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Analyzing BSEE violation patterns Last five years show BSEE violations are changing,

in terms of incident type and compliance

The Bureau of Safety and Environmental Enforcement (BSEE) and its predeces-sor the Minerals Management Service (MMS) have conducted thousands of inspections of offshore exploration and

production facilities in federal waters. Typically, about 20% of inspections find a

violation of BSEE rules; these result in the issuance of “Incidents of Non-Compliance,” or INCs, a written citation giving the operator either 14 or 30 days to take corrective action. Serious violations or INCs which operators fail to cure within the prescribed time become penalty cases. Less than 1% of all inspections result in civil penalty or criminal cases.

Since September 1997, a total of 532 pen-alty cases have been resolved for combined payments of $25,892,071. Surprisingly, only 20 offshore oil and gas operators account for 60% of all penalties levied since 1998.

The goal here is to examine how penalty cases are categorized by incident type, and what categories are changing in regulatory emphasis. Additional analysis examines pat-terns among the majors and independents that comprise the select group of 20.

Legal authority BSEE may lawfully impose monetary pen-

alties and other remedies upon operators of drilling rigs and production platforms pursu-ant to §24(b) of the Outer Continental Shelf Lands Act (OCSLA):

(A)ny person who fails to comply with the OC-SLA, or leases, permits, regulations, or orders is-sued thereunder, after notice of the failure and a reasonable period to correct the noncompliance, shall be liable for a civil penalty of not more than $20,000 (now adjusted to $40,000) for each day of the continuance of such failure.

If a failure to comply constitutes … a “threat of serious, irreparable, or immediate harm or damage to life …, property, any mineral de-posit, or the … environment,” a civil penalty may be imposed without allowing a corrective action period.

Not all regulatory violations warrant re-view as civil penalty proceedings. Generally, those violations that cause injury, death, en-

vironmental damage, or create a threat to human life or the environment will trigger BSEE review. Examples include:

• Unsafe and un-workmanlike operations involving injury to humans or pollution

• Safety devices, e.g. surface and sub-surface safety valves and emergency shut-down systems that are (a) bypassed or removed without a valid reason, prior approval, and lock-out/tag-out procedures, or (b) inoper-able but are left in service without repair.

The Oil Pollution Act of 1990 (OPA 90) revised and strengthened the OCS Civil Pen-alty program. Congress authorized a maxi-mum fine of $20,000 in OPA 90, compared to $10,000 then available under OCSLA. Rules implementing the OPA 90 penalty policy went into effect in June 1991 (56 Fed. Reg. 21953). However, it was not until February 1998 that MMS began to publicly disclose the names of the affected companies, the penalty amounts, and the type of violations.

Key findingsWith the advent of 15 years of data obtained

from 532 individual penalty cases, emerging

trends can be spotted in enforcement patterns. The “change analysis” table arranges cases ac-cording to categories of violations, and depicts their cumulative usage by BSEE and MMS from 1998 to 2012. For example, bypass of safe-ty equipment or warning devices and manipula-tion of sensors account for 35% all penalty cases.

But the frequency of bypass/manipula-tion cases is not constant. Such cases vary from 24% of penalty cases in 2008-2012 to as much as 39.5% of penalty cases in 1998-2002. Thus, bypass/manipulation of sensors, while still the largest single category, is trending downward in 2008-12 compared to historical levels. This trend is confirmed in the “change analysis” table. In fact, the recent trend is 30% below the long-term average for the category of bypass/manipulation of sensors. The table underscores those categories of violation that display marked divergence from norms.

The analysis of BSEE/MMS penalty cas-es includes these additional findings:

Emerging trends in violation categories. Risk of fall and “open hole” accidents are growing substantially among recent penalty cases, perhaps reflecting agency concern for worker

Michael B. SmithFowler & Rodriguez, LLP

8 Offshore June 2013 • www.offshore-mag.com

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safety in the offshore domain. Another emerg-ing violation category is excessive corrosion and wear of handrails, stairs, and deck grates – which also present safety risks. These trends are depicted in the “change analysis” table.

Penalties for pollution are remarkably consis-tent. For each five-year interval, penalties for this category came within 0.2 points of the long-term average of 7.8%. This is the least variable category of violations among seven frequently cited types.

