Evaluation of Montara Commission of Inquiry Report and Draft Government Response Conclusions

WWF-Australia

This submission is in response to the Australian Governmentrsquos request for input on its November 2010 Draft Government Response to the Report of the Montara Commission of Inquiry (Draft Government Response)

The Draft Government Response considered 105 recommendations made in the June 2010 Montara Commission of Inquiry Report (COI Report) Of those recommendations the Draft Government Response proposes to accept 92 note 10 others and reject three (3) The Draft Government Response also reviewed a number of relevant issues such as the roll-out of marine bioregional planning in Australiarsquos Commonwealth waters that was not subsequently picked up by a recommendation in the Draft Government response WWF feels this is an important issue and a section on marine bioregional planning is included in this submission Annexes are also included comparing the findings of a US White House Inquiry into the DeepWater Horizon incident and also an annex on findings from a UK Government Inquiry into the DeepWater Horizon Incident to identify relevant issues for the Australian Government to consider

The Australian Government proposes to take several courses of action as a result of the Montara Blowout

1 Establish a single national regulator for offshore petroleum activities by January 2010 by expanding the functions of the National Offshore Petroleum Safety Authority (NOPSA) These expanded functions include regulation of structural integrity environment plans safety integrity greenhouse gas storage activities and day-to-day operations associated with petroleum activities in Commonwealth waters The expanded authority will be named the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA)

2 Provide technical and regulatory support to NT DoR to ensure the integrity of all wells in the Northern Territory administered offshore areas

3 Implement 92 of the 105 recommendations made by the Montara Commission of Inquiry (COI)

4 Establish a taskforce led by DRET to implement the legislative amendments required to address the specific findings and recommendations in the Final Government Report

5 Host an international conference for governments regulators and the offshore petroleum industry to share lessons learned from the Montara Blowout and learn from the experience of other nations in 2011

6 Complete an independent expert evaluation of PTTEPrsquos organizational and cultural capability to safely and responsibly operate in Australiarsquos offshore waters and make a decision as to whether to issue a show cause notice relating to PTTEPrsquos production license for the Montara oil field

7 Complete the compliance investigation into potential breaches of occupational health and safety matters by PTTEP under the OPGGS Act

WWF agrees with and supports the Australian Governmentrsquos proposed response to the Montara Blowout with the exception of whether to implement or how to implement a number of the COI Report Recommendations However WWF also requests that the Australian Government acknowledge the current marine bioregional planning process in its recommendations and support the need to establish a network of highly protected marine parks in commonwealth waters This letter provides further explanation and recommendations on these points

Montara Commission of Inquiry Recommendations

The Montara Commission of Inquiry (COI) did an exceptional job investigating the circumstances of the Montara Well blowout WWF supports the majority of the COIrsquos 100 findings and 105 recommendations and commends the COI for a job well done However after careful review there are some areas where WWF recommends that the COIrsquos findings and recommendations be further clarified or strengthened

While we understand that the COI Report is final and will not be changed as a result of WWFrsquos input in this letter it is our understanding that our input will help determine which of the COI recommendations the Australian Government will ultimately accept and implement Therefore in this letter we offer recommendations for strengthening and revising a few of COI recommendations for the Australian Government to consider in finalizing the Government Response Report

WWF agrees that Australiarsquos regulatory system should maintain the highest standards and reward and accommodate development of best industry practices and best technology While WWF is generally supportive of an objective-based legislative regime it is clear from the Montara blowout lessons learned that an objective-based legislative regime alone is insufficient Objective-based legislative regimes must be coupled with minimum standards and well trained and qualified industry and government personnel capable of implementing both types of standards

WWF remains concerned that the Draft Government Response does not clearly articulate which minimum standards will be returned to Australian regulation nor does it provide a rigorous plan to train quality industry and government staff to effectively implement these best practice standards and technology

The Draft Government Response rejects prescriptive-based regulation because it ldquorequires frequent amendment and relies heavily on the ability of legislative drafters to understand and anticipate the risks and operational environment of the industryrdquo WWF does not support this reasoning The Australian Government has a responsibility to the public and the environment to clearly articulate in law and regulation the risks responsibilities and rules for operating in the offshore environment The Australian Government should not relieve itself of this duty by handing over the reins to industry Government cannot remain ldquosilentrdquo on offshore industry expectations or relieve itself of the hard work of routinely updating laws and regulations to incorporate best technology If government is unwilling to stay abreast of new technology and keeping its requirements current it hardly sets a good example for industry to do so

