Posted on September 18, 2012 by Pamela Giblin
By Pam Giblin and Amber MacIver, Baker Botts L.L.P.
The regulatory landscape for the offshore oil and gas industry has been subject to rapid change in the two years following the Macondo Incident in the Gulf of Mexico.1 Two primary themes have emerged in the new and revised regulations: (1) increased agency oversight, and (2) requirements for third party certification. The regulations are relatively recent, but operators can expect to feel the impacts over the next year.
Increase Agency Involvement
The Mineral Management Service (MMS) oversaw many of the revenue collection, leasing, permitting and enforcement functions for the offshore industry prior to the Macondo Incident. Following that event, the MMS was restructured into separate agencies in part to enable increased agency involvement and oversight.2 The three new agencies are:
(i) the Bureau of Ocean Energy Management (BOEM), which has the leasing functions;
(ii) the Bureau of Safety and Environmental Enforcement (BSEE), which has responsibilities for permitting and enforcement; and
(iii) the Office of Natural Resources Revenue (ONRR), which has revenue collection.
The new agencies, and in particular BSEE and ONRR, have demonstrated a trend of increased agency involvement. With respect to the ONRR, in just the past year, it has issued penalties that represent an increase in excess of three times the previous yearly average under MMS.3 This increased enforcement is a trend we expect to continue.
BSEE’s increased oversight is seen in the numerous regulations it has issued in the past two years. Many of those new rules require additional agency intervention in offshore oil and gas operations. For example, Section 250.456(j) of the Drilling Safety Rule requires that before an operator may switch from heavy to light drilling fluid, the operator must receive approval from BSEE. The Workplace Safety on Safety and Environmental Management Systems (SEMS) rule requires operators to submit their self-audit plans to BSEE for review, BSEE may make changes to the plan, and it has the option to participate in the audit.4 In addition to formal changes in the regulations, both the former director of BSEE and the current director have indicated a potential shift in enforcement policy that would add contractors to the scope of BSEE’s enforcement actions, contrary to former MMS policy, further expanding the agency’s oversight of the industry. We have not seen an example of this yet, but would expect that contractors could see enforcement in the near future.
These changes, among others, illustrate a trend of increased agency oversight of the offshore oil and gas industry. It is a trend we expect to see continue at least during the next year.
Third Party Certification
BSEE has issued new regulations and amended others, adding dozens of new rules and requirements for offshore oil and gas operations. The trend that runs through many of these changes is a requirement for certification by a third party. For example, the Drilling Safety Rule requires that operators have a professional engineer independently certify that the casing and cementing program is appropriate for the purpose for which it is intended under expected wellbore pressure.5 Although the current SEMS rule allows for self-audits to be conducted either by designated qualified personnel (DQP) or third party auditors, the proposed SEMS II rule would eliminate the option to use DQP, requiring all self-audits to be performed by independent third party auditors.6
The likely outcome of the changes that result from these two overarching themes, increased agency involvement and third party certification, is additional enforcement and red tape. Operators may face difficulty in scheduling operations when they have to rely on outside parties to certify their work or agency approval to make changes. Enforcement actions are likely to increase as agency oversight increases. Operations that have not been subject to scrutiny in the past are likely to face additional hurdles and possibly enforcement under the new regulations. Offshore oil and gas operators need to closely follow the evolving regulatory scheme to stay in compliance with the rules and avoid costly enforcement actions.
1The “Macondo Incident” refers to the April 20, 2010 explosion from the Deepwater Horizon drilling rig, in the Macondo prospect, Mississippi Canyon Block 252.
2See DOI Secretarial Order No. 3299 (May 19, 2010) (issued in May 2010 and gave the Assistant Secretary- Land and Minerals Management and the Assistant Secretary — Policy, Management and Budget 30 days to develop a schedule to implement the Order).
3See, e.g. ONRR Press Release, April 30, 2012, http://www.onrr.gov/about/pdfdocs/20120430.pdf, last visited July 9, 2012 ($1.9 million civil penalty against Cabot alleging inaccurate records); ONRR Press Release, March 29, 2012, http://www.onrr.gov/about/pdfdocs/20120329.pdf, last visited July 9, 2012 ($1.7 million civil penalty against Merrion for late royalty payments); ONRR Press Release, July 11, 2012, http://www.onrr.gov/about/pdfdocs/20120711.pdf, last visited August 30, 2012 ($1.2 million civil penalty against QEP resources for maintenance of inaccurate reports).
430 C.F.R. § 250.1920(b).
530 C.F.R. §§ 250.418(h), 250.420(a)(6).
676 Fed. Reg. 56683 (Sept. 14, 2011).
Tags: Mineral Management Service, Macondo Incident, oversight, third party certification, offshore oil and gas, Regulation