Penalties from independents exceed those from majors. Penalties incurred by 20 specific E&P operators were identified and tracked for repeated listings during 1998-2012. The research showed that seven majors contrib-uted a combined $4,391,700, or 16.96% of all penalties obtained over the 15-year interval. In contrast, thirteen independents contrib-uted a combined $11,291,700, or 43.61% of all penalties obtained in the same interval.

Fewer cases are made against majors. Over the last five years, nine of thirteen indepen-dents were responsible for 52 civil penalty cases totaling $5,788,500. In contrast, five of seven majors were responsible for 10 penalty cases totaling a scant $290,000 in 2008-12. The average penalty from independents was $111,000; by comparison, the average pen-alty from majors was $29,000. The severity, extent, and duration of OCSLA violations, as measured in terms of penalties recovered in 2008-12, are substantially greater for a group of select independents than for majors. It should be noted that a great many other inde-pendents seldom experience penalty cases.

Discrepancies among operator groups com-paratively recent. From 1998 to 2002, MMS brought 69 penalty cases against major op-erators, or 29% of all cases filed. A decade later, BSEE brought 10 penalty cases against majors from 2008-2012, or 7.5% of the total. In this manner, the frequency of penalty cases brought against majors has declined to its lowest level since MMS began publish-ing results of cases in 1998. But the current condition was not always the case.

Penalty cases have doubled in value. When enforcement results are grouped in five-year segments, two trends emerge: first, the number of penalty cases filed has declined from 45/yr in 1998-2002 to 28/yr in 2008-12; and second, the dollar amount of each pen-alty case averaged $34,000 in 1998-2002 and grew to $66,000 in 2008-12.

Emerging trendsRecent trends suggest greater attention by

inspectors to worker safety than in the 1990s. However, data addressed in the “change analysis” may not reflect actual changes in enforcement priorities. For example, recent growth in the category for risk of fall/open hole may be the product of more frequent

repair and maintenance activity associated with older drilling rigs and platforms. Simi-larly, growth in the category for corrosion/excessive wear may signify aging equipment as much as new safety initiatives.

Older equipment is generally associ-ated with platforms and structures located in shallow water (200 meters or less). The newer E&P facilities in the deepwater OCS have more safety and well control equip-ment requiring longer inspections. But the number of shallow-water platforms vastly exceeds those located in depths suitable for modern, floating structures.

Yet another reason for more frequent oc-currence of risk of fall/open hole penalty cases may be expanded incident report-ing obligations for OCS operators. In 2006, MMS changed the threshold for incident reporting from “serious injury” to any lost time accident or injury resulting in restrict-ed work (e.g. “light duty”). Some observers believe that once reported, these incidents give rise to safety-related cases at the lower range of the penalty matrix.

Civil penaltiesThe last five years of BSEE penalty data

point to a 20-fold disparity in the frequency and gravity of penalty cases between majors and independents. A leading explanation offered by many industry veterans is the relative age of shallow and deepwater structures, and the difficulty of conducting repairs on older plat-forms. But do other causes also contribute to this gap in OCS compliance? Are engineering and HSE compliance staffs comparable in size, training, resources and experience?

Analysis of compliance performance should consider the following factors. Major oil companies have organizational resources to conduct self-evaluation audits and train employees and contractors for compliance. A culture of safety and operations awareness is cultivated and rewarded by many majors. In contrast, independents carry fewer com-pliance staff, relying upon contractors to execute safety and spill prevention plans, or perform critical monitoring tasks. When compliance obligations are out-sourced, are these operators are less likely to “own” the issue, or perform consistently in accordance with company or regulatory standards?

In addition, capital investments for deep-water E&P facilities are much larger than for equivalent facilities in shallow water. Not only are deepwater structures newer, but deepwa-ter operational risk requires that equipment be maintained to high standards. In contrast, the independents that dominate shallow-wa-ter E&P zones are constrained by facilities built decades ago. Does this “hardware dif-ferential” explain variable performance by all independents? Or do some members know-

ingly defer maintenance, and/or fail to appre-ciate that such choices lead to safety risks?

