Moratorium Following the BP Oil Spill. The Deepwater Horizon tragedy was the most extensive and

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1 Jesse Lagarde Moratorium Following the BP Oil Spill Summary The Deepwater Horizon tragedy was the most extensive and devastating oil industry disasters in US history. 1 Along with leaving eleven workers dead, the event raised many issues to the viability of deepwater production in the Gulf of Mexico. One multifaceted issue of the Horizon spill was the Federal government s immediate response, the legal challenges to that response, and the new industry regulations that followed. Background On April 20, 2010, the Gulf of Mexico offshore drilling rig Deepwater Horizon caught fire and exploded, sinking two days later. 2 Prior to that time, the rig had just finished an exploratory well 52 miles off the cost of Louisiana in the deepwater Macondo oil field. 3 The explosion caused large amounts of crude oil to flow to the Gulf s surface, spreading out over thousands of square miles. 4 Due to this unprecedented disaster, the immediate response from the federal government was to suspend all deepwater drilling in the Gulf. Ten days after the initial explosion, the President requested The Secretary of the Interior Kenneth Salazar to

2 2 evaluate the Deepwater Horizon failure and report any recommendations to improve the safety of oil and gas exploration off the outer continental shelf. 5 The most immanent recommendation was a six-month moratorium on all deepwater exploration and production operating at that time in the Gulf. Limitation of Liability and Consolidation of Claims Following the explosion, multiple legal actions were filed in numerous venues. 6 In May of 2010, Transocean (the owner of the Deepwater Horizon, BP was the lessee) filed for a limitation of liability action in Southern District of Texas to limit economic liability for damages resulting from the explosion. 7 The claimants in that proceeding, among many other motions, filed to transfer the case out of the Texas Southern District. 8 Concurrently,the Judicial Panel on Multi-District Litigation reviewed requests from other affected claimants seeking to consolidate all spill related actions into one trial 9 (which would also include Transocean s limitation action). The JPML ruled that center of gravity of the incident was in Louisiana, and thus determined the Eastern District court in New Orleans was the most convenient venue for all further proceedings. 10 DOI s immediate response: May 30th, 2010 Moratorium

3 3 On May 30 th, 2010, the Department of the Interior (DOI) by way of the Minerals Management Service (MMS) implemented a directive instructing all operators of federal oil and gas leases in the Gulf of Mexico to cease exploration and production immediately. 11 The six-month moratorium directed the Operators to cease drilling any new deepwater wells and gave notice that the MMS would not issue any new permits for drilling greater than 500 feet during the suspension. This notice was based on the findings established in the Increased Safety Measures for Energy Development on the Outer Continental Shelf report (Safety Report) issued days earlier from Secretary Salazar at the President s request. 12 Purpose: The moratorium s purpose was to properly mitigate and prevent any further harm that may follow from continued deepwater drilling by other parties off the outer continental shelf. According to the moratorium, under [then] current conditions, deepwater drilling pose[d] an unacceptable threat of serious and irreparable harm or damage to wildlife and the marine, coastal and human environment. 13 This standard was established in Part 250 Oil and Gas and Sulphur Operations in the Outer Continental Shelf of the Code of Federal Regulations, which also granted the Secretary authority to issue any suspension of operation. 14 In addition to preventing possible further

4 4 harm from another spill, the suspension allowed the parties and the federal government to fully assess the Deepwater Horizon accident without danger of another catastrophe. 15 Considering other deepwater operations in the Gulf used similar safety equipment and industry practices, the issuance of the moratorium was reasonable and paramount at the time. Along with the prevention of another spill, the moratorium also allowed the government to reassess industry practice regarding well safety, most importantly wild well intervention and blowout containment equipment. 16 Further the suspension allowed for a reevaluation of industry practices, mainly requiring evidence that drill operators have the ability to respond effectively to any future spills. The BP Oil Spill is a dynamic situation, and new information is made available every day about the risks associated with deepwater drilling on the OCS, including: (1) systemic drilling and workplace safety issues, (2) the inadequacies of a variety of attempted wild well intervention and blowout containment strategies, and (3) the shortcomings of current oil spill response plans and resources. Recent events also have made clear that there are systemic problems that apply across different types of deepwater drilling, including, but not limited to, problems with BOPs, a lack of viable deepwater wild well intervention and blowout containment strategies and capabilities, and inadequacies in oil spill response plans and resources, particularly in light of the ongoing response to the 17 BP Oil Spill. Legal Authority: The legal framework of the May 30 th moratorium was first established by the Outer Continental Shelf Lands Act (OCSLA), granting federal jurisdiction over the outer continental shelf and authorizes the Secretary of the Interior to lease such lands for certain purposes. 18 Further the act gives