A combined approach of minimum standards (to set the minimum bar) and objective-based standards (to continuously improve the upper bar) must be used to regulate the offshore industry Government officials must also be trained and qualified to know how to approve and enforce those standards

WWF also remains concerned that some of the COI Report and the Draft Government Response Recommendations lean too heavily on industry led regulatory programs where industry is handed the reins to write their own rules WWF does not support recommendations that would allow industry to develop its own standards The Australian Government must set in regulation its own clearly articulated set of minimum standards for well integrity well control and emergency pre-planning to industry WWF does not support incorporating the lessons learned from the Montara Well blowout into unenforceable guidance documents written solely by industry

Minimum Standards for Well Integrity

The Draft Government Response the COI Report and the WWF Reports all agree that minimum standards are needed to avoid another blowout However WWF recommends that Australia revise regulations to clearly articulate those minimum standards whereas the Government and COI recommend that industry again be tasked with determining those minimum standards without substantial regulatory amendment WWF strongly recommends against industry writing its own minimum standards

In 2004 the regulatory pendulum swung too far away from prescription and into a regime of almost exclusive self-regulation The 2004 Australian Petroleum (Submerged Lands) (Management of Well Operations) Regulations set a goal of promoting new technology and new best practices while requiring the Operator to demonstrate only that its application met ldquogood oilfield practicerdquo However the term ldquogood oilfield practicerdquo was not adequately defined in regulation leaving its application subject to government and industry interpretation and misapplication While the Draft Government Response the COI Report and the WWF Reports all agree that the term ldquogood oilfield practicerdquo needs to be clearly defined the Draft Government Response does not provide a plan to explicitly define this term in regulation

Because people with differing levels of experience and expertise will interpret the regulatory term ldquogood oilfield practicerdquo differently the term must be explicitly defined The revised definition should include human health safety and environmental (HSE) objectives and establish firm unambiguous and measurable compliance yardsticks

During the Inquiry industry staff with decades of experience struggled not only to define ldquogood oilfield practicerdquo but also to explain what that actually means in terms of the ldquonuts-and-boltsrdquo This confusion clearly indicates that the term ldquogood oil field practicerdquo needs further definition and that minimum technical standards must be set

Regulatory systems must have clearly articulated minimum standards that personnel with all levels of experience and expertise can easily understand and implement The rules must be clear simple measurable and verifiable Absent these criteria industry may opt to take shortcuts and regulators will not have clear standards to use in processing permits and measuring compliance

There needs to be consistency in standards interpretation and implementation across all offshore regulators Achieving consistency starts with establishing simple straightforward minimum standards for the government to implement and for industry to follow

While the best efforts should be made to codify minimum standards that will stand the test of time inevitably there will be some future technical innovations that will require revisions to regulatory standards WWF is concerned that the Draft Government Response does not include a long-range plan with procedures for updating regulations on a routine basis (eg every 3-5 years) or procedures to address waivers to minimum standards

WWF recommends that the Australian Government revise the regulations to codify minimum standards and codify corollary mechanisms to (1) update regulations on a routine basis and (2) establish a formal technical expert review process to examine any proposed waivers to the existing standards Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in Australiarsquos best interest to approve this technical innovation ahead of a regulatory amendment

COI Recommendations 2-4 COI Recommendations 2-4 and the Draft Government Response both suggest that the Well Operations Management Plan (WOMP) continue to be the primary framework document for achieving well integrity and that the WOMP should incorporate ldquonon-exhaustive minimum compliance standards in relation to well controlrdquo WWF agrees that a WOMP should continue to be

prepared by the well operator and that the plan should be reviewed and approved by the regulator However WWF does not agree that the well operator should define within each WOMP ldquonon-exhaustive minimum compliance standards in relation to well controlrdquo Instead WWF recommends that clearly articulated minimum compliance standards be set in Australiarsquos regulations for all operators to use in developing a WOMP This practice would ensure that the minimum standards are clear and consistent for all offshore operators while not allowing industry to set its own minimum standards

