The Gulf of Mexico oil spill: consequences for the oil and gas industry

This article examines the legal and commercial consequences of the 2010 BP Gulf of Mexico oil spill and considers how the future of the global oil and gas industry might be shaped as a result.

Aditi Mene, PLC Cross-border
Contents

On 20 April 2010, an explosion on the Deepwater Horizon rig, (or the Macondo oil well, as it was also known), located in the deep waters of the Gulf of Mexico off the coast of Louisiana, resulted in 11 rig workers dying, the rest of the crew being evacuated, and a large rupture in the oil well. Efforts to contain the vast amounts of oil spilling from the rupture took many months and were conducted under intense media, political and public pressure. A permanent seal was finally established in September 2010, but not before four million barrels of oil had been released, making the Gulf of Mexico oil spill the largest accidental ocean oil spill in history.

It was an environmental disaster and a public relations nightmare for oil company BP, who operated the rig. The effects have been wide-ranging, and are likely to be felt for years to come, not just by the businesses and communities in the immediate vicinity of the spill, but by oil and gas companies all over the world.

The oil spill has focused attention on, and prompted a review of, the laws, regulations and safety standards pertaining to oil exploration and extraction and environmental liability, not only in the US but around the globe.

Further, the oil spill may also result in changes in the way oil and gas companies operate their businesses, to contain liabilities and deal with increased costs, as well as taking measures to restore their tarnished public image and ensure that a similar accident will not happen again.

Against this background, this article examines the legal and commercial consequences of the oil spill and considers how the future of the global oil and gas industry might be shaped as a result. Specifically, it discusses the following:

  • The immediate aftermath, including the US moratorium on deep-sea drilling.

  • The legal actions and costs.

  • New laws and regulations in the US and around the world.

  • The civil and criminal investigations.

  • Commercial effects of the spill.

  • The future.

 

The immediate aftermath

While BP was attempting to plug the spill, an environmental clean-up and rescue operation was immediately mobilised to save the wildlife, beaches and habitats in the Gulf of Mexico, and the US government imposed a moratorium on deep-sea oil drilling. At the same time, legal actions against BP from business owners affected by the oil along the Gulf Coast were set in motion, along with the US government's own civil and criminal investigation of the spill.

By the time the well was finally plugged in September 2010, a huge amount of discussion and scrutiny of the oil and gas industry and of deep-sea drilling had already taken place. Oil-producing governments, the global press and environmental groups were (and continue to be) actively engaged in the issues surrounding the spill, and its causes, costs and lessons.

Scrutiny of the industry's exploration and production methods, as well as its commercial impetus, has increased since the explosion.

The US government began a lengthy criminal and civil investigation into the incident and began reviewing the laws and regulations governing health and safety, and environmental standards on rigs and oil drilling operations.

In Europe and elsewhere around the world, there were also discussions about a potential moratorium on drilling, as well as debates about amending legislation governing health and safety, and environmental compliance in oil and gas exploration.

 

The US deep-sea drilling moratorium

In March 2010 (before the spill), the US government had announced plans to expand its offshore drilling operations in the Gulf of Mexico area to increase domestic oil production. However, after the spill, and while BP was attempting to plug the well, the US government produced a report called the "30-day safety report to the President" (27 May 2010). The report included consultations with industry experts on their safety recommendations for deep-sea drilling (see Department of Interior: Increased safety measures for energy development on the outer continental shelf, 27 May 2010). Following the report, the government issued an immediate moratorium on deep-sea oil drilling.

The US moratorium, which was planned to be in place until November 2010 but was lifted earlier on 12 October, attracted intense criticism from the oil and gas industry which felt that it placed an unsustainably heavy economic burden on the industry (see US oil industry protests against drilling moratorium, ft.com, 1 September 2010 (requires registration)). According to the US oil and gas industry lobby body, the American Petroleum Institution, the moratorium affected a number of deep-sea oil rigs, along with thousands of jobs and businesses dependent on the rigs (see BP spill won't change oil sector radically, ft.com, 30 August 2010). Shallow water drilling was less affected, although it was also subject to a moratorium which was lifted sooner than the deep-water moratorium.

Even after the deep-water moratorium was lifted, it continued to provoke controversy. Media reports in November 2010 stated that the initial safety report presented to President Obama in May, and which suggested a moratorium was necessary, was re-written to suggest that a panel of experts had endorsed this view when, in fact, it had not (see BP oil spill: White House rewrote drilling ban report, guardian.co.uk, 10 November 2010).

Furthermore, despite both the deep and shallow water drilling bans being lifted, oil companies continued to criticise the slow speed at which the backlog of drilling permits were, and continue to be, handed out. Oil companies also complained that new safety rules that were put in place by the US oil and gas regulator slowed down the progress of new permits being granted (see below, New laws and regulations in the US). Up until the moratorium was reinstated in December 2010, there continued to be pressure from the oil and gas industry to speed up the process for granting permits.

At the same time, environmental and safety lobbying groups in the US raised concerns that the moratorium was lifted without enough evaluation of the risks that deep-sea drilling poses on the environment. The Center for Biological Diversity applied for an injunction against the US Interior Department's policy of lifting the moratorium, and argued that a rigorous environmental review was necessary before any further permits were given (see Lawsuit seeks renewed moratorium on deepwater oil drilling, demands environmental review, Center for Biological Diversity, 23 October 2010). The Interior Department argued that the new safety requirements and a new permit procedure would deal with the issues raised by the Center for Biological Diversity.