5 5 the DOI authority for suspension or temporary prohibition of any operation or activity, including production, pursuant to any lease or permit if there is a threat of serious, irreparable, or immediate harm or damage to life (including fish and other aquatic life), to property, to any mineral deposits (in areas leased or not leased), or to the marine, coastal, or human environment. 19 Under Title 30--Mineral Resources of the Code of Federal Regulation, the secretary had the authority to promote orderly exploration, development, and production of mineral resources; Prevent injury or loss of life; Prevent damage to or waste of any natural resource, property, or the environment. 20 Furthermore the DOI may grant or direct a suspension of operation or production. Most notably when: activities pose a threat of serious, irreparable, or immediate harm or damage. This would include a threat to life (including fish and other aquatic life), property, any mineral deposit, or the marine, coastal, or human environment. When 21 necessary for the installation of safety or environmental protection equipment. It was this regulative authority that authorized Secretary Salazar to issue the drilling moratorium based on the threat that an additional spill would impose while assessing the damage of the Deepwater Horizon disaster. 22 New Safety Regulations: The moratorium and the Safety Report both outlined a need for new safety protection standards. These measures included new certifications and verifications for Blowout Preventer Equipment and Emergency Systems,

6 6 new safety equipment requirements and operating procedures, well-control guidelines and fluid displacement procedures, well design and construction (casing and cementing), along with increased enforcement of existing safety regulations and procedures. 23 Additionally, the moratorium changed the standards for existing deepwater production rigs wishing to obtain approval to continue oil production. These new regulations required: A new Application for Permit to Drill or Application for Permit to Modify, as appropriate; Purpose of the well (disposal, injection, water flood); Type of rig/bop; Water depth; Safety systems in place; and L ocation/placement of safety system devices (hydraulic accumulators located in a protected area). 24 Further notice required structured risk analysis of losing well control, risk of not conducting the requested activity, and a planned use of best practices, specific for each situation and detailed description of the activity. 25 Hornbeck Offshore Services v. Salazar Litigation The biggest challenge to the moratorium was a case filed June 7, 2010 in the Eastern District of Louisiana by Hornbeck Offshore Services, L.L.C. 26 There a Gulf deepwater oil exploration support service plaintiff, claimed the moratorium would adversely affect its service business, the local economy,

7 7 and the over all economic stability of the Gulf oil drilling industry who employed residents of the Gulf communities. The plaintiff also noted that the Safety Report issued by the Secretary was misleading to the over all threat that continued drilling in the gulf imposed. According to the experts cited as peer reviewed, none agreed nor recommended a general moratorium. Rather they recommend a more limited moratorium on drilling deeper than 1,000 feet in order to implement the particular safety regulations outlined in the report. The district court found that the moratorium failed to justify the six month suspension by never discussing any irreparable harm that could exacerbate the current situation nor explained how long it would take to implement the new recommended safety measures. 27 The court ruling utilized the language of the Administrative Procedure Act, which authorizes judicial review of final agency action where there is no other adequate remedy in a court. 28 This legislation allowed the Eastern District to determine if the DOI had acted within the scope of its authority, based on a consideration of relevant factors, or if the agency had acted in an arbitrary or capricious manner, in which the court could provide relief. 29 Here the plaintiff argued that an injunction of the moratorium was necessary to prevent irreparable economic harm. 30

8 8 When determining whether the government acted within the scope of its authority, the court asked if moratorium was based on a consideration of the relevant factors and whether there has been a clear error of judgment. 31 The Secretary argued his decision was based on the investigative reports that deepwater drilling imposed unacceptable risk[s] of serious and irreparable harm to life and property and a finding that the installation of additional safety or environmental protection equipment is necessary to prevent injury or loss of life and damage to property and the environment. 32 Furthermore the government s resource were then currently stretched too thin to adequately cope with another potential spill. 33 Secondly, the plaintiff presented evidence of present economic lost due to canceled contracts, and it was clear Hornbeck would lose future earnings for the entirety of the suspension. 34 Thus the court concluded the plaintiff would experience irreparable harm if an injunction were not granted. Further, in evaluating injunctive relief, the court also considered the best interest of the public, concluding an injunction was in the best interest of the entire gulf community. 35 The court ruled that the secretary, in fulfilling his duties established under the OCSLA acted arbitrary and capricious when enacting the general moratorium because it did not establish any relationship between the scope

