Changing Direction: How Regulatory Agencies Have Responded to the Deepwater Horizon Oil Spill (Part II of II)
Editor’s Note: This is the second installment of Mr. Theriot’s discussion on the changing landscape of United States offshore regulations in the wake of the BP-Horizon oil spill. The first installment of Mr. Theriot’s note may be found here.
V. Industry Self-Regulation in the United States
One of the Oil Spill Commission’s strongest recommendations was for industry to take more responsibility for ensuring safety on the Outer Continental Shelf (OCS) and establish a safety institute independent from the American Petroleum Institute (API) to develop and share best practices.[1] The industry’s response to the Commission’s recommendations was for API to create the Center for Offshore Safety (COS), an industry-wide body whose membership is not restricted to members of API. COS was created by the oil and gas industry to ensure compliance with RP 75 and SEMS, yet remains under API’s umbrella. The board of COS is composed entirely of industry members, with representation including operators, drilling contractors, suppliers, and industry association members. The board has an external advisory group that consists of representatives from government and academia, but the board is not required to consider or incorporate input from the advisory group.[2]
The proposed activities of COS include sharing best practices, providing a forum for discussing methods for continual improvement, and overseeing third-party audits of drilling facilities.[3] Audits of facilities will be conducted by independent third parties, but COS has not yet identified the qualifications for becoming an auditor, whether auditors can inspect facilities at which they are employed, or the frequency and content of audits. Any audits will be additional to those required by BSEE under the SEMS program.[4]
COS’s relationship with API has raised concerns. One member of the Oil Spill Commission has stated that API’s history of taking anti-regulatory views could make it hard for COS to work effectively as part of API.[5] A recent report by an outgrowth of the Commission expressed similar concern with COS’ independence, but found that the creation of COS was a positive and promising development overall. It is interesting that COS chose to describe itself as being modeled on the Institute of Nuclear Power Operations (INPO). If COS mirrors INPO by conducting rigorous independent audits and backing them up with meaningful sanctions for non-compliance, then it has the potential to be highly successful as improving safety in the offshore oil and gas industry.[6]
Industry self-regulation such as COS is being highly promoted among oil companies, but how effective will this self-regulation actually be? What can these companies do administratively that will help prevent noncompliance, and what punishments can the government place on these companies to act as a deterrent? Programs relying solely on a company’s self-certification are often ineffective because of the absence of oversight and independent verification.[7] A more credible, reliable, and effective program is one that requires audits conducted by independent third parties who are themselves accredited by another third party. Such a design, requiring two layers of independent certification, helps ensure that auditors are both independent and technically qualified.
In addition to creating COS, API also formed the Joint Industry Task Force (JITF) to recommend permanent improvements in two key areas: offshore operating procedures and offshore equipment.[8] Ultimately, four API task forces focused on four major areas of operation, the first two of which are technology-centered: Subsea Intervention and Containment, Offshore Equipment, Offshore Operating Procedures, Oil Spill Responses.[9]Recommendations from the JITF were to close any identified gaps in current blowout preventer operating practices, and align industry standards with recognized industry best practices.[10]JITS issued a “White Paper on Recommendations for Improving Offshore Safety,” which recommended the use of a Safety Case-type of process, requiring that two independent barriers exist across potential flow paths and ensuring that BOPs have secondary control systems. That the JITF recommendations were written so quickly and subsequently endorsed by an industry with a long tradition of opposing proposed regulations for greater safety and better equipment reflects how deficient the Gulf of Mexico regulations had been.[11] Many JITF recommendations were incorporated by BSEE into final rules.
The details of COS’s organization and functions have not been finalized, but it appears that COS will remain under the umbrella of API and its board will consist solely of industry representatives. COS will oversee third-party audits of SEMS programs, but it is not clear what mechanisms will be in place to ensure the independence of these auditors. While COS sounds like a program that will help ensure safety compliance throughout the offshore drilling industry, the industry’s history of noncompliance and tendency to avoid safety regulations in pursuit of higher profit cast doubt on an organization that shares such close ties to API. In order to properly regulate the offshore drilling industry, COS should establish procedures to ensure the independence of its third-party auditors, create robust sanctions for non-compliant operators, require the sharing of safety information among drilling operators, and consider how to establish and maintain its independence from the lobbying arm of API.
