The Post-Macondo World

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The Post-Macondo World
Executive DirectorShallow Water Energy Security
Coalitionwww.shallowwaterenergy.orgtwitter
_at_shallowwaternrg
Senior Vice President, General Counsel and Chief
Compliance Officerww.herculesoffshore.com
James W. Noe
40388
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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
U.S. GOM Shallow Water Total Permits Approval
History (1)

• 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)

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 additional
   information

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Time Delays in Permit Review
Approval Time for Permits to Drill New Wells
(Average Days)
Source Bureau of Ocean Energy Management,
Regulation and Enforcement
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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 (contd.)

• 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 (contd.)

• 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 111th 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 states
  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 111th Congress (contd.)

• 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 - 112th 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 Obamas Offshore
  Moratorium Act lifted the Administrations 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 recommendations1
• 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
  changes2

1. Deep Water, The Gulf Oil Disaster and the Future
   of Offshore Drilling, Recommendations, the
   National Commission on the BP Deepwater 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 (contd.)

• 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 didnt 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 (5th
  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
  arms 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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