9 9 of the moratorium and the possible harm it intended to prevent. 36 Additionally, the Safety Report lacked any analysis of the probable dangers, nor any timeframe of increasing safety measures. In considering the very likelihood of irreparable economic harm the plaintiff faced, the court ruled that an injunction of the general moratorium was appropriate. 37 Second Moratorium Following the government s unsuccessful stay of the injunction 38, Secretary Salazar issued a second moratorium order July , rescinding the original issued in May. 39 The second moratorium no longer defined a deepwater drilling operation as deeper than 500 feet but reevaluated deepwater to any rig that used subsea Blowout Preventers (BOP s) or surface BOP s on floating rigs. 40 Since this technologic was exclusively used on deepwater drilling operations, the new moratorium had essentially the same effect as its predecessor. As the court criticized in Hornbeck 41, the new moratorium included greater detail to justify the need for a general moratorium, yet mainly hinged on the inefficiency of existing BOP technology. Purpose for a Moratorium:

10 10 The structure of the second moratorium was organized into three defined categories. The first argument was the imperative to investigate the current spill thoroughly without the threat of second disaster, an issue fully addressed in the original moratorium. 42 Secondly, the moratorium would give the industry time to reassess their worst-case scenario clean up plans. 43 This included: [the] capability to stop an uncontrolled blowout of an oil well in deepwater. BP s inability, after more than 80 days, to contain the Macondo blowout and spill provides continuing evident that BP and the rest of the industy, which has been cooperating with BP in its efforts to contain on-going spill had not prepared to contain a blowout in the deepwater environment. In Congressional testimony, industy executives have admitted that the industy is unprepared to stop deepwater oil well blowouts effectively, and that many of the containment methods attempted with respect to the Macondo blowout have been improvised 44 and were untested. The final consideration examined the industry s then current ability to contain a possible second spill. 45 While the new initiative claimed to be in conjunction with the Hornbeck injunction, the Secretary cited his continuing obligation under the OCSLA and new evidence to necessitate some form of general moratorium on deepwater oil production. 46 Overarching Industry Deficiencies: The main crux of the DOI s justification were the heightened risks associated with deepwater drilling, rig workplace safety, and post-blowout containment capabilities. 47 The BP oil spill raised major issues with deepwater operation and the sufficiency of equipment to thwart wild well

11 11 blowouts. The two type of blowout preventers (BOP s) mentioned in the moratorium were subsea and surface (on floating rigs). 48 Subsea BOP s pose great difficulty for maintenance, repair, and containment simply because of their location 1000 feet below the sea surface. Then, as the ongoing spill reiterated, there was no effective or quick way to contain a failed subsea BOP. The second category was surface BOP s located on floating rigs. 49 Although they were more accessible for repair and intervention, they also impose greater risks due to their employment on floating rigs as opposed to shallow water jack up or fixed platforms, which offer greater protection and stability to the well s casings. 50 The failure of the Deepwater Horizon s subsea BOP emphasized the threat that deepwater drilling imposed. Further, the lack of a definitive explanation for the failure to prevent a blowout accelerated the hazards of all deepwater operations considering all other rigs used the same type of BOP s. 51 The DOI considered this risk too great to continue operation at that time. 52 Additionally, the deepwater environment itself imposed its own hazards including the amount of production volume of a deepwater well (5 to 10 times greater than shallow water operations), overpressure oil formation complications are magnified at such depths, and the delay in repair or

12 12 containment of the well-head due to the sheer time needed for equipment to reach the seafloor 53 (the Horizon well-head was 5,000 feet underwater 54 ). Secondly, the spill uncovered regulatory gaps and shortcomings in the federal government s drilling oversight, generating an imperative to improve safety practices and procedures. 55 A majority of the recommendations were made in the Safety Report, but also ongoing observation of the spill containment initiative reiterated the need for better strategic oversight of the industry. 56 Basically more time was needed in order to evaluate the suggested changes to the Bureau of Ocean Energy Management (BOEM, formerly the MMS), in order to concisely mitigate these problems. Lastly was the foremost consideration was post-blowout containment strategies, capabilities, and resources. 57 The Horizon incident exposed the inability of the industry to contain a major deepwater spill. Two things were evident at the time of the moratorium s issuance: the industry as a whole was ill prepared to deal with a spill of that magnitude and, due to the taxation of clean up resources, no party (government or private entity) could have handled a simultaneous second spill. 58 Considering these requirements were mandated by the OCSLA and CFR, they were a major imperative in the moratoriums justification. 59 However, BP s inability, after more than 80 days, to contain the Macondo blowout and spill despite the cooperation of