However, on 1 December 2010, in a reversal of its earlier decision, Kenneth Salazar, the US Interior Secretary, announced that the Obama administration would once again impose a moratorium on deep-sea drilling in the eastern section of the Gulf of Mexico and along the Atlantic Coast, as a result of lessons learned from the BP oil spill (see US halts plan to drill in Eastern Gulf, The New York Times, 1 December 2010). It is thought that the moratorium will be in place until 2017, although drilling will continue in the central and western parts of the Gulf of Mexico under new safety rules announced by Interior Secretary Ken Salazar (see Department of Interior: Salazar announces revised OCS leasing program, Department of Interior, 1 December 2010). Oil companies immediately criticised the decision and suggested that the new regulations would be enough to safeguard environmental safety, as would the industry's own commitment to the environment. Environmental campaigners praised the decision.

A European moratorium?

In Europe, discussions about a similar moratorium also took place. In September 2010, the European Parliament proposed that a moratorium should be considered for deep-sea drilling rigs until the cause and effects of the Gulf of Mexico oil spill were fully understood (see European Parliament: Environment Committee calls for deep sea drilling moratorium, 28 September 2010).

The reaction from the UK government to this proposal was critical and it indicated that there would not be any need for a moratorium, due to the already stringent UK regulatory regime (see Brussels plans strict new controls for offshore oil drilling, guardian.co.uk, 12 October 2010).

By the middle of October, the European Commission had instead proposed that new stricter regulations on deep-water drilling activities were necessary, rather than a moratorium (see European Commission: Communication from the Commission to the European Parliament and the Council, Facing the challenge of the safety of offshore oil and gas activities, 12 October 2010).

In September 2010, the environmental activist group Greenpeace also called for the UK government to impose a moratorium on deep-sea drilling. Greenpeace also said it would begin legal action against the government if it continued to grant drilling licences without carrying out new and more stringent environmental assessments, and before understanding the full cause and effects of the BP oil spill (see New deep sea drilling is not only irrational, our lawyers say it's illegal too, Greenpeace UK, 2 September 2010). Greenpeace claimed that the UK government failed to undertake the necessary environmental assessments when granting new licences for deep-sea drilling, under EU Directive 2001/42/EC (the SEA Directive) and the Environmental Assessment of Plans and Programmes Regulations 2004 (SI 2004/1633), which state that authorities have to carry out a strategic environmental assessment (SEA) where a proposed plan is likely to have a significant effect on the environment (see legislation.gov.uk: Environmental Assessment of Plans and Programmes Regulations 2004). Greenpeace argued that the deep-sea rigs were located in areas off the Scottish coast that were environmentally important and home to marine creatures such as dolphins and whales and that, until an SEA of the area was carried out, no new licences should be granted.

In October 2010, the pressure group began preparing a legal claim against the UK government when it granted new drilling permits to oil company Chevron, to explore the deep water west of the Shetland Islands (see Chevron to begin deep-water drilling off UK coast, guardian.co.uk, 1 October 2010).

Greenpeace's lawyers filed their claim with the High Court on 12 November 2010 to stop the UK government from issuing further deep-sea drilling licences until the causes from the Gulf oil spill were properly established, and until the government had carried out a proper environmental assessment on the area where drilling would take place (see We take the government to court over oil drilling, Greenpeace UK, 12 November 2010).

According to Michael Barlow, a partner from UK firm Burges Salmon, the legal challenge from Greenpeace could potentially have a big impact if it is successful. Even if it is not successful, he notes that any increased scrutiny from a high-profile pressure group such as Greenpeace could make companies reconsider their risk and environmental compliance strategies and make it clear to the public that safety and environmental compliance is a priority (see below, Scrutiny and perception of the industry).

In January 2011, the UK government confirmed that there would be no moratorium of deep-sea drilling in UK waters. However, a report issued by the House of Commons Energy and Climate Change Committee instead emphasised the need for operators to have better and site-specific response plans to emergencies, as well as clarity regarding which parties would be liable in case of an accident. Smaller operators will also need to have compulsory third-party insurance (see Spill fears fail to curb deepwater drilling, ft.com, 5 January 2011).

 

Legal actions and costs

In the US, BP faces a number of legal claims from a number of different parties under a range of laws, including:

  • The Oil Pollution Act 1990, under which BP must pay for all clean up costs, but liability can be limited to US$75 million. However, this cap on liability does not apply if BP, or any of its contractors, are found to have acted with gross negligence, or found to have breached state or federal safety laws and regulations.

  • The Clean Water Act 1972, under which BP will have to pay fines depending on the number of barrels of oil that were spilled. This is US$1,100 for each barrel, but could go up to US$4,300 per barrel if it is found that the spill was caused as a result of gross negligence or wilful misconduct.

  • US federal and state safety and operational regulations.

  • The Refuse Act 1899

  • The Endangered Species Act 1973

  • The Migratory Bird Treaty Act 1918

Class actions

In the immediate aftermath of the spill, local fishing and tourist communities in Louisiana and along the Gulf Coast began class actions against BP and the other parties involved, seeking damages for the effect the spill had on their lives and businesses (see BP hit by avalanche of compensation claims over US oil spill, guardian.co.uk, 31 May 2010).

In May 2010, class actions were filed by the BP Oil Spill Legal Network on behalf of a number of claimants to obtain damages for those whose livelihoods were affected by the spill (see BP Oil Spill Legal Network files class action lawsuit on behalf of Louisiana commercial fishermen and charter boat operators, PR Web, 5 May 2010). The plaintiffs in the claim allege that the defendants (which include BP, Transocean, Halliburton and Cameron), owed them a duty of care to operate the rig safely, and knew, or should have known, that the rig presented a risk and that its equipment was faulty. As a result, the claimants are alleging that the defendants were negligent in a number of areas. These include:

  • Failure to inspect and monitor the rig's equipment.