The Draft Government Response and COI Report conclude that the elimination of Australiarsquos prescriptive standards (Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production) was not a root cause of the blowout WWF disagrees WWF found that if the standards in the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production for well control barriers had remained in place the exchange of a 9-58rdquo Pressure Containing Control Cap (PCCC) for a 45m (148rsquo) long shallow-set cement plug barrier would not have been allowed likely adverting this disaster Instead the Montara WOMP included higher risk batch drilling procedures and was amended (via permit waivers issued by the Australian Government) to include use of higher risk well control barriers Because there were no minimum standards in place for measuring whether these procedures were ldquogood oilfield practicerdquo Australian regulators approved permits to carry out both these high risk procedures leading to the blowout

The Draft Government Response and the COI Report found that if the WOMP was correctly followed the blowout would have been averted WWF disagrees WWF found that PTTEP proposed and NT DoR approved an amendment to the permits allowing changes to the wellbore barrier configuration that were not good oilfield practice NT DoR staff lacked written engineering guidance or instruction to the assist in making the decision When questioned by the COI about what engineering guidance or instruction the other Designated Authorities (DAs) rely on to make permit decisions the DArsquos all referenced the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production If the engineering specifications written in the now-expired Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production are used by the DAs to make permit decisions those engineering specifications should be codified as minimum standards Alternatively the Australian Government can develop a new more updated list of minimum standards It is WWFrsquos position that the minimum standards must be clear and not left to industry neither must those minimum standards be left for various government engineers to guess at based on their experience or lack thereof

COI Recommendation 7 COI Recommendation 7 is incomplete The COI recommends an independent compliance review of well integrity a recommendation that WWF strongly supports However the frequency and the timing of an independent compliance review during the well construction process is unclear in the COI Recommendation WWF recommends that the independent compliance review occur during random audits of Well Operations Management Plans (WOMPs) and Final Well Construction and Drilling Records While an independent compliance review of each and every well plan and actual well construction execution would be optimal WWF recognizes that the funding for this level of oversight would be difficult to achieve Therefore WWF recommends that Australia commit to audit at least one of every ten wells drilled offshore and at least one well per year per offshore operator

COI Recommendation 8 The Draft Government Response rejected COI Recommendation 8 WWF agrees Wellbore gas bubbling should trigger immediate well control action at the rig location to secure the well

COI Recommendation 10 COI Recommendation 10 assigns development of a well control barrier manual to licensees rig operators and cementing contractors not to the Australian Government While WWF agrees that industry should be involved in developing a well control barrier manual that documents minimum standards and best technology WWF does not agree that the development of a well control barrier manual should be solely delegated to industry

WWF recommends that minimum well control barrier compliance standards be set in Australiarsquos regulations and that those standards are clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators and industry is not allowed to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well control barrier manual obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well control barrier manuals should be routinely updated to ensure that best technology and practices remain current

WWF takes exception with the Draft Government Response conclusion as it relates to COI Report Recommendation 10 where it states ldquoThe Government notes that the Montara incident was caused by lack of adherence by the operator to the accepted industry practicesrdquo WWF agrees that PTTEP did not follow accepted industry practices but it was not alone in fault The Government Response should also acknowledged that the government granted permit approvals that also did not conform to accepted industry practices (eg permits amending batch drilling program procedures and well barriers) which were causal factors in the blowout

COI Recommendations 20 COI Recommendation 2 states that ldquoIf a dispute arises between a licensee and a rig operator in relation to a well control issue and is not resolved between them the matter must be raised with the relevant regulator before discretionary operations proceed [emphasis added]rdquo The Draft Government Response rejects this recommendation concluding that ldquowell control issues need to be resolved quickly by the operator so the issue does not escalate furtherrdquo WWF agrees that well control issues need to be resolved quickly to avoid escalation to an unsafe point however a safe technically robust well control solution must be implemented Immediate well control actions would not be considered a ldquodiscretionary operationrdquo on a rig

WWF agrees with COIrsquos main point that is serious non-discretionary well control issues need resolution and if the licensee and operator disagree the issue needs to be raised to a higher authority for resolution The Australian Government is that higher authority and is responsible for protection of human health and the environment

