Michael B. Smith
Fowler & Rodriguez, LLP
The Bureau of Safety and Environmental Enforcement (BSEE) and its predecessor the Minerals Management Service (MMS) have conducted thousands of inspections of offshore exploration and production facilities in federal waters.
Typically, about 20% of inspections find a violation of BSEE rules; these result in the issuance of "Incidents of Non-Compliance," or INCs, a written citation giving the operator either 14 or 30 days to take corrective action. Serious violations or INCs which operators fail to cure within the prescribed time become penalty cases. Less than 1% of all inspections result in civil penalty or criminal cases.
Since September 1997, a total of 532 penalty cases have been resolved for combined payments of $25,892,071. Surprisingly, only 20 offshore oil and gas operators account for 60% of all penalties levied since 1998.
The goal here is to examine how penalty cases are categorized by incident type, and what categories are changing in regulatory emphasis. Additional analysis examines patterns among the majors and independents that comprise the select group of 20.
BSEE may lawfully impose monetary penalties and other remedies upon operators of drilling rigs and production platforms pursuant to §24(b) of the Outer Continental Shelf Lands Act (OCSLA):
(A)ny person who fails to comply with the OCSLA, or leases, permits, regulations, or orders issued thereunder, after notice of the failure and a reasonable period to correct the noncompliance, shall be liable for a civil penalty of not more than $20,000 (now adjusted to $40,000) for each day of the continuance of such failure.
If a failure to comply constitutes … a "threat of serious, irreparable, or immediate harm or damage to life …, property, any mineral deposit, or the … environment," a civil penalty may be imposed without allowing a corrective action period.
Not all regulatory violations warrant review as civil penalty proceedings. Generally, those violations that cause injury, death, environmental damage, or create a threat to human life or the environment will trigger BSEE review. Examples include:
- Unsafe and un-workmanlike operations involving injury to humans or pollution
- Safety devices, e.g. surface and sub-surface safety valves and emergency shutdown systems that are (a) bypassed or removed without a valid reason, prior approval, and lock-out/tag-out procedures, or (b) inoperable but are left in service without repair.
The Oil Pollution Act of 1990 (OPA 90) revised and strengthened the OCS Civil Penalty program. Congress authorized a maximum fine of $20,000 in OPA 90, compared to $10,000 then available under OCSLA. Rules implementing the OPA 90 penalty policy went into effect in June 1991 (56 Fed. Reg. 21953). However, it was not until February 1998 that MMS began to publicly disclose the names of the affected companies, the penalty amounts, and the type of violations.
With the advent of 15 years of data obtained from 532 individual penalty cases, emerging trends can be spotted in enforcement patterns. The "change analysis" table arranges cases according to categories of violations, and depicts their cumulative usage by BSEE and MMS from 1998 to 2012. For example, bypass of safety equipment or warning devices and manipulation of sensors account for 35% all penalty cases.
But the frequency of bypass/manipulation cases is not constant. Such cases vary from 24% of penalty cases in 2008-2012 to as much as 39.5% of penalty cases in 1998-2002. Thus, bypass/manipulation of sensors, while still the largest single category, is trending downward in 2008-12 compared to historical levels. This trend is confirmed in the "change analysis" table. In fact, the recent trend is 30% below the long-term average for the category of bypass/manipulation of sensors. The table underscores those categories of violation that display marked divergence from norms.
The analysis of BSEE/MMS penalty cases includes these additional findings:
Emerging trends in violation categories. Risk of fall and "open hole" accidents are growing substantially among recent penalty cases, perhaps reflecting agency concern for worker safety in the offshore domain. Another emerging violation category is excessive corrosion and wear of handrails, stairs, and deck grates – which also present safety risks. These trends are depicted in the "change analysis" table.
Penalties for pollution are remarkably consistent. For each five-year interval, penalties for this category came within 0.2 points of the long-term average of 7.8%. This is the least variable category of violations among seven frequently cited types.
Penalties from independents exceed those from majors. Penalties incurred by 20 specific E&P operators were identified and tracked for repeated listings during 1998-2012. The research showed that seven majors contributed a combined $4,391,700, or 16.96% of all penalties obtained over the 15-year interval. In contrast, 13 independents contributed a combined $11,291,700, or 43.61% of all penalties obtained in the same interval.
Fewer cases are made against majors. Over the last five years, 9 of 13 independents were responsible for 52 civil penalty cases totaling $5,788,500. In contrast, five of seven majors were responsible for 10 penalty cases totaling a scant $290,000 in 2008-12. The average penalty from independents was $111,000; by comparison, the average penalty from majors was $29,000. The severity, extent, and duration of OCSLA violations, as measured in terms of penalties recovered in 2008-12, are substantially greater for a group of select independents than for majors. It should be noted that a great many other independents seldom experience penalty cases.
Discrepancies among operator groups is comparatively recent. From 1998 to 2002, MMS brought 69 penalty cases against major operators, or 29% of all cases filed. A decade later, BSEE brought 10 penalty cases against majors from 2008-2012, or 7.5% of the total. The frequency of penalty cases brought against majors has declined to its lowest level since MMS began publishing results of cases in 1998.
Penalty cases have doubled in value. When enforcement results are grouped in five-year segments, two trends emerge: first, the number of penalty cases filed has declined from 45/yr in 1998-2002 to 28/yr in 2008-12; and second, the dollar amount of each penalty case averaged $34,000 in 1998-2002 and grew to $66,000 in 2008-12.
Recent trends suggest greater attention by inspectors to worker safety than in the 1990s. However, data addressed in the "change analysis" may not reflect actual changes in enforcement priorities. For example, recent growth in the category for risk of fall/open hole may be the product of more frequent repair and maintenance activity associated with older drilling rigs and platforms. Similarly, growth in the category for corrosion/excessive wear may signify aging equipment as much as new safety initiatives.
