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Environmental regulation at the frontier: government oversight of offshore oil drilling north of Alaska.

   I. INTRODUCTION
  II. OVERVIEW OF THE OFFSHORE DRILLING LEGAL FRAMEWORK
      A. The Outer Continental Shelf Lands Act
      B. The Oil Pollution Act of 1990
      C. Other Relevant Federal Laws
 III. HISTORICAL BACKGROUND ON OIL DRILLING IN U. S. ARCTIC WATERS
      A. Initial U.S. Exploratory Activities
      B. Resurgence of Industry Interest
      C. Shell's 2012 Exploratory Drilling
      D. Looking Ahead
  IV. PREVIOUS SCHOLARSHIP ON OFFSHORE DRILLING
      A. Scholarship on Differing Goals Between Government and
         Firms
      B. Scholarship on Asymmetrically Held Information in
         Offshore Drilling
      C. Scholarship on Regulatory Imperfections
   V. CHALLENGES OF REGULATING INFREQUENT, CATASTROPHIC RISKS AT
      THE FRONTIER
      A. Framework for Evaluating Government Action to Reduce
         Catastrophic Events
      B. Uncertainty
      C. Benchmarking Gaps
      D. Shortcomings in Existing Policy Tools
  VI. PRINCIPLES FOR REFORM
      A. Delay and Coordination
      B. Transparency and Accountability
      C. Adopting a More Prescriptive Approach
 VII. IMPLICATIONS
      A. Comparisons to Other High-Risk Industries
      B. Long-Term Outlook for Offshore Drilling Regulation
      C. The Next Arctic Frontier?
VIII. CONCLUSION


I. INTRODUCTION

The April 2010 explosion and sinking of the Deepwater Horizon oil drilling rig in the Gulf of Mexico, (1) which claimed eleven lives and led to the United States' largest ever offshore oil spill, (2) sparked reflection on the future of offshore oil drilling. (3) Among the critiques were that regulatory agencies failed to take account of an infrequent, catastrophic "fat-tail" (4) risk like the Deepwater Horizon disaster; that regulators did not understand oil drilling technologies well enough to properly regulate them; that the liability regime did not incentivize oil companies to take proper care; and that the Department of Interior's former Mineral Management Service (MMS)--the government entity primarily regulating offshore drilling--was corrupted by the industry it oversaw. (5) In response to these critiques, the federal government made reforms, (6) including dismantling MMS and establishing separate new agencies in its place. (7) Many other changes are underway. (8)

As this review of what went wrong in the Gulf of Mexico continues, a new "last frontier" for offshore drilling (9) has emerged: the Beaufort and Chukchi Seas, two arms of the Arctic Ocean north of Alaska. (10) Inclement and ice covered for much of the year, these waters hold some of the largest untapped offshore oil reserves in the world. (11) Various factors long limited industry interest in the region, (12) but the calculus recently changed due to improved technologies for extracting difficult-to-reach oil, increased estimates of the resources available, and ice cover reductions from climate change. (13) As a result, private money and resources have poured into oil and gas production. (14) One oil company, Shell, has spent more than $4.5 billion in preparation for oil exploration and development in the Beaufort and Chukchi Seas, (15) and it drilled new wells in 2012. (16) Interest is far from unique to Shell. Other oil companies have announced plans to drill in the Beaufort and Chukchi Seas, (17) and other countries, ranging from Canada to Norway to Russia, are pursuing opportunities in their own Arctic waters. (18)

To date, little legal scholarship has explored the implications of oil drilling in U.S. Arctic waters. (19) The lack of commentary is surprising because regulation of the sector poses problems that are distinct from those facing offshore drilling generally and relevant for the regulation of other technological frontiers.

This Article aims to help fill the gap in scholarship. Drawing on a literature review of post-Deep water Horizon scholarship, I develop a simple framework for examining offshore drilling and other industries causing catastrophic environmental harms. This framework is rooted in three concepts common in studies of public administration: asymmetric preferences between government and firms, asymmetric information between government and firms, and imperfections in government's ability to act as society's agent. Application of this framework leads to a specific set of debates about how to best mitigate catastrophic risks. I argue that those debates are reframed when, as here, the industry capable of causing the disaster is operating at the technological frontier.

