CHAPTER 6 LIABILITY OF OWNERS, CONTRACTORS, AND NON-OPERATORS

• Jurisdiction: United States

Federal Offshore Regulatory Enforcement
(Jan 2016)
CHAPTER 6
LIABILITY OF OWNERS, CONTRACTORS, AND NON-OPERATORS

John Cossa
Associate
Beveridge & Diamond PC
Washington, DC

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JOHN COSSA is an associate at the Washington, DC law firm Beveridge and Diamond, P.C. Mr. Cossa's practice focuses on the development of energy and mineral resources on federally managed lands both onshore and on the Outer Continental Shelf. He advises clients on matters related to the leasing and development of oil and gas, wind, solar, and mineral resources and rights-of way for pipeline and transmission infrastructure. Mr. Cossa counsels clients on compliance issues related to OCS leasing, exploration, production, and decommissioning, and appeals of agency decisions and orders to the Interior Board of Land Appeals. Prior to joining the firm, Mr. Cossa served as an Attorney-Advisor at the U.S. Department of the Interior's Office of the Solicitor. While at the Solicitor's Office, Mr. Cossa was lead counsel for the Bureau of Ocean Energy Management's (BOEM) offshore renewable energy program, and also counseled the BOEM Directorate and agency staff on legal issues related to the leasing, development, and regulation of offshore oil and gas resources, with particular emphasis on emerging issues such as Arctic development and post-Macondo regulatory reforms. Prior to joining the Solicitor's Office, Mr. Cossa served as advisor to the Assistant Secretary for Land and Minerals Management on Bureau of Land Management energy and land use issues. He also served in the BLM's Division of Land Use, Planning and NEPA, where he worked on projects of national significance such as the expansion of oil and gas leasing in the western states, and the establishment of the West-Wide energy transmission corridors. Mr. Cossa is a graduate of Syracuse University and a former art dealer.

A BRAVE NEW WORLD: CONTRACTOR LIABILITY ON THE OCS

I. Introduction

For over 60 years since the enactment of the Outer Continental Shelf Lands Act ("OCSLA"), 43 U.S.C. §§ 1331-1356b , in 1953, each of the government agencies responsible for overseeing the development of offshore oil and gas¹ exclusively held lessees and their "designated operators" accountable for all violations of applicable oil and gas operating regulations on the Outer Continental Shelf ("OCS"), regardless of whether the violation was attributable to the lessee, the operator, or one of their independent service contractors. During that time, the government never attempted to enforce for violations of OCS operating regulations directly against a contractor. Instead, the government simply held lessees and operators responsible for any transgressions committed by those they retained to perform work on an OCS lease. This traditional enforcement practice reflected the widely held understanding that the Department of the Interior's offshore oil and gas enforcement authority was limited, by statute and its implementing regulations, to holders of OCS leases and their designated operators, and did not extend to their contractors, subcontractors, or non-operator service providers. Not only was enforcing the regulations exclusively against lessees and contractors administratively efficient, but it was also consistent with the conventional understanding that this was the result intended by Congress and the statute it adopted granting the Department the authority to issue and regulate oil and gas leases on the OCS.

The regulation of oil and gas activities on the OCS traditionally involved up to three distinct classes of parties, all of whom deliberately entered into relationships with one another with clearly identified duties and obligations. The first class was the U.S. Government, acting

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through the designated agencies of DOI.² As the entity responsible for the disposition and regulation of OCS oil and gas resources, the Department performs the function of the landlord and lessor, as well as a regulator.³ Through the Bureau of Ocean Energy Management ("BOEM"), it leases OCS resources to third parties and, as a condition of those OCS leases, requires compliance with applicable safety and environmental regulations administered by BOEM and the Bureau of Safety and Environmental Enforcement ("BSEE")⁴ The second class is the lessee, which, through the lease agreement, contracts for the right to develop OCS resources, agrees to pay rent and royalties, and consents to Departmental jurisdiction and regulation by BOEM and BSEE.⁵ The third class is the lessee's designated operator (or "operator"), which is authorized by both the lessee and the Department to conduct operations on the OCS on behalf of the lessee.⁶ Like lessees, designated operators consent to the jurisdiction of the federal OCS oil and gas regulations.⁷ In this arrangement, both the lessee and the operator agree to be held responsible for all lease-related regulatory compliance, including the regulatory - compliance of their contractors.⁸