WWF does not agree with the Draft Government Responsersquos conclusion that ldquothe operator is best placed to assess and understand the risk [emphasis added]rdquo Lessons learned from the Montara Blowout case clearly show that PTTEPrsquos staff were not best placed to assess and understand the risk neither were they trained qualified or adequately staffed to make technically sound decisions related to well control In fact in the events leading up to the Montara blowout the rig operator and PTTEP consultants raised concerns about PTTEPrsquos well construction This is exactly why the Australian Government must have highly trained and qualified personnel on staff to aide in making technically sound and safe decisions as it relates to offshore oil and gas activities If Australia is not willing to resource its agencies to this level it should not allow offshore exploration and production to proceed

WWF does agree that the liability for any accident should be retained by the licensee and that the licensee should have adequate financial resources and insurance in place relative to any risks undertaken offshore

WWF agrees with Draft Government Responsersquos conclusion that ldquowell control issues should be reported to the Regulator in the daily drilling reportrdquo However WWF recommends that the Government also provide highly trained and qualified staff to be on duty overseeing offshore operations 24 hours per day 365 days per year Further anyone who has a well control concern or who has identified a well control problem should be required to contact those on duty staff in a timely manner

COI Recommendations 23 The Draft Government Response states that ldquothe Government will also consider if elements of the previously legislated Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004rdquo

WWF strongly supports a thorough technical expert review of the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production to identify which minimum standards should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004 WWFrsquos Reports identify numerous minimum standards that should be incorporated in the regulations as well as additional standards based on industry best practices

COI Recommendations 24 amp 28 COI Recommendation 24 states that ldquoa minimum of two barriers should be in place at all timesrdquo for well control ldquowhenever it is reasonably practicable to do sordquo WWF agrees that a minimum of two barriers should be in place at all times for well control We do not agree that there are times when it is reasonable to have fewer than two barriers in place WWF recommends that the clause ldquowhenever it is reasonably practicable to do sordquo be removed

COIrsquos Recommendation 28 reiterates that ldquotwo or more barriersrdquo should be a minimum standard WWF agrees

COI Recommendation 25-26 COI Recommendations 25-26 suggest a process for regulatory approval of one barrier instead of a minimum compliance standard of two barriers for well control The COI suggests that regulators be allowed to approve a one-barrier approach to well control if a ldquoproper risk assessment is carried outrdquo ldquoexceptional circumstances existrdquo and ldquorisks involved are reduced to as low as reasonably practicablerdquo WWF does not agree with this recommendation There is no technical reason that a two-barrier well control configuration cannot be achieved WWF recommends that a minimum two-barrier well control configuration be codified in regulation without exception

WWF is pleased to see the Draft Government Response acknowledges that ldquothe accepted industry practice is for two well barriers to be available during all well activities and operations including suspended and abandoned wellsrdquo Further WWF is pleased to see the Draft Government Response states that ldquothe Regulator has the power to requires additional barriers should it be considered necessaryrdquo

We are concerned that the Draft Government Response does not address the COI Recommendation to allow less than two minimum barriers WWF recommends that the Final Government Response clearly articulate that waivers allowing less than two barriers will not be granted If the Australian Government disagrees on this point finding that there are technical circumstances in which only one barrier can be installed it should explain its case and the level of risk Australia would be taking with its offshore resources when using such an approach

COI Recommendation 29 COI Recommendation 29 assigns development of best practice standards for well cementing to industry regulators and trainingresearch institutions While WWF agrees that industry should be involved in developing best practice standards for well cementing WWF recommends that minimum well cementing compliance standards be set in Australiarsquos regulations and clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators while not allowing industry to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well cementing standards obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well cementing standards should be routinely updated to ensure that best technology and practices remain current

COI Recommendation 30 COI Recommendation 30 suggests that cement problems and failures that occur offshore of Australia be tracked and analyzed WWF agrees with this recommendation and suggests that this task be assigned to the Australian Government WWF further suggests that the data should be compiled at least quarterly and made available to all offshore industry members and the public on a publically accessible website The website should also contain more immediate safety alerts and notifications issued by the Australian Government when immediate action is needed to ensure that a poor cementing technique is not duplicated in other offshore wells

