The classification of the constituents of a chaos, nothing less is here essayed.
-Herman Melville, Moby Dick
As previously reported on Striding the Quarterdeck, the post-Macondo overhaul of the Minerals Management Service (MMS) and the scope and substance of its regulatory reach resulted in the Bureau of Safety and Environmental Enforcement (BSEE, the MMS’s successor agency) asserting unprecedented civil penalty jurisdiction over offshore contractors, after decades of espousing the policy and practice of enforcing such penalties solely against lease holders and operators. Now, after years of industry uncertainty, seemingly contradictory and confused policy statements (official and informal), and despite the lack of any actual rulemaking in this area to date, the veritable “chaos” around this issue has been “essayed” and determined by the Interior Board of Land Appeals (IBLA, the final administrative appellate body within the Department of the Interior within which BSEE is situated) in a landmark administrative opinion determining once and for all – pending further potential judicial review in the federal courts – that BSEE has unfettered jurisdiction to assess civil penalties against any contractors performing work on the Outer Continental Shelf. See Island Operating Co., 186 I.B.L.A. 199 (Oct. 5, 2015).
The facts of the case are relatively straight forward, as set forth in the BSEE incident report. Island Operating contracted with Apache to perform work on an unmanned Apache platform. Two Island Operating employees – one crane operator and one rigger – were gravity filling a chemical tank on the platform via a chemical tote tank that they had lifted up with the crane on the platform from the deck of a supply vessel. During this operation, the crane operator left the crane cab to retrieve the day’s lunches. While he was out of the crane cab, the chemical tank overflowed onto the deck of the platform, and the spilled chemical ignited when it entered the platforms exhaust stacks, resulting in a fire that spread across the platform. Both Island Operating employees jumped off the platform into the water, but were not seriously hurt and were rescued within minutes. The fire was controlled within roughly 30 minutes. There was no structural damage to the platform, although the two tanks involved and some of the nearby equipment were fairly heavily damaged.
BSEE investigated the incident and issued a single incident of non-compliance (INC, BSEE’s civil enforcement mechanism) to Island Operating pursuant to the general safety requirements of 30 C.F.R. § 250.107(a) for failure to perform all operations on the Platform in a safe and workmanlike manner. Notably, this regulation is not operation or task-specific; rather, it is a broadly worded, catch-all provision that requires inter alia the “protect[ion] [of] health, safety, property, and the environment by . . . [p]erforming all operations in a safe and workmanlike manner; and . . . [m]aintaining all equipment and work areas in a safe condition.”
Island Operating challenged BSEE’s issuance of the INC on the basis that BSEE does not have jurisdiction under the Outer Continental Shelf Lands Act (OCSLA), or its implementing regulations promulgated at C.F.R. Title 30, Part 250, to issue civil penalties directly to offshore contractors. Rather, Island Operating took the position, which had been espoused by BSEE/MMS itself over decades of practice and even limited regulatory commentary, that only OCS lease holders and/or operators are subject to civil penalty enforcement under the OCSLA. Critically, Island Operating’s challenge to the INC was the first direct challenge to BSEE’s unilateral assertion of regulatory jurisdiction over offshore contractors in the wake of Macondo.
By way of background, the first time BSEE actually issued INCs to offshore contractors was in the wake of the Macondo blowout, when Transocean and Halliburton were both issued various INCs – including for violation of the same broad provisions of 30 C.F.R. § 250.107(a) at issue in the Island Operating INC. These INCs to Transocean and Halliburton (mentioned in passing in the IBLA’s decision) touched off a firestorm among offshore contractors (spearheaded in large part by the main industry advocacy group, National Oceans Industry Association) disputing BSEE’s unprecedented and unilateral extension of its regulatory reach. However, Halliburton and Transocean eventually settled with BSEE, thus precluding any direct challenge to the INCs. In the meantime, BSEE has obviously continued to issue INCs to offshore contractors like Island Operating and other offshore contractors as well. That said, in the interim, BSEE’s enforcement actions against contractors have been somewhat inconsistent, with BSEE sometimes issuing INCs to offshore contractors (as in the West Delta Block 32 fire); sometimes rescinding previously issued INCs (depending on the nature of contractor operations at the time of an incident); and sometimes not issuing INCs to contractors at all (as in the Vermilion Area Block 380 fire). Indeed, in the latter instance, the IBLA affirmed issuance of INCs solely to the operator, notwithstanding contractor fault, on the basis that “BSEE’s regulation at 30 C.F.R. § 250.146(c) makes it clear that the operator has primary responsibility for supervising and maintaining safety over all operations and equipment.”