New metrics neededMajor and independent groups in this

article are constructed without regard to production volumes, or the number of wells maintained by operators. A more compelling analysis would allocate penalties on the basis of production criteria, or wells installed. Con-sider, for example, an operator with 150 plat-forms in shallow water, many producing from one or two wells. Should that operator be mea-sured by the same criteria as a deepwater pro-ducer with three or four platforms in the Gulf? What if the deepwater producer maintains 20 wells deployed from single platform? Is vol-ume of production a relevant factor, or does operational risk coincide with the number of platforms, their age and repair frequency?

Future research should explore new met-rics that (will hopefully) yield useful results, desired by company managers and regula-tors alike. By way of example, analysis of “penalty/platform” ratios, or penalties per barrel of production, may offer more mean-ingful measures of long-term performance. •

The author Michael B. Smith joined the Houston office of Fowler Rodriguez as Partner in 2011. He practices in the areas of oil and gas law, general litigation, and environmental issues associated with exploration, production, and pipeline operations. In the oil and gas domain, he represents mineral owners and operators in royalty disputes, leases, and production agreements, and advises offshore operators and service companies on compliance with OCSLA and environmental and safety matters administered by BSEE. His experience includes representing oil and gas operators in property disputes, facility audits, and HSE compliance matters. Formerly in-house with Chevron, he represented the company in complex property damage claims as well as regulatory and enforcement cases. Smith received his Bachelor of Arts from University of Texas at Austin in 1975 with honors. He then obtained a Master’s degree in City Planning and Land Use from University of California, Berkeley, and his Juris Doctor from Univer-sity of California, Hastings College of Law in 1982.

References 1. The OCS violator has 60 days to pay the penalty as

proposed by BSEE or file an appeal to the Interior Board of Land Appeals (IBLA). 30 CFR 250.1400 et.seq. Cases resolved by BSEE are published on a quarterly basis at http://www.bsee.gov/Inspection-and-Enforcement/Civil-Penalties-and-Appeals/Civil-Penalties-and-Appeals.aspx.

2. 43 U.S.C. §1350(b)(1&2). Authority for MMS to initiate penalty cases without waiting for operators to correct violative conditions was added by the Oil Pollution Act of 1990 [OPA 90]. Subtitle B of OPA 90 increased the maximum civil penalty from $10,000 to $20,000 per violation for each day of noncompliance. Where failure to comply with ap-plicable regulations constitutes a threat of serious,

irreparable, or immediate harm or damage to life (including fish and aquatic life); property; any mineral deposit; or the marine, coastal, or human environment, OPA 90 allows the Secretary of Interior to assess a civil penalty without regard to expiration of time for corrective action.

3. 30 CFR 250.1404, as supplemented by BOEMRE Civil Penalty Program and Revised Assessment Matrix set forth in its Notice to Lessees [NTL] No. 2011-N06 (June 6, 2011).

4. Notice to Lessees [NTL] No. 1997-4N (September 1, 1997). “The purpose of this notice is to inform lessees and operators of federal oil, gas, and sulphur leases on the outer continental shelf that the Minerals Management Service (MMS) will annually publish a summary of OCS civil penal-ties paid. The annual summary will highlight the identity of the party, the regulation violated, and the amount paid. Publication of the annual sum-mary of civil penalties for the preceding calendar year will begin in 1998.” This same NTL also announced an increase in the maximum civil penalty to $25,000.

5. 2,750 platforms operate in depths up to 200 me-ters; only 64 platforms are in depths greater than 200 meters. Offshore Statistics by Water Depth, BOEM. Source: http://www.data.boem.gov/homepg/data_center/leasing/WaterDepth.asp.

6. 30 CFR 250.188(b): “You must provide a written report of the following incidents to the District Manager within 15 calendar days after the incident: (1) Any injuries that result in one or more days away from work or one or more days on restricted work or job transfer. One or more days means the injured person was not able to return to work or to all of their normal duties the day after the injury occurred. When the rule change was adopted in April 2006 MMS wrote in response to comments that “Under the current regulation, industry has reported an average of 56 injuries per year over the past nine years. In many of the reported injuries there was insufficient informa-tion to assess the seriousness of the injury. This [new] rule requires a description of the injury so that MMS can assess the seriousness.” 71 Fed.Reg. 19640, April 17, 2006.