COI Recommendation 32 COI Recommendation 32 recommends that ldquocement integrity should be evaluated wherever practicable by way of cement evaluation tests rather than relying on pre-operational calculations of cement and displacement fluid volumesrdquo WWF agrees that cement evaluation practices and standards should be improved However WWF recommends that cement conditions be examined using all three techniquesmdashpre-operational calculations of cement displacement fluid volumes and post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing)mdashin combination since all that data plays an important role in cement evaluation Additionally WWF recommends that the requirement to obtain post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing) be codified in regulation as a minimum standard

COI Recommendation 29-34 The Draft Government Response notes that in relation to COI Recommendations 29-34 NOPSA has increased its planned inspection frequency for manned drilling and production facilities from once to twice a year and that a recruitment program has been instigated to resource this higher inspection frequency WWF applauds the Governmentrsquos increased inspection program regime for manned drilling and production facilities but recommends that an increased inspection frequency also be applied to unmanned drilling and production facilities where risks can go unnoticed for long periods of time due to lack of onsite staffing

COI Recommendation 38 WWF agrees with the Draft Government Response conclusion that COI Recommendation 38 has some technical problems that need to be remedied COI Recommendation 38 suggests that a ldquohorizontal or high angle penetration of a reservoir should be avoided wherever practicable until such time as the apparent problems associated with the cementing of a casing shoe in these situations are satisfactorily overcomerdquo It would not be reasonable to restrict industry from drilling horizontal or high angle wells because this technology is needed in many cases to produce Australiarsquos oil and gas resources However there are technical remedies that need to be implemented to address lessons learned from the Montara H 1 well blowout Technical remedies include barrier requirements casing design and cementing practices as fully described in WWFrsquos Submission prepared by Susan Harvey Recommendations 18 148 149 167-170 174-175 178 179 and 181

COI Recommendations 66 and 77 WWF agrees with COI Recommendation 66 that ldquothe pendulum has swung too far away from prescriptive standardsrdquo and that ldquoin some areas relating to well integrity there needs to be minimum standardsrdquo WWF does not agree with the COIrsquos Recommendation 77 which suggests that the COI findings related to well integrity need be only included in a guidance manual WWF believes that those minimum standards need to be set in regulation not just included in a legally unenforceable guidance document

COI Finding 52 WWF does not agree with COI Finding 52 that concludes ldquoThe existing legislative regime is largely sufficient to allow effective monitoring and enforcement by regulators of offshore petroleum-related operations ndash the inadequacies identified by the Inquiry relate primarily to the implementation of this legislation However the Inquiry has identified some relatively minor amendments to applicable legislation which it considers would reduce the risk of an event such as the Blowout occurring again [emphasis added]rdquo

Montara Commission of Inquiry Recommendations

The Montara Commission of Inquiry (COI) did an exceptional job investigating the circumstances of the Montara Well blowout WWF supports the majority of the COIrsquos 100 findings and 105 recommendations and commends the COI for a job well done However after careful review there are some areas where WWF recommends that the COIrsquos findings and recommendations be further clarified or strengthened

While we understand that the COI Report is final and will not be changed as a result of WWFrsquos input in this letter it is our understanding that our input will help determine which of the COI recommendations the Australian Government will ultimately accept and implement Therefore in this letter we offer recommendations for strengthening and revising a few of COI recommendations for the Australian Government to consider in finalizing the Government Response Report

WWF agrees that Australiarsquos regulatory system should maintain the highest standards and reward and accommodate development of best industry practices and best technology While WWF is generally supportive of an objective-based legislative regime it is clear from the Montara blowout lessons learned that an objective-based legislative regime alone is insufficient Objective-based legislative regimes must be coupled with minimum standards and well trained and qualified industry and government personnel capable of implementing both types of standards

WWF remains concerned that the Draft Government Response does not clearly articulate which minimum standards will be returned to Australian regulation nor does it provide a rigorous plan to train quality industry and government staff to effectively implement these best practice standards and technology

The Draft Government Response rejects prescriptive-based regulation because it ldquorequires frequent amendment and relies heavily on the ability of legislative drafters to understand and anticipate the risks and operational environment of the industryrdquo WWF does not support this reasoning The Australian Government has a responsibility to the public and the environment to clearly articulate in law and regulation the risks responsibilities and rules for operating in the offshore environment The Australian Government should not relieve itself of this duty by handing over the reins to industry Government cannot remain ldquosilentrdquo on offshore industry expectations or relieve itself of the hard work of routinely updating laws and regulations to incorporate best technology If government is unwilling to stay abreast of new technology and keeping its requirements current it hardly sets a good example for industry to do so