Older equipment is generally associated with platforms and structures located in shallow water (200 m or less). The newer E&P facilities in the deepwater OCS have more safety and well control equipment requiring longer inspections. But the number of shallow-water platforms vastly exceeds those located in depths suitable for modern, floating structures.
Yet another reason for more frequent occurrence of risk of fall/open hole penalty cases may be expanded incident reporting obligations for OCS operators. In 2006, MMS changed the threshold for incident reporting from "serious injury" to any lost time accident or injury resulting in restricted work (e.g. "light duty"). Some observers believe that once reported, these incidents give rise to safety-related cases at the lower range of the penalty matrix.
The last five years of BSEE penalty data point to a 20-fold disparity in the frequency and gravity of penalty cases between majors and independents. A leading explanation offered by many industry veterans is the relative age of shallow and deepwater structures, and the difficulty of conducting repairs on older platforms. But do other causes also contribute to this gap in OCS compliance? Are engineering and HSE compliance staffs comparable in size, training, resources, and experience?
Analysis of compliance performance should consider the following factors. Major oil companies have organizational resources to conduct self-evaluation audits and train employees and contractors for compliance. A culture of safety and operations awareness is cultivated and rewarded by many majors. In contrast, independents carry fewer compliance staff, relying upon contractors to execute safety and spill prevention plans, or perform critical monitoring tasks. When compliance obligations are out-sourced, are these operators are less likely to "own" the issue, or perform consistently in accordance with company or regulatory standards?
Also, capital investments for deepwater E&P facilities are much larger than for equivalent facilities in shallow water. Not only are deepwater structures newer, but deepwater operational risk requires that equipment be maintained to high standards. In contrast, the independents that dominate shallow-water E&P zones are constrained by facilities built decades ago. Does this "hardware differential" explain variable performance by all independents? Or do some members knowingly defer maintenance, and/or fail to appreciate that such choices lead to safety risks?
New metrics needed
Major and independent groups in this article are constructed with respect to capitalization of stock value. For analysis of penalties, a a better indicator may be overall production criteria or wells installed. Consider, for example, an operator with 150 platforms in shallow water, many producing from one or two wells. Should that operator be measured by the same criteria as a deepwater producer with three or four platforms in the Gulf? What if the deepwater producer maintains 40 wells deployed from single platform? Is volume of production a relevant factor, or does operational risk coincide with the number of platforms, their age and repair frequency?
Future research should explore new metrics that (will hopefully) yield useful results, desired by company managers and regulators alike. By way of example, analysis of "penalty/platform" ratios, or penalties per barrel of production, may offer more meaningful measures of long-term performance.
|Michael B. Smith joined the Houston office of Fowler Rodriguez as Partner in 2011. He practices in the areas of oil and gas law, general litigation, and environmental issues associated with exploration, production, and pipeline operations. Smith advises offshore operators and service companies on compliance with OCSLA and environmental and safety matters administered by BSEE and the US Coast Guard. His experience includes representing oil and gas operators in property disputes, facility audits, and HSE compliance matters. Formerly in-house with Chevron, he represented the company in complex property damage claims as well as regulatory and enforcement cases. Smith received his Bachelor of Arts from University of Texas at Austin in 1975 with honors. He earned his Juris Doctor from University of California, Hastings College of Law in 1982.|
1. The OCS violator has 60 days to pay the penalty as proposed by BSEE or file an appeal to the Interior Board of Land Appeals (IBLA). 30 CFR 250.1400 et.seq. Cases resolved by BSEE are published on a quarterly basis athttp://www.bsee.gov/Inspection-and-Enforcement/Civil-Penalties-and-Appeals/Civil-Penalties-and-Appeals.aspx.
2. 43 U.S.C. §1350(b)(1&2). Authority for MMS to initiate penalty cases without waiting for operators to correct violative conditions was added by the Oil Pollution Act of 1990 [OPA 90]. Subtitle B of OPA 90 increased the maximum civil penalty from $10,000 to $20,000 per violation for each day of noncompliance. Where failure to comply with applicable regulations constitutes a threat of serious, irreparable, or immediate harm or damage to life (including fish and aquatic life); property; any mineral deposit; or the marine, coastal, or human environment, OPA 90 allows the Secretary of Interior to assess a civil penalty without regard to expiration of time for corrective action.
3. 30 CFR 250.1404, as supplemented by BOEMRE Civil Penalty Program and Revised Assessment Matrix set forth in its Notice to Lessees [NTL] No. 2011-N06 (June 6, 2011).
4. Notice to Lessees [NTL] No. 1997-4N (September 1, 1997). "The purpose of this notice is to inform lessees and operators of federal oil, gas, and sulphur leases on the outer continental shelf that the Minerals Management Service (MMS) will annually publish a summary of OCS civil penalties paid. The annual summary will highlight the identity of the party, the regulation violated, and the amount paid. Publication of the annual summary of civil penalties for the preceding calendar year will begin in 1998." This same NTL also announced an increase in the maximum civil penalty to $25,000.
5. 2,750 platforms operate in depths up to 200 meters; only 64 platforms are in depths greater than 200 meters. Offshore Statistics by Water Depth, BOEM. Source:http://www.data.boem.gov/homepg/data_center/leasing/WaterDepth.asp.
6. 30 CFR 250.188(b): "You must provide a written report of the following incidents to the District Manager within 15 calendar days after the incident: (1) Any injuries that result in one or more days away from work or one or more days on restricted work or job transfer.