  • Failure to maintain and repair the rig's equipment.

  • Failure to safely operate the rig's equipment.

  • Failure to properly design, maintain, operate and function the blow out preventer (BOP) valve.

  • Failure to adequately cement the well head casing.

The claim also alleges that the nature of the drilling was extremely hazardous, and therefore presented a high risk and likelihood of substantial harm to people, property and land. As a result of the extreme risks involved, the claim states that the defendants could not have exercised reasonable care to avoid the risks, and is therefore subject to strict liability.

The claim then also alleges that due to the defendants' gross negligence, the rig was unseaworthy and not fit for purpose. As a result, the claimants assert that they are entitled to punitive damages from BP and the other defendants (see Dugas v BP et al (Louisiana), BP Oil Spill Network, 3 May 2010 and Lockridge v BP (Southern District of Alabama), 5 May 2010 ).

These class actions, and a number of others, were then combined in a multi-district litigation claim in August 2010. The US judicial panel on multi-district litigation decided that the best venue to hear the joined claim would be the Eastern District of Louisiana (see Transfer order re: oil spill by the oil rig "Deepwater Horizon" in the Gulf of Mexico on 20 April 2010, United States Judicial Panel on Multi-district Litigation, BP Oil Spill Legal Network, 10 August 2010). The claim combines the economic damages claims with personal injury and wrongful death claims against the defendants.

BP's compensation fund

In August 2010, BP set up a compensation fund to deal with the claims.

The US$20 billion compensation fund provides companies and individuals with the right to claim a lump sum of compensation in lieu of going to court. The fund is being administered by Kenneth Feinberg, who was appointed by the White House and who co-ordinated the compensation fund for victims of the September 11 2001 terrorist attack on the World Trade Center.

The BP fund has been controversial, however, and there have been complaints that it is too restrictive in deciding who is eligible for compensation. There were also criticisms that BP deliberately delayed the claims process by citing the Oil Pollution Act 1990 to argue that claimants should not file their complaints in court before first going through the compensation fund process and then waiting 90 days to file their court claims (see Opposition grows to BP's legal strategy, ft.com, 15 September 2010).

When the deadline of 23 November 2010 for emergency claims approached, media reports stated that the likely amount BP would have to pay to affected businesses would be much lower than expected because a number of the claimants did not have the proper documentation to support the damage that had been caused to their businesses. In the final three months of the compensation fund's claim period, 450,000 claims were submitted but many of those were from fishermen from the Gulf region, who operated on a cash-only basis and could not provide enough documentation (see Half of BP oil spill damages claims 'inadequate', says payout chief, guardian.co.uk, 24 November 2010).

On 24 November 2010, the second phase of administration of the compensation fund began, during which time the lump sum settlements were negotiated. Official guidance on the rules for the settlements was released on 22 November 2010 (see Gulf Coast claims facility protocol for interim and final claims, Gulf Coast Claims Facility, 22 November 2010 (updated 8 February 2011)). Claimants who seek compensation can still choose to sue BP and any other parties, unless they accept a final settlement. Once they accept a final settlement, claimants must waive their right to sue BP. Claimants will also have the option of receiving quarterly interim payments, with the option to sue BP for any outstanding money owed. An appeals process is also in place for claimants unhappy with their compensation offer. Claimants whose claims would normally fail in the US courts under the proximity test set by the Oil Pollution Act 1990 will be considered for compensation by Feinberg.

Despite these seemingly generous terms, there were calls for the claims process to be clearer (see Final settlement phase starts for BP oil spill, The New York Times, 24 November 2010).

Clean-up costs and civil and criminal fines

In addition to the compensation fund payouts, BP is likely to face increasing costs for the clean-up operation, as well as a potentially large fine from the US government, following its civil and criminal investigations into the spill (see Box, Reports and investigations in the US). Media reports suggest that the total cost for BP could amount to US$40 billion (see BP oil spill costs to hit $40bn, guardian.co.uk, 2 November 2010).

BP has not so far invoked the US$75 million liability cap under the Oil Pollution Act 1990. Some US legal media reports suggest that the reason BP did not invoke this liability cap was because it knows that if it is found to have been grossly negligent, the cap would not apply in any case (see BP, Texas officials clash over general counsel's alleged admission of negligence, Law.com, 3 August 2010). Under the Clean Water Act 1972, if BP were found to have been grossly negligent, it could face potentially huge fines from the US government.

Jeffrey Gracer, a partner at Sive Paget & Riesel in New York, comments that "if gross negligence or wilful misconduct was involved, not only would it eliminate the cap, but it would also point towards criminal liability for those involved in the decision chain". He notes that "if wanton disregard for public health and safety is found, the government is going to go after who it thinks is responsible". If senior level executives are targeted by the government and receive criminal convictions as a result of the spill, Gracer thinks this could lead to much more cautious behaviour from the oil and gas industry and from all industrial sectors in general.

One US energy lawyer who was interviewed notes that oil and gas companies will inevitably keep a close eye on the criminal investigation that is underway, to gauge what actual corporate liability exposure the parties involved will have.

US government legal action against BP

On 15 December 2010, the US government's Department of Justice (DoJ) announced that it would be suing BP, along with Anadarko, Transocean, Mitsui and Lloyds of London. The DoJ filed its civil lawsuit in a New Orleans court, stating that BP and others had breached federal safety and operational regulations, which included:

  • Failure to properly secure the Macondo well before the explosion on 20 April.

