advances elsewhere to migrate to the European Union. That was the major objection the U.K. offshore industry had to the original proposal. Under the original concept, a one-size-fits-all set of regulations was to be adopted, which were largely to be based on the U.K.'s offshore safety cases. However, the proposed rules lifted from the UK regulations were poorly worded such that the terminology was altered and the intent of the rules was made ambiguous.

Potentially the most contentious issue in the European Union's offshore rules is the provision that each state that grants offshore drilling licenses must satisfy itself that only operators with proven technical and financial capacities necessary to ensure the safety of offshore activities and environmental protection are authorized to explore for and produce oil and gas in European Union waters. It is reported that this requirement includes "liability for potential economic damage where such liability is provided for by national law." The question this provision raises is what it means for the future composition of the universe of offshore operators. Could a mix change actually translate into a reduction in the number of oil and gas companies allowed to operate offshore? Would that be a good thing? Wouldn't fewer operators translate into reduced offshore lease bonuses and a potential reduction in offshore lease royalties for governments? That would also mean less offshore oil and gas resources discovered, developed and produced. It also might be damaging to the health of the offshore oil service industry as fewer operators is likely to translate into fewer wells drilled and fields developed.

An international legal news service interviewed several lawyers in Europe about the possible impact of this financial and technical requirement. One thought was that the financial test could be satisfied by the posting of credit or bank guarantees. This is easy for the major integrated oil companies, the national oil companies and very large independent exploration and production (E&P) companies to do. It will be more difficult for small E&P companies to obtain credit guarantees. When it comes to assessing the technical and financial capability of operators, including their responsibility to cover potential economic damage, the idea that each country will make the necessary determination probably provides the greatest flexibility to the regulation. Alex Msimang, the managing partner of Vinson & Elkins LLP's London office, commented, What [the directive] at least does is create some…minimum requirement that's likely to apply in any member state. There's still going to be a difference on what exactly the criteria are." He went on to say, "What you tend to see in the U.K. is going to be far more developed and elaborate than what you see in Belgium." For oil and gas companies, the world has not come to an end but the amount of flexibility companies have to operate continues to be eroded.


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