MMS SEEKS OPA DAMAGE CONTROL

The Minerals Management Service is seeking a way to implement the 1990 Oil Pollution Act's oil spill insurance requirements without harming the U.S. offshore petroleum industry.

Producers are warning MMS its proposed rule, published in the Aug. 25 Federal Register, could force many small offshore operators to halt operations. The insurance industry says it cannot underwrite all current offshore projects at the required $150 million of insurance. The U.S. Coast Guard has a similar rule pending for tanker operations.

Energy Sec. Hazel O'Leary has asked the National Petroleum Council to prepare a study by Dec. 1 on how the law could restrain offshore production (OGJ, Oct. 25, Newsletter).

Asst. Interior Sec. Bob Armstrong told NPC the required $150 million of insurance may be too high in light of the industry's "enviable record" in preventing offshore pollution the past 2 decades.

National Ocean Industries Association Pres. Robert Stewart said, "We believe the enormity of the problems and the numerous sections of the statute that contribute to those problems make it unlikely MMS can deal with them administratively.

"We think the greater likelihood is that, as more individuals learn how the statute and the pending regulations will impact them, pressure on Congress to address these problems will grow."

Stewart complained the law is inequitable because a small producer with only a few wells on a small number of platforms is required to carry the same level of insurance as a major oil company with hundreds of platforms and thousands of barrels of production.

FUZZY GUIDELINES

At a House Merchant Marine subcommittee hearing on the issue, MMS Director Tom Fry said his agency has been unable to find evidence of clear congressional intent contrary to the language of the law and thus has little discretion in drafting the rules.

Fry said, "MMS intends to draft regulations that are consistent with the law and expressed congressional intent. We are concerned that unless we follow the law as literally stated in OPA, our regulations may fail on one or more key issues if challenged in the courts."

Tim Herbert, Louisiana's deputy oil spill coordinator, said MMS's "broad definition of 'offshore facility' would seem to make every marine and fuel dock in the country, every pipeline that crosses inland navigable waters, and facilities and pipelines located in wetlands subject to these financial requirements."

He said Congress did not intend the offshore oil production insurance requirements to apply to inland facilities such as a pipeline crossing the Ohio River.

Herbert said an analysis by the Louisiana State University Center for Energy Studies estimated the proposed rule would literally shut down the oil and gas industry in Louisiana. He said only 122 of Louisiana's 2,000 oil and gas operators could afford insurance at $5/$1,000/year coverage, and only 70 of them at $10/$1,000/year coverage.

The Marine Operators Association of America said the rule would cause virtually all marinas in the country to close their fuel docks because the rule defines oil to include gasoline, diesel, and other fuels.

Patrick Taylor, president and chief executive officer of Taylor Energy Co., New Orleans, said any truck carrying fuel will become an "offshore facility" if it crosses any navigable stream no matter how far inland and must carry $150 million of insurance.

Taylor warned the insurance requirement would shut in 300,000 b/d of Gulf of Mexico production and force independents out of business. "At Taylor Energy, the rules will mean personal bankruptcy for me, and 120 families will be without a breadwinner."

DRIVE-BY SHOOTING

The American Petroleum Institute at an early November hearing in Houston expressed concerns about proposed MMS geographic jurisdiction under OPA, application of direct action requirements to oil field insurers, and self-insurance criteria that would prevent offshore operators from spreading risks through a combination of self-insurance, commercial insurance, and indemnity arrangements.

API said valid claims under the Outer Continental Shelf Lands Act (Ocsla) have been satisfied promptly by responsible parties, whose eligible claims have been reimbursed by insurers and indemnitors.

"Because this has worked historically, MMS should take no action to weaken it," Shell Offshore Inc.'s Peter Velez said on behalf of API.

U.S. independents especially are fearful of the high level of net worth OPA 90 would require to allow oil and gas companies to operate offshore, if adopted as proposed by MMS.

In a letter to MMS Director Tom Fry, BT Operating Co., Houston, said, "OPA 90 is like "a drive-by shooting, only OPA missed its target and killed an innocent bystander-the producer."

If OPA is adopted with a $150 million net worth requirement for offshore operators, BT Operating attorney Roger Evans wrote, "It won't reduce independent oil and gas operators' activities. It will eliminate them. You will kill every cat in the alley."