  • Failure to use the safest drilling technology to check the well's condition.

  • Failure to maintain and survey the well.

  • Failure to use and maintain equipment that was necessary to ensure the safety and protection of staff, property, natural resources and the environment.

The DoJ asserts that these failures caused or contributed to the oil spill and that, under the Oil Pollution Act 1990, the defendants are therefore responsible for the government's clean-up costs, as well as the losses suffered by local businesses and individuals and damage caused to the environment (see United States sues BP over Gulf oil disaster, guardian.co.uk, 16 December 2010). The DoJ is also seeking civil penalties under the Clean Water Act 1972 for the large amount of oil that was released into the Gulf before the well was capped.

Halliburton and Cameron International were not named in the lawsuit, but the DoJ stated that it might add more claims and defendants in the future.

Other parties' liabilities

The numerous legal claims against BP will likely be lengthy and complex to resolve. Adding to the complexity is the potential liability of the other parties involved, including Transocean (the drilling company), Halliburton (the cementing contractor of the well) and Anadarko and Mitsui (who both co-owned part of the well with BP), as well as Cameron International (who built the blow out preventer).

Some reports released in July 2010 suggest that Transocean may have shouldered some of the blame for the accident, with rig workers confidentially reporting days before the accident, that alarms were often switched off on the rig, and that various technical parts on the rig, including safety valves, were in need of replacement (see Workers on doomed rig voiced concern about safety, The New York Times, 21 July 2010). The majority of the rig workers worked for Transocean, rather than BP. The rig's chief technician also confirmed to the US federal investigation's hearing in July that alarms were switched off to stop false alarms going off on the rig, and to enable workers to sleep (see Deepwater Horizon's alarms were switched off 'to help workers sleep', guardian.co.uk, 23 July 2010).

In BP's own report on the incident on 8 September 2010, it attributed the accident to eight separate causes, including the cement work done by Halliburton and the way in which the well was operated by Transocean (see BP releases report on causes of Gulf of Mexico tragedy, BP.com, 8 September 2010). By denying that its well design was the main cause of the accident, media commentators and other parties involved, such as Transocean, suggest BP has attempted to deflect any potential claims that it was grossly negligent in the design of the well (see Backlash greets BP's internal report, ft.com, 8 September 2010). Transocean is already arguing that, under maritime law, its liability should be limited to US$27 million (see Oil disaster rig owner tries to escape liability, Maritime Journal, 26 May 2010).

A preliminary report on 28 October 2010 from the US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling (established by President Obama in May 2010) announced that Halliburton's cement job was inadequate, and that Halliburton and BP knew this was the case (see Letter from National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, The New York Times, 28 October 2010). This finding raises the prospect of BP and Halliburton being found grossly negligent for the spill (see BP and Halliburton face bigger claims, ft.com, 29 October 2010). However, BP could still be found principally liable for damages because of the control it exercised over Transocean and Halliburton, according to commentators (see Legal battle over spill still wide open, ft.com, 8 September 2010).

Until further reports and investigations are concluded, there remains uncertainty about who will ultimately be found responsible for the accident. Investigations and reports look likely to continue for a number of months before any solid conclusions are reached.

In any case, there is no doubt that there will be a protracted and lengthy dispute between BP, Transocean, Halliburton, and the various other parties over who was primarily responsible for the spill and who will be liable for compensation to the numerous businesses affected by it. The oil and gas industry will no doubt be paying close attention to the dispute between the owners of the rig, the result of which may inform how third party contractors are dealt with in the future, with potentially stricter indemnity provisions within contracts. The conclusions of the various investigations and reports are also likely to affect the industry and the way it operates.

 

New laws and regulations in the US

It is likely that new or revised safety and environmental regulations and legislation will be created as a result of the BP oil spill. Lawyers point out that there has been a historical precedent for this in the US and that these types of incidents inevitably result in new legislation. For example, in 1980, when 21,000 tons of toxic waste was found to have been buried by a chemical company in the Niagara Falls neighbourhood of Love Canal, the Comprehensive Environmental Response Compensation and Liability Act 1980 (CERCLA Superfund) was enacted, which taxed the chemical and petroleum industries, and gave federal authorities power to act against the release of harmful substances to the public and environment. In 1984, when the Union Carbide Corporation pesticide plant leaked chemicals into the town of Bhopal in India killing thousands of people, the Emergency Planning and Community Right to Know Act 1986 was enacted, which mobilised emergency planning at state and federal level, and gave local authorities information about potentially hazardous chemicals released in their area. The oil spill that occurred in Prince William Sound in Alaska, as a result of the Exxon Valdez oil tanker which ran aground in 1989, led to the Oil Pollution Act in 1990.

Oil Pollution Act cap

The current US$75 million cap on liability for oil spills, set by the Oil Pollution Act 1990 and put in place after the Exxon Valdez spill, is being debated by Congress. Gracer notes, however, that there are questions about whether Congress can change this cap retrospectively. In any case, operators and contractors will be watching closely, as any change will potentially affect all parties involved, including sub-contractors and third parties, who will no doubt aim to make all contracts drafted more tightly, and to include stricter indemnities relating to costs arising out of any potential accidents.

However, Gracer also points out that even BP's US$20 billion compensation fund, which clearly exceeds the current Oil Pollution Act cap on liability, could be rendered inconsequential, with respect to claims not settled through the fund, if BP is found to have acted negligently. As discussed above (see above, Legal actions and costs), the results of the US government's investigation into the incident, and its conclusion as to who was ultimately responsible, could have collateral consequences in court actions involving private parties.

