Regulation | Bud's Offshore Energy (BOE)

Archive for the ‘Regulation’ Category

Guyana: Interesting oil spill liability battle

Posted in accidents, Guyana, Offshore Energy - General, oil spill response, Regulation, well control incidents, tagged bp, Exxon, Guyana, macondo, oil spill iiability, Supreme Court on May 10, 2023| 6 Comments »

There are a number of recent articles related to the Guyana Supreme Court ruling on Exxon’s financial assurance obligations. An Oil Now piece (quoted below) is the most informative. It seems that the Supreme Court decision is based on a provision of Exxon’s EPA permit and that EPA is siding with Exxon in this dispute.

The Guyana government and the Environmental Protection Agency (EPA) are set to appeal a recent Guyana Supreme Court ruling that determined that the EPA and ExxonMobil affiliate, Esso Exploration and Production Guyana Limited (EEPGL), breached the terms of the Liza 1 environmental permit. The permit was revised and granted to EEPGL last year for operations in the Stabroek Block, offshore Guyana.

Justice Sandil Kissoon granted several declarations, including that the EPA failed to enforce compliance by EEPGL of its Financial Assurance obligations to provide an unlimited Parent Company Guarantee Agreement and/or Affiliate Company Guarantee Agreement to indemnify and keep indemnified the EPA and the Government of Guyana against all environmental obligations of the Permit Holder (EEPGL) and Co-Venturers (Hess and CNOOC) within the Stabroek Block.

While acknowledging the court’s ruling, the Government of Guyana, as a major stakeholder, maintained in a statement that the Environmental Permit imposes no obligation on the Permit Holder to provide an unlimited Parent Company Guarantee Agreement and/or Affiliate Company Guarantee Agreement. The government believes that Justice Kissoon erred in his findings and that the ruling could have significant economic and other impacts on the public interest and national development.
OIlNow

Unlimited liability is a rather daunting and open-ended obligation that would trouble permittees in any industry.

In the US, the liability for oil spill cleanup costs is unlimited for offshore facilities, but there is a liability cap for the resulting damages. That cap is currently $167.8 million after a recent inflation adjustment. BP, of course, paid far more than that for damages associated with the Macondo blowout. BP’s costs, which amounted to an astounding $61.6 billion, were both voluntary and compulsory as a result of agreements and settlements. Keep in mind that the damage liability limit was only $75 million at the time. One can imagine what would have happened if a company with less financial strength or more inclination to fight had been responsible for the spill.

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A 2013 Supreme Court houseboat decision applies to massive floating production units

Posted in energy policy, Gulf of Mexico, Offshore Energy - General, Regulation, tagged Coast Guard, floating production units, OOC, SCOTUS, vessel definition on May 8, 2023| Leave a Comment »

Dr. Malcolm Sharples, a leading marine engineer and offshore safety advocate, brought this Supreme Court’s decision and the resulting regulatory confusion to my attention.

It turns out that the SOCTUS decision about this houseboat…..

has created regulatory uncertainty for floating production facilities like this:

In a 7-2 decision, the court ruled that a gray, two-story home that its owner said was permanently moored to a Riviera Beach, Florida, marina was not a vessel, depriving the city of power under U.S. maritime law to seize and destroy it.
Reuters

The floating production facilities are still subject to Coast Guard regulation and inspection pursuant to separate authority under the OCS Lands Act. The extent to which Coast Guard approval and inspection practices will change is not entirely clear. The Coast Guard will issue new certificates of inspection for these floating facilities, and new policy guidance is being developed.

Attached are answers that the Coast Guard provided to questions from the Offshore Operators Committee.

20223-fof-pl-qa-w-ooc-24mar2022 Download

This may be a good warmup for an upcoming post on regulatory fragmentation.

