OFFSHORE PETROLEUM REGULATION: THEORY AND DISASTER AS DRIVERS FOR INSTITUTIONAL CHANGE.

AuthorDaintith, Terence

ABSTRACT I. INTRODUCTION II. REGULATORY REFORM IN THE 20TH AND 2 1ST CENTURIES A. The OECD and the World Bank B. The Independent Regulator Model C. Separation of Policy-Making and Regulatory Functions D. An Alternative Model: The Concession System E. The Development of Principles of Good Regulation III. THE SPECIAL CHARACTERISTICS OF THE OFFSHORE PETROLEUM INDUSTRY AND ITS REGULATION A. The Traditional Oil Concession: Its Replacement and Modification B. The Offshore Factor IV. THE UNITED KINGDOM EXPERIENCE IN THE NORTH SEA A. 1964: The Initial Approach: The Onshore Concession Scheme Applied Offshore B. 1965: The Sea Gem Disaster and the First Health and Safety Regulations C. 1972: The Robens Report and the Reform of Occupational Health and Safety Regulation D. 1988: The Piper Alpha Disaster and its Regulatory Consequences E. Departmental Administration of Environmental Controls V. THE NORWEGIAN EXPERIENCE IN THE NORTH SEA A. The Initial Role of Licenses and Regulations B. Institutional Arrangements 1965-1985: From Ministerial Department to Multi-Function Independent Regulator C. 2002: The Splitting of NPD D. Environmental Controls VI. THE AUSTRALIAN OFFSHORE EXPERIENCE, 1967 TO DATE A. Federal and State Jurisdiction Over Offshore Petroleum B. 1967: The Nature and Administration of the PSLA Regime C. Unusual Features of the Australian Structure and Resultant Criticisms D. 2003: The National Offshore Petroleum Safety Authority as an Independent Regulator E. Other Developments F. The Montara Blowout as a Catalyst for Change VII. REACTIONS TO MONTARA AND MACONDO A. Introduction B. The European Union Proposals C. The Norwegian Response D. The United Kingdom Response VIII. CONCLUSION: OFFSHORE MANAGEMENT AND REGULATORY THEORY A. The Independent Regulator Concept B. The Separation of Policy-Making from Regulation and Administration C. The Goal of Clarity--For Whom? ABSTRACT

The overhaul of U.S. offshore regulatory arrangements that followed the Macondo/Deepwater Horizon disaster is only the latest in a series of regulatory reconstructions undertaken over the years by major offshore petroleum producing countries. In this article, we attempt to relate the continuing process of design and redesign of offshore regulatory institutions that has been going on since the 1960s in the United Kingdom, Norway, and Australia to the general precepts of "good regulation" that have been developed, notably within "western" governments and in bodies like the Organisation for Economic Co-operation and Development (OECD) and the World Bank, since the 1980s. How influential have these precepts been in recent processes of reform? Do they suggest that the United Kingdom, Norway, and Australia all spent decades practicing "bad" offshore regulation? Have there been other influences or factors (not least the occurrence of disasters like the antecedents of Macondo) shaping the evolution of offshore regulation? And does this evolution suggest any limits to the applicability of current doctrines about "good regulation" to the particular circumstances of offshore oil exploration and production?

  1. INTRODUCTION

    The blow-out and fire on the Deepwater Horizon rig in the Gulf of Mexico in early 2010, which caused loss of life and an unprecedentedly large underwater oil and gas spill from the Macondo well, called into question not only the competence of even the largest oil companies to manage the safety and environmental risks of their operations but also the ability of industry regulators to exercise adequate and effective oversight. In the United States, major changes in regulatory institutions rapidly followed the occurrence of the Macondo blowout: in May 2010, the Secretary of the Interior ordered the division of the responsible federal regulator, his Department's Minerals Management Service (MMS), into separate and independent entities to be responsible for resource management, environmental and safety matters, and royalties and revenue collection. (1) The dispersal of MMS's hitherto comprehensive functions of regulating operations on the United States Continental Shelf, completed in October 2011, involved the creation of an Office of Natural Resources Revenue to collect leasing revenue (cash premiums and royalties); a Bureau of Ocean Energy Management, responsible for resource development and energy management functions, including leasing and planning; and a Bureau of Safety and Environmental Enforcement to enforce safety and environmental regulations. (2) A key objective of this reform was to eliminate MMS's "conflicting missions of promoting resource development, enforcing safety regulations, and maximizing revenues from offshore operations" and to "separate resource management from safety oversight to allow permitting engineers and inspectors greater independence, more budgetary autonomy and clearer senior leadership focus." (3)