New safety rules

In late September, the US Secretary of the Interior Kenneth Salazar issued two emergency rules to improve the safety and security of offshore drilling. These are called the Workplace Safety Rule and the Drilling Safety Rule.

The Drilling Safety Rule states that rig operators must certify that the cement and casing of the wells was sound, and that the blow out preventers (BOPs) have been properly installed, are working and are able to be operated remotely. The rule also states that operators must test the BOPs, and that all staff who work on the BOPs must be fully trained and qualified to operate them.

The Workplace Safety Rule states that operators must make sure that they have safety and environmental management programmes in place, which identify and reduce the risks and hazards of drilling (see Department of Interior: Salazar announces regulations to strengthen drilling safety, reduce risk of human error on offshore oil and gas operations, 30 September 2010).

Tougher stance on permits

Some lawyers think that even before new legislation is enacted, there will be increased enforcement under existing authorities. For example, Salazar confirmed, in a speech on 30 September 2010, that oil and gas operators would need to work harder to be given permits for drilling, and would need to show that they had contingency plans in place to deal with the risks of major accidents occurring. He also announced that the Minerals Management Service had been replaced by the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEM) which would regulate the industry and provide stricter regulations on the design of BOPs. A separate body would be formed to deal with the revenues from the oil and gas drilling industry. Further proposals for regulatory changes in the coming months were also discussed (see Department of Interior Speeches: Secretary Salazar's speech on a safe, secure, clean energy future, 30 September 2010).

In fact, before the moratorium was lifted in the US, media reports stated that the Obama administration was aiming to ensure that the industry regulator, the BOEM, had a much stricter approach to assessing the environmental consequences of new drilling projects before granting permits (see US issues new rules on offshore drilling, New York Times, 30 September 2010). There were criticisms of the Minerals Management Service, which had approved a number of projects without carrying out full environmental assessments under the National Energy Policy Act.

It is expected that this reassessment of the environmental effects of drilling projects will have a measurable impact on the offshore oil and gas industry, by increasing costs in regulatory compliance and slowing down the permit process. The industry response to this increased regulatory scrutiny has been critical, and there have been calls to make the requirements for permits and drilling clearer (see Oil groups ready to fight tougher rules, ft.com, 18 August 2010).

New European regulations

In Europe, there have been similar discussions about stricter regulations for offshore drilling and a proposal for a moratorium on drilling (see above, A European moratorium?). Whether new European regulations or a moratorium will materialise is difficult to predict. According to Thomas Rouhette from Hogan Lovells in Paris, regulations in Europe are already very strict. However, he also notes that Europe has taken a strict zero tolerance approach towards risk on industrial sites. Rouhette further points out that while Europe is more heavily regulated than the US at present, there will undoubtedly be a trend of "more burdens, more regulations, more monitoring and more controls. The Gulf spill is the sort of event that will convince regulators more is needed".

The European Commission has called for stricter regulations for drilling and oil exploration and extraction (see Europe proposes new oil safety standards, ft.com, 13 October 2010 ). Although the Commission retreated on the idea of a moratorium after it was criticised by governments such as the UK, it remains committed to the idea of Europe-wide safety regulations. Some of the stricter regulations it has proposed include increasing the distance from shore for which companies would be liable for the clean-up costs of a spill, from 12 miles offshore to 200 miles offshore (see Brussels plans strict new controls for offshore oil drilling, guardian.co.uk, 13 October 2010). There are also plans to increase the Commission's power over national governments and regulators in licensing and monitoring issues. The European energy commissioner, Gunther Oettinger, hopes the proposals would become law in 2011, but there are likely to be major obstacles from member states such as the UK, who will vote on these measures.

The UK's oil and gas industry body, Oil & Gas UK, has already expressed reservations at a Europe-wide set of regulations. It argues that not only would European regulations be cumbersome and take time to implement, but that the current UK regulations, which are among the strictest in the world, are already being scrutinised and improved by its Oil Spill Prevention and Response Advisory Group (OSPRAG) (see European Commission's call for suspension of licensing in UK wholly unjustified, Oil & Gas UK press release, 13 October 2010).

In the UK, the Secretary of State for Energy and Climate Change, Chris Huhne, has committed to doubling the number of inspections taking place on rigs (see PLC Environment Legal update, BP oil spill: urgent review of UK offshore extraction regimes, 22 June 2010 (www.practicallaw.com/4-502-5710)) . However, Barlow sounds a note of caution about this: "Politically, the government will probably need to carry out increased inspections, but it will be interesting to see how it will play out against the spending cuts the government also wants to make". There is some question over whether the various spending cuts detailed for the Health and Safety Executive and frontline staff who will undertake the rig inspections will tally with the announcement that more inspections are needed. (See PLC Construction Article, Blog post: Health and safety issues in offshore extraction and the construction sector, 1 September 2010 (www.practicallaw.com/3-503-1976) ).

New regulations elsewhere around the world

Outside the US, there has been a cautious approach to the US government's investigations and new regulations.

Mexico

According to Monica Santoyo, from Santamarina and Steta in Mexico City, directly after the spill Mexico’s federal and environmental authorities, and Pemex, the major oil and gas operator, undertook a damage prevention exercise, which included carrying out a number of audits on the compliance standards of the drilling rigs, and checking all drilling activities on the rigs and the blow out preventers on exploratory wells.

Santoyo also notes that the Mexican Hydrocarbons National Commission, in conjunction with Pemex, the Mexican Secretary of the Environment and Natural Resources (Semarnat), and the Federal Agency for the Protection of the Environment (Profepa), has proposed new regulations to test rigs and dismantle submarine control systems on the rigs. Santoyo thinks that this is the standard that all rigs will have to adhere to in the future, and that the Mexican Congress will shortly approve the new regulations. In addition, Pemex has announced that it is reviewing all of its contractors' compliance with regulations.

Although these announcements and plans were made quickly after the Gulf spill, it is likely that the effect may be diluted because of the inevitable time lag before Congress approves the new regulations, and before Pemex has finished its internal compliance checks. Santoyo thinks the compliance checks and the new regulations "are a side effort for the government and Pemex. Pemex has no plans to stop its exploratory and production projects, and oil and gas work will continue as planned for the next few years."

However, Santoyo notes that the Gulf spill will prompt more careful consideration of the planning and development of specialised infrastructure for deep water drilling. She also thinks that Pemex will be more careful about contracting out work to third parties for the technical, environmental and security issues on the rigs. Indeed, in November 2010, Pemex announced that it was revising the way it contracts with third parties, and would be introducing a new incentive-based contractual scheme, where third parties will be given a set amount for each barrel of oil they help to produce (see Pemex approves incentive-based oil contracts, ft.com, 25 November 2010). The aim is to increase oil production while also enabling flexibility within the third party contracts.

Canada

In neighbouring Canada, where the oil sands are a major export, authorities are awaiting the outcome of the US investigations before taking any regulatory action. Dennis Mahony, a partner from Torys in Toronto, notes that the oil sands have already faced negative press from environmental groups, and that the Gulf spill has increased generalised sensitivity to the impact that industrial operations can have on the environment. "The negative focus on the oil industry that comes with the Gulf of Mexico spill does not help the oil sands," he adds. However, Mahony also notes that the Canadian government is likely to adopt a "wait and see attitude" to what the US might do, because the oil sands in Canada are a lucrative export, and "we cannot afford to be insensitive to what the US is going to do from a trade stand point ".

Brazil

In Brazil, where the legislation relating to offshore oil operations safety is considered among the strictest in the world, the National Oil Agency (ANP) and the Brazilian government were nevertheless quick to review protocols and procedures following the Gulf oil spill to ensure that a similar accident did not happen in Brazilian waters.

Partner Ana Karina Esteves de Souza from Brazilian firm Machado Meyer Sendacz e Opice Advogados, comments that the ANP sent a representative to the US and the Mexican Gulf "to understand exactly how the accident came about, and to investigate and learn some of the lessons that could eventually be adopted by Brazil". The ANP is also taking part in an international oil and gas regulators forum, where there is likely to be a discussion of the measures that will need to be taken to avoid a similar spill in the future.

In October 2010, the ANP issued a notice to all companies operating oil and gas wells in Brazil, requesting information about their control systems for drilling in deep-sea wells. Regulations introduced in 2007 regulate the operation of offshore platforms and are considered very stringent. However, Esteves de Souza considers that the ANP's information-gathering exercise might indicate that it is considering re-evaluating or improving the 2007 regulations.

In addition, environment partner, Roberta Leonhardt from Machado Meyer Sendacz e Opice Advogados says the Deepwater Horizon accident has prompted the Brazilian government and the Ministry of Environment to review the environmental licensing procedure for wells. The government also tried to speed up the process for issuing a federal decree to establish a national contingency plan to combat oil leakage and accidents. Leonhardt says that the Brazilian government, as a member of the London International Convention for Oil Pollution Preparedness and Co-operation (OPRC) (which requires its members to implement contingency and emergency plans to prepare for oil spill accidents), is developing a contingency plan as quickly as possible.

 

Commercial effects of the spill

The immediate impact of the spill has been well-documented, but there will be several enduring commercial effects on the industry that are likely to be felt for years to come.

Scrutiny and perception of the industry

In addition to the inevitable scrutiny that has arisen from governments around the world, environmental groups and activists have also increased their focus on the oil and gas industry. As discussed above, environmental activists Greenpeace have launched a high-profile legal campaign against the UK government for its decision to grant new permits for Chevron to drill for oil in the area off the coast of the western Shetlands (see Chevron to begin deep-water drilling off UK coast, guardian.co.uk, 1 October 2010).

The Gulf of Mexico oil spill has also put the media and public spotlight on the activities of oil and gas companies and has resulted in heavy reputational damage to the industry. As a result, oil and gas companies will need to rethink their public relations strategies to improve public perception of their activities and clearly communicate their efforts to maintain environmental standards.

Increased transparency

Some lawyers note that, despite overall improvement in their environmental records over the past decade, oil and gas companies need to make their safety processes as open and transparent as possible. Gracer reiterates this sentiment: "There is going to be less trust based simply on a company's claims. The increased public and environmental organisation scrutiny is going to push companies to really open their books and be much more transparent to both the government and the public, and the people reviewing their safety and environmental plans are going to be a lot more rigorous".

However, one US energy lawyer who was interviewed also says that many oil and gas companies in the US have already worked very hard to maintain and improve their safety records and have done a good job at that. The lawyer comments that the Gulf of Mexico oil spill and other incidents like it tend to "paint everyone with a really broad brush despite the fact that there are areas where they are doing as much as can be done for prevention and maintenance".

Gracer agrees, and thinks that "in general, corporations recognise that environmental issues are critical, not only to their reputation, but to their profitability and their strategic role in the world". He thinks it is "important for people not to use this spill as a reason to demonise all corporate efforts to deal with these kinds of issues," but corporate claims are likely to be scrutinised with increased scepticism if words are not backed up by deeds.

In the short and long-term, this increased scrutiny on the oil and gas industry could lead to changes to the way in which companies operate and communicate with the public.

