There has never been a greater focus on safety and regulatory enforcement in the offshore oil patch than today. With a steady stream of new rules, policy directives, and enforcement programs, the Bureau of Safety and Environmental Enforcement (BSEE) is making good on its post-Macondo promise to be more proactive and less responsive in its regulatory and enforcement policies. Most recently, on December 7, 2015, BSEE announced its “Pilot Risk-Based Inspection Program” for offshore facilities. Though light on details, BSEE’s announcement suggests this program could have far reaching consequences beyond more frequent inspections for some facilities.
There is no shortage of examples illustrating BSEE’s post-Macondo safety and enforcement efforts:
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In 2010, BSEE reinterpreted its longstanding regulations to grant it authority to directly regulate contractors and issue contractors Incidents of Non-Compliance (INCs).
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In 2013, BSEE announced it would investigate the “safety culture” of operators working on the Outer Continental Shelf (OCS).
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In 2015, the Department of Justice announced criminal charges against employees of both the operator and contractors involved in the West Delta Block 32 platform fire in November 2013—an incident which saw BSEE take unprecedented enforcement actions against the operator, including the implementation of a performance improvement plan and the threat to revoke the company’s status as operator on all existing offshore facilities.
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In 2015, BSEE proposed its new Well Control Rule much to the consternation of the industry which believed it had been excluded, or marginalized, in the rule making process. This has resulted in BSEE Director Brian Salerno defending the rule before the U.S. Senate Committee on Energy and Natural Resources, as well as authoring an editorial published on the industry website FuelFix.
Numerous other examples exist of heightened regulatory scrutiny in the past five years, including more frequent and rigid inspections, greater penalties, and increased whistleblower investigations conducted by BSEE’s Investigations and Review Unit. The latest example, the Pilot Risk-Based Inspection Program, could create significant issues for those operators and their facilities which are included in the program.
The Pilot Risk-Based Inspection Program
BSEE’s stated rationale for this program is that “[b]y focusing on facilities based upon their risk factors, BSEE can more efficiently and effectively manage limited inspection and audit resources.” The risk factors that BSEE will use to identify facilities potentially with a “a greater likelihood of experiencing an incident” according to BSEE Director Brian Salerno, include the facility’s design and its operating and environmental characteristics.
Potentially “At-risk” or “higher-risk” facilities will be identified through “a systemic approach relying on both a quantitative model and qualitative performance and risk-related data”, according to BSEE. The manner in which facilities are classified likely will be a topic of much discussion for the operators of the five facilities chosen to participate in the pilot program and subjected to “focused inspections and reviews of the facilities.”
Looming Unintended (or Intended) Consequences of the Program
While Director Salerno is careful to caution that inclusion in this program “does not mean that the facility has a bad safety record or is a poor safety performer,” it is difficult to envision how a facility’s inclusion in this program would not be viewed as such by some. This program necessarily requires BSEE to pass judgment on whether a facility is at a higher risk of an incident (e.g., fire, fatality, loss of well control event, etc.) than others. BSEE’s identification of a facility as presenting a higher risk could increase an operator’s cost, or ability, to obtain insurance. The marketability and value of such a facility could also be negatively affected. Contractors performing work on such a facility may face increased insurance costs, which operators likely would resist absorbing. More frequent, and what appears to be more robust, facility inspections could also increase regulatory compliance costs.
The litigation consequences of operating a higher risk facility could prove significant. Having been branded by BSEE as higher risk facility, does that operator now have a heightened duty to mitigate those risks? Does that same operator now have greater potential liability for having been deemed to operate a facility that deviates from—or is more dangerous than, as plaintiffs’ attorneys would argue—the ordinary and customary facilities? One can envision litigation involving an incident at a higher risk facility where discovery focuses on the operator’s actions to mitigate those higher risks and the differences in which the operator managed its higher risk facilities from its other facilities.
This program is likely to have a disproportionate effect on smaller operators. As noted, the criteria for identifying higher risk facilities is not transparent. BSEE may well focus on older facilities with a history of INCs. Such facilities may have older designs and been constructed using methods acceptable for their time, utilize older equipment, and be approaching their end-of-life. An oilfield’s traditional life-cycle suggests that the larger operators are more likely to divest these older assets to smaller operators, which can more economically produce the assets. Inclusion in this risk based program may render an economical facility compliant with regulations into a non-economical asset with higher operating costs, decreased marketability, and accelerated decommissioning liabilities.
The unintended—or potentially intended—consequence of this program could be to incentivize the decommissioning of these higher risk facilities and drive the smaller operators from the OCS. The cost of deepwater exploration has largely foreclosed these plays from smaller operators. Increased operating costs and liabilities in the shallower waters, where the older facilities and oilfields predominate, may result in the same effect.
