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September/October 2010

Major Changes to the Minerals Management Service and
Off-Shore Drilling Regulation in the Aftermath of the Deepwater Horizon Explosion

By Robert Painter

The Deepwater Horizon explosion and spill in the Gulf of Mexico left many casualties—the death of 11 platform workers and injuries to 17 others, damage to the environment and marine life, and a staggering economic impact. One governmental agency has reluctantly joined this undistinguished list, the Minerals Management Service (MMS), the division of the U.S. Department of the Interior with responsibility for both regulatory oversight and revenue management for oil, gas and mineral projects on the Outer Continental Shelf.

For years MMS was plagued by accusations of disturbing ethical lapses, conflicts of interest, and poor oversight. Most recently, in May 2010, the Department's Acting Inspector General wrote a memorandum to Interior Secretary Ken Salazar announcing the findings of an investigation of MMS's business and ethical practices.[1] The report expressed tremendous concern about fraternization between MMS employees and industry, and the revolving doors that whisked personnel easily from one sphere to the other. The Inspector General's investigation revealed numerous serious problems that betrayed public confidence and diminished organizational effectiveness, including government employees routinely accepting gifts from companies they regulated. The report detailed one incident in which an inspector conducted four inspections of offshore platforms while in the process of negotiating and later accepting employment with that company.

While the time period covered by the Inspector General's investigation preceded the recent Gulf of Mexico disaster, the findings in the report helped to propel the need for comprehensive MMS reform to the forefront once the Deepwater Horizon incident occurred. Shortly after the Deepwater Horizon explosion took and injured lives, and initiated the worst offshore environmental disaster in American history, MMS Director Elizabeth Birnbaum resigned. Secretary Salazar seized the opportunity to reform MMS by issuing two secretarial orders that will result in a sweeping reorganization of the beleaguered agency.

The shakeup sounds simple enough at first glance, but the details of where the former agency's broad powers will reside in the new structure are anything but straightforward. The task is so complex, in fact, that the Obama Administration has not yet been able to think it through to conclusion; it will take around 18 months to be fully implemented.[2] This drawn-out, incremental approach will, no doubt, create a confusing climate for extraction companies, attorneys, and even the government regulators themselves.

The highest level of restructuring may actually be little more than rebranding. Secretarial Order 3302, signed on June 18, 2010, changed the name of the entire agency to the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE).[3] Days later, President Barack Obama named Michael Bromwich the first Director of BOEMRE. Bromwich quickly assumed the post because the position does not require confirmation by the U.S. Senate.[4]

Bromwich, an attorney, has a reputation for cleaning up troubled organizations.[5] At the time of his appointment Bromwich was a partner at a Washington, DC law firm, Fried, Frank, Harris, Shriver and Jacobson, where he was a litigator and conducted internal investigations for private companies. Bromwich was previously a federal prosecutor and Inspector General for the Department of Justice, and has led investigations into numerous governmental entities, including our own Houston Police Department's famously troubled Crime Lab.

While the renaming of MMS will probably have little real impact on industry or Americans, the divvying up of its extensive powers will likely be much more significant. Secretarial Order 3299, dated May 19, 2010, splits the former-MMS's authorities among three new divisions, all of which fall under BOEMRE.[6] Whether this will turn out to be a game of bureaucratic musical chairs is the subject of some debate, but it seems probable that the holders of the new positions created by Order 3299 will choose to put their marks on governmental policy. Thus, attorneys handling offshore matters need to be aware of the new structure and pay careful attention to new developments as the staggered implementation takes place. Even at that point the changes will not be complete because the new governmental entities will likely start issuing their own regulations.

One of the principal goals in the MMS restructuring is to create independence and separate financial considerations from the regulatory arm. Secretary Salazar attempts to achieve this by having these functions supervised by different directors and chains of command.

The Assistant Secretary of Interior of Policy, Management and Budget will oversee the Office of Natural Resources Revenue (ONRR), which will be led by its own director. ONRR's mission will involve royalty and revenue management, and will be separate from the bureau in charge of safety and environmental practices. Offshore activities have contributed a significant sum to the U.S. Treasury, recently averaging $13 billion per year. In order to satisfy criticisms that there is an inherent conflict of interest in having the same agency that regulates oil and gas operators also collect revenue from the operators, the ONRR aspect of the reorganization has been expedited, with the goal of an effective date of October 1, 2010.[7]

Empowering the new regulatory bureaus will take more time, with a phased implementation beginning in January 2011, and lasting at least one year. The Assistant Secretary of the Interior for Land and Minerals Management will oversee the two new regulatory bureaus, each of which will be led by its own director.

First, the Bureau of Ocean Energy Management will be in charge of balancing environmental considerations with appropriate development of the Outer Continental Shelf for energy and mineral resource projects. In this role, the bureau will oversee resource evaluation, permitting and leasing, and all residual powers of the previous agency not otherwise assigned by Secretarial Order 3299. In July, Director Bromwich informed Congress of the creation of an Investigations and Review Unit within the Bureau of Ocean Energy Management, which will function as an internal watchdog to probe allegations of misconduct or unethical behavior by bureau employees or the industry, and ensure readiness to respond to spills and accidents.[8]

Second, the Bureau of Safety and Environmental Enforcement will be charged with promoting and enforcing safety in offshore energy exploration and production, with appropriate consideration of environmental impacts. The bureau will be responsible for safety and oversight, with powers to inspect, investigate, summon witnesses, obtain evidence, levy penalties, and cancel or suspend extraction activities.

The Department of the Interior is implementing these changes based on secretarial orders rather than new legislation. The horrifying scope of the Deepwater Horizon incident, though, has rekindled ongoing efforts for an even more comprehensive Congressional reform of the former MMS. This, too, is something attorneys involved in offshore interests must monitor because it will have an immediate and sweeping impact on the industry if it becomes law.

In September 2009, U.S. House of Representatives Energy and Natural Resources Chairman Nick Rahall (D-WV) introduced H.R. 3534, the "Consolidated Land, Energy, and Aquatic Resources (CLEAR) Act," a bill to create a new agency within the Department of the Interior to revamp the federal offshore royalty system and administer oil and gas leasing on federal lands (including offshore).[9] Congressman Rahall made significant amendments to the bill after the Deepwater Horizon incident, including his own take on MMS restructuring, which is actually quite similar to those currently underway by the Department of the Interior.[10] The bill was voted favorably out of committee to the House of Representatives.

If the amended CLEAR Act becomes law there would be a number of specific requirements and policy changes to contend with that have not yet been addressed in the reforms generated by Secretarial Orders 3299 and 3302. For example, the Rahall legislation would require new offshore drilling safety standards, independent certifications of critical offshore equipment, operator demonstration of readiness to respond to blowouts or spills, more inspections, harsher penalties, and elimination of the practice of granting environmental waivers for offshore drilling plans.[11] The CLEAR Act would also establish a training academy for federal oil and gas inspectors, which would have the goal of supplying BOEMRE with qualified inspectors who would abide by strict ethical standards.

At this stage, it is impossible to say what specific responsibilities each of the new bureaus will possess and when responsibilities will shift from the old structure to the new ones. We also do not know what policy and regulatory changes will follow once the transition to the new structure is finished. Confounding this uncertainty is the possibility that Congress may get involved. Suffice it to say that, in the aftermath of the Deepwater Horizon tragedy, considerable change to offshore exploration and production is coming, and it is coming soon.

Robert Painter is an associate editor of The Houston Lawyer. He is an attorney at Painter Law Firm PLLC, where he handles litigation matters, including representing plaintiffs in oil and gas explosions.

1. http://www.doioig.gov/images/stories/reports/pdf/Island OperatingCo.pdf
2. http://www.doi.gov/deepwaterhorizon/loader.cfm?csModule=security/getfile&PageID=38543%20
3. http://www.doi.gov/deepwaterhorizon/loader.cfm?csModule=security/getfile&PageID=35872
4. The former MMS, now called BOEMRE, is the only major Department of the Interior bureau led by an official that does not require U.S. Senate confirmation. See Noelle Straub, Sweeping Rahall Bill Would Overhaul Federal Oil and Gas Leasing, Royalties, N.Y. TIMES, Sept. 9, 2009.
5. http://www.boemre.gov/ooc/PDFs/BromwichTestimony0722.pdf
6. http://www.doi.gov/deepwaterhorizon/loader.cfm?csModule=security/getfile&PageID=32475
7. http://www.doi.gov/deepwaterhorizon/loader.cfm?csModule=security/getfile&PageID=38543%20
8. http://www.boemre.gov/ooc/PDFs/BromwichTestimony0722.pdf
9. http://thomas.loc.gov/cgi-bin/bdquery/z?d111:h.r.03534:
10. http://resourcescommittee.house.gov/images/Documents/h3534_001_xml.pdf
11. http://resourcescommittee.house.gov/images/Documents/clear%20act%20%20discussion%20draft%