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Supreme Court will review the “Chevron doctrine”

Posted in energy, energy policy, Offshore Energy - General, Regulation, Uncategorized, tagged Chevron Doctrine, offshore energy, Regulation, Supreme Court on May 4, 2023| Leave a Comment »

The Supreme Court will hear a case that could significantly scale back federal agencies’ authority, with implications for regulations affecting the US offshore program. The court could overturn a precedent known as the “Chevron doctrine” that instructs judges to defer to federal agencies when interpreting ambiguous federal laws.

Few Supreme Court doctrines have been stretched more by regulators and lower-court judges than Chevron deference, which says judges should defer to regulators’ interpretations when laws are supposedly ambiguous. The High Court agreed Monday to give Chevron a much-needed legal review.
WSJ

About the Chevron doctrine:

One of the most important principles in administrative law, the “Chevron deference” was coined after a landmark case, Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 468 U.S. 837 (1984). The Chevron deference is referring to the doctrine of judicial deference given to administrative actions. In Chevron, the Supreme Court set forth a legal test as to when the court should defer to the agency’s answer or interpretation, holding that such judicial deference is appropriate where the agency’s answer was not unreasonable, so long as Congress had not spoken directly to the precise issue at question.
Cornell Law

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For historians: the OCS Orders

Posted in energy policy, Gulf of Mexico, Offshore Energy - General, Regulation, tagged OCS Orders, offshore regulations on March 23, 2023| 2 Comments »

The OCS Orders were the foundation for the current operating regulations in the US and many states and other countries. They were logically organized, easily updated, and published for public comment prior to being finalized.

I have an email message indicating that the first OCS Order No. 1 (Identification of Wells, Platforms, and Structures) was signed on 1/31/1957 and the first OCS Order No. 2 (Drilling) dates back to 2/3/1958! (If anyone has access to the actual documents, please let me know.) The orders were developed much further in the 1970s and 1980s.

Contents of the 1/1980 Atlantic Orders:

OCS Order No. 1: Identification of Wells, Platforms, Structures, Mobile Drilling Units, and Subsea Objects
OCS Order No. 2: Drilling Operations
OCS Order No. 3: Plugging and Abandonment of Wells
OCS Order No. 4: Determination of Well Producibility
OCS Order No. 5: Production Safety Systems
OCS Order No. 6: Well Completions and Workover Operations
OCS Order No. 7: Pollution Prevention and Control
OCS Order No. 8: Platforms and Structures
OCS Order No. 9: Oil and Gas Pipelines
OCS Order No. 10 (reserved)
OCS Order No. 11: Oil and Gas Production Rates, Prevention of Waste, and Protection of Correlative Rights
OCS Order No. 12: Public Inspection of Records
OCS Order No. 13: Production Measurement and Commingling

You can view the full set of 1977 Gulf of Mexico OCS Orders here

There has been much discussion, particularly since the 1988 Piper Alpha tragedy, regarding the optimal approach to offshore safety regulation be it prescription, goal setting, safety cases, management systems, or some combination, and how to best influence facility, company, and industry safety culture.

My personal view is that the quality and type of regulations are not nearly as important as the people implementing them. My take:

Good regulators are more important than good regulations and are the key to a successful regulatory program.
Regulators must understand and be committed to their organization’s mission and the strategy for achieving that mission.
While they should have a good understanding of the activities that they regulate, their focus is on challenging operators, not directing them.
Regulators should audit operator activities and carefully review incident and performance data. They should identify problems and concerns, but should not direct solutions.
Safety leaders should be applauded and poor performers should be penalized.
The quality of regulators is more important than the quantity.
Internal and external communication and collaboration are critical to their success.
Management should ensure that regulators are able to focus on their mission and that organizational distractions are minimized.

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Did the IRA’s royalty provisions and DOI lease sale decisions penalize small offshore producers?

