On the first anniversary of the Macondo oil spill it is important first to remember the families of those who lost loved ones in the incident and also the communities still affected by the aftermath of the spill. However, it is perhaps also an appropriate moment to review how government and industry has responded to those events, both in the US and here in the UK.
US Regulatory Regime Overhauled
The Macondo incident has lead to a seismic shift in oil and gas regulation in the Gulf of Mexico. Although the immediate moratorium on deepwater drilling in the Gulf was quite rapidly overturned, the inevitable reluctance of the authorities to authorise further deepwater drilling until the new regulations were in place means that it was really only at the end of February this year that new permits began to be issued for deepwater drilling – mostly the resumption of wells which had already been planned or underway prior to the moratorium but also a handful of new wells.
The regulators have instead been focused on a radical overhaul of their structures and procedures. Alongside criticism of the parties involved and of the prevailing safety culture in the industry, the US regulators also came in for a high degree of criticism in the Report of the US National Commission on the Macondo oil spill (despite recognition that this was in part due to a failure of resourcing which prevented adequate recruitment and training of staff).
As a consequence of the investigation, the old Minerals Management Service (MMS) is being split up into three new agencies:
- Office of Natural Resources Revenue
- Bureau of Ocean Energy Management
- Bureau of Bureau of Safety and Environmental Enforcement
The National Commission also recommended a move towards more goal-based legislation – using the UK’s regime as something of a model - and BOEM has already responded to this by introducing two new rules:
- The Drilling Safety Rule - this imposes tough new standards for well design, casing, cementing and well control equipment, including BOPs; requires independent third-party inspection and certification for each stage of the proposed drilling process; and requires an engineer to certify that blowout preventers meet new standards for testing and maintenance and are capable of severing the drill pipe under anticipated well pressures.
- Workplace Safety Rule – under this rule operators are now required to develop a comprehensive safety and environmental management program that identifies the potential hazards and risk-reduction strategies for all phases of activity.
It has also issued additional guidance (in the form of its traditional Notices to Lessees (NTLs)) to operators on complying with existing regulations. The most significant guidance is:
- NTL-06 (June 2010) - this states that oil spill response plans must include a well-specific blowout and worst-case discharge scenario – and operators must provide the assumptions and calculations behind these scenarios.
- NTL-10 (November 2010) - this requires each operator to demonstrate that it has access to, and can deploy, subsea containment resources that could promptly respond to a deepwater blowout or other loss of well control. It is this containment issue that has delayed issue of deep water permits.
There is continuing debate in the US as to whether the current $75 million cap on strict liability for oil spills under the federal Oil Pollution Act 1990 should be increased (although it should be noted that, just as in the UK, there is no limit on liability in the US for pollution caused by negligence).
UK Regulation Reviewed
The offshore oil and gas industry in the UK is regulated by the Health & Safety Executive (HSE) and the Department of Energy and Climate Change (DECC). Following the Gulf of Mexico disaster, both organisations conducted a review of the UK’s existing safety and environmental regulatory regime and concluded that overall it was robust and fit for purpose, reflected in the fact that there has not been a blow out on the UKCS for over 20 years.
Following a six-month enquiry, the House of Commons Energy and Climate Change Committee (the “House of Commons Committee”) also published a report in December into the implications of the Gulf of Mexico oil spill for UK deepwater drilling and has made 25 recommendations for changes to UK regulation and operating practices (see our LawNow).
The HSE has reinforced its existing rules and procedures by:
- Increasing levels of peer review of well design assessments and auditing of safety case acceptance for MODUs.
- Introducing basic well control assessment for all MODU offshore inspections.
- Creating an internal Deepwater Horizon Advisory Group focused on monitoring the outcomes from investigations into the Gulf of Mexico disaster and the Montara blowout in Australia to ensure that any recommendations which emerge are taken account of.
DECC also decided to strengthen the environmental regime further by:
- Increasing the number of MODU environmental inspections by DECC inspectors, effectively doubling the number of annual inspections to drilling rigs.
- Increasing the number of HSE/DECC joint inspections of MODUs.
- Revising and enhancing requirements for Oil Pollution Emergency Plans (OPEPs), whereby operators must: Be able to respond to a worst case scenario of a potential well blow-out that cannot be controlled in the short-term, requiring the drilling of a relief well. Ensure proper systems, procedures, resources and staff are established to activate a response to any pollution incident. This includes setting out procedures for locating an alternative rig to drill a relief well.
OSPRAG – Oil Spill Prevention and Response Advisory Group.
One of the most significant differences in terms of the culture of the oil and gas industry between the US and the UK is the extent to which the industry and regulators in the UK work closely together to achieve improvements in practice. An example is the establishment, only a month or so after Macondo, of OSPRAG, made up of oil companies, contractors, the HSE, the DECC, the Maritime and Coastguard Agency and trade unions. OSPRAG divided its activities into four streams:
- Oil Spill and Emergency Response Review Group - reviewing United Kingdom Continental Shelf regulation and practices concerning pollution prevention and response.
- Insurance and Indemnities Review Group - reviewing the adequacy of financial provisions for such a response.
- Technical Review Group - monitoring and reviewing findings from investigations into the Gulf of Mexico disaster and assisting the implementation of any recommendations resulting from such investigations that may be relevant to the UK.
- EU Issues Review Group - working with European and other regulatory, technical and industry bodies across the globe for purposes of information sharing and to ensure a co-ordinated response.