Further, during this same period, BSEE issued its Interim Policy Document (IPD) No. 12-07, which set out four factors BSEE would use to determine whether an offshore contractor’s conduct was so “egregious” as to merit BSEE enforcement action: (1) whether the violation implicated health, safety, or environmental concerns; (2) resulting harm or potential harm from violation with respect to health, safety, and the environment; (3) foreseeability of such harm; and (4) extent of the contractor’s involvement in the violation. However, as previously discussed on this blog, these factors appeared to be largely result-driven and inherently prone to a 20/20 hindsight analysis, as opposed to a forward-looking proactive regulatory approach.
In the midst of this arguable “chaos,” the industry anxiously awaited the IBLA’s decision on the Island Operating INCs, which Island Operating challenged on the fundamental basis that “[i]n the 60 years since the passage of [OCSLA] . . . no tribunal has ever found a contractor liable for an OCSLA violation . . . [for the simple reason that BSEE] lacks legal authority from Congress to take enforcement action against contractors.” Island Operating Statement of Reasons for Appeal at p.1. Unfortunately, the decision was not what Island Operating or the industry had hoped for.
The IBLA affirmed the issuance of the INCs to Island Operating, pursuant to the four factors of the IPD, and rejected all arguments against BSEE’s jurisdiction over offshore contractors. Primarily, the IBLA decision focused on the broad language of the OCSLA, which it held “clearly make[s] any person actually performing any activity, in connection with any operations on an OCS lease, liable for failing to perform the activity in a safe and workmanlike manner” and thus subject to the civil penalty jurisdiction of BSEE. 186 I.B.L.A. at 207. In particular, the IBLA held that because the Secretary of the Interior (through his/her designated agency BSEE) has general authority to administer activities on the OCS, BSEE’s jurisdiction on the OCS is essentially unlimited:
Section 22 of the OCSLA provides, in subsection (a), that the Secretary “shall enforce safety and environmental regulations” promulgated pursuant to the statute, and, in subsection (b), that the “holder of a lease” under the OCSLA has a duty to maintain “all places of employment within the lease area . . . in compliance with occupational safety and health standards and . . . free from recognized hazards to employees of the lease holder . . . or of any contractor . . . operating within such lease area,” and to maintain “all operations within [its] lease area . . . in compliance with regulations intended to protect persons, property, and the environment on the outer Continental Shelf[.]” 43 U.S.C. § 1348(a) and (b) (2012).
Subsection (a) is the only statutory provision that specifically authorizes the Secretary to enforce the safety and environmental regulations promulgated pursuant to the OCSLA. It does not define “the entities subject to enforcement,” or, indeed, contain any language limiting the objects of enforcement or otherwise constraining the exercise of the Secretary’s enforcement authority. . . While the duty spoken of in subsection (b) “belongs to the lessee,” we think it clear from the OCSLA that it imposes a duty to comply with regulations promulgated under the statute on parties other than the lessee.
186 I.B.L.A. at 206.
Thus, by relying on statutory silence in the extremely broad general language of §1348(a), the IBLA reached the conclusion that BSEE can directly regulate offshore contractors pursuant to §1348(a), notwithstanding that the legislative history of subsection (b) of that same statute indicates that Congress deleted language explicitly identifying contractors as responsible for compliance with regulations promulgated pursuant to the OCSLA. In other words, the IBLA relied on a negative – i.e. the absence of anything about contractors – in the vague provisions of §1348(a) as more dispositive than the positive and specific indications in the drafting history of §1348(b) to find jurisdiction over offshore contractors.
Critically, however, this necessarily could not end the IBLA’s analysis of this issue, because the implementing regulations – as opposed to the OCSLA itself – expressly provide that only “a lessee, the owner or holder of operating rights, [or] a designated operator or agent of the lessee(s),” (the group defined as “You” in 30 C.F.R. 250, and to which the regulatory provisions of the general safety rule of 30 C.F.R. §207 expressly and limitedly apply) are subject to regulation by BSEE. Moreover, BSEE itself (when it was the MMS) had previously expressly disclaimed regulatory authority over oilfield service contractors in favor of directly regulating the “lessees” and “operators” for whom they work: “The operator is responsible for the performance of its contractors. MMS will hold the operator accountable for the contractors’ performance.” 63 Fed. Reg. 7335 (Feb. 13, 1998). And again a few years later, BSEE reconfirmed that it “does not regulate contractors; we regulate operators.” 75 Fed. Reg. at 63616. Indeed, BSEE continued even after its attempt to invoke broader jurisdiction over contractors to generally hold operators/lessees responsible even when a contractor’s negligence may give rise to a violation. See, e.g., Apache Corp., 183 IBLA 273 (Apr. 17, 2013) (affirming issuance of BSEE INCs issued to platform operator as a result of fire caused at least in part by negligence of painting contractor performing maintenance painting work). Further, even another federal agency (the Chemical Safety Board, which released its preliminary findings regarding the DWH Incident on July 24, 2012) has suggested that the extension of BSEE’s jurisdiction to oilfield contractors is questionable.
