Bud's Offshore Energy (BOE)

In a draft rule published on June 29, 2023, BOEM proposes to discontinue using a company’s record of compliance in determining the need for supplemental financial assurance for decommissioning. BOEM’s full explanation for this surprising change is pasted at the end of this post.

Opposing view:

• BOEM should be more attentive, not less, to safety performance and compliance data. If they were, taxpayers would have been better protected from the risks associated with the lease acquisitions by Fieldwood, Cox, Black Elk, Signal Hill, and others, and their subsequent bankruptcies.
• Safe operations, as reflected in compliance and performance data, are critical to a company’s financial success.
• BOEM wrongly infers that Incidents of Noncompliance (INCs) are solely dependent on the number and complexity of facilities. Decades of normalized compliance data have told us that there are marked differences among operators in terms of compliance and safety performance. Companies at the bottom of the performance table don’t usually survive.
• Accidents are not mere matters of chance; management and culture matter.
• Honor Roll companies, large and small, have superior compliance records, and in 2022 these companies had 50-90% fewer INCs/facility-inspection than the Gulf of Mexico average.
• Does BOEM expect noncompliance leaders to be concerned about decommissioning obligations? The record shows that they are not.
• Cox’s 2023 bankruptcy was predictable given their past safety performance. In 2022, Cox was a violations leader by any measure, and was responsible for 9 of the 30 safety incidents that were significant enough to require investigation by BSEE.
• Fieldwood’s terrible 2021 safety performance has been discussed, and there was ample evidence of performance problems prior to their bankruptcy declaration in 2018. In 2016 and 2017 Fieldwood was, by far, the GoM violations leader with 818 INCs, 401 of which required a facility or component shut-in.
• Ironically (or maybe not), the only other company that was even in the same noncompliance ballpark as Fieldwood in 2016 and 2017 was future Cox affiliate Energy XXI GOM. Energy XXI earned 465 INCs (240 shut-ins) during that 2 year period. Did BOEM object to or otherwise comment on the 2018 Cox-Energy XXI merger?
• Black Elk Energy was new in 2007 and quickly became a violations leader. Between 2010 and 2012, BSEE cited Black Elk 415 times. 218 of these violations were serious enough to require facility or component shut-ins. On November 16, 2012, explosions at Black Elk’s West Delta 32 platform killed 3 workers, and 2 others suffered severe burns. Criminal charges and a complex bankruptcy followed. BSEE records show 1107 INCs during the company’s short history, 464 of which required facility or component shut-ins.
• The rapid growth of Fieldwood, Cox, and Black Elk was in part facilitated by lax lease assignment and financial assurance policies. Operating companies should have to demonstrate that they can operate safety and comply with the regulations before they are approved to acquire more properties.
• The Signal Hill saga was documented nearly 2 years ago, and none of the questions raised in that post have been answered. Violations data and inspector feedback predicted the Signal Hill/POOI failure. Nonetheless, and despite the objections of regional staff, Signal Hill was allowed to tap into its decommissioning account to cover operating expenses. Responsibility for decommissioning Platforms Hogan and Houchin is still uncertain.
• Bankruptcy has been used to avoid or transfer decommissioning obligations. In that regard, Chevron’s comprehensive objection to Fieldwood’s restructuring plan is telling.
• Given that BSEE, not BOEM, is responsible for safety and compliance, I sincerely hope that regulatory fragmentation was not a factor contributing to BOEM’s decision to discontinue the use of compliance data in determining financial assurance needs.

BOEM’s explanation for the proposal to eliminate the record of compliance criterion:

BOEM also proposes to eliminate the existing “record of compliance” criterion found in the current version of § 556.901(d)(1)(v). BOEM has determined that the number of INCs a company receives correlates with the number of OCS properties it owns, not its financial stability, and therefore, BOEM has concluded that it is not an accurate predictor of its financial health. BOEM reviewed BSEE’s Incidents of Non-Compliance (INCs) records and its Increased Oversight List, which represent BSEE’s cumulative records of violations of performance standards on the part of OCS operators and lessees and determined that the number of incidents of non-compliance typically increases with the size and complexity of the operator’s or lessee’s operations, including the ratio of incidents to number of components. Because larger companies (regardless of credit score) tend to have more properties and components and therefore more INCs, BOEM determined that record of compliance criterion does not accurately predict financial default. BOEM’s review of this information confirmed the feedback BOEM received in response to the 2016 NTL, namely that companies with a large number of properties and facilities tended to receive a large number of INCs and had more individual properties on the Increased Oversight List. BOEM specifically requests comments regarding the use of fines and violations as a criterion in the determination of a company’s ability to fulfill decommissioning obligations, and any data or analysis addressing any correlation between the number of violations and the risk of financial default. BOEM also requests comments on whether the elimination of the INC’s criteria would create a disincentive to comply with regulations. BOEM also requests comment on whether or not the cost of decommissioning is likely to increase based on the type, quantity, and magnitude of previous violations.

On a related note, BOEM/BSEE should consider a followup to the John Shultz thesis which found that INCs are a very good predictor of accidents and spills.

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