Feds’ offshore powers cover contractors

For decades, the U.S. agency that polices offshore drilling has had a laser-like focus on the companies searching for oil and gas in federal waters.

But now under the leadership of a former federal prosecutor, the agency is expanding its regulatory reach beyond oil and gas companies to the drilling rig owners, service firms and other contractors that work for operators.

“No one operating on the outer continental shelf should be immune,” argues Michael Bromwich, the head of the federal Bureau of Ocean Energy Management, Regulation and Enforcement.

And, Bromwich adds, it would be irresponsible for the government to turn its back on any “egregious” behavior offshore, just because it’s by a rig owner, cement contractor or any other service firm.

Bromwich insists that a new legal interpretation of the ocean energy bureau’s authority confirms that the agency can pursue fines and other civil penalties against offshore contractors that behave badly — even though he stresses that the chief focus will remain on operators.

Last year’s Gulf oil spill put a new focus on the way the oil and gas industry is regulated, especially after a presidential commission said the disaster was evidence of systemic problems and poor communication among the broad cast of characters involved in the project.

At the very top of the chain was BP, the primary offshore operator who held the lease on which its failed Macondo well was drilled. Other companies also were involved — including Transocean, which owned the Deepwater Horizon rig working on the job, and Halliburton, which applied cement barriers at the well site.

Bromwich said the spill revealed holes in the bureau’s traditional approach to enforcement because, no matter what or who caused last year’s disaster, the agency generally would be limited to holding the primary operator — BP — responsible.

Even so, the agency’s traditional focus on operators does not bar BP from suing its contractors independently. It also doesn’t block the Justice Department from pursuing criminal or civil claims against others involved in an offshore accident — just as is happening now in a federal district court in New Orleans.

Bromwich also was frustrated earlier this year after he unsuccessfully pressed Transocean to help ensure that two of its employees would testify before a federal probe of the spill.

“This served to underscore the sense that Transocean — and other contractors and subcontractors — were acting as though they had no regulatory obligations,” Bromwich said.

By upending a longstanding practice of making offshore operators solely responsible for accidents that happen under their watch, contractors say the change casts doubt on their legal liability and the risk their insurers take on.

“It’s not well defined, so insurance companies are unsure how to insure for it and what kind of premiums (to charge),” said Randall Luthi, head of the National Ocean Industries Association. “We in industry always feel that it’s important that you tell the regulated what you’re going to expect from them, and how you are going to regulate them,” Luthi said. “But those details apparently are lacking.”

Brian Petty, the executive vice president of government affairs for the International Association of Drilling Contractors, said Bromwich is overturning a system has been “settled” for decades.

Any move to shuffle the system and create “an opening for government action without any parameters” is unsettling, Petty said. “This gives us huge indigestion.”

He added that the insurance calculations and threat of unlimited risk could discourage some rig owners from operating in U.S. waters.

“In this robust global drilling market, drilling contractors will have to assess whether they want to take on the possibility of that exposure,” Petty said.

Facing a backlash from some Gulf Coast lawmakers on Capitol Hill, Bromwich has appeared to scale back plans that initially seemed much more ambitious.

When he first announced the plan at the Offshore Technology Conference in Houston this May, Bromwich stressed that the ocean energy bureau has “broad legal authority over all activities relating to offshore leases, whether it is engaged in by lessees, operators or contractors.”

“We can exercise such authority as we deem appropriate,” he added, in a room filled with representatives from the very contractors he was targeting.

But after testifying before the House Natural Resources Committee on July 15, Bromwich told reporters that the change wasn’t going to be “a revolution” or “the new dominant strain in our regulation.” And he made clear that his agency does not plan to issue new regulations targeting offshore operators.

Not everyone is assuaged. The House is set to debate a government spending bill next week that would bar the ocean energy bureau from using federal dollars to go after contractors unless it explained its authority to Congress. Although the provision stops short of an outright ban, it is a signal that lawmakers intend to keep a close watch on the issue.

One of them is Rep. Jeff Landry, R-La., who argues that the ocean energy bureau’s move creates too much uncertainty.

“It’s going to create a very crowded chain of command when it comes to incidents in the oil and gas industry,” Landry said.

Landry insisted that companies that perform badly already pay a price in the free market.

“If you do a bad job, you’re going to go out of business,” Landry said, adding that companies face a bigger, “more onerous” penalty in the free market — “more than anything the government can do.”