The IBLA fully acknowledged several of these points, but nonetheless held that neither the applicable regulatory definition, nor the BSEE/MMS’s prior policy statements, precluded direct civil penalty jurisdiction over contractors. Rather, in addition to the broad language of OCSLA §1348(a), the IBLA further relied on 30 C.F.R. § 250.146(c), which provides that, “[w]henever the regulations in 30 CFR [P]art 250 . . . require the lessee to meet a requirement or perform an action, the lessee, operator[,] . . . and the person actually performing the activity to which the requirement applies are jointly and severally responsible for complying with the regulation.”
While the language of §250.146(c) might seem on its face to support an argument for extension of BSEE jurisdiction to contractors (notwithstanding the definition at §207 and the prior regulatory statements indicating no such jurisdiction exists), there is a significant problem with this rationale: the proposed rule in which MMS first promulgated §250.146(c) in 1998 included the express language quoted above indicating that “[t]he operator is responsible for the performance of its contractors [and that] MMS will hold the operator accountable for the contractors’ performance.” 63 Fed. Reg. 7335 (Feb. 13, 1998). Notably, the IBLA opinion does not discuss this contradictory aspect of its rationale.
Moreover, the IBLA decision never directly addresses the fact that the definition of “You,” which is the lynchpin term used throughout the BSEE regulations regarding who is responsible for compliance, expressly does not include contractors.
In short, the IBLA opinion relies essentially on a series of silences in the OCSLA and the implementing BSEE regulations – plus BSEE’s recent, post-facto and self-fulfilling policy statements – to reach the affirmative and resounding conclusion that contractors fall within BSEE’s civil penalty authority.
Moreover, the IBLA rejected the argument that BSEE’s unprecedented, previously disavowed jurisdiction over contractors could only be asserted after formal rulemaking. Doubling down on its interpretation of §250.146(c), the IBLA held that the promulgation of this section was sufficient formal rulemaking to extend BSEE’s jurisdiction to contractors. And once again relying on regulatory silence instead of affirmative authority, the IBLA also rejected the argument – admittedly supported by a several federal decisions – that BSEE was unilaterally re-writing its regulations by taking civil enforcement actions against contractors, and thereby arbitrarily and capriciously violating vested industry interests based on the prior, long-standing interpretation/application of the regulations:
[W]e find no longstanding interpretation by the Department that it was precluded from taking enforcement actions against contractors, from which it now deviates, and, therefore, we are not persuaded that BSEE changed any regulatory interpretation or rewrote its regulation.
* * *
Just as BSEE’s forbearance in enforcement does not constitute its interpretation of a regulation, neither does its more rigorous post-Deepwater Horizon enforcement [i.e. the INCs issued to Transocean and Halliburton] constitute a change in any interpretation of authority or a change in the regulation, requiring the Department to take serious reliance interests into account . . . and constraining it, in any way, from enforcing the rule against contractors.
186 I.B.L.A. at 219-220. Moreover, the IBLA expressly rejected the practical argument that BSEE’s newly minted jurisdiction over contractors would “upse[t] the myriad ways in which contractors have reasonably relied on that interpretation in setting prices, allocating liability, and otherwise establishing their contractual relationship with lessees/operators.” Id. at 220.
It cannot be overstated that the IBLA’s decision in Island Operating is a watershed moment for offshore contractors on the OCS. Island Operating will have 90 days from the date of the opinion – through Christmas Day, December 25, 2015 – to seek judicial review of the IBLA’s holding by filing an action in federal district court. That said, the standard of review under the Administrative Procedures Act only allows for reversal of the IBLA’s decision if it is “arbitrary, capricious, an abuse of discretion … [or] in excess of statutory jurisdiction [or] authority….” 5 U.S.C. §706(2). As such, courts must give substantial deference to IBLA’s interpretation of its own rules: “[A]n agency’s interpretations of its own rules must be given controlling weight unless it is plainly erroneous or inconsistent with the regulation.” Nexen Petroleum U.S.A., Inc. v. Norton, 2004 WL 722435, at *3 (E.D. La. Mar. 31, 2004).