13 13 other major oil companies provides continuing evidence of industry's limited capability to stop an uncontrolled blowout of an oil well in deepwater. 60 To achieve this imperative, much development was needed on the part of industry participants to create an effective containment plan. 61 The BP Oil Spill alone is taxing these shared response resources to the limit. Industry executives have testified and stated repeatedly that they already have offered all available resources to the BP Oil Spill. 62 2d Moratorium as a reaction to Hornbeck: The July 12th moratorium noted that although it is in compliance with the court injunction, the Secretary still had an ongoing obligation under OCSLA to manage the OCS in a safe and environmentally sound manner. 63 This was the footing for the second issuance in order to address the shortcomings cited by the court in Hornbeck. The ruling criticized the original moratorium for several lacking features 64 that were subsequently addressed by the second moratorium. One of the considerations was the greater economic threat to the industry (and gulf community) as a whole. 65 Although the OCSLA does not require any sort of balancing analysis, the DOI did address the economic impact of the moratorium. However, a moratorium s necessity remained, stating: it is self-evident that the economic and environmental costs of the current spill, which even now has

14 14 not been brought under control, outweighs the economic impacts of a temporary suspension of drilling activities, especially since [shallow water] production operations in the Gulf continue. 66 Secondly, Hornbeck criticized the department for not considering other courses of action, 67 yet these were also addressed. 68 The No suspension of drilling option was rejected because of the known safety risks addressed throughout the report. 69 Moratorium on drilling, but with defined criteria for relief from suspensions, which would offer provisions to conduct lower risk drilling, considering the operations met the three major concerns outlined in the issuance. 70 Rejected because the spill had not been fully investigated to determine what operations would qualify. Finally the DOI considered adopting suspension recommendations offered by industry representatives, which would allow for activities that were identified as low risk after certain safety regulations were applied. 71 This option was also rejected, reiterating that the present oil spill was an example of a disaster occurring in a presumed controllable environment. 72 Finally, a greater detailed decision concluded the second moratorium also a factor in the Hornbeck decision. 73 Along with the basic guidelines for a suspension of all operation employing subsea or surface BOP s, the decision included a justification for the timeframe of the

15 15 suspension, as well as outlined special stipulations for lifting the moratorium at a sooner than speculated date (November 30, 2010). 74 Conclusion On September 19, 2010, after many months of effort by multiple parties, the BP well was finally fully contained. 75 The amount of time and effort devoted to ending the disaster raised many issues to the future of deepwater drilling, especially the industry adapting to new safety regulations. On October 12th, Secretary Salazar issued a third memorandum terminating the suspension as to all deepwater drilling and effectively lifting the moratorium a month and half soon than planned. 76 In addition to meeting the requirements laid out in the July 12th decision, this final memorandum further required each operator to have a written and enforceable commitment to ensure spill containment. 77 Moreover, each operator s CEO personally certify compliance with new safety and drilling regulations. 78 However, despite ending the moratorium, it was not until February of the next year that any of the industry participants created a viable containment model. 79 The group, headed by Exxon, said the new model could contain a spill similar in scope to the Deepwater Horizon. 80 After the spill, Shell was the first company approved by the BOEM to

16 16 receive a drilling permit. By February, there were six permits pending approval yet hindered by a lack of sufficient containment strategy. Yet, the Exxon containment model could only effectively deal with one spill at a time 81, a contingency echoing the reasoning of the May 30th memorandum. A year later two years after the initial spill the situation was much different for gulf operators. As of March of 2012, more than 115 shallow water and 323 deepwater permits had been approved. 82 Though, for BP the time since the spill had been lukewarm. Costs have mounted for the company, including $14 billion in spill response and $8 million in claims, though it profited $26 billion in 2011 alone. 83 BP reported the company had invested $52 billion in the gulf over the past five years (not including spill related cost), making it the largest investor in the area. 84 It was announced November 15, 2012 that the company intended to settle with the US government for $4.5 billion, including $1.3 billion in criminal fines and $2.4 billion to the National Fish and Wildlife Foundation. 85 The company also plans to plead guilty to the felony counts related to the eleven killed in the Horizon s explosion. 86 End Notes 1 Exec. Summary from Kenneth Salazar, Sec. of the Int., U.S., to Barack Obama, Pres., U.S., Increased Safety Measures for Energy Development on the Outer Continental Shelf 1 (May 27, 2010) (available at