With respect to Arctic offshore drilling, I identify two informational problems central to frontier regulation. The first problem is the uncertainty (20) of Arctic oil spills and spill response. Uncertainty is a near-ubiquitous feature of environmental regulation but takes on special prominence when, as here, the regulated activity is new and without ready analogues. It also differs from the classic challenge of asymmetrically held information because the information simply may not exist and firms may not be incentivized to develop it due to weaknesses in the liability regime. In the Arctic, uncertainty is considerable because scarcely any drilling has happened. (21) The second problem, also common to frontier environments, is the lack of benchmarking or comparative data accessible to regulators. Only one company, Shell, has drilled in the U.S. Arctic recently, and even with subsequent entry the total number of players is likely to be small. Other countries' experiences in the Arctic are arguably too limited or dissimilar to provide much guidance for U.S. regulators. Because U.S. regulators lack alternative frames of reference, the Arctic generates a heightened danger that oil companies will use their informational advantages to influence the regulatory choice that is ultimately made. Indeed, this lack of benchmarking may introduce behavioral bias into regulatory decision making. (22) Shell's 2012 experience in Arctic waters, which proved near disastrous, evidences the perils that lack of benchmarking creates. (23)

These two problems of frontier regulation, uncertainty and lack of benchmarking, reshape approaches to dealing with catastrophic risk. For example, one line of work has looked to the U.S. nuclear power experience with risk-based regulations that rely on quantitative indicators of previous accidents and near-accidents. (24) It may be difficult to devise such regulations for Arctic offshore drilling because much of the data do not exist. Moreover, regulatory tools designed to deal with environmental uncertainty, such as the adaptive management approach that has received considerable emphasis in environmental law, may be ill-adapted to environmental threats capable of causing disastrous harm. (25) In light of these problems, a ban on Arctic oil drilling may well be justified. (26) If a ban is not feasible, the Arctic's extraordinary conditions demand, at minimum, a different approach.

The approach that I propose looks to regulatory theory and administrative law to address the Arctic's problems of uncertainty and lack of benchmarking. One element is to substantially delay and better coordinate approval of drilling activities, at least until more industry players and countries enter the Arctic. Delay would enable U.S. regulators to use multiple firms as a tool for revealing information about offshore drilling risks and give other countries time to get up to speed. The benefits from delay may well outweigh whatever sacrifices in short-term revenue and innovation spillovers occur. Another element is to introduce greater transparency in oil spill response plans and other regulatory reviews, which until now have been largely immune from outside scrutiny. Transparency is time consuming and costly but would provide a needed reality check and help legitimize the decision-making process. A third step is to instill greater regulatory expertise on offshore drilling and, potentially, to adopt a more prescriptive approach to Arctic regulation. Prescriptive regulation, though sometimes inflexible, (27) may be useful for risky, frontier industries that lack well-developed internal controls. This strategy--centered on the principles of caution and open government--brings with it policy trade-offs. But the strategy may play a useful role in mitigating the risk of Arctic oil spills and catastrophic risks in other industries operating at the frontier. (28)

This analysis makes several contributions to the legal literature. The Arctic is a microcosm for studying regulation of risky industries at the leading edge of technology. (29) Scholarship to date tends to focus either on catastrophic risks or on regulating at the frontier without considering the rich interplay between the two problems. (30) Thus, this Article, while focused on the Arctic, offers fresh insights for regulating other, similarly structured industries. The Arctic is also a vital topic for U.S. energy law, given the resources potentially recoverable from the region. (31) Therefore, the Arctic, while only a single case study, is worth examining with care.

This Article is organized as follows. Part II describes the laws governing offshore drilling, including those governing exploitation and oil spill response. Part III provides background on offshore drilling in the U.S. Arctic, recounting the history of failures there to date. Part IV moves from background to theory by surveying the legal scholarship regarding offshore drilling. Much of this scholarship arose in the wake of the Deepwater Horizon disaster and little of it addresses the Arctic specifically. Part V builds on this offshore drilling scholarship and lays out the quandaries of regulating catastrophic risks at the frontier, emphasizing the problems of uncertainty and lack of benchmarking. In response to these problems, Part VI offers a set of principles to guide regulatory reform of offshore oil drilling in the Arctic. Part VII suggests theoretical and practical implications of this research. Part VIII concludes by speculating on the future of offshore drilling in the region.

II. OVERVIEW OF THE OFFSHORE DRILLING LEGAL FRAMEWORK

This analysis begins by summarizing the major laws governing offshore drilling. (32) Two features largely define the legal landscape. First, the Outer Continental Shelf Lands Act (OCSLA) (33) governs federal management of offshore oil and gas resources on the U.S. Outer Continental Shelf (OCS), (34) including those in U.S. Arctic waters. (35) OCSLA also triggers environmental review requirements under the National Environmental Policy Act (NEPA) (36) and Endangered Species Act (ESA). (37) The lead agency for enforcing much of OCSLA is the Bureau of Ocean Energy Management (BOEM), which rose from MMS's ashes following the Deepwater Horizon disaster. (38) Second, the

Oil Pollution Act of 1990 (OPA), (39) enacted shortly after another disastrous oil spill--the Exxon Valdez in 1989 (40)--imposes liability and planning requirements for oil spills. The lead agency for implementing these requirements and enforcing companies' safety and environmental compliance is the Bureau of Safety and Environmental Enforcement (BSEE), another entity sprung from MMS. (41) In addition to OPA and OCSLA, other federal environmental laws not unique to offshore drilling, such as the Marine Mammal Protection Act, (42) have major effects on the sector. I review OCSLA, OPA, and these other environmental laws in turn.