VI. Blending Government Regulations, Agency Review, and Industry Participation to Promote Offshore Drilling Safety
The Center for Offshore Safety aims to model itself after the INPO, which is a nuclear safety organization created by the U.S. nuclear industry in response to the Three Mile Island meltdown. INPO is viewed as a highly successful regulatory program; and while the nuclear industry and offshore drilling industry differ greatly, INPO provides a successful framework on which to base offshore drilling industry safety regulations. First, INPO establishes performance guidelines for the operation of nuclear plants and conducts regular, detailed evaluations of plants to examine the safety of each facility. Similarly, the operators in the offshore drilling industry need clear and specific safety guidelines to follow in order to know whether a rig is up to industry standards. INPO ensures plant inspectors are independent by creating inspection teams of about twenty people, of which one-third are full-time inspectors, one-third are industry members on loan for 18 to 24 months, and one-third are industry members on loan from a different company for only a particular inspection. A similar practice could help provide the offshore drilling industry with the necessary independent auditors and inspectors, helping put an end to the problem of agency capture.
Based on inspections, the plant safety is rated by INPO on a scale of one to five, and these results are presented at an annual conference, which places significant peer pressure on poor performers. More importantly, insurers of nuclear plants base their premiums in part on INPO ratings, providing firms with an immediate and significant financial incentive to improve safety. A similar practice would encourage offshore drilling operators to be as safe as possible. INPO’s use of team audits and its point-based rating system for facilities are both effective program features that could potentially be applied in the context of offshore drilling.
A successful offshore drilling regulatory agency must possess the following five conditions: (1) Clear, measurable program goals, (2) up-to-date industry performance standards, (3) accurate, independent verification of the regulated entity’s performance, (4) robust enforcement mechanisms, all of which (5) combine industry resources with government oversight. The three most important criteria for any agency to successfully regulate the offshore drilling industry would be two layers of independent audit review, industry funding of necessary inspections, and criminal sanctions for noncompliance.
A. Clear and Measurable Program Goals
Explicit and readily quantifiable requirements for proper participation in a regulatory program leads to successful safety regulations. Requirements in management systems must not be so broad as to essentially impose no obligations on industry. There are no clear numerical standards established in regulatory statutes that assist industry operators in knowing precisely what is and what is not a safety violation. The Benzene decision discussed the question of how to measure risk levels numerically:
The requirement that a “significant” risk be identified is not a mathematical straightjacket. It is the Agency’s responsibility to determine, in the first instance, what it considers to be a “significant” risk.” If, for example, the odds are one in a billion that a person will die from cancer by taking a drink of chlorinated water, the risk clearly could not be considered significant. On the other hand, if the odds are one in a thousand that regular inhalation of gasoline vapors that are 2% benzene will be fatal, a reasonable person might well consider the risk significant and take appropriate steps to decrease or eliminate it.”[12]
Viewing concrete mathematical standards as a “straightjacket” is a viewpoint that should be changed in hopes of creating a more transparent and sufficient regulatory practice. By establishing clear and measurable program goals in regulatory statutes, industry will have a clearer view of what standards it is being asked to meet. Leaving standards at the agency’s discretion is a dangerous practice, especially when said discretion is subject to agency capture. However, setting concrete numerical standards is an uncommon practice in U.S. regulatory agencies. In fact, U.S. statutes contain only two examples of such numerical standards, both of which tolerate no more than a one in 1,000,000 level of risk.[13] The first of these statutes is section 408(b)(2)(A)(iii) of the Food Quality Protection Act, interpreting the statutory standard of a “reasonable certainty of no harm,” and the second is section 112 of the Clean Air Act, setting the maximum level of exposure for the “most exposed” individuals in the context of limiting exposure to carcinogens. Both of these provisions appear in sections of the statutes that do not allow the balancing of costs and benefits, and they involve the protection of the general public, not workers.