EXTENT OF JURISDICTION

Speaking for API, Shell's Velez said Congress never intended for MMS authority over offshore oil and gas facilities under OPA to cover installations outside the federal Outer Continental Shelf.

But for the rulemaking process, MMS has proposed defining offshore facilities under OPA to include any onshore pipelines, onshore fuel storage tanks and related piping and hoses, and onshore drill strings, flow lines, or production casing as long as they are near or cross navigable waters.

Velez maintained that specific definitions control a statute's meaning and that OPA draft provisions clearly distinguish between offshore and onshore facilities and parties responsible for either.

He said, "To ignore the distinction would presume that Congress gratuitously set out separate and redundant provisions for onshore facilities. API urges MMS to reconsider its erroneous view of the extent of OPA's geographical reach and confine application of its financial responsibility requirements to offshore facilities engaged in oil exploration and production on the OCS."

API said incorrectly applying OPA direct action requirements to financial indemnitors also could impede companies from demonstrating financial responsibility adequate to operate offshore. MMS should not apply OPA in a way that holds insurers or bond issuers accountable for offshore spills, "as if they are joint participants in the responsible parties' operations rather than simply financial indemnitors."

Considering insurers as guarantors while still holding them to commercial promises to indemnify would curtail availability of oil field insurance coverages. If adequate insurance markets are to be available, MMS must recognize that financial rigidity of the current marketplace is not subject to change according to the wills of parties involved, API said.

"All regulatory flexibility allowed by OPA should be utilized if markets are to be available."

Similarly, API urged MMS to adopt a regulatory regime under OPA that would allow effective offshore coverage through a combination of self-insurance, commercial insurance, and indemnity coverage. MMS should allow companies to self-insure offshore operations if they have adequate short term liquidity to cover costs and claims that could arise immediately after a spill and long term capital resources sufficient to satisfy OPA requirements, API suggested.

REQUIREMENTS UNWARRANTED

Opinion is widespread that the environmental track record compiled by U.S. offshore operators does not warrant requirements as stiff as those proposed by OPA.

Citing MMS statistics at the Houston hearing, Velez said installations on the Gulf of Mexico OCS during 1974-92 spilled 69,957 bbl of oil and condensate in 10 upstream incidents. By comparison, tankers since 1974 have spilled more than 1.88 million bbl of oil and refined products in 92 reported incidents.

Velez also pointed out:

• Of the 13 largest U.S. offshore spills in 1964-92, cleanup and damage costs for 12 were estimated at less than $10 million, far less than OPA's proposed $150 million financial responsibility requirement. The largest spill since 1964 cost about $63 million in damages and cleanup costs.

• Of the 300 largest U.S. oil and gas companies compiled by Oil & Gas journal, 211 in 1992 reported assets of less than $150 million (OGJ, Sept. 20, p. 58). If OPA rules were approved as proposed, those 211 companies and others too small to make the list presumably would be unable to show financial strength adequate to operate offshore.

• OPA requires oil tankers to post financial surety amounting to about $67.50/bbl of oil or refined products transported across U.S. waters. By comparison, OPA's requirement for upstream offshore facilities would amount to $130,000/bbl for an installation producing 1,000 b/d of oil. An offshore installation would have to produce 2.2 million b/d to achieve a per bbl exposure as small as that required of tanker operators, but combined oil output from all U.S. offshore wells in 1992 averaged less than 1.222 million b/d.

Of the 115 companies permitted in 1992 to produce oil and gas on the Gulf of Mexico OCS, 66 (57%) produced less than 1,000 b/d. A company producing 50,000 b/d of oil offshore would have an average exposure of $3,000/bbl, an exposure nearly 50 times that of the gulf's biggest polluters. But only four companies in 1992 produced more than 50,000 b/d of oil in the gulf.

Such statistics show OPA rules as proposed would be lethal to independent companies like BT Operating, which operates entirely in the Gulf of Mexico with about 60 employees and production amounting to 25 MMcfd of gas and 1,600 b/d of oil.

While the company has been growing rapidly by acquiring, drilling, and developing leases in the gulf, BT's Evans said, "The $150 million requirement will put us out of business, along with dozens of other independents just like us."