Environmental regulation at the frontier: government oversight of offshore oil drilling north of Alaska.

• Author: Hults, David
• Position: I. Introduction through IV. Previous Scholarship on Offshore Drilling, p. 761-803

1. INTRODUCTION II. OVERVIEW OF THE OFFSHORE DRILLING LEGAL FRAMEWORK A. The Outer Continental Shelf Lands Act B. The Oil Pollution Act of 1990 C. Other Relevant Federal Laws III. HISTORICAL BACKGROUND ON OIL DRILLING IN U. S. ARCTIC WATERS A. Initial U.S. Exploratory Activities B. Resurgence of Industry Interest C. Shell's 2012 Exploratory Drilling D. Looking Ahead IV. PREVIOUS SCHOLARSHIP ON OFFSHORE DRILLING A. Scholarship on Differing Goals Between Government and Firms B. Scholarship on Asymmetrically Held Information in Offshore Drilling C. Scholarship on Regulatory Imperfections V. CHALLENGES OF REGULATING INFREQUENT, CATASTROPHIC RISKS AT THE FRONTIER A. Framework for Evaluating Government Action to Reduce Catastrophic Events B. Uncertainty C. Benchmarking Gaps D. Shortcomings in Existing Policy Tools VI. PRINCIPLES FOR REFORM A. Delay and Coordination B. Transparency and Accountability C. Adopting a More Prescriptive Approach VII. IMPLICATIONS A. Comparisons to Other High-Risk Industries B. Long-Term Outlook for Offshore Drilling Regulation C. The Next Arctic Frontier? VIII. CONCLUSION I. INTRODUCTION

   The April 2010 explosion and sinking of the Deepwater Horizon oil drilling rig in the Gulf of Mexico, (1) which claimed eleven lives and led to the United States' largest ever offshore oil spill, (2) sparked reflection on the future of offshore oil drilling. (3) Among the critiques were that regulatory agencies failed to take account of an infrequent, catastrophic "fat-tail" (4) risk like the Deepwater Horizon disaster; that regulators did not understand oil drilling technologies well enough to properly regulate them; that the liability regime did not incentivize oil companies to take proper care; and that the Department of Interior's former Mineral Management Service (MMS)--the government entity primarily regulating offshore drilling--was corrupted by the industry it oversaw. (5) In response to these critiques, the federal government made reforms, (6) including dismantling MMS and establishing separate new agencies in its place. (7) Many other changes are underway. (8)

   As this review of what went wrong in the Gulf of Mexico continues, a new "last frontier" for offshore drilling (9) has emerged: the Beaufort and Chukchi Seas, two arms of the Arctic Ocean north of Alaska. (10) Inclement and ice covered for much of the year, these waters hold some of the largest untapped offshore oil reserves in the world. (11) Various factors long limited industry interest in the region, (12) but the calculus recently changed due to improved technologies for extracting difficult-to-reach oil, increased estimates of the resources available, and ice cover reductions from climate change. (13) As a result, private money and resources have poured into oil and gas production. (14) One oil company, Shell, has spent more than $4.5 billion in preparation for oil exploration and development in the Beaufort and Chukchi Seas, (15) and it drilled new wells in 2012. (16) Interest is far from unique to Shell. Other oil companies have announced plans to drill in the Beaufort and Chukchi Seas, (17) and other countries, ranging from Canada to Norway to Russia, are pursuing opportunities in their own Arctic waters. (18)

   To date, little legal scholarship has explored the implications of oil drilling in U.S. Arctic waters. (19) The lack of commentary is surprising because regulation of the sector poses problems that are distinct from those facing offshore drilling generally and relevant for the regulation of other technological frontiers.

   This Article aims to help fill the gap in scholarship. Drawing on a literature review of post-Deep water Horizon scholarship, I develop a simple framework for examining offshore drilling and other industries causing catastrophic environmental harms. This framework is rooted in three concepts common in studies of public administration: asymmetric preferences between government and firms, asymmetric information between government and firms, and imperfections in government's ability to act as society's agent. Application of this framework leads to a specific set of debates about how to best mitigate catastrophic risks. I argue that those debates are reframed when, as here, the industry capable of causing the disaster is operating at the technological frontier.

   With respect to Arctic offshore drilling, I identify two informational problems central to frontier regulation. The first problem is the uncertainty (20) of Arctic oil spills and spill response. Uncertainty is a near-ubiquitous feature of environmental regulation but takes on special prominence when, as here, the regulated activity is new and without ready analogues. It also differs from the classic challenge of asymmetrically held information because the information simply may not exist and firms may not be incentivized to develop it due to weaknesses in the liability regime. In the Arctic, uncertainty is considerable because scarcely any drilling has happened. (21) The second problem, also common to frontier environments, is the lack of benchmarking or comparative data accessible to regulators. Only one company, Shell, has drilled in the U.S. Arctic recently, and even with subsequent entry the total number of players is likely to be small. Other countries' experiences in the Arctic are arguably too limited or dissimilar to provide much guidance for U.S. regulators. Because U.S. regulators lack alternative frames of reference, the Arctic generates a heightened danger that oil companies will use their informational advantages to influence the regulatory choice that is ultimately made. Indeed, this lack of benchmarking may introduce behavioral bias into regulatory decision making. (22) Shell's 2012 experience in Arctic waters, which proved near disastrous, evidences the perils that lack of benchmarking creates. (23)

   These two problems of frontier regulation, uncertainty and lack of benchmarking, reshape approaches to dealing with catastrophic risk. For example, one line of work has looked to the U.S. nuclear power experience with risk-based regulations that rely on quantitative indicators of previous accidents and near-accidents. (24) It may be difficult to devise such regulations for Arctic offshore drilling because much of the data do not exist. Moreover, regulatory tools designed to deal with environmental uncertainty, such as the adaptive management approach that has received considerable emphasis in environmental law, may be ill-adapted to environmental threats capable of causing disastrous harm. (25) In light of these problems, a ban on Arctic oil drilling may well be justified. (26) If a ban is not feasible, the Arctic's extraordinary conditions demand, at minimum, a different approach.

   The approach that I propose looks to regulatory theory and administrative law to address the Arctic's problems of uncertainty and lack of benchmarking. One element is to substantially delay and better coordinate approval of drilling activities, at least until more industry players and countries enter the Arctic. Delay would enable U.S. regulators to use multiple firms as a tool for revealing information about offshore drilling risks and give other countries time to get up to speed. The benefits from delay may well outweigh whatever sacrifices in short-term revenue and innovation spillovers occur. Another element is to introduce greater transparency in oil spill response plans and other regulatory reviews, which until now have been largely immune from outside scrutiny. Transparency is time consuming and costly but would provide a needed reality check and help legitimize the decision-making process. A third step is to instill greater regulatory expertise on offshore drilling and, potentially, to adopt a more prescriptive approach to Arctic regulation. Prescriptive regulation, though sometimes inflexible, (27) may be useful for risky, frontier industries that lack well-developed internal controls. This strategy--centered on the principles of caution and open government--brings with it policy trade-offs. But the strategy may play a useful role in mitigating the risk of Arctic oil spills and catastrophic risks in other industries operating at the frontier. (28)

   This analysis makes several contributions to the legal literature. The Arctic is a microcosm for studying regulation of risky industries at the leading edge of technology. (29) Scholarship to date tends to focus either on catastrophic risks or on regulating at the frontier without considering the rich interplay between the two problems. (30) Thus, this Article, while focused on the Arctic, offers fresh insights for regulating other, similarly structured industries. The Arctic is also a vital topic for U.S. energy law, given the resources potentially recoverable from the region. (31) Therefore, the Arctic, while only a single case study, is worth examining with care.

   This Article is organized as follows. Part II describes the laws governing offshore drilling, including those governing exploitation and oil spill response. Part III provides background on offshore...