In contrast, contractors are neither lessees nor operators, and have no relationship or privity with the government, either in its role as a landlord or as a regulator. Contractors have no lease or other agreement with DOI agencies, and need no formal approval from BOEM or BSEE to perform work on an OCS lease. Instead, under OCSLA, contractors have traditionally been held accountable only to the lessee or operator for the satisfactory and compliant performance of their duties. As far as the Department was concerned, it was the lessees and operators who bore the responsibility of ensuring that their contractor's work was compliant with federal regulations.⁹ If there was any problem, the regulations would be enforced against the lessees or operators.¹⁰

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That all changed when, in the wake of the Macondo incident, BSEE informally initiated a new policy of enforcing its safety and environmental regulations directly against contractors.¹¹ Beginning in 2011, BSEE started issuing Notices of Incidents of Noncompliance ("INCs") to contractors that had been involved in offshore incidents such as platform explosions and fires prior to receiving notice of this policy change and, in some cases, BSEE assessed civil penalties against those contractors.¹² The first to receive BSEE INCs were the BP contractors involved in the Macondo incident, Halliburton and Transocean, which were cited, inter alia, for: (1) failing to "protect health, safety, property, and the environment by...[failing to perform] all operations in a safe and workmanlike manner;" (2) failing to "take measures to prevent the unauthorized discharge of pollutants into offshore waters;" and (3) failing to "take necessary precautions to keep [the well] under control at all times" in violation of 30 C.F.R. §§ 250.107(a)(1) 250.300 ; and 250.401(a) , respectively.¹³ Ultimately, as part of a broad civil and criminal settlement, Transocean and the federal government resolved not to contest the claims in the INCs, leaving untested, at least for the moment, the issue of BSEE's regulatory enforcement jurisdiction over contractors. Halliburton's appeal of its INCs is still pending before the Department's Interior Board of Land Appeals ("IBLA" or "Board").

Needless to say, the offshore service industry was surprised by this sudden and radical shift in longstanding agency policy, particularly given that the industry and the underlying contract arrangements upon which it relies are not structured to account for the contractor's exposure to this universe of regulatory liability. Many contractors' insurance policies did not cover losses associated with regulatory liability, and the extent to which existing contracts indemnified service companies for the costs of fines and civil penalties was unclear. Because in over 60 years of OCS regulation the government had never attempted, or apparently even considered attempting, to bring an enforcement action against a contractor for a regulatory violation, most OCS contractors had little, if any, familiarity with BOEM or BSEE's regulatory enforcement or appeals procedures. When faced with the potential for civil penalties of up to $40,000 per day per violation,¹⁴ potential exposure to liability under other statutes,¹⁵ and the likely disruption of traditionally defined roles and responsibilities for all those participating in the offshore oil and gas industry, this sudden change in BSEE policy appeared ominous.

On August 15, 2012, BSEE issued an internal Interim Policy Document, IPD No. 12-07, which was intended to provide "consistency" in the application of BSEE's enforcement authority

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against contractors.¹⁶ In the IPD BSEE explains that, while its enforcement efforts will continue to be focused on lessees and operators, it will take enforcement action against contractors "for serious violations," when the contractor has "engaged in egregious conduct."¹⁷ The IPD outlines four factors that BSEE will consider when determining whether to issue an INC to a contractor:

(1) whether the violation implicated health, safety, or environmental concerns;

(2) the degree of harm or potential harm to health, safety, or the environment that resulted from the violation;

(3) the foreseeability of such harm resulting from the violation; and

(4) the extent of the contractor's involvement in the violation (i.e., the degree of the contractor's control over the activity that resulted in the violation, whether the contractor's act or failure to act played a significant role in the violation, and whether the contractor knew or should have known that its activity might result in the violation). ¹⁸

Given the flexibility inherent in these criteria, it is difficult to predict precisely under which circumstances BSEE will issue an INC to a contractor. Despite that the stated objective of IPD No. 12-07 is to "provide consistency in the application of [BSEE's] enforcement authority," the IPD provides little...