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The Post-Macondo World40388

James W. Noe

Senior Vice President, General Counsel and Chief Compliance Officer

ww.herculesoffshore.com

Executive DirectorShallow Water Energy Security Coalition

www.shallowwaterenergy.orgtwitter: @shallowwaternrg

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Topics

The Regulatory and Legislative Aftermath in the Post-Macondo World

Contract Risk Management in the Post-Macondo World

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Regulatory and Legislative Aftermath in the Post-Macondo World

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Regulatory and Legislative Aftermath in the Post-Macondo World

In the aftermath of Macondo, both the Obama Administration and the then-Democratic controlled Congress reacted in a broad and restrictive manner Administration imposed sweeping, across-the-board offshore drilling

moratorium Ultimately lifted moratorium on shallow water and then deep water

de facto moratorium replaced the express moratorium “Dynamic regulatory environment” imposed All resulting in a dramatic slowing of pace of permitting

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Shallow Water Permitting Activity

Permit issuances down by roughly half since new regulations in June 2010 Year-to-date, 37% of permits issued are for new wells, up from 30% during June thru

December 2010 Backlog of permits seeking approval at the highest level, post Macondo (2)

U.S. GOM Shallow Water Total Permits Approval History (1)

(1) Source: Bureau of Ocean Energy Management, Regulation and Enforcement as of August 24, 2011(2) As of August 24, 2011, there were 29 shallow water permits pending, with another 14 permits returned to operators seeking additional information

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27

38

32

36

2629

24

19

2627

26

21

1111 12

15 14

21

17

12

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28

22

2

1517

12

16

8

15

0

5

10

15

20

25

30

35

40

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

3-Year Avg (07-09) 2010 2011

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Time Delays in Permit Review

Prior to new regulations, it took operators less than two weeks to receive a permit for new wells

Since the new regulations, it takes operators almost two months to receive a permit for new wells

Time delays create operator confusion and frustration with new regulations

Approval Time for Permits to Drill New Wells (Average Days)

Source: Bureau of Ocean Energy Management, Regulation and Enforcement

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57.9

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10.0

20.0

30.0

40.0

50.0

60.0

70.0

Jan '09 thru May '10 Jun '10 thru Sep '11

(Num

ber o

f day

s)

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Regulatory and Policy Actions

BOEMRE: “The Obama Administration launched the most aggressive and comprehensive reforms to offshore oil and gas regulation and oversight in U.S. history”

Drilling Safety NTL-06 – operators required to demonstrate that they are prepared to deal

with a blowout and the “worst-case discharge” Drilling Safety Rule – “codifying” NTL-05 – permit applications for drilling

projects must meet new standards for well-design, casing and cement and be independently certified by professional engineer

NTL-10 – operators must provide a corporate compliance statement and review of subsea blowout containment resources for deepwater drilling

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Regulatory and Policy Actions (cont’d.)

Workplace Safety Workplace Safety Rule – operators must maintain comprehensive safety and

environmental programs. Mandates implementation of a Safety and Environmental Management System (SEMS) September, 2011 – announced proposed revisions requiring

Stop work authority Identification of ultimate authority Employee participation in development of SEMS

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Regulatory and Policy Actions (cont’d.)

Reorganization of former MMS Three separate agencies

Office of Natural Resources Revenue – collection of revenue and lease bonus payments

Bureau of Ocean Energy Management (BOEM) – to manage development of offshore resources – leasing, plans, environmental studies, NEPA analysis, geological risk analysis

Bureau of Safety Environmental Enforcement (BSEE) – issue permits, enforce safety and environmental regulations, inspections, oil spill response, training and compliance

Recusal policy implemented Ocean Energy Safety Advisory Committee – DOI/BOEMRE established

permanent advisory group consisting of scientific, engineering and technical experts to provide guidance on improving offshore drilling safety, well containment and spill response

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Legislative Actions – Background of Existing Law

Oil Pollution Act of 1990 Responsible party liable for removal costs, clean-up costs and damages

Damages Injuries to natural resources Loss of subsistence use of natural resources Lost government revenues resulting form destruction of property or

natural resource injury Lost profits and earnings resulting form property loss or resource injury Cost of providing extra public services during or after spill response

33 U.S.C. 2702(b)

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“Liability Cap”

Total of all removal costs plus $75 million. 33 U.S.C. 2704(a)

Cap does not apply if spill caused by Gross negligence Willful misconduct Violation of an applicable federal safety, construction or operating

regulation33 U.S.C. 2704(c) Fines and liability under state law33 U.S.C. 2718

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Legislative Actions – 111th Congress

HR 3534 – Consolidated Land, Energy and Aquatic Resources Act of 2009 (“Clear Act”) (passed House only) Amended various regulations regarding well engineering, well design, BOP

testing and spill response and containment Amended OPA 90 to repeal limits on liability for certain vessels and

offshore facilities Increased minimum COFR amounts to $300 million, with ability of

President to lower to $105 million for offshore facility seaward of state’s boundary

Expanded liability to include damages to human health S 3663 – Clean Energy Jobs and Oil Company Accountability Act (introduced

by then-Senate Majority Leader Reid – no Senate action) Amended OPA 90 to remove limits of liability for offshore facilities Repeal Limitation of Liability Act for claim for wages or pollution

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Legislative Actions – 111th Congress (cont’d.)