When it comes to risk level measurements the British are very comfortable with numbers, in the case of petroleum regulation the risk level is one in 1,000 deaths and a value per life of $1 million, and the HSE is willing to delegate the chore of deciding what actions to take to meet these numerical standards.[14] Of course numerical risk factors, such as risk levels in deaths per thousands and cost-benefit analysis as dollars per statistical life, are routinely incorporated in documents used as the basis for regulation in the United States, including regulatory impact assessments prepared by the government.[15] However, there are only two examples where an American agency used numerical risk levels to explain how a final regulation would work.[16] Embracing such numbers in safety cases largely as substitutes for regulation reflects comfort with the reliability of the methodologies used to produce such numbers, a comfort that American regulators have been unwilling to accept in favor of maintaining agency discretion. Yet adopting a willingness to implement more concrete numerical standards could aid industry by having clear and measurable goals to follow, increasing the transparency between regulatory agencies and industry.
B. Up-to-Date Industry Performance Standards
This follows the prior discussion on clear and measurable goals. Clearly, there can be no confusion as to what is being required of industry operators from regulatory agencies. BSEE and BOEMRE mirroring INPO and establishing a ranking system to distinguish poor performances from quality performances will assist operators in knowing how well they are doing in practicing safely. Ranking operators based on performance would be the first step, there would also need to be transparency throughout the industry as to what makes one operator performance safe and proper and another operator’s performance subpar. Such transparency and established standards will give operators a benchmark to strive for and let them know what they are doing well and what they need to improve on.
C. Independent Verification of the Regulated Entity’s Performance
Agency capture is a major problem in regulating the offshore drilling industry. A report from the National Research Council recommended that BSEE take a holistic approach to ensuring the effectiveness of recently mandated SEMS programs.[17] This approach should include independent inspections and audits, as well as a whistleblower program. These recommendations are consistent with BSEE’s proposd changes to SEMS with the exception of one change requiring that audits be performed by third parties.[18] A truly independent internal audit team must be used instead of an external third-party team to avoid a compliance mentality.
Independent verification is vital to help the offshore regulatory agencies escape the public perception of agency capture. MMS was notorious for feeding from the oil industries’ big pockets, and such agency capture led to lenient penalties and subpar regulatory oversight. Properly funded and trained third party inspection teams must be put in practice to ensure the oil industry is practicing safely. Requiring the oil industry to assist in funding the training of such third party teams would be a step in the right direction, as it would show the oil industry is interested in preventing another major environmental disaster.
D. Robust Enforcement Mechanisms
Rather than relying on facility-specific and abstract demonstrations of unacceptably high risk levels, American regulatory reform should focus on mandating the installation of the best available “failsafe” technology and teaching workers how to use it. Compliance documents should be transparent and available not just to regulators, but to private sector overseers who can hold them accountable, including inspectors general, the Government Accountability Office, public interest groups, the insurance industry, and investment firms. The imposition of strong civil and criminal liability is far more likely than safety cases to alter industry complacence and produce real safety improvements.
BSEE and BOEMRE should follow the INPO and use a public rating system as an enforcement mechanism. Offshore operators should be given a performance rank by its regulatory agency, and this ranking will be published and shared nationally, across the industry and with the national public. Obviously an operator will not want the public and fellow operators to be aware of its low performance standards, and this will serve as encouragement for operators to always be performing as safely as possible.
More importantly, larger fines must be used to force industry to comply with safety regulations. A $25,000 fine will not mean anything to a multi-billion dollar company, it must be acceptable that million dollar fines are levied against industry operators to guarantee they comply with new safety regulation. Failure to pay such fines must result in an immediate suspension of an operator’s license. One of the main causes of the BP oil disaster was lenient agency oversight, in order to restore power to the regulatory agencies, industry operators must be hit where it hurts most: their wallets. Brazil’s policy of placing all fault on operators is viewed as too harsh by some industry professionals, but such harsh fines and consequences is what is necessary to ensure regulatory compliance. Making it necessary that industry pay for fixing violations and reaching compliance will make operators more careful and ensure that all offshore drilling operations will be conducted safely.
