The Post-Macondo World

forestsaintregisOil and Offshore

Nov 8, 2013 (3 years and 11 months ago)

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The Post
-
Macondo World

40388

James W. Noe


Senior Vice President, General
Counsel and Chief Compliance Officer

ww.herculesoffshore.com

Executive Director

Shallow Water Energy Security Coalition

www.shallowwaterenergy.org

twitter: @shallowwaternrg

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Topics


The Regulatory and Legislative Aftermath in the
Post
-
Macondo World


Contract Risk Management in the Post
-
Macondo
World

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Regulatory and Legislative Aftermath in the Post
-
Macondo World

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Regulatory and Legislative Aftermath in the Post
-
Macondo World



In the aftermath of Macondo, both the Obama Administration and the then
-
Democratic controlled Congress reacted in a broad and restrictive manner


Administration imposed sweeping, across
-
the
-
board offshore drilling
moratorium


Ultimately lifted moratorium on shallow water and then deep water


de facto

moratorium replaced the express moratorium


“Dynamic regulatory environment” imposed


All resulting in a dramatic slowing of pace of permitting

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Shallow Water Permitting Activity


Permit issuances down by roughly half since new regulations in June 2010


Year
-
to
-
date, 37% of permits issued are for new wells, up from 30% during June thru
December 2010


Backlog of permits seeking approval at the highest level, post Macondo
(2)

U.S. GOM Shallow Water Total Permits Approval History

(1)

(1)
Source: Bureau of Ocean Energy Management, Regulation and Enforcement as of August 24, 2011

(2)
As of August 24, 2011, there were 29 shallow water permits pending, with another 14 permits returned to operators seeking add
iti
onal information

36
27
38
32
36
26
29
24
19
26
27
26
21
11
11
12
15
14
21
17
12
22
28
22
2
15
17
12
16
8
15
0
5
10
15
20
25
30
35
40
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
3-Year Avg (07-09)
2010
2011
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Time Delays in Permit Review



Prior to new
regulations, it took
operators less than
two
weeks

to receive a
permit for new wells


Since the new
regulations, it takes
operators almost
two
months
to receive a
permit for new wells


Time delays create
operator confusion and
frustration with new
regulations

Approval Time for Permits to Drill New Wells

(Average Days)

Source: Bureau of Ocean Energy Management, Regulation and Enforcement

13.3
57.9
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Jan '09 thru May '10
Jun '10 thru Sep '11
(Number of days)
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Regulatory and Policy Actions


BOEMRE: “The Obama Administration launched the most aggressive and
comprehensive reforms to offshore oil and gas regulation and oversight in U.S.
history”


Drilling Safety


NTL
-
06



operators required to demonstrate that they are prepared to deal
with a blowout and the “worst
-
case discharge”


Drilling Safety Rule



“codifying” NTL
-
05


permit applications for drilling
projects must meet new standards for well
-
design, casing and cement and be
independently certified by professional engineer


NTL
-
10



operators must provide a corporate compliance statement and
review of subsea blowout containment resources for deepwater drilling

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Regulatory and Policy Actions (cont’d.)

Workplace Safety


Workplace Safety Rule



operators must maintain comprehensive safety and
environmental programs. Mandates implementation of a Safety and
Environmental Management System (SEMS)


September, 2011


announced proposed revisions requiring


Stop work authority


Identification of ultimate authority


Employee participation in development of SEMS

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Regulatory and Policy Actions (cont’d.)

Reorganization of former MMS


Three separate agencies


Office of Natural Resources Revenue



collection of revenue and lease
bonus payments


Bureau of Ocean Energy Management (BOEM)



to manage
development of offshore resources


leasing, plans, environmental studies,
NEPA analysis, geological risk analysis


Bureau of Safety Environmental Enforcement (BSEE)



issue permits,
enforce safety and environmental regulations, inspections, oil spill
response, training and compliance


Recusal policy implemented


Ocean Energy Safety Advisory Committee



DOI/BOEMRE established
permanent advisory group consisting of scientific, engineering and technical
experts to provide guidance on improving offshore drilling safety, well
containment and spill response

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Legislative Actions


Background of Existing Law

Oil Pollution Act of 1990


Responsible party liable for removal costs, clean
-
up costs and damages


Damages


Injuries to natural resources


Loss of subsistence use of natural resources


Lost government revenues resulting form destruction of property or
natural resource injury


Lost profits and earnings resulting form property loss or resource injury


Cost of providing extra public services during or after spill response

33 U.S.C. 2702(b)

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“Liability Cap”


Total of
all

removal costs
plus

$75 million.


33 U.S.C. 2704(a)


Cap does
not
apply if spill caused by


Gross negligence


Willful misconduct


Violation of an applicable federal safety, construction or operating
regulation

33 U.S.C. 2704(c)


Fines and liability under state law

33 U.S.C. 2718



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Legislative Actions


111
th

Congress


HR 3534


Consolidated Land, Energy and Aquatic Resources Act of 2009
(“Clear Act”) (passed House only)


Amended various regulations regarding well engineering, well design, BOP
testing and spill response and containment


Amended OPA 90 to repeal limits on liability for certain vessels and
offshore facilities


Increased minimum COFR amounts to $300 million, with ability of
President to lower to $105 million for offshore facility seaward of state’s
boundary


Expanded liability to include damages to human health


S 3663


Clean Energy Jobs and Oil Company Accountability Act (introduced
by then
-
Senate Majority Leader Reid


no Senate action)


Amended OPA 90 to remove limits of liability for offshore facilities


Repeal Limitation of Liability Act for claim for wages or pollution

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Legislative Actions


111
th

Congress (cont’d.)