Proven contingency plans

Gracer notes that, apart from publicising that they have contingency plans in place and that they are fully complying with regulations, oil and gas companies also need to address basic engineering questions. "Companies must ensure they have the ability to respond effectively to an incident in a well that is 5000 feet below sea-level. That is going to put a lot of pressure on companies to show that their contingency plans have been demonstrated to be feasible, not just in theory, but in fact". To achieve this, Gracer says that contingency plans, which "were historically paper plans where people wrote down what the regulations required, but undertook no real scrutiny of actual proven technical ability", now need to be tested and proven. He thinks that "there has to be much greater focus on worst case scenarios and making sure the contingency plans and disaster response plans are real and have a proven track record, rather than being theoretical".

Michael Barlow from Burges Salmon agrees and says that any oil company, after seeing what had happened in the Gulf, would be advised "to make sure they have a strategy in place for dealing with such an event, both in terms of PR and in terms of works to rectify the issue".

New operating structures

Along with increased transparency and effective contingency plans, oil companies may need to start changing other ways in which they operate. For example, BP has now linked employee bonuses and cash incentives to safety performance (see BP to link pay to safety after Gulf oil disaster, guardian.co.uk, 19 October 2010 ).

Higher insurance and operating costs

Another major impact with long-term consequences will be the higher operating costs for oil companies, due to higher insurance premiums and increased regulatory compliance costs.

For example, the UK government is deciding whether to increase the insurance and indemnity levels that oil companies need to have to drill in the seas around the UK (see Department for Energy and Climate Change: UK increases North Sea rig inspections, 8 June 2010), and oil companies in the UK are already expecting that the joint insurance policy operators have to hold will increase in the future (see UK to double inspections of drilling rigs, ft.com, 8 June 2010).

One US lawyer who was interviewed notes that the spill has highlighted problems with existing energy infrastructure. Much of this infrastructure in the US is aging and will need to undergo costly inspection, repair or replacement. Further, because much of the infrastructure is located far away from major cities that need the energy the most, the lawyer thinks "it will be more challenging building energy infrastructure today than it was 50 years ago".

In addition, new contractual terms are beginning to appear in the bidding process. In November 2010, when opening up bids to drill for oil in its Arctic waters, Greenland announced that it would require the winning oil company to pay a US$2 billion bond. This would be to ensure that any clean-up costs after a potential accident would be met. This term, which is new to the industry, has pleased environmental activists, and could potentially influence other governments around the world and add to the increased costs of oil companies (see Greenland wants $2bn bond from oil firms keen to drill in its Arctic waters, guardian.co.uk, 12 November 2010).

Some argue that this confluence of factors could have a devastating impact on smaller operators who would be unable to cover these costs, unlike larger operators such as BP, which was able to insure itself and have funds available for clean-up and compensation costs.

However, this may not necessarily be the case. Rouhette notes that "in Europe, the market has a lot of players who all have significant bargaining power…so they will all take individual approaches to what happens". He thinks that the increased bargaining power and competition will not only ensure better prices for renewals of insurance policies, but also put an extra focus on safety and environmental compliance, and "those efforts to improve security and safety will be used to try to show the insurance and reinsurance industry that the additional exposure is not that significant anyway".

Rouhette does not think that the European market will be forced to consolidate or that smaller players will be unable to keep up with the new regulatory burdens and costs: "My view is that the oil and gas industry is already pretty much consolidated, especially when compared to other industries".

Instead, Rouhette thinks the main group to face the burdens of increased costs will be consumers. One US energy lawyer who was interviewed agrees that the insurance market and increased costs are likely to lead to "a challenging environment" which will ultimately result in consumers demanding different types of energy and better energy infrastructure. Mahony agrees and thinks that the tighter regulation and higher insurance premiums are just two of many factors in the increasing costs of oil.

Renewable energy and climate change legislation?

The commercial impact of higher oil prices could, in turn, lead to a wider debate and an increased focus on obtaining cleaner, renewable sources of energy which are safer and which might be cheaper. This could potentially have a major impact on the oil industry. One US energy lawyer notes that "globally, sources of energy and types of energy use are shifting and a lot of observers in the US think we are going to see a shift in market share towards natural gas. Renewable energy standards are also going to be important".

However, some do not think much will change as a result of the oil spill: Barlow states that although the Gulf of Mexico spill was a major event and safety will certainly be a priority, his view is that "it will not have a significant effect on whether we use fossil fuels or not, as we are so dependent on them". He also thinks that "the arguments regarding climate change, which I think are stronger, are not having an impact on their own, so I am not sure [the Gulf oil spill] will be a game changer in that sense".

Mahony agrees: "The climate change initiative is considerably stronger than oil spills and other kinds of environmental catastrophes in moving the world towards renewable energy". He says the Gulf oil spill will help to focus people's minds on the environmental and commercial cost of extracting oil and thinks this might be a factor in the long-term increased use of renewable energy, but does not think that it will be a principal driving factor. "The principal driving factor is, ironically, not that the oil has an impact when we extract it from the ground, but that it is getting more expensive and that we are running out of it". Some US oil and gas lawyers echo this, and one lawyer who was interviewed says that the continued use of oil will "depend on how much more the public are willing to spend for their energy. This will be an interesting public policy issue ultimately, and that could feed back again to conservation and renewable issues".

For more information on renewable energy in general, see PLC Environment, Practice note, Renewable energy: overview (www.practicallaw.com/7-380-7949).