A. The Outer Continental Shelf Lands Act

OCSLA sets a four-stage process for federal government management of offshore oil and gas resources. (43) At the first stage, the Secretary of the Interior, acting through BOEM, prepares a five-year program for leasing publicly owned oil and gas resources throughout the OCS, including the Beaufort and Chukchi Seas. (44) The leasing program specifies the size, timing, and location of leasing activity. (45) The program's goal, tilted towards resource exploitation, is to "best meet national energy needs." (46) OCSLA's second stage shifts from nationwide plans to individual leases covering smaller areas. At this stage, the Secretary of the Interior, again acting through BOEM, solicits bids from oil companies and issues leases through a competitive bidding process. (47) For the third stage, lessees wishing to conduct exploratory oil and gas activities (48) submit a publicly available Exploration Plan (49) detailing such information as the proposed exploratory activities--e.g., location of drilling sites, number of wells to be drilled--and other requested information--e.g., company resources to be deployed in the event of an oil spill. (50) OCSLA provides that the Secretary of the Interior must approve an Exploration Plan (51) before exploratory activities may occur, (52) though the grounds expressly provided for nonapproval are limited. (53) The fourth and final OCSLA stage kicks in if a lessee seeks to move from exploration to commercial development--a move that may never materialize because exploration often comes to naught. (54) A lessee desiring commercial development must submit a publicly available Development and Production Plan (DPP) for most lease areas, including those in the Beaufort or Chukchi Seas. (55) In several respects, the law on DPPs mirrors that on Exploration Plans. A DPP must describe the work to be performed and other relevant information--e.g., environmental safeguards, safety standards (56)--and the Secretary of the Interior must approve the DPP before development activities may occur. (57)

At least three of the four OCSLA stages generate environmental review requirements under NEPA. (58) The three stages are the five-year program, lease sale, and DPP approval, where BOEM58 (59)--previously MMS--prepares a lengthy (60) Environmental Impact Statement (EIS). (61) By contrast, OCSLA does not mandate preparation of an EIS at the Exploration Plan approval stage. Before the Deepwater Horizon disaster, MMS often categorically excluded (62) Exploration Plans from NEPA requirements altogether, (63) including the Exploration Plan in effect at the time of the disaster. (64) BOEM has since adopted a policy of not categorically excluding most Exploration Plans from NEPA, (65) though it may prepare a less extensive Environmental Assessment (EA) to determine whether an EIS is required, (66) as was the case for Shell's 2012 Exploration Plans for the Beaufort and Chukchi Seas. (67) Even when it is prepared, an EIS at a later stage in the OCSLA process may, and as a practical matter does, rely on the analysis conducted at previous stages. (68) This process, known as "tiering," (69) stirred widespread debate after the Deepwater Horizon disaster. (70)

In addition to NEPA, the ESA applies to several OCSLA stages. (71) Several circuits have held the lease sale and all later OCSLA stages are "agency actions" (72) triggering the ESA mandate (73) to consult (74) with the U.S. Fish and Wildlife Service (USFWS) and the National Marine Fisheries Service (NMFS) on species and habitat effects. (75) The law is less settled with respect to the five-year program stage, but the D.C. Circuit holds it does not trigger ESA consultation requirements. (76)

Three other features of OCSLA merit attention. First, OCSLA authorizes the federal government to set prescriptive regulations for offshore drilling; before the Deepwater Horizon disaster, such regulation was minimal in several respects. (77) Second, before any drilling activities may take place under an approved Exploration Plan or DPP, BSEE (78) must approve a site-specific

Application for a Permit to Drill (APD). (79) The requirement of site-specific approval provides an additional layer of review that in part prevented Shell from carrying out most of its planned Arctic drilling in 2012. (80) Third, the Coast Guard must provide a Letter of Compliance before drilling ships may operate in the OCS. (81) This Coast Guard requirement also played an important role in Shell's 2012 drilling season. (82)

B. The Oil Pollution Act of 1990

Whereas OCSLA sets a process for exploitation of offshore resources, OPA, which modifies the Clean Air Act, is aimed at reducing exploitation risks. (83) OPA provides, among other things, that the party or parties responsible for an oil spill take a leading role in spill response. (84) To promote contingency planning, parties operating an offshore oil and gas facility must prepare an Oil Spill Response Plan (OSRP) before such operation may occur. (85) Among the subjects covered in an OSRP is a "worst case" scenario for an uncontrolled thirty-day oil discharge, (86) the planned use of chemical dispersants to break up oil slicks," (87) and any planned burning of oil on open waters (88)--known as "in-situ burning." (89) BSEE approves the OSRP in the first instance; (90) BOEM must also consider the OSRP before approving an Exploration Plan or DPP. (91)

Compared to an Exploration Plan or DPP, an OSRP is subject to little public or interagency review. (92) OSRP approval may not trigger NEPA or ESA requirements. (93) In approving an OSRP, BSEE is not required to solicit interagency input, invite public comments, or make the OSRP available to the public after approval. (94) The lack of outside involvement in the OSRP approval process has received criticism (95) and is a subject addressed further in Part VI of this piece. In addition, OPA gives the government authority to conduct unannounced inspections and monitoring of offshore oil facilities. (96) BSEE exercised this authority during Shell's 2012 drilling in the Arctic and uncovered serious concerns. (97)

OPA also imposes liability to incentivize oil companies to avoid oil spills. The party responsible for an oil spill (98) is strictly liable (99) for up to $75 million in damages unless that party commits gross negligence, willful misconduct, or violates certain federal regulations, in which case damages are unlimited. (100) OPA's liability cap became subject to withering criticism after the Deepwater Horizon disaster because $75 million in liability does not adequately deter against major spills or come anywhere close to providing adequate compensation (.101) (Other laws may provide more significant liability exposure but have their own limitations.) (102) To mitigate the "judgment proof' problem (103) and other liability escapes, OPA imposes certain financial responsibility requirements on owners and operators of offshore facilities. (104) These financial responsibility requirements are tied to the liability cap and, like that cap, suffer from major shortcomings. (105)

Lastly, OPA restructured the previously extant Oil Spill Liability Trust Fund. (106) Monies from this fund, which come from a per-barrel oil tax, (107) pay for federal government oil spill response and up to $1 billion in oil spill-related damages if the responsible party is unable to pay. (108) Though the fund partly addresses inadequacies in OPA's liability regime, uncompensated losses would remain considerable in the event of a major oil spill. (109)

C. Other relevant federal laws

In addition to OCSLA and OPA, other federal environmental laws bear on the legal framework for offshore drilling. These laws include Clean Water Act (110) liability provisions (111) and restrictions on discharge of dredged and fill material (112) and certain "point source" pollutants--i.e., those from single identifiable sources; (113) Clean Air Act restrictions on hazardous contaminant emissions, such as from drilling rigs hovering above drilling sites; (114) prohibitions in the Marine Mammal Protection Act (MMPA) (115) against the "taking" of marine mammals; (116) Migratory Bird Treaty Act violations for the death of protected birds; (117) Coastal Zone Management Act (CZMA) requirements for consistency with state coastal zone management plans; (118) certification requirements by the Coast Guard; (119) and fishery protections under the Magnuson-Stevens Fishery Conservation and Management Act. (120) Several of these laws, in particular the Clean Water Act, affected oil company liability after the Deepwater Horizon disaster. (121) Others, such as the Clean Air Act and Coast Guard requirements, came into play during Shell's 2012 exploratory drilling season. (122)

As the above summary suggests, the medley of laws governing offshore drilling is multilayered and complex. (123) The legal framework provides for at least some liability, some regulatory oversight, and many points of engagement for resourceful groups opposed to offshore drilling. Nevertheless, it failed to prevent the Deepwater Horizon disaster from occurring. I consider how to improve upon the framework in subsequent Parts of this piece.

III. HISTORICAL BACKGROUND ON OIL DRILLING IN U.S. ARCTIC WATERS

Having sketched the law governing offshore drilling generally, this piece turns to the Arctic experience. I trace four phases in time: a period of minimal exploratory drilling during the 1980s and 1990s; renewed industry interest starting in 2005; Shell's 2012 exploratory drilling season; and projections for the future. For each phase, the Arctic's extreme conditions have presented obstacles.

A comparative note before proceeding: In addition to the United States, other countries have also dipped their toes in Arctic waters. (124) The two countries that have moved most aggressively are Russia and Norway. In Russia, following repeated delays, state-owned oil company Gazprom recently launched an Arctic commercial project. (125) The Gazprom project has an ice-resistant drilling platform, billed as the world's first ever. (126) Another Russian state-owned oil company, Rosneft, entered into a strategic agreement with ExxonMobil to develop additional offshore oil fields in the Russian Arctic. (127) In Norway, state-owned oil company Statoil has operated an offshore natural gas facility north of the Arctic Circle since 2007. (128) Unlike operations in U.S. Arctic waters, the Statoil facility is bathed by warmer Gulf Stream waters, free of ice year-round, and situated near significant population centers. (129) In June 2013, Norway agreed to license oil and gas exploration in a colder region--the eastern Barents Sea--but industry operations are several years away. (130) Also in the planning or licensing stages are offshore drilling projects in Canada, (131) Denmark (in Greenland), and Iceland. (132) These countries' experiences in the Arctic, brief as they are, inform the U.S. regulatory approach. With these comparative contexts in mind, this piece next details the U.S. Arctic experience specifically.

A. Initial U.S. Exploratory Activities

U.S. offshore drilling in the Beaufort and Chukchi Seas, though not wholly new, is a sporadic and recent phenomenon. (133) Following a major oil discovery in northern Alaska in 1968, (134) the oil industry began drilling in the Beaufort and Chukchi Seas in 1981. (135) Companies drilled thirty-one exploratory wells through the mid-1990s (136) before nearly stopping drilling altogether. (By comparison, the oil industry drilled 15,138 wells in the Gulf of Mexico OCS between 1971 and 2010.) (138) With the exception of some shallow-water projects immediately next to shore, none of the Arctic exploratory activities ever proceeded to development. (139)

This initial phase foundered for a variety of reasons. For one, exploration did not suggest the existence of commercially viable oil deposits, a risk common to such activities generally. (140) Another explanation is the public relations fallout from the 1989 Exxon Valdez disaster in Alaska's Prince William Sound. (141) Difficult operating conditions in the Arctic also played a role. (142) Despite no major spills (143)--which is unsurprising in light of the few wells drilled and the relative infrequency of such events (144)--MMS repeatedly suspended exploratory activities because of ice floes, extreme weather, and migration of the endangered bowhead whale near drilling sites. (145)

B. Resurgence of Industry Interest

Following a long hiatus, the oil industry returned with vigor to the Arctic in the early 2000s. (146) A 2005 lease sale for the Beaufort Sea was the area's most successful in seventeen years, (147) and a 2008 lease sale for the Chukchi Sea netted $2.7 billion. (148) Shell acquired multiple leases during both lease sales, spending $2.1 billion on Chukchi Sea leases alone. (149) Also purchasing Chukchi Sea leases were ConocoPhillips, Repsol, and Statoil. (150) Though these latter companies took no immediate actions on their leases, (151) Shell moved aggressively toward exploration. Shell filed Exploration Plans for the Beaufort and Chukchi Seas in 2007 and 2009, respectively. (152) Both Exploration Plans received approval from MMS, (153) but oil exploration did not then proceed because of the Deepwater Horizon disaster, multiple NEPA suits, (154) and a Clean Air Act action challenging permits that were issued. (155) Following resolution of these suits, Shell submitted revised Exploration Plans in 2011. (156) Shortly thereafter, BOEM (157) approved the Exploration Plans (158) and issued Environmental Assessments in conjunction with the approvals. Simultaneously with the Exploration Plan process, Shell submitted regional OSRPs for the Beaufort and Chukchi Seas. (159) BSEE approved the plans in early 2012, (160) months before exploratory drilling began. (161)

Regulators approved Shell's 2012 exploratory drilling program subject to several conditions. For the Exploration Plans, Shell proposed, and BOEM agreed, that Shell would drill only when ice was expected to be absent. (162) BOEM added a further requirement that Shell end Chukchi Sea drilling thirty-eight days before ice was expected to encroach. (163) This condition was not imposed for the Beaufort Sea, (164) but BOEM required Shell to suspend Beaufort Sea drilling in mid-August so that Native Alaskans could hunt for nearby whales. (165) Shell committed, in the event of an oil spill, to contain the flow of oil using a specially designed piece of equipment called the "Arctic Containment System" (ACS). (166) Having secured the plan-level approvals, Shell moved on to the site-specific permits, and to exploratory drilling itself, in mid-2012.

C. Shell's 2012 Exploratory Drilling

Shell's 2012 drilling season was, in several respects, a near disaster, though no mayor oil spills or loss of life occurred. First, the ACS never deployed. Shell submerged its collection dome dining a BSEE-observed performance test and underwater pressure "crushed [the dome] like a beer can," rendering it inoperable. (167) Because Shell could not contain spilled oil, BSEE granted permission to drill only in the shallow part of wells, above where oil and gas resources are found. (168) In a review of Shell's exploratory season, the Department of the Interior attributed the ACS failure to "Shell's lack of rigorous and direct contractor oversight for a complex first-of-its-kind project." (169)

Second, all three of Shell's ships designated for Arctic operations--the ACS support vessel, named the Arctic Challenger, and two drillships, named the Kulluk and the Noble Discoverer--experienced problems. (170) In December 2012, the Kulluk--traveling from the Arctic to Seattle--ran aground during Gulf of Alaska storms. (171) While little oil spilled and no one was injured, the U.S. Coast Guard had to carry out a dangerous helicopter rescue of the Kulluk s crew. (172) In November 2012, the Noble Discoverer suffered an engine fire and was towed to shore for repairs, also en route from the Arctic to Seattle. (173) Even before these accidents, the Kulluk and Noble Discoverer repeatedly violated Clean Air Act permits for nitrogen oxide emissions. (174) As for the Arctic Challenger, Shell did not receive Coast Guard certification to use it until October 2012--after the containment dome had already failed--because it had been inactive for ten years and took longer than expected to refurbish. (175) The Department of the Interior's review found that these problems resulted from "Shell not employing its internal marine expertise" and from insufficiently auditing the Noble Discoverer in advance of operations. (176)

Third, unexpected ice floes shortened the already brief exploratory drilling season. In early September 2012--nearly two months before the average first date of ice encroachment--a large floe neared one of Shell's drill sites in the Chukchi Sea. (177) Shell moved its ships out of danger before the ice floe arrived and later, after the floe passed, returned to the site. (178) The incident shortened Shell's drilling season and underscored the unpredictability of drilling in Arctic environments. (179)

The many complications during Shell's 2012 exploratory season nearly precluded Shell from searching for oil at all. Shell's goal was to drill up to ten wells in 2012, (180) but only two were drilled, and to much shallower than planned depths. (181) The two wells did not reach oil and gas resources underground because of restrictions imposed by BSEE following the ACS failure. (182)

D. Looking Ahead

In the wake of Shell's 2012 drilling season, all exploratory drilling, whether by Shell or anyone else, has been on hold. After the Department of the Interior completed its review of Shell's operations, then-Secretary Ken Salazar stated that Shell would not resume drilling until it could demonstrate its operations would be conducted safely. (183) Shell proposed drilling plans for the 2014 season but then abandoned those plans in January 2014 following an adverse Ninth Circuit decision. (184) Other major companies with interests in U.S. Arctic waters also suspended plans for oil exploration. (185)

This pause is likely temporary. The U.S. government has reiterated its long-term commitment to Arctic offshore drilling. (186) Industry observers expect that oil companies eventually will resume drilling because of the region's resource potential. (187) The suspension thus provides a moment to consider the future of Arctic offshore drilling, both at the exploration and development stages. (188) Part IV next reviews the legal literature on offshore drilling to see what lessons it might hold for the Arctic.

IV. PREVIOUS SCHOLARSHIP ON OFFSHORE DRILLING

Offshore drilling has provided rich fodder for legal scholarship, particularly since the Deepwater Horizon disaster. This Part reviews the literature to tease out remaining theoretical questions; subsequent Parts consider whether the Arctic offers answers.

Commentary has identified several characteristics of the offshore drilling industry. First, offshore drilling has the potential to cause disastrous harm, a potential that manifested itself during the Deepwater Horizon disaster. (189) Second, drilling activities are complex--both in terms of the technologies employed and their ecosystem effects--creating handicaps for regulators attempting to stay up to speed. (190) Third, the oil industry has historically had a cozy relationship with offshore drilling regulators, raising the specter of industry influence or outright corruption--both variants of "agency capture." (191) These features are not unique to offshore drilling--other high-risk industries, such as nuclear power or prescription drugs, share some similarities (192)--but a cottage industry of post-Deep water Horizon scholarship has explored their particular interaction here. (193)

To organize the discussion, this piece divides the scholarship into three groups, each of which reflects a persistent and interrelated problem in regulatory theory (194) and principal-agent analysis. (195) The first group centers on the problem of differing or asymmetric preferences between government and firms, (196) which are common everywhere but particularly salient in the offshore oil industry. Scholarship on this topic, typically in tort and insurance law, advances liability and tax-based solutions for aligning interests, including major reforms of OPA. The second group considers another paradigmatic issue in government-firm relations: the pervasive information asymmetries favoring firms, which are pronounced in the offshore drilling context because of the sophisticated and rapidly changing technologies involved. (197) Much of this commentary advocates information-forcing tools to reduce the informational imbalances. The third, and perhaps most divided, category of scholarship steps away from the government-firm dynamic to look at the deficiencies in regulators themselves due to agency capture by the oil industry or inherent limitations in the regulator's institutional capacity to provide effective oversight. Commentary in this vein calls for NEPA sunlighting of agency decision making, institutional reforms to reduce the risk of regulatory capture, and searching judicial review. Each of these groups of scholarship is discussed in greater detail below. (198)

A. Scholarship on Differing Goals Between Government and Firms

Various works have examined the diverging goals of oil companies and society. The most commonly cited reason for this divergence is that firms, as a whole, prioritize profit maximization, (199) whereas society places higher value on environmental and social concerns. (200) Because social and business goals differ, government, acting as society's rough proxy, (201) employs policy tools to induce a firm to do the government's bidding. (202) Among the more conventional tools is to make a firm liable (203) for the environmental and social harms it causes. (204) Liability offers important advantages relative to regulation because it does not require the government to have extensive knowledge of a firm's activities to function effectively. (205) Rather, liability causes the firm to at least partially internalize incentives for proper care. (206) This aspect of liability is particularly relevant for complex industries like offshore drilling, where it is difficult for government to obtain the requisite knowledge. (207) Another instrument is tax, which may have similar effects to liability to the extent the tax is calibrated to the relevant risks. (208)

Much of the commentary views the current offshore oil spill liability regime as flawed. (209) Commentary focuses on four problems in particular: OPA's outdated and patently insufficient $75 million liability cap; (210) weaknesses in OPA's financial responsibility requirements; (211) limitations in liability exposure under other federal and state laws apart from OPA; (212) and the high legal costs of obtaining recovery under the various liability regimes. (213)

These critiques have prompted a series of policy recommendations. The most widely embraced is removing OPA's liability cap (214) and raising the financial responsibility requirements to cover the social costs of worst-case oil spills. (215) A supplemental step is to mandate insurance requirements equivalent to, if not in excess of, the financial responsibility threshold. (216) Another recommendation, recognizing that a truly devastating spill would bankrupt many firms, is to levy offshore drilling taxes to account for the unrecoverable social costs of an oil spill. (217) Other scholarship has explored criminal liability for major oil spills (218) or lax oversight of oil operation safety systems. (219) None of these recommendations have not translated into policy changes to date. (220)

B. Scholarship on Asymmetrically Held Information in Offshore Drilling

Research on offshore drilling regulation has focused in significant part on the quality of relevant information that regulators possess. Asymmetrically held information is a regular challenge of regulation, occurring both when firms withhold key information from regulators and when firms give regulators too much information. (221) This challenge is particularly great in the offshore drilling context because of the detailed geological and geophysical data, ever-changing slate of technologies, and the web of oil company-contractor relationships involved. (222) Indeed, the information failures and agency capture in offshore drilling may account for the regulatory lacuna before the Deepwater Horizon disaster. (223)

Unlike research on civil liability, about which there is broad agreement, scholarship on information failures follow different tracks. One line of scholarship views the information failures in offshore drilling as intractable and advocates a modest regulatory role. (224) Other work suggests that certain policies, loosely grouped together as "information-forcing tools," (225) induce firms to divulge information that improves the quality of regulatory design. (226) Two such tools have received attention in the offshore drilling context: risk-based regulations and whistleblower protections. Another information-forcing tool, NEPA, is also discussed in the next subsection on regulatory accountability. (227)

Risk-based regulations, which prioritize regulatory interventions based on risk significance and other system level indicators, (228) are employed for such complex industries as nuclear power (229) and food safety. (230) A distinctive feature of risk-based regulation is the information used to govern conduct. (231) Industry typically provides detailed information on accidents and nearaccidents to regulators, (232) who capitalize on this information to adopt a more tailored regulatory approach relative to traditional, prescriptive regulation. (233) Several scholars argue that risk-based regulations have had a positive effect in the nuclear power industry (234) and in offshore drilling in Norway and the United Kingdom, (235) though other commentary is less sanguine. (236)

The United States did not have comprehensive risk-based regulations in place for offshore drilling before the Deepwater Horizon disaster. (237) The Department of the Interior subsequently implemented (238) a Safety and Environmental Management System (SEMS239) that incorporates some of the information-forcing concepts discussed above, and creates a process for system-level monitoring of a firm's internal controls. (240)

Other scholarship suggests greater whistleblower programs to overcome information asymmetries in offshore drilling. (241) Whistleblower programs build off the insight that a firm is, in reality, a collection of self-interested individuals who may be motivated to turn over information if they receive employment protections and, perhaps, bounty hunting rewards. (242) After the Deepwater Horizon disaster, several policy groups recommended that the government institute a whistleblower protection for reporting safety lapses in the offshore drilling industry. (243) In 2013, a modest version of these recommendations became reality. BSEE's revised SEMS program mandates that oil companies create guidelines for employee reporting of unsafe working conditions directly to BJ3EE. (244)