17 17 2 Id. 3 Id. 4 Id. 5 Id. 6 In re: Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico, on April 20, 2010, 731 F.Supp.2d 1352 (U.S. J.P.M.L. 2010) at In re Complaint and Petition of Triton Asset Leasing GmbH, 719 F. Supp. 2d 753 (S.D. Tex. 2010) at Id. at Supra n Id. at Notice to Lessees from Mineral Mgt. Serv., to Lessees & Operators of Fed. Oil & Gas Leases, Moratorium on all Drilling of Deepwater Wells 1 (May 30, 2010) (available at pressreleases/upload/moratorium_ntl.pdf). 12 Id. at Id C.F.R (2011). 15 Exec. Summary, supra n. 1, at Dec. Memo. from Kenneth Salazar, Sec. of the Int., U.S., to Michael R. Bromwich, Dir. of Bureau of Ocean Energy Mgt, Decision memorandum regarding the suspension of certain offshore permitting and drilling activities on the Outer Continental Shelf 2 (July 10, 2010) (available at 17 Id U.S.C.A. 1334(a) (West 2005). 19 Id. at (1)(A)-(B) C.F.R (2011) C.F.R (b)-(c) (2011). 22 Dec. Memo. supra n. 16, at Exec. Summary, supra n. 1, at Table ES Notice to Lessees, supra n. 3, at Id. 26 Hornbeck Offshore Services, L.L.C. v. Salazar, 696 F.Supp. 2d 627 (E.D. La. 2010) at Id. at Id. at 634 citing 5 U.S.C Id. citing 5 U.S.C. 706(2)(A). 30 Id. at 635 Preliminary Injunction citing Ridgely v. FEMA, 512 F. 3d 727, 734 (5th Cir. 2008). 31 Id. at 634 Administrative Procedure Act (B) citing Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, (1972). 32 Id. at Arbitrary and Capricious. 33 Id. at Id. at Irreparable Harm. 35 Id. at Id. at Id. at Dec. Memo., supra n. 8, at Id. at 22 IMPLEMENTATION. 40 Id. at 1 SUMMARY. 41 Hornbeck, supra n. 17 at Dec. Memo. supra n. 16, at Dec. Memo., supra n. 8, at Id. 45 Id. at Id. at Id. IDENTIFIED RISKS TO CONTINUTED DRILLING IN DEEPWATER. 48 Id. at 8-9 Equipment Blowout Preventers.

18 18 49 Id. 50 Id. 51 Id. at Id. 53 Id. at 9-10 Factors That Correlate to Deepwater. 54 Exec. Summary, supra n. 1, at 1 INTRODUCTION 55 Id. at Drilling and Workplace Safety. 56 Id. at Id. at Attention Must Be Devoted to Post-Blowout Containment Strategies and Capabilities and Limited Spill Response Resources Are Available to Battle Another Deepwater Spill. 58 Id. at Id. at 12, 14, and Id. at Id. at Limited Spill Response Resources Are Available to Battle Another Deepwater Spill 62 Id. at Id. at Hornbeck, supra n. 17 at Id. at Dec. Memo., supra n. 8, at Hornbeck, supra n. 17 at Dec. Memo., supra n. 8, at OPTIONS CONSIDERED BUT REJECTED. 69 Id. at Id. at 18 Moratorium on drilling, but with defined criteria for relief from suspensions. 71 Id. at Adopt recommendations from industry representatives regarding suspensions. 72 Id. at Hornbeck, supra n. 17 at Dec. Memo., supra n. 8, at DECISION. 75 Fausset, Richard, Few cheers for BP well's final plugging, (Sep. 20, 2010). 76 Dec. Memo. from Sec. of the Int., U.S., to Dir. of Bureau of Ocean Energy Mgt, Termination of the suspension of certain offshore permitting and drilling activities on the Outer Continental Shelf 1 (October 12, 2010) (available at Text.pdf). 77 Id. at Id. 79 Kahn, Chris, Oil spill stopper unveiled, (Feb. 18, 2011). 80 Id. 81 Id. 82 Stein, Sam, BP's Influence Peddling In Congress Bears Fruit Two Years After Gulf Spill, (March 12, 2012). 83 Id. 84 Id. 85 Kunzelman, Michael, BP agrees to pay $4.5 billion for spill in which 11 died, (Nov. 15, 2012). 86 Id.