    It is abundantly clear, from inquiries and reports commissioned after the Macondo disaster, that MMS was an under-resourced and ineffective regulator excessively influenced by the industry it was supposed to supervise. (4) The decision to break the agency up into three separate regulatory bodies however, reflected not just dissatisfaction with its performance, but also an acceptance of a particular view of appropriate regulatory structures. This view favors regulators with a single well-defined objective and a high degree of independence from other regulators and from policy-makers who may have inconsistent, or potentially inconsistent, objectives. The European Union, the United Kingdom, and Australia have all introduced post-Macondo reforms to offshore regulatory institutions of a broadly similar nature: a process accelerated, in Australia, by the occurrence of an incident (the "Montara" blowout (5)) a few months before Macondo and of a similar but less serious nature. (6)

    The structures resulting from these reforms strongly contrast with the structures operative in the early years of offshore development in the North Sea (United Kingdom and Norway), Australia, and the United States. In this paper, our aim is to provide some comparative context for recent U.S. developments (7) by examining the development of offshore regulation in the United Kingdom, Norway, and Australia over the last half-century, away from the original institutional structures and towards the type of pattern now adopted in the United States. We seek to relate this process to the elaboration of general precepts of "good regulation" that has been under way, notably within western governments and in bodies like the Organisation for Economic Co-operation and Development (OECD) and the World Bank, since the 1980s. How influential have these precepts been in recent processes of reform? Do they suggest that the United Kingdom, Norway, and Australia all spent decades practicing "bad" offshore regulation? Have there been other influences or factors (not least the occurrence of disasters like the antecedents of Macondo) shaping the evolution of offshore regulation? And does this evolution suggest any limits to the applicability of current doctrines about "good regulation" to the particular circumstances of offshore oil exploration and production?

    We begin by outlining these prescriptions for the good design of regulatory institutions, relating them to the special characteristics of offshore petroleum activity that have borne strongly on governments' approach to its regulation. We then review the regulatory structures adopted by the United Kingdom, Norway, and Australia at the outset of serious offshore petroleum activity in the 1960s and how those structures developed up to 2010. Next, we look at the responses of these countries and the European Union to the Macondo and Montara incidents. On this basis we attempt to assess how far we have improved regulatory structures in this particular field, what this improvement owes to "good regulation" thinking, and what challenges the post-Macondo architecture of offshore petroleum regulation still has to face.

  2. REGULATORY REFORM IN THE 20TH AND 21ST CENTURIES

    1. The OECD and the World Bank

      Regulatory reform has been one of the major preoccupations of the OECD and the World Bank this century. With the former focusing on "western" democracies and the latter addressing the developing world, these bodies have preached a consistent message urging their audiences to engage in regulatory reform as a means of improving economic performance. (8) These international efforts, which started in the 1990s, were largely engendered by the drive towards privatization of public utilities and of infrastructure more generally that was widely (though not universally) seen, starting in the 1980s, as the best recipe for more efficient service delivery in both developed and developing nations. (9) When it became clear that privatization was often not securing the intended results, because state control over privatized entities was often arbitrary or ineffective or both, (10) attention turned towards improving the regulatory structures, procedures, and rules that had replaced direct control over public enterprises. (11) Two related notions were seen as important to such improvement: the creation of independent regulators for such entities, and the institutional separation of policy-making and regulatory functions.

    2. The Independent Regulator Model

      Political influence had been identified as one of the reasons why utilities run by publicly-owned enterprises were less than optimally efficient, and it was posited that this influence might, unless effectively excluded, deter investment in utilities once privatized. (12) The problems of the control of utilities by politically-responsible government departments have been described as follows:

      In many cases, the line Ministry may have the responsibility but little power. De facto, the utilities often dominate the line Ministries and achieve a substantial degree of regulatory...

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