S 3763 – Restoring Ecosystem Sustainability and Protection of the Delta Act (RESPOND Act) (introduced by Senator Landrieu – no Senate action taken) Amended OPA 90 to remove $75 million “limit” Amended OCSLA to establish Offshore Facilities Oil Spill Mutual Insurance

Fund Mandated mutual insurance pool requiring operators to pay $250

million per occurrence deductible with pool covering up to $10 billion

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Legislative Actions - 112th Congress

S 512 and HR 993 – LEASE Act – extended leases impacted by express and de facto moratorium by one year

HR 1229 – Putting Gulf Back to Work Act – ended de facto moratorium by imposing deadlines on permit review process

HR 1230 – Restoring American Offshore Leasing Now Act – requires Administration to hold Gulf of Mexico and Virginia lease sales

HR 1231 – Reversing President Obama’s Offshore Moratorium Act – lifted the Administration’s ban on new offshore drilling by requiring movement on the 2012 – 2017 Lease Plan

- No Senate action on bills.

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Policy Actions

National Commission recommendations:1

Establish a mutual liability pool, including risk-based premiums Phasing in higher liability limits for pollution Promoting joint ventures between smaller and larger operators Increase size and per occurrence limit of Oil Spill Liability Trust Fund

Currently $1 billion single incident limit and $500,000 limit for natural resource damage

Report Regarding the Causes of the April 20, 2010 Macondo Well Blowout released September 14, 2011 – expected to generate additional regulatory changes2

1. Deep Water, The Gulf Oil Disaster and the Future of Offshore Drilling, Recommendations, the National Commission on the BP Deepwater Horizon Oil Spill andOffshore Drilling, January 2011.

2. http://www.BOEMR.gov/pdfs/maps/DWHFINAL.pdf

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Legislative and Regulatory Actions – Looking Ahead

Amending/increasing liability limits – less likely Creating mutual insurance pools – less likely Additional taxes/removing “subsidies” and tax benefits – more likely Additional technical/operational regulations regarding well design and

construction, BOP, temporary abandonment, cementing and spill response and containment possible

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Contract Risk Management in the Post-Macondo World –

The tug-of-war and the growing importance of “gross negligence”

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Traditional Allocation of Offshore Drilling Risks – “Knock-for-Knock”

Responsibility of Operator

Own people – bodily injury, illness and death

Own property

Loss or damage to hole and downhole tools

All other pollution/down-hole pollution

Damage to reservoir

Costs of controlling wild well

Responsibility of Contractor

Own people - bodily injury, illness and death

Own property

Rig pollution

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Traditional Allocation of Offshore Drilling Risks – “Knock-for-Knock” (cont’d.)

Risk allocation and indemnities apply regardless of fault Typically intended to include gross negligence of party seeking indemnity

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Gross Negligence Defined

Ordinary negligence is a failure to exercise the degree of care that a person with ordinary prudence would exercise under the same or similar circumstances

What lifts ordinary negligence into gross negligence is the mental attitude of the defendant

The plaintiff must show that the defendant was consciously, i.e., knowingly, indifferent to his rights, welfare and safety

In other words, the plaintiff must show that the defendant knew about the peril, but his acts or omissions demonstrated that he didn’t care

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BP - Transocean

BP: May seek ruling that Transocean and other contractors were “grossly negligent” in order to make indemnity obligations unenforceable

Pollution indemnity clause – neither expressly includes or excludes “gross negligence”:

Company shall assume full responsibility for and shall protect, release, defend, indemnify and hold contractor harmless from and against any loss, damage, expense, claim, fine, penalty, demand, or liability for pollution or contamination, including control and removal thereof, arising out of or connected with operations under this contract . . . Without regard for negligence of any party or parties and specifically without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of contractor.

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Enforceability of Indemnities for Gross Negligence

Maritime law: appears federal courts applying general maritime law feel that it is against public policy to be indemnified for gross negligence. Energy XXI v. New Tech Engineering C.P., 2011 WL 1458638 (S.D. Tex.

2011); see also Todd Shipyards v. Turbine Services, Inc., 674 F.2d 401, 411 (5th Cir. 1982) (noting, in dicta, that gross negligence would “invalidate an exemption from liability”)

Texas Law Unsettled whether contractual indemnity agreements releasing a party from

liability for its gross negligence will be upheld. See Atlantic Richfield v. Petroleum Personnel, Inc., 768 SW2d 724 (Tex. 1989)

Seems trend in recent cases is to uphold enforcing contractual provisions negotiated at arm’s length

“any negligence . . .” likely broad enough to include “gross negligence” RLI Insurance Company v. Union Pacific Rail Road Company, 463 F.Supp 2d 646 (S.D. Tex. 2006)

Louisiana Law Enforceable. See Urban v. Acadian Contractors, Inc., 627 F.Supp. 2d 699

(W.D La. 2007)

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Contractor – Operator Tug-of-War

Operators increasingly pushing to exclude gross negligence from pollution/blowout indemnities

Operators pushing to increase use of contractor limits for “feel the pain” provisions in indemnities

Contractors responding by offering “gross negligence” as trigger for any pollution/blowout liability

Operators requesting access to contractors insurance for pollution/blowout OEE

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