A combined approach of minimum standards (to set the minimum bar) and objective-based standards (to continuously improve the upper bar) must be used to regulate the offshore industry Government officials must also be trained and qualified to know how to approve and enforce those standards

WWF also remains concerned that some of the COI Report and the Draft Government Response Recommendations lean too heavily on industry led regulatory programs where industry is handed the reins to write their own rules WWF does not support recommendations that would allow industry to develop its own standards The Australian Government must set in regulation its own clearly articulated set of minimum standards for well integrity well control and emergency pre-planning to industry WWF does not support incorporating the lessons learned from the Montara Well blowout into unenforceable guidance documents written solely by industry

Minimum Standards for Well Integrity

The Draft Government Response the COI Report and the WWF Reports all agree that minimum standards are needed to avoid another blowout However WWF recommends that Australia revise regulations to clearly articulate those minimum standards whereas the Government and COI recommend that industry again be tasked with determining those minimum standards without substantial regulatory amendment WWF strongly recommends against industry writing its own minimum standards

In 2004 the regulatory pendulum swung too far away from prescription and into a regime of almost exclusive self-regulation The 2004 Australian Petroleum (Submerged Lands) (Management of Well Operations) Regulations set a goal of promoting new technology and new best practices while requiring the Operator to demonstrate only that its application met ldquogood oilfield practicerdquo However the term ldquogood oilfield practicerdquo was not adequately defined in regulation leaving its application subject to government and industry interpretation and misapplication While the Draft Government Response the COI Report and the WWF Reports all agree that the term ldquogood oilfield practicerdquo needs to be clearly defined the Draft Government Response does not provide a plan to explicitly define this term in regulation

Because people with differing levels of experience and expertise will interpret the regulatory term ldquogood oilfield practicerdquo differently the term must be explicitly defined The revised definition should include human health safety and environmental (HSE) objectives and establish firm unambiguous and measurable compliance yardsticks

During the Inquiry industry staff with decades of experience struggled not only to define ldquogood oilfield practicerdquo but also to explain what that actually means in terms of the ldquonuts-and-boltsrdquo This confusion clearly indicates that the term ldquogood oil field practicerdquo needs further definition and that minimum technical standards must be set

Regulatory systems must have clearly articulated minimum standards that personnel with all levels of experience and expertise can easily understand and implement The rules must be clear simple measurable and verifiable Absent these criteria industry may opt to take shortcuts and regulators will not have clear standards to use in processing permits and measuring compliance

There needs to be consistency in standards interpretation and implementation across all offshore regulators Achieving consistency starts with establishing simple straightforward minimum standards for the government to implement and for industry to follow

While the best efforts should be made to codify minimum standards that will stand the test of time inevitably there will be some future technical innovations that will require revisions to regulatory standards WWF is concerned that the Draft Government Response does not include a long-range plan with procedures for updating regulations on a routine basis (eg every 3-5 years) or procedures to address waivers to minimum standards

WWF recommends that the Australian Government revise the regulations to codify minimum standards and codify corollary mechanisms to (1) update regulations on a routine basis and (2) establish a formal technical expert review process to examine any proposed waivers to the existing standards Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in Australiarsquos best interest to approve this technical innovation ahead of a regulatory amendment

COI Recommendations 2-4 COI Recommendations 2-4 and the Draft Government Response both suggest that the Well Operations Management Plan (WOMP) continue to be the primary framework document for achieving well integrity and that the WOMP should incorporate ldquonon-exhaustive minimum compliance standards in relation to well controlrdquo WWF agrees that a WOMP should continue to be

prepared by the well operator and that the plan should be reviewed and approved by the regulator However WWF does not agree that the well operator should define within each WOMP ldquonon-exhaustive minimum compliance standards in relation to well controlrdquo Instead WWF recommends that clearly articulated minimum compliance standards be set in Australiarsquos regulations for all operators to use in developing a WOMP This practice would ensure that the minimum standards are clear and consistent for all offshore operators while not allowing industry to set its own minimum standards

