Aggressive Regulation And BSEE's Unlimited Powers

In our last Musings we discussed the presentation at the 40th Annual National Ocean Industries Association (NOIA) meeting in March dealing with the proposed extension of offshore regulation to oil service companies by the Bureau of Safety and Environmental Enforcement (BSEE). Since that meeting there has been a development that should increase the pressure for oil service companies to respond to the regulatory expansion.

In early March an initiative was undertaken by NOIA to challenge the extension of BSEE's jurisdiction to service companies. Under the guidance of several members, and with the help of lawyers Bob Thibault and Paul Smyth of the law firm Perkins Coie, a letter was sent by NOIA President Randall Luthi to Admiral James Watson, the director of BSEE, challenging the jurisdiction of the agency to extend regulation to service companies operating offshore. The four-page letter included in its final paragraph a suggestion that BSEE could reverse and revoke its statements and actions, or it could at least proceed with a formal rulemaking process that would enable the industry to have input into those final rules. But the key demand was that the agency responds to the letter and "provide detailed and fully supported justification and authority of its announced extension of BSEE jurisdiction beyond federal lessees and their designated operators." That request asked for a formal response by April 10th.

On March 30th a response was sent by BSEE. The two-page letter sets forth the broad authority that the agency believes grants it the jurisdiction over service companies offshore. BSEE cites the OCS Land Act and implementing regulations, 30 C.F.R. Chapters 2 and 5. It concludes that "BSEE has broad legal authority over all activities conducted under federal offshore leases, whether such activity is engaged in by lessees, operators, or contractors, and we can exercise such authority as we deem appropriate." The agency then cites two examples where the regulations apply to "all operations conducted under OCSLA" or "any person [who] fails to comply with any provision of this subchapter, or any regulation or order issued under this subchapter." Based on its interpretation of the statutes BSEE goes on to state, "The 'any person' language of section 24(b) makes it clear that persons other than lessees and operators can be subject to the Secretary's rules or orders."

So there service industry - you are now subject to regulation if you perform any service offshore. What does this mean for those companies who sell equipment for offshore work? If they perform any maintenance, one could conclude that they too are subject to regulation. To us, the scary thing about this sudden bureaucratic regulatory power-grab is that everything is up to the discretion of BESS and its inspectors, many of whom, due to the rapid growth of the agency, lack experience and probably even sufficient training. It could be that BSEE inspectors are to the offshore oil industry as TSA inspectors are to airline passengers. That's truly scary!

The last paragraph of the BSEE letter is what bothers us the most about this regulatory expansion. It says:

"We currently are in the process of developing a policy regarding the circumstances in which BSEE will exercise its existing authority over service companies and contractors conducting on-lease activities. BSEE is committed to ensuring that everyone, including service companies and contractors, is committed to higher standards of safety and environmental protection on the OCS."

So BSEE is going to develop a "policy" about when it may act, but it won't be done under a rulemaking procedure nor will companies be consulted. Secondly, BSEE is suggesting that everyone should be held to "higher" standards of safety and environmental protection offshore. So "higher" than what? Are these standards going to be new safety and environmental standards, or merely arbitrary ones?

We view this letter and the philosophy enunciated by Admiral Watson, both in his presentation at the NOIA meeting and in the letter, in the context of a recent statement by former Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) director Michael Bromwich in an interview with a reporter for The Houston Chronicle. Mr. Bromwich said, "If you're going to be a credible regulator, you've got to be aggressive in your enforcement. We all need to see evidence of aggressive enforcement." Of course the purpose of his interview was to announce the launching of the Bromwich Group, a Washington-based consultancy aimed at advising companies on revamping their operations. The revolving door has barely stopped spinning! What better way to ensure your new venture has business than to encourage your successors to be aggressive!

But we suggest that BSEE might want to keep in mind the recent Supreme Court unanimous slap-down of the Environmental Protection Agency's (EPA) heavy-handed enforcement actions under the Clean Water Act when that law didn't give them the power they were exercising. Maybe BSEE should also consider the recent string of reversals on water pollution actions related to shale gas developments by the EPA and the U.S. District Court's dismissal of the EPA's air quality suit against Texas as examples of the need to follow the rules versus being overly aggressive.

There was a small gathering of NOIA members with the Perkins Coie attorneys in Houston last week to discuss the BSEE response to the NOIA letter. That response has started a clock ticking for any formal response and challenge to the proposed BESS actions. The meeting discussed the possibility of formation of an ad hoc group to respond, either through the rulemaking process or a court challenge. In one case, the response time is 60 days and in the other possibly as short as 45 days. There was also a discussion about the creation of a more formal organization such as the Shallow Water Coalition that challenged the federal government's Gulf of Mexico drilling moratorium following the Macondo blowout.

We know that many of the readers of Musings From the Oil Patch are engaged in the management and operation of energy and energy service companies that work offshore and will be impacted by these proposed new, and arbitrary offshore regulations. For offshore service companies: If you didn't know it before, you should understand it now, your world has changed! You are now subject to regulations you've never experienced before with the attendant impact those rules will have on your company – its management, governance and operations. Becoming engaged in understanding and helping shape those regulations may be the best course of action.

G. Allen Brooks works as the Managing Director at Parks Paton Hoepfl & Brown. Reprinted with permission of PPH & B.