The repercussions of this (at least for now) final decision confirming BSEE’s civil penalty jurisdiction over offshore contractors are far-reaching for both practical and legal reasons.
First, even though IBLA dismissed practical commercial concerns as unimportant, offshore contractors will need to re-evaluate their contractual relationships with OCS leaseholders/operators to ensure that bargained-for allocation of liabilities remain intact in the wake of BSEE’s expanded authority. For example, standard knock-for-knock negligence indemnities in a contractor’s favor may be superseded by separate provisions requiring the contractor to indemnify the operator/lease holder in the event of any regulatory violation by the contractor.
Second, offshore contractors should review their insurance programs to ensure whether and to what extent they have coverage for potential civil fines and penalties resulting from INCs issued by BSEE. In particular, there may be express exclusions in certain policies barring coverage for civil fines/penalties resulting from regulatory violations. And moreover, even in the case of policies that do not expressly exclude coverage for such penalties, most courts hold that civil fines/penalties do not qualify as “damages” covered by a standard commercial general liability (CGL) policy. Thus, even absent an express exclusion, most standard CGL policies commonly issued to offshore contractors likely do not cover civil fines/penalties.
Third, BSEE’s expanded civil penalty jurisdiction may saddle offshore contractors that own/charter vessels with additional regulatory burdens, given the as-yet unresolved and widely reported problem of post-Macondo overlapping regulatory jurisdiction between the United States Coast Guard and BSEE. Indeed, as noted earlier, BSEE issued INCs to Transocean, as owner of the semi-submersible vessel rig DEEPWATER HORIZON, based on the same regulation at issue in the Island Operating decision.
Fourth, INCs issued by BSEE to offshore contractors may provide new theories of negligence – and potentially per se negligence – for personal injury plaintiffs. See, e.g., Tajonera v. Black Elk Energy Offshore Operations, L.L.C., 2015 WL 6758258, at *16 (E.D. La. Nov. 5, 2015).
Finally, and perhaps most importantly, BSEE’s expanded jurisdiction may have far-ranging, time-consuming, and expensive implications for all the various types of offshore contractors (vessel, offshore construction, downhole, ROV, etc.) given the pending regulatory changes to BSEE’s “best available and safest technology” (BAST) provisions at 30 C.F.R. §250.107(c) – a different subsection of the same regulation BSEE relied on to cite Island Operating – which have been discussed previously here. Briefly stated, the current language of §250.107(c) requires BAST but also provides two “safe harbors” by (1) limiting mandatory BAST to “whenever [it is] practical,” and also (2) providing that compliance with BSEE regulations will “in general” constitute the use of BAST. However, newly proposed amendments to §250.107(c), which has already been through the public comment period and is simply awaiting approval in the “Final Stage” regulatory process, removes both safe harbors and would require that offshore contractors “must use the BAST that BSEE determines to be economically feasible on all new drilling and production operations, and wherever practicable, on existing operations . . . [with] BSEE . . . specify[ing] what is economically feasible BAST.” 78 Fed. Reg. 52239, 52243 (Aug. 22, 2013).
In other words, these new provisions would remove both safe harbors by making BAST applicable “whenever economically feasible,” with feasibility to be unilaterally determined by BSEE, and even if the BAST otherwise exceeds BSEE’s minimum regulatory requirements. These pending changes to §250.107(c) are particularly problematic to BSEE’s newly minted jurisdiction over offshore contractors, given the wide range of expertise, equipment, and operations conducted by all the various contractors performing myriad different tasks on the OCS. BSEE likely does not have the personnel nor the resources to properly identify BAST across all the various disciplines of all the various offshore contractors working on the OCS. Yet BSEE will ostensibly be able make its own “Monday morning quarterback” decisions on BAST and then impose civil penalties on contractors after the fact.
And so, once again, it appears “the universal thump is passed round.” In the wake of the Island Operating decision, offshore contractors of all stripes, from welders to caterers to ROV operators to vessel owners (and the list goes on), should take measures to ensure they are protected against BSEE’s apparent jurisdiction over their OCS operations. Likewise, offshore contractors and industry groups should consider filing amicus briefs in any suit for judicial review that Island Operating may file in the federal courts.