Posted in Alaska, energy policy, Gulf of Mexico, Offshore Energy - General, Regulation, tagged Alaska, Cook Inlet, Inflation Reduction Act, Lease Sale 258, lease terms, royalty rate, Sale 244, Sale 256, Sale 257, Senator Manchin on March 9, 2023| Leave a Comment »

Senator Manchin and the Alaska delegation criticized the DOI decision memo for Sale 258. The memo implied that the highest allowable royalty rate was chosen to minimize bidder interest and limit future production. Unfortunately, the “Inflation Reduction Act,” which mandated these lease sales, was not particularly helpful in creating interest in the less attractive OCS tracts like those in the Cook Inlet and the shallower waters of the Gulf of Mexico.

Sec. 50261 of the IRA raised the minimum allowable royalty rate from 12 1/2% to 16 2/3%, while capping the maximum rate at 18 3/4%. This provision favors deepwater operators, typically majors and large independents, whose royalty rates were capped at 18 3/4%, the same rate as for previous OCS sales.

Conversely, the IRA royalty provisions penalize the smaller companies and gleaners who are critical to sustaining shallow water (shelf) operations, including environmentally favorable nonassociated (gas-well) natural gas production, by raising the minimum royalty rate to 16 2/3%. DOI exacerbated IRA’s impact by electing to charge the highest allowable royalty rate for Cook Inlet and GoM shelf leases. The net result was a 50% royalty rate increase from prior sales (12.5 to 18.75%).

The table below illustrates the royalty rate implications of the IRA language and the DOI decisions.

Area	Sale	Date	% royalty: <200m water depth	% royalty: >200m water depth
Cook Inlet	244	6/21/2017	12.5	12.5
GoM	256	11/18/2020	12.5	18.75
GoM	257	11/17/2021	12.5	18.75
Cook Inlet	258	12/30/2022	18.75	18.75
GoM	259	3/29/2023	18.75	18.75

Notes:

The base primary term for GoM shelf leases is only 5 years vs. 10 years for leases in .>800 m of water.
In lease year 8 and beyond the rental rates are nearly double for shelf leases vs. deepwater leases ($40/ac vs. $22/ac).
While deepwater development typically requires more time, the higher rental penalty for delayed shelf production (which must be approved by BSEE) is not warranted. $40/acre or $240,000 per year (plus inspection and permitting fees) is a high cost for a marginal shelf lease.
Cook Inlet Sale 244 drew 14 high bids totaling more than $3 million. Sale 258 drew only 1 bid of $64,000. While many factors influence lease sale participation, the 50% increase in royalty rate certainly made the Cook Inlet leases less attractive.
Other than the increased royalty rate, the terms for both Cook Inlet sales were essentially the same. The primary lease term was 10 years and the minimum bonus bid was $25/hectare for both sales. The rental rate was increased by only $3/hectare ($13 to $16).

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Lawrence Livermore National Laboratory and the US offshore oil and gas program

Posted in California, Offshore Energy - General, Regulation, tagged California platforms, earthquakes, Lawrence Livermore, Minerals Management Service, seismic studies on March 3, 2023| 1 Comment »

Lawrence Livermore is receiving attention for concluding that the Covid pandemic most likely arose from a laboratory leak in Wuhan.

This reminded me of an important Lawrence Livermore project that was funded by the Minerals Management Service in 1995. The study considered seismic hazard criteria for offshore platforms on the California OCS. My colleague Dr. Charles Smith, a structural engineer, had an important role in this research. Charles had been instrumental in the establishment of an earthquake measurement network in the Pacific Region. The measurement system at Platform Grace in the Santa Barbara Channel successfully recorded 5 earthquakes and the structural responses at multiple locations on the platform.

Lawrence Livermore and the other national laboratories have many outstanding scientists and engineers. The national labs do excellent work, although their studies are a bit pricey 😉

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Would BOEM’s new bid adequacy procedures have changed the outcome of Sale 257 or prior lease sales?

Posted in energy policy, Gulf of Mexico, Offshore Energy - General, Regulation, tagged bid adequacy procedures, BOEM, Lease Sale 257 on February 28, 2023| Leave a Comment »

BOEM’s new procedures, which have been published for public comment, seem reasonable. However, it would be helpful to learn more about the testing of the new methodology. (See the quote below). Further, would the rejected Sale 257 bid have been accepted? What was the LBCI for that tract? Would any accepted Sale 257 bids have been rejected? Would the outcome of other sales have been affected?