Research to date on information-forcing tools raises several issues. First, these studies have focused on a fairly narrow subset of possible tools that, while promising, do not capture the range of regulatory approaches available. Part VI of this piece considers other possibilities. Second, the two policy tools that have received most attention (245)--whistleblower protections and risk-based regulations--are recent developments for offshore drilling, so evaluations of their effectiveness are scant. (246) It is thus unclear whether they will work in the Arctic--an issue addressed in Part V--and whether the regulators entrusted with their implementation will adequately carry out their roles. I turn to the latter issue next.

C. Scholarship on Regulatory Imperfections

In contrast with scholarship on types of regulation, the last line of scholarship I discuss concerns the regulators of offshore drilling. This scholarship flows from the recognition that the government is, by its nature, an imperfect regulator. In the offshore drilling context, this imperfection may arise from various factors, including regulators' natural tendency to discount uncommon yet disastrous events like a major oil spill, (247) regulatory limitations in overseeing a technologically advanced industry like offshore drilling, (245) and--as the Deepwater Horizon disaster revealed--powerful industry influence. (249) The assumption of government imperfection underpins many of the accountability checks--including judicial review and public "sunlighting" of agency decisions (250)--which the modern administrative state provides. (251)

In the environmental arena, one accountability check has received attention above all others: NEPA, a law that partly came into being because of another offshore oil spill more than forty years ago. (252) Two perspectives on NEPA warrant attention here. (253) One view, steeped in the hallmark administrative law values of transparency and accountability, argues that NEPA's exhaustive environmental review (254) and public participation requirements, (255) combined with the possibility of court challenge, improve the quality of agency decision making. (256) Another view champions similar values but reaches a more pessimistic conclusion. (257) By this critique, the sheer weight of NEPA's documentation requirements (258) decreases transparency through obfuscation, (259) and it weakens accountability by giving judges a substantively shallow way to review agency decision making. (260) This debate over NEPA's effectiveness does not always pit legal scholars against one another; many are both supportive yet critical of NEPA's record. (261) The broader NEPA debate plays out in a particular context of offshore drilling: analysis of worst-case scenarios of a catastrophic oil spill. (262) One of the most frequent post-Deepwater Horizon critiques was that MMS, in conducting its NEPA environmental reviews, (263) failed to anticipate an oil spill anywhere close to the magnitude of the Deepwater Horizon disaster. (264) Much of the blame falls on the regulations implementing NEPA, which once required agencies to include a "worst-case analysis" for uncertain adverse effects, (265) but since 1986 have employed a "reasonably foreseeable significant adverse effects" test instead. (266) According to this perspective, a requirement to consider worst-case effects--as would have been the case under NEPA's old regulations--reduces agencies' natural tendency to downplay such risks (267) and better prepare for a Deepwater Horizon-scale oil spill. (268) This argument, rooted in the NEPA-centric idea of requiring agencies to produce more information and plan for more scenarios, has run into criticism of its own, mostly by scholars who question the meaning and value of a worst-case analysis. (269)

Two other lines of NEPA research are particularly relevant. One line considers MMS's practice of categorically excluding OCSLA exploration plans from NEPA review altogether. (270) Since the Deepwater Horizon disaster, BOEM has restricted its use of categorical exclusions for Exploration Plans, (271) including in the Arctic, (272) but BOEM's policy is only guidance and invites doubts about the long-term regulatory approach. (273) A related critique is that MMS improperly shortcuts NEPA analysis by tiering project level environmental reviews--for Exploration Plans or DPPs--to those at the broader, programmatic level--i.e., at the lease sale stage of the OCSLA process. (274) Unlike categorical reviews, tiering continues much as it did before the Deepwater Horizon disaster, (275) though BOEM has stated that tiering would not come at the expense of site-specific analysis. (276)

Notably, most scholarship on transparency and accountability has addressed the four stages of OCSLA review, not OPA's OSRP requirement. This tendency may reflect the fact that MMS conducted at least some NEPA review of at least some OCSLA stages. OSRPs, by contrast, have never been subject to NEPA review. (277) The Arctic provides a fresh setting in which to consider the values of transparency and accountability anew.
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Title Annotation:I. Introduction through IV. Previous Scholarship on Offshore Drilling, p. 761-803
Author:Hults, David
Publication:Environmental Law
Date:Jun 22, 2014
Words:6564
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