S 3763


Restoring Ecosystem Sustainability and Protection of the Delta Act
(RESPOND Act) (introduced by Senator Landrieu


no Senate action taken)


Amended OPA 90 to remove $75 million “limit”


Amended OCSLA to establish Offshore Facilities Oil Spill Mutual Insurance
Fund


Mandated mutual insurance pool requiring operators to pay $250
million per occurrence deductible with pool covering up to $10 billion

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Legislative Actions
-

112
th

Congress


S 512 and HR 993


LEASE Act


extended leases impacted by express and
de facto

moratorium by one year


HR 1229


Putting Gulf Back to Work Act


ended
de facto

moratorium by
imposing deadlines on permit review process


HR 1230


Restoring American Offshore Leasing Now Act


requires
Administration to hold Gulf of Mexico and Virginia lease sales


HR 1231


Reversing President Obama’s Offshore Moratorium Act


lifted the
Administration’s ban on new offshore drilling by requiring movement on the
2012


2017 Lease Plan





-

No Senate action on bills.

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Policy Actions


National Commission recommendations:
1


Establish a mutual liability pool, including risk
-
based premiums


Phasing in higher liability limits for pollution


Promoting joint ventures between smaller and larger operators


Increase size and per occurrence limit of Oil Spill Liability Trust Fund


Currently $1 billion single incident limit and $500,000 limit for natural
resource damage


Report Regarding the Causes of the April 20, 2010 Macondo Well Blowout
released September 14, 2011


expected to generate additional regulatory
changes
2

1.
Deep Water, The Gulf Oil Disaster and the Future of Offshore Drilling, Recommendations, the National Commission on the BP Dee
pwa
ter Horizon Oil Spill and


Offshore Drilling, January 2011.

2.
http://www.BOEMR.gov/pdfs/maps/DWHFINAL.pdf

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Legislative and Regulatory Actions


Looking Ahead


Amending/increasing liability limits


less likely


Creating mutual insurance pools


less likely


Additional taxes/removing “subsidies” and tax benefits


more likely


Additional technical/operational regulations regarding well design and
construction, BOP, temporary abandonment, cementing and spill response and
containment possible

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Contract Risk
Management in the
Post
-
Macondo World




The tug
-
of
-
war and
the growing
importance of “gross
negligence”

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Traditional Allocation of Offshore Drilling Risks


“Knock
-
for
-
Knock”

Responsibility of Operator


Own people


bodily injury,
illness and death

Own property

Loss or damage to hole and
downhole tools

All other pollution/down
-
hole
pollution

Damage to reservoir

Costs of controlling wild well

Responsibility of Contractor


Own people
-

bodily injury,
illness and death

Own property

Rig pollution

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Traditional Allocation of Offshore Drilling Risks


“Knock
-
for
-
Knock” (cont’d.)


Risk allocation and indemnities apply regardless of fault


Typically intended to include
gross negligence

of party seeking indemnity

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Gross Negligence Defined


Ordinary negligence is a failure to exercise the degree of care that a person
with ordinary prudence would exercise under the same or similar
circumstances


What lifts ordinary negligence into gross negligence is the mental attitude of
the defendant


The plaintiff must show that the defendant was consciously, i.e., knowingly,
indifferent to his rights, welfare and safety


In other words, the plaintiff must show that the defendant knew about the peril,
but his acts or omissions demonstrated that he didn’t care

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BP
-

Transocean


BP: May seek ruling that Transocean and other contractors were “grossly
negligent” in order to make indemnity obligations unenforceable


Pollution indemnity clause


neither expressly includes or excludes “gross
negligence”:

Company shall assume full responsibility for and shall protect,
release, defend, indemnify and hold contractor harmless from
and against any loss, damage, expense, claim, fine, penalty,
demand, or liability for pollution or contamination, including
control and removal thereof, arising out of or connected with
operations under this contract . . . Without regard for
negligence of any party or parties and specifically without
regard for whether the pollution or contamination is caused in
whole or in part by the negligence or fault of contractor.

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Enforceability of Indemnities for Gross Negligence


Maritime law
: appears federal courts applying general maritime law feel that it is
against public policy to be indemnified for gross negligence.


Energy XXI v. New Tech Engineering C.P.,

2011 WL 1458638 (S.D. Tex. 2011);
see also Todd Shipyards v. Turbine Services, Inc., 674 F.2d 401, 411 (5
th

Cir.
1982) (noting,
in dicta
, that gross negligence would “invalidate an exemption
from liability”)



Texas Law



Unsettled whether contractual indemnity agreements releasing a party from
liability for its gross negligence will be upheld. See
Atlantic Richfield

v.
Petroleum Personnel, Inc
., 768 SW2d 724 (Tex. 1989)


Seems trend in recent cases is to uphold enforcing contractual provisions
negotiated at arm’s length



“any negligence . . .” likely broad enough to include “gross negligence”
RLI
Insurance Company v. Union Pacific Rail Road Company
, 463 F.Supp 2d 646
(S.D. Tex. 2006)


Louisiana Law


Enforceable. See
Urban v. Acadian Contractors
, Inc., 627 F.Supp. 2d 699
(W.D La. 2007)

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Contractor


Operator Tug
-
of
-
War


Operators increasingly pushing to
exclude

gross negligence from
pollution/blowout indemnities


Operators pushing to increase use of contractor limits for “feel the pain”
provisions in indemnities


Contractors responding by offering “gross negligence” as trigger for any
pollution/blowout liability


Operators requesting access to contractors insurance for pollution/blowout
OEE

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