After Deepwater Horizon: The New Offshore Regulatory Regime 66 th annual Oil and Gas Law Conference Houston, Texas February 20, 2015 Copyright © 2015 by Michael R. Bromwich

A shock to the offshore community and the country Blowout of the Macondo well Sinking of the Deepwater Horizon drilling rig 11 workers dead Spill of 4.9 million barrels of oil into the Gulf of Mexico The Accident 2

Accident Triggered Prompt and Comprehensive Reexamination of Offshore Regulation April 30, 2010 – President Obama commissioned 30-day report from Secretary of the Interior on “what, if any, additional precautions and technologies should be required to improve the safety of oil and gas exploration and production operations on the outer continental shelf.” Recommendations included: – Immediate new prescriptive requirements – Longer-term performance-based safety measures – Working groups to explore long-term safety issues Temporary deepwater drilling moratorium – originally 6 months 3

Deepwater Drilling Moratorium Provided breathing space for implementation of measures recommended in 30-day report Provided time to gather information on three central issues implicated by Deepwater Horizon: – Prevention of blowouts and spills through new regulations – Address need for capabilities to contain subsea blowout – Enhance oil spill response Lifted moratorium after less than five months (October 2010) – But no drilling permits issued until February

Results of Comprehensive Reexamination of Offshore Regulation Reviews highlighted major weaknesses in industry and government attempts to adequately address prevention, containment and spill response Accident served as wake-up call for industry, government and public Prompted comprehensive, critical reviews of existing safety technologies, practices, risk management, and regulations Goal: make immediate – and lasting – improvements Fresh assessments of prevention, containment and spill response 5

Initial Regulatory Steps Use of Notices to Lessees (NTLs) – interpretation and application of existing rules NTL-2010-NO5 (June 8, 2010) – Incorporated many recommendations of 30-day report – Required certification of compliance from company CEOs – Required certification by professional engineer of well-casing and well-cementing – Required 3 rd party verification and certification of blowout preventer (BOP) 6

Initial Regulatory Steps (2) NTL-2010-N06 (June 18, 2010) – Addressed need for more detailed information on blowout scenarios and worst case discharge scenarios – Required companies to provide information on worst case spill – Required specifics on drilling relief well – Focused on sharing all assumptions and calculations of worst case discharge – Provided information on additional steps to prevent blowout, and methods to intervene in possible blowout 7

The Drilling Safety Rule Enacted on emergency basis – eliminated notice and comment process – Announced: September 30, 2010 – Effective on publication: October 14, 2010 – Revised and slightly modified as Final Rule: August 15, 2012 Implemented many recommendations from 30-day report New requirements for: – Well-bore integrity – Well-control equipment 8

Containment: The Missing Element Absence of containment capabilities to deal with subsea blowout Failure by industry and government to anticipate need for capability Series of techniques were tried and failed – Containment dome – “Top Kill” and “Junk Shot” Capping stack was successfully installed: July 12, 2010 – Oil stopped flowing: July 15, 2010 New requirement that operators demonstrate capability to deal with subsea blowout – NTL N10 Capabilities developed by two industry consortia in February 2011, allowing deepwater permits to be approved 9

The SEMS Rule (Workplace Safety Rule) Proposed in 2009, before Deepwater Horizon Safety and Environmental Management Systems (SEMS) Rule makes mandatory previously voluntary practices contained in API’s Recommended Practice 75 (RP 75) Published as final rule: October 15, 2010 Industry was given until November 2011 before government would consider enforcement actions for failure to develop and implement SEMS program Companies required to submit first completed SEMS audit to BSEE by November 15,

SEMS II September 2011: Proposed enhancement to SEMS (SEMS II) announced – Safety audits required by 3 rd party auditors – Enhancement of Stop Work authority – Employee participation for program implementation Published as final rule: April 2013 SEMS II became effective on June 4,

Development of Hybrid Regulatory Model 30-day report and President’s Commission recommended adoption of Safety Case Recommendation was fully considered and its immediate adoption rejected – Deference to realities of wholesale transformation of regulatory model – Dominance and acceptance of prescriptive model in U.S. – Lack of public confidence in industry to effectively perform the types of analyses required by Safety Case Implementation of SEMS is 1 st step towards hybrid regulatory model in U.S. Future may see additional performance-based regulations 12

Reorganization of the Former MMS Effectiveness of Minerals Management Service (MMS) diminished by conflicting missions: promoting resource development, enforcing safety regulations, and maximizing revenues from offshore operations. MMS was unable to keep pace with the challenges of overseeing industry In place of MMS, new independent agencies eliminated conflicts by clarifying and separating missions across new agencies. 13

Bureau of Ocean Energy Management (BOEM) Responsible for managing development of the nation’s offshore resources in an environmentally and economically responsible way The Bureau of Safety and Environmental Enforcement (BSEE) Responsible for developing, implementing, and enforcing safety and environmental regulations Reorganization of the Former MMS

Summing Up Offshore drilling far safer now than in April 2010 Risks of offshore accident have been reduced but not eliminated Neither industry nor government can afford to ignore or minimize risks Collaboration between industry and government not only necessary but desirable to enhance safety Government regulators need to master the difficult art of working with industry but remaining aggressive – Developing new regulations – Enforcing existing rules 15

Michael R. Bromwich Founder and Managing Principal The Bromwich Group