 

The future

Although the oil spill in the Gulf of Mexico was undeniably tragic and set in motion numerous regulatory and commercial changes to the energy sector, the oil and gas industry will most likely emerge intact, if not stronger than before (see Oil services feel post-Macondo activity jump, ft.com, 10 November 2010 ). The industry had already taken a good look at its own safety practices and had attempted to show the public and governments that safety and environmental issues can be dealt with in conjunction with exploration and development activities.

As oil continues to be valuable and cleaner forms of energy are not yet widely used, despite the fact that there will be numerous new restrictions and regulations on the industry, oil and gas exploration and development looks likely to continue into the foreseeable future.

 

Reports and investigations in the US

A number of reports and investigations into the spill have been published, and more are expected to be published in the coming months.

BP's internal report

BP's own report into the spill was published on 8 September 2010 (see BP releases report on causes of Gulf of Mexico tragedy, BP.com, 8 September 2010). As discussed, it attributed the cause of the spill to eight different factors, and spread the blame to Halliburton and Transocean.

US federal and criminal reports

The US government has a number of civil and criminal investigations underway. These include the federal investigation being carried out by the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling and the criminal investigation being carried out by the Department of Justice and the Environmental Protection Agency.

The independent agency the US Chemical Safety and Hazard Investigation Board is also investigating the causes of the spill.

Timeline of the US National Commission's findings

The US National Commission released some initial findings on 28 October 2010, and concluded that Halliburton had informed BP about the faulty cement mixture used in the well, but that neither Halliburton nor BP acted on this information (see Chief Counsel Fred Bartlit and staff release data from industry lab tests; identify concerns with Macondo cement, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, 29 October 2010 and Letter from National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, The New York Times, 28 October 2010).

On 8 November, further findings were released which stated that the Commission had not found any evidence to suggest that BP, nor Transocean or Halliburton, had put money before safety in the operation of the Deepwater Horizon rig. However, the Commission also noted that a number of questions remained as to:

On 16 November, an interim report was released from a panel of scientific experts from the US National Academy of Engineering, who were commissioned by Interior Secretary Salazar to find the causes of the accident and to suggest preventative measures. The preliminary findings indicated that:

  • BP had failed to properly consider the risk that led to the explosion.

  • The hierarchy and responsibilities of the on-board staff were unclear and that the crew members were not properly trained in the event of an emergency.

  • BP, along with Halliburton and Transocean made a number of critical decisions in the time leading up to the accident, which increased the risk of the explosion happening.

However, the report also stated that a number of factors had caused the explosion, and that it was not only BP's failure, but also the failure of the US government's Minerals Management Service which had not properly supervised the safety procedures on the rig, and had not scrutinised BP and the actions it had taken (see Interim report on causes of the Deepwater Horizon oil rig blowout and ways to prevent such events, National Academy of Engineering and National Research Council, 16 November 2010). The final report will be prepared by June 2011.

On 22 November, more reports were released by the National Commission, concluding that the US government and the oil industry had not been prepared enough for a deepwater well accident. The reports found that oil companies had not invested enough money in planning what they would do to control and clean up potential oil spills, while the US government had not invested enough in the staff and technology necessary to deal with a major offshore spill.

The reports put forward a number of recommendations, for example, that oil companies with deepwater operations should provide detailed plans showing what they would do in the event of a spill and that smaller oil companies should also provide contingency plans to demonstrate how they would recover from a major accident (see Response/ clean up technology research and development and the BP Deepwater Horizon oil spill, Draft staff working paper no.7, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling and Stopping the spill: the five-month effort to kill the Macondo well, Draft staff working paper no.6).

The final public discussions of the National Commission took place in early December 2010. The Commission reported that bad management from BP, Halliburton and Transocean led to the accident, which could have been avoided. However, it also reported that cost-cutting measures carried out by BP did not increase the risk of an accident occurring but that the company was prone to safety lapses. The Commission also concluded that all three companies had weak communication systems and did not share information, and therefore were unaware of the risks that were occurring on the rig.

Finally, the Commission also pointed out that the government monitoring and oversight of offshore drilling was poor, with oil companies only required to report accidents when they were as large as the BP spill (see BP oil spill blamed on management and communication failures, guardian.co.uk, 2 December 2010).

On 6 January 2011, the Commission released a chapter of its final report, and reiterated and concluded that the oil industry, as a whole, had been 'complacent' about the risks of deep-sea drilling, and that BP, Transocean and Halliburton had failed in their procedures, decisions and operation of equipment. It also accused BP of poor management, as well as criticising the US regulator, the Minerals Management Service. It also stated that operators would have to undertake stricter analyses of safety procedures, and prove that lower-cost alternatives are as safe as more costly procedures, and that, unless the industry and the US government changed their practices, a similar accident was likely to happen again (see 'Complacent' oil industry rebuked, ft.com, 6 January 2011).

The US National Commission's full final report was submitted on 11 January 2011, and recommended large-scale changes to the offshore oil industry (see Final report, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, 11 January 2011). It recommended, among other things, that:

  • The liability cap for oil spills should be raised.

  • There should be a new government safety agency set up for the oversight of the offshore oil industry.

  • There should be increased safety regulations, similar to those in Norway and the UK.

  • Government regulators should be given up to 60 days to approve drilling licences.

  • Before drilling permits are granted, oil companies should show that they have the technical ability to deal with leaks and blow-outs.

It remains to be seen what practical effect this report will have as yet, as it has received criticism from the US oil industry lobby, and also needs Congress to approve a number of its recommendations.

Despite the plethora of reports, very little has been firmly concluded from what has been published so far. The situation is being closely watched by the oil and gas and energy industries because, as one US energy lawyer explains, "these are evolving issues which will eventually have a very direct impact on every member of the industry".


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