The Need for a New Approach to Risk Assessment and Management

¶As described in Chapter 3 and staff working papers, neither the industry's nor the federal government's approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology, practices, and risks associated with the different geological and ocean environments being explored and developed for oil and gas production. Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itself—especially the rise of specialized service contractors and the general trend toward outsourcing multiple functions. When the operator directly regulated by the government does not itself perform many of the activities critical to well safety, regulators face additional challenges due to the separation of these functions. However, MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable. In other countries, operators of drilling are required to demonstrate to the regulators their own fitness and risk management systems.

¶Also missing has been any systematic updating of the risk assessment and risk management tools used as the basis for regulation. MMS attempted under several administrations to promulgate regulations that would have required companies to manage all of their activities and facilities, and those of their contractors, under a documented Safety and Environmental Management System (SEMS). But, in the face of industry opposition, MMS did not adopt such a requirement until September 2010, after the BP Deepwater Horizon disaster. Industry objections also derailed a past MMS proposal to expand data reporting requirements as part of an effort to track and analyze offshore incidents and to identify safety trends and lagging and leading indicators. The proposal was abandoned when the Office of Management and Budget agreed with industry complaints about compliance cost (industry also complained about the potential for overlap with Coast Guard reporting requirements). As a result, there has historically been no legal requirement that industry track or report instances of uncontrolled hydrocarbon releases or "near misses"—both indicators that could point to a heightened potential for serious accidents. The United States has the highest reported rate of fatalities in offshore oil and gas drilling among its international peers, but it has the lowest reporting of injuries. This striking contrast suggests a significant under-reporting of injuries in the United States and highlights the need for better data collection to ensure needed attention to worker safety.

¶Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore. They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations, including those relating to well design and integrity, supplemented by a proactive, risk-based performance approach that is specific to individual facilities,

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operations, and environments. This would be similar to the "safety case"* approach that is used in the North Sea, which requires the operator and drilling rig owners to assess the risks associated with a specific operation, develop a coordinated plan to manage those risks, integrate all involved contractors in a safety management system, and take responsibility for developing and managing the risk management process.

To accomplish these goals of creating a new approach to risk assessment and management, the Commission offers the following three recommendations:

Recommendations A1: The Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations.

A2: The Department of the Interior should develop a proactive, risk-based performance approach specific to individual facilities, operations and environments, similar to the "safety case" approach in the North Sea.

A3: Working with the International Regulators' Forum and other organizations, Congress and the Department of the Interior should identify those drilling, production, and emergency-response standards that best protect offshore workers and the environment, and initiate new standards and revisions to fill gaps and correct deficiencies. These standards should be applied throughout the Gulf of Mexico, in the Arctic, and globally wherever the international industry operates. Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO).

More specifically, the following actions are needed to truly transition to a proactive, risk-based performance approach:

Engage a competent, independent engineering consultant to review existing regulations for adequacy and "fit for purpose" as a first step toward benchmarking U.S. regulations against the highest international standards. Following this review, develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations. A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice.

Require operators to develop a comprehensive "safety case" as part of their exploration and production plans—initially for ultra-deepwater (more than 5,000

The term "safety case" is a shorthand expression for a comprehensive and structured set of safety documentation that provides a basis for determining whether a risk management system for a specific vessel or equipment is adequately safe for a given application in a given environment.

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feet) areas, areas with complex geology, and any other frontier or high-risk areas— such as the Arctic. In addition, for lease sales in those and other areas, prospective lessees should be required to demonstrate competence, based on experience, financial capacity, and expertise, as a prequalification for bidding.

Expand Safety Environmental Management System requirements to include regular third-party audits at three- to five-year intervals and certification. These plans should be expanded for frontier areas to encompass the full range of risk assessment and management.
For both new and transferred leases, require the operator to participate in a new safety institute or agree to expert audits, and to contribute to safety and environmental research and development. Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease. The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill, and sufficient financial capacity to compensate for damages caused by a spill.
To cultivate and maintain government expertise on offshore drilling safety:

(1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks. This process should include, to the extent that the National Academy deems appropriate, input from experts in the U.S. Geological Survey, the Department of Energy, NOAA, and academia. Furthermore, the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments. Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated, proactive, risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects. As noted above, these efforts should initially focus on areas with complex geology, ultra-deep water, and any other frontier or high-risk areas—such as the Arctic.

(2) Establish a coordinated, interagency research effort to develop safer systems, equipment, and practices to prevent failures of both design and equipment in the future. The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics, sensors and instrumentation, and command electronics that could and should be transferred to the offshore industry.* The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program, an existing research and development program created by statute and managed by the Secretary of Energy, should be refocused toward mitigating the risks of offshore operations.

Secretary of Energy Steven Chu advised the Commission on the capacity within the Department of Energy, the Nuclear Regulatory Commission, the Federal Aviation Administration and elsewhere in the federal government to undertake sophisticated risk and technology assessments. The Department of Energy and the national laboratories have the depth and breadth of research and technical experience in such areas as high-performance computing, image processing, mechanical/structural stress analysis, complex fluid flow simulations, and other areas that proved instrumental in diagnosing the state of the Macondo well blowout preventer and in assessing plans to stop the leak.

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Develop more detailed requirements for incident reporting and data concerning offshore incidents and "near misses." Such data collection would allow for better tracking of incidents and stronger risk assessments and analysis. In particular, such reporting should be publicly available and should apply to all offshore activities, including incidents relating to helicopters and supply vessels, regardless of whether these incidents occur on or at actual drilling rigs or production facilities. In addition, Interior, in cooperation with the International Regulators Forum, should take the lead in developing international standards for incident reporting in order to develop a consistent, global set of data regarding fatalities, injuries, hydrocarbon releases, and other accidents. Sharing information as to what went wrong in offshore operations, regardless of location, is key to avoiding such mistakes.

Lead in the development and adoption of shared international standards, particularly in the Gulf of Mexico and the Arctic. Transparent information and data sharing within the offshore industry and among international regulators is critical to continuous improvement in standards and risk management practices. The United States shares the waters of the Gulf of Mexico and its sub-surface resources with Cuba and the Republic of Mexico. After many decades of declining investment and production in the Mexican part of the Gulf by PEMEX, the national oil company, a recent Mexican Supreme Court ruling has created the opportunity for U.S. and other foreign oil and gas companies to enter Mexican waters. PEMEX has indicated its intention to auction deepwater contracts beginning in 2012. Separately, Cuba has already leased blocks 50 miles off the coast of Florida with reported plans for seven exploration wells by 2014. Agreement on standards for operations should be part of any negotiation to define the maritime boundary between the United States, Mexico, and Cuba in the eastern Gulf of Mexico. The need for international standards for activities in the Arctic is also unquestioned: the United States has already awarded leases in the region and now it is incumbent on the United States to push for such standards.

Provide protection for "whistleblowers" who notify authorities about lapses in safety. All offshore workers have a duty to ensure safe operating practices to prevent accidents. To ensure all workers, regardless of employer, will take appropriate action whenever necessary, Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings.