Darrell L. Conner

The implications of final rule regulating Arctic OCS drilling

On July 7, almost a year and a half after the proposed rules were published, the U.S. Department of the Interior’s Bureau of Ocean Energy Management and Bureau of Safety and Environmental Enforcement announced final regulations regarding future exploratory drilling activities on the U.S. Outer Continental Shelf in the Arctic. The final rule focuses on exploratory drilling operations from floating vessels operating on the OCS within the Beaufort Sea and Chukchi Sea Planning Areas. Recognizing the unique operating conditions in the Arctic, the final rule is designed to “ensure safe, effective and responsible exploration,” while protecting the environment and cultural traditions of the region. As a result, the final rule imposes a number of new requirements, such as the development of comprehensive plans that account for the challenging Arctic conditions and demonstrate that the operator is prepared to respond to any number of issues that may arise on the Arctic OCS, including ready access to a relief rig to ensure quicker response in the event of an incident. Companies and investors interested in engaging in Arctic development should understand the new requirements and their direct impacts from a cost, compliance, and enforcement perspective. Background In the Outer Continental Shelf Lands Act, Congress established a national regime for the leasing, exploration, and production of the OCS, subject to environmental safeguards,  emphasizing the need for it to be developed in a safe manner to minimize the likelihood of occurrences that may cause damage or endanger life or health. In response to renewed industry interest in exploratory drilling on the Arctic OCS, BOEM and BSEE published a Notice of Proposed Rulemaking in February 2015. This final rule included input from over 100,000 individual commenters, Alaska Native Tribes, a review of Shell’s Arctic exploratory drilling programs and environmental and safety analyses. Overview of final rule The Arctic OCS final rule establishes a holistic regulatory framework that is more stringent than the regulations that govern other OCS locations. Importantly, the final rule only applies to Arctic OCS exploratory drilling activities that use mobile offshore drilling units, or MODUs, and related operations during the open-water drilling season (typically late June to early November). The final rule does not apply to exploratory drilling on the Arctic OCS using other drilling technologies, including shallow water drilling from gravel islands or the use of a land rig on grounded or land-fast ice. As a result, exploratory drilling operations on the Arctic OCS using non-MODUs technology continue to be subject to the existing OCS oil and gas regulatory regime. The final rule seeks to ensure that operators identify operational risks early on, plan to avoid and/or mitigate those risks, and understand and account for the unique challenges of operating on the Arctic OCS. As such, the final rule requires each operator to: 1. Design and conduct exploration programs in a manner that accounts for Arctic OCS conditions; 2. Develop an integrated operations plan, or IOP, that addresses all phases of its proposed Arctic OCS exploration program, which must be submitted to BOEM at least 90 days in advance of filing its Exploration Plan, or EP; 3. Have access to and the ability to promptly deploy Source Control and Containment Equipment, or SCCE, while drilling or working below the surface casing; 4. Have access to a separate relief rig located close enough to timely drill a relief well in the event of a loss of well control; 5. Have the ability to predict, track, report, and respond to ice conditions and adverse weather events; 6. Effectively manage and oversee contractors; and 7. Develop and implement an Oil Spill Response Plan, OSRP, that is designed and executed in a manner that accounts for the unique conditions in the Arctic and that provides the necessary equipment, training, and personnel to respond to an oil spill on the Arctic OCS. The final rule is estimated to result in new compliance costs for the industry between $1.74 billion and $2.05 billion over 10 years. BOEM and BSEE believe these costs are offset by the “unique significance” of the Arctic ecosystem and the substantial value to be gained if resources can be extracted and marketed economically, and they will not discourage exploratory drilling on the Arctic OCS. New operational requirements The final regulations include a number of revised and new prescriptive and performance-based requirements for operators on the Arctic OCS. Throughout the final rule, the DOI recognizes that there may be alternative pathways to achieve compliance with these new regulations. IOP: The final rule requires the development of an IOP that describes at a strategic level how exploratory drilling operations will be designed, executed, and managed as an integrated endeavor from start to finish. SCCE capabilities: The types of relief capabilities that are needed to respond to potential crisis events are not generally available in the Arctic. Thus, this final rule requires operators who use a MODU when drilling or working below the surface casing to “be able to stop or capture the flow of an out-of-control well” using their own SCCE (such as a capping stack, cap and flow system, and containment dome). Relief rig requirement: One controversial element of the final rule is BSEE’s requirement that, as a redundancy, operators have access to a separate relief rig that could fully accommodate an out-of-control well. With the relief rig, operators must be able to “drill a relief well, kill and abandon the original well, and abandon the relief well prior to expected seasonal ice encroachment at the drill site” within 45 days, with some flexibility given to operators who can establish the same level of protection through the use of alternative technologies. Weather and ice forecasting: The final rule requires that operators include in their IOPs, EPs, and Applications for Permit to Drill, or APDs, a description of their weather and ice monitoring and forecasting capabilities, notify BOEM and BSEE immediately of any sea ice movement that has the potential to affect operations and notify BSEE of the start and termination of ice management activities. Oil spill response plan: The final rule notes that OSRPs and related activities should be tailored to the unique Arctic OCS conditions and establishes specific planning requirements to maximize the application of oil spill response technology and ensure a coordinated response system.  Reducing pollution: In response to concerns from partners including Alaska Native Tribes, BSEE also requires the capture of all petroleum-based mud and associated cuttings from Arctic OCS exploratory drilling operations to prevent the discharge of such pollutants into the marine environment. Contractor oversight: DOI is requiring that operators provide an explanation in their IOP of how they would apply oversight and risk management protocols to their personnel and contractors. Industry responses Some environmental groups allege that the final rule did not do enough, noting that the Interior Department released “minimum regulations” that need strengthening, and in one case asserted that “the only ‘safe’ form of drilling for the Arctic and the climate is none at all.” Industry groups like the American Petroleum Institute, however, have challenged the basis for the final rule, asserting that some of the new requirements “may not improve safety and in fact may inhibit innovation and technological advancements.” Implications Given that operators recently have scaled back significantly on investments in Arctic OCS exploration (see Shell’s decision to discontinue their exploratory drilling), the extensive additional requirements set out in the final rules are expected to add significant costs to any future industry activities in the Arctic region. Although BOEM and BSEE recognize alternative and cooperative solutions, such as mutual aid agreements, to meet SCCE and relief rig capabilities and help manage the compliance costs of the new regulations, the final rule nonetheless is likely to further detract operators from investing in the Arctic region, particularly in the short- and medium-term. For future medium- and long-term opportunities, companies will have to consider and likely accommodate these new BOEM and BSEE requirements.  
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