E. Using Industry Resources
Because the agencies in charge of regulating the offshore drilling industry are severely underfunded, they are incapable of effectively regulating the industry. As a multi-billion dollar industry, the offshore drilling industry should be required to provide the proper funding needed to train independent third-party auditors and inspectors, as well as provide the resources needed to correct any violations discovered on a drilling vessel. The fines and penalties levied against industry operators need to be exponentially higher, and industry operators must be held accountable to fix any violations they have or face a ban from operating.
Industry operators providing funding for independent, third-party oversight should be made a requirement for an operator to receive a high safety rating. Operators who provide a certain level of funding towards safety oversight will be rewarded with a higher safety rating than operators who do not contribute to such safety funding. Essentially, industry operators contributing to third-party safety oversight will create a hybrid regulatory system shared by the private industry and the government. The government would still have to make sure resources provided by the offshore industry does not lead to agency capture, but funding from the industry is invaluable in ensuring that independent auditors and inspectors have the resources necessary to properly conduct their inspections.
VII. Conclusion
Numerous changes have occurred since the BP oil disaster, yet it seems apparent that there is still a tremendous amount of regulatory reform that needs to be undertaken to bring the offshore drilling safety regulation regime to an acceptable level. Receiving adequate funding remains a key priority, as well as avoiding agency capture by industry interests along with enforcing the new safety regulations being passed. With the United States energy sector continuing to grow, the Government should allocate more funds for offshore safety regulation, while still requiring industry operators to mirror their British counterparts in providing private funding in support of independent inspections. Penalties for deliberate noncompliance should be burdensome as is the case in Brazil, but not to a point of discouraging sound industry operations. The Safety Case from the United Kingdom provides a fine example of a regulatory program that enforces compliance throughout the offshore drilling industry, and INPO in the American nuclear industry provides tools for creating a sound framework as to how a US agency can properly regulate a sector of the growing US energy field. Given our ever growing thirst for cost effective energy production, offshore drilling is not likely to decrease in the near term, and this is all the more reason why the recommendations included in this paper focus on creating a safer and financially sound offshore drilling industry that will be able to successfully operate well into the future.
Preferred Citation: Stuart Theriot, Changing Direction: How Regulatory Agencies Have Responded to the Deepwater Horizon Oil Spill, LSU J. Energy L. & Res. Currents (November 19, 2014), http://sites.law.lsu.edu/jelrblog/?p=506.r
[1] Hastings et al., supra note 4, at 18.
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Hastings et al., supra note 4, at 18.
[7] Id.
[8] Weaver, supra note 6, at
[9] Id. at
[10] Id. at
[11] Id. at
[12] Indus. Union Dep’t., 448 U.S. at 655.
[13] Flournoy, supra note 8, at 296.
[14] Id. at 297.
[15] See Regulatory Impact Analysis for EPA’s Proposed RCRA Regulation of Coal Combustion Residues Generated by the Electric Utility Industry, 75 FR 35128-01 at sec. XII 121-22 (2010).Available at http://www.securitiesmosaic.com/uploaded/resourcecenter/EPA-HQ-RCRA-2009-0640-0003.pdf (Still can’t locate the federal registrar citation, but here is the article)
[16] The first example is the APA’s efforts to set a lifetime exposure risk of airborne benzene for the general population, establishing a “maximum level of a pollutant for a lifetime.” (MIR) of one in 10,000 as “acceptable” and then promised to consider other health and safety factors in making a final regulatory determination. National Emission Standards for Hazardous Air Pollutants; Benzene Emissions, 54 Fed. Reg. 38,044, 38,048 (Sept. 14. 1989) (codified at 40 C.F.R. pt. 61). The second is OSHA’s use of such figures to explain how it sets permissible exposure levels (PELs) for toxic chemicals, which is typified by its Federal Register notice for the final rule controlling workplace exposures to hexavalent chromium. Occupational Exposure to Hexavalent Chromium, 71 Fed. Reg. 10,100 10,225 tbl. VII-2 (Feb. 28, 2006) (codified at 29 C.F.R. pt. 1910, 1915, 1917, 1918, 1926).
[17] See generally Evaluating the Effectiveness of Offshore Safety and Environmental Management Systems, Special Report 309, Transportation Research Board (2012).
[18] Id. at