After a 2-year comprehensive technical review of the delayed valuation methodology, BOEM intends to replace the delayed valuation methodology with a statistical lower bound confidence interval (LBCI) at a 90 percent confidence level as a decision criterion for accepting or rejecting qualified high bids on tracts offered in OCS oil and gas lease sales. Following extensive testing of the alternative approaches using both historical and current lease sale tract data and existing BOEM cash flow simulation models, BOEM determined that the LBCI approach would be the most appropriate substitute for the delayed valuation methodology. The LBCI is a statistical concept that captures the lower bound of a range of values encompassing the true unknown mean of the risked present worth of the resources at the time of the lease sale. The LBCI incorporates the uncertainty of parameters unique to the valuation of each OCS oil and gas lease sale tract. These parameters may include, but are not limited to, subsurface characterization of reservoir properties, cost and timing of the development, and projected revenues. Unlike the delayed valuation methodology, the LBCI approach would not require that BOEM estimate the time delay period between the current OCS oil and gas lease sale and the projected next lease sale. As such, BOEM finds the LBCI to be a better approach going forward.
Federal Register

Below is the flow chart for the new procedures. It’s interesting that high bids on nonviable tracts are automatically (and gratefully) accepted! 😉

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Indicted former Congressman once charged BSEE with finding ways to “bleed” Repsol

Posted in cuba, energy policy, Regulation, Uncategorized, tagged BSEE, cuba, Repsol on January 26, 2023| Leave a Comment »

“Former U.S. Rep. David Rivera, a well-connected Florida Republican, has been arrested on federal charges that include failing to register as a foreign agent. The case centers on Rivera’s signing of a $50 million contract with Venezuela’s government in early 2017, and his subsequent attempts to thaw Venezuela’s icy relationship with the U.S.”
NPR

Perhaps Mr Rivera’s conduct at a 2012 hearing on Cuban offshore drilling was a hint of things to come. Mr. Rivera inappropriately pressed BSEE, represented by Lars Herbst, to find ways to “bleed” Repsol should there be an incident while they were drilling in Cuban waters.

“So, we need to figure out what we can do to inflict maximum pain, maximum punishment, to bleed Repsol of whatever resources they may have if there is a potential for a spill that will affect the U.S. coast. So, I hope you will look into that and verify that for us.”
Congressman David Rivera, 2012 Hearing on Cuban offshore drilling

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2022 Safety Honor Roll: Gulf of Mexico operators

Posted in Gulf of Mexico, Offshore Energy - General, Regulation, tagged AnadarkoOxy, bp, Cantium, Chevron, compliance leaders, Contango, Gulf of Mexico, Hess, LLOG, Murphy Oil, offshore oil and gas operations, Safety Honor Roll, Shell on January 24, 2023| 1 Comment »

The Honor Roll companies for 2022 (listed alphabetically) are Anadarko (Oxy), bp, Cantium, Chevron, Contango, Hess, LLOG, Murphy, and Shell.

Our criteria:

Must average <0.3 incidents of noncompliance (INCs) per facility-inspection.
Must average <0.1 INCs per inspection-type. (Note that each facility-inspection may include multiple types of inspections (e.g. production, pipeline, pollution, Coast Guard, site security, etc). On average, each facility-inspection included 3.25 types of inspections in 2022. Here is a list of the types of inspections that may be performed.)
Must operate at least 3 production platforms and have drilled at least one well (i.e. you need operational activity to demonstrate compliance and safety achievement).
May not have a disqualifying event (e.g. fatal or life-threatening incident, significant fire, major oil spill). Due to the extreme lag in updates to BSEE’s incident tables, investigation and news reports are used to make this determination.
Pacific and Alaska operations will be considered separately.