A huge amount of very detailed work has been carried out and is ongoing within OSPRAG on all aspects of risk mitigation in relation to oil spills including preventing problems with wells in the first place, minimising the length of time and volume of any escape of oil, ensuring effective spill response strategies and ensuring sufficient financial arrangements are in place to cover the response to any spill. (See its latest interim report). Some of the main actions to come out of OSPRAG to date include:
- The commissioning of an oil spill containment device (being constructed by Cameron Ltd. which will be available from this summer to all operators in the UKCS through Oil Spill Response Limited (an industry owned company) in the event of an uncontained well.
- The commissioning of scenario modelling work to establish the potential damage which might be caused by a sustained uncontained oil spill on the UKCS and therefore whether the current liability limits under OPOL (see below) are adequate.
- The identification of industry best practices in well management as well as areas with potential for on-going continuous improvement. These have published as recommendations and a new Well Life Cycle Practices Forum (WLCPF) has been established to serve as the permanent forum for the UK upstream oil and gas industry to address well life-cycle related issues, which will report to the Oil & Gas UK Board.
- A National Contingency Plan exercise will be held on 18 and 19 May 2011. The scenario for the exercise will be based upon a drilling incident west of Shetland and will include the deployment of physical response, potentially including aerial and vessel dispersant application, at sea containment and recovery and shoreline protection. The use of vessels of opportunity, including fishing vessels, will be exercised.
Offshore Pollution Liability Association Ltd (OPOL) limits increased
For companies operating in the UK offshore industry, there is no legislative limit on liability for clean-up and compensation resulting from environmental or other damage if their installations fail. However, in 1975 the industry formed Offshore Pollution Liability Association Ltd (OPOL) to administer a voluntary industry mutual agreement whereby third party claims can be addressed rapidly on a strict liability basis (i.e. without the need to establish fault). OPOL also serves as a form of reinsurance in that, in the unlikely event of default by an OPOL member, the remaining members will step in and assume liability for third party costs up to the pre-determined OPOL limit. In light of the Gulf of Mexico disaster, on 18 August 2010, OPOL members agreed to increase the OPOL limit from US$120 million to US$250 million. Above that limit, claims could still be made against the companies responsible but it would be necessary to prove negligence or breach of duty.
The House of Commons Committee in its report expressed the view that the new limit of $250 million is still insufficient to cover the costs of dealing with a blowout in the UKCS and that the voluntary nature of the scheme weakens its force. It therefore recommended that it should be a requirement of the licensing process that licensees prove their ability to pay for the consequences of any incident that could occur and also that Government consider whether compulsory third-party insurance should be required for small E & P companies.
Initial oil spill modelling work has been carried out by OSPRAG and is ongoing. Although at present OSPRAG has stated that with the capping device on hand for rapid deployment, the new $250 million per occurrence limit should cover the third party costs associated with the majority of spill scenarios, there may be some circumstances in which these limits may not be adequate and this is still under review. Recommendations are now being considered within OSPRAG on how to ensure that in such cases, no costs will fall on the public purse, possibly through the formation of a top-up mechanism on a case-by-case basis that is above and separate to OPOL. All such recommendations will be dependent on the outcome of further industry and governmental consultations.
Many of the issues addressed by OSPRAG will require further work in coming months, even after the group is wound up, possibly as early as the summer – a new panel within Oil & Gas UK will take on any outstanding actions. In addition, the industry will be following closely developments in relation to:
- NGO activity: Greenpeace has challenged DECC’s award of new licenses in deepwater areas in October 2010, arguing that it should have awaited full results of Macondo investigation, and reconsidered environmental assessments in light of the incident. A judicial review hearing will be held in the next few months (see our LawNow on this issue). In September, Greenpeace briefly held up the move of the Stena Carron, employed by Chevron to drill a deepwater well west of Shetland, until Chevron obtained an injunction to end the occupation. There was also protest from environmental activists at the recent BP AGM.
- EU regulation of safety: Macondo focused the European Commission’s attention on the offshore industry for the first time and lead to a communication entitled “Facing the challenge of the safety of offshore oil and gas activities” (Nov 2010) (see our LawNow). This rejected calls for a ban on offshore drilling but proposed a single legislative framework for offshore operations, including EU “key requirements” for licensing, uniform criteria for offshore operations and independent evaluation of national regulators. While uniform standards may be desirable, there is fear in the UK that the goal-based approach which has been so successful here might be lost in the rush to ensure minimum levels of safety in member states which do not have the UK’s history and experience in offshore oil and gas development. However we await any concrete proposals from the Commission on this issue.
- Minimum safety standards: For fail-safe devices, the House of Commons Committee recommended that Government should adopt minimum, prescriptive safety standards, and specifically that the HSE considers prescribing two “blind shear rams” (the device which failed on the Macondo well), rather than one, for blow out preventers. The new Well Life Cycle Practices Forum will be liaising with the HSE over this issue.
- New pollution regulation?: While the House of Commons Committee rejected calls for increased regulatory oversight from the European Commission on the basis that “EU countries without a North Sea coastline should not be involved with discussions on regulation of the offshore industry on the UK Continental Shelf”, it did suggest that the Government work with the EU to ensure a new directive is drawn up that follows the polluter pays principle and unambiguously identifies who is responsible for the remediation of any environmental damage.
The UK industry should be proud of its record in relation to drilling incidents but not complacent. Although the regulatory regime has served as a model for others, there is always scope for improvement. It is to the credit of government and industry that there has been so much co-operation in the last 12 months to find ways to ensure that no such incident as Macondo ever happens on the UKCS.