The Draft Government Response and COI Report conclude that the elimination of Australiarsquos prescriptive standards (Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production) was not a root cause of the blowout WWF disagrees WWF found that if the standards in the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production for well control barriers had remained in place the exchange of a 9-58rdquo Pressure Containing Control Cap (PCCC) for a 45m (148rsquo) long shallow-set cement plug barrier would not have been allowed likely adverting this disaster Instead the Montara WOMP included higher risk batch drilling procedures and was amended (via permit waivers issued by the Australian Government) to include use of higher risk well control barriers Because there were no minimum standards in place for measuring whether these procedures were ldquogood oilfield practicerdquo Australian regulators approved permits to carry out both these high risk procedures leading to the blowout

The Draft Government Response and the COI Report found that if the WOMP was correctly followed the blowout would have been averted WWF disagrees WWF found that PTTEP proposed and NT DoR approved an amendment to the permits allowing changes to the wellbore barrier configuration that were not good oilfield practice NT DoR staff lacked written engineering guidance or instruction to the assist in making the decision When questioned by the COI about what engineering guidance or instruction the other Designated Authorities (DAs) rely on to make permit decisions the DArsquos all referenced the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production If the engineering specifications written in the now-expired Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production are used by the DAs to make permit decisions those engineering specifications should be codified as minimum standards Alternatively the Australian Government can develop a new more updated list of minimum standards It is WWFrsquos position that the minimum standards must be clear and not left to industry neither must those minimum standards be left for various government engineers to guess at based on their experience or lack thereof

COI Recommendation 7 COI Recommendation 7 is incomplete The COI recommends an independent compliance review of well integrity a recommendation that WWF strongly supports However the frequency and the timing of an independent compliance review during the well construction process is unclear in the COI Recommendation WWF recommends that the independent compliance review occur during random audits of Well Operations Management Plans (WOMPs) and Final Well Construction and Drilling Records While an independent compliance review of each and every well plan and actual well construction execution would be optimal WWF recognizes that the funding for this level of oversight would be difficult to achieve Therefore WWF recommends that Australia commit to audit at least one of every ten wells drilled offshore and at least one well per year per offshore operator

COI Recommendation 8 The Draft Government Response rejected COI Recommendation 8 WWF agrees Wellbore gas bubbling should trigger immediate well control action at the rig location to secure the well

COI Recommendation 10 COI Recommendation 10 assigns development of a well control barrier manual to licensees rig operators and cementing contractors not to the Australian Government While WWF agrees that industry should be involved in developing a well control barrier manual that documents minimum standards and best technology WWF does not agree that the development of a well control barrier manual should be solely delegated to industry

WWF recommends that minimum well control barrier compliance standards be set in Australiarsquos regulations and that those standards are clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators and industry is not allowed to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well control barrier manual obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well control barrier manuals should be routinely updated to ensure that best technology and practices remain current

WWF takes exception with the Draft Government Response conclusion as it relates to COI Report Recommendation 10 where it states ldquoThe Government notes that the Montara incident was caused by lack of adherence by the operator to the accepted industry practicesrdquo WWF agrees that PTTEP did not follow accepted industry practices but it was not alone in fault The Government Response should also acknowledged that the government granted permit approvals that also did not conform to accepted industry practices (eg permits amending batch drilling program procedures and well barriers) which were causal factors in the blowout

COI Recommendations 20 COI Recommendation 2 states that ldquoIf a dispute arises between a licensee and a rig operator in relation to a well control issue and is not resolved between them the matter must be raised with the relevant regulator before discretionary operations proceed [emphasis added]rdquo The Draft Government Response rejects this recommendation concluding that ldquowell control issues need to be resolved quickly by the operator so the issue does not escalate furtherrdquo WWF agrees that well control issues need to be resolved quickly to avoid escalation to an unsafe point however a safe technically robust well control solution must be implemented Immediate well control actions would not be considered a ldquodiscretionary operationrdquo on a rig

WWF agrees with COIrsquos main point that is serious non-discretionary well control issues need resolution and if the licensee and operator disagree the issue needs to be raised to a higher authority for resolution The Australian Government is that higher authority and is responsible for protection of human health and the environment

WWF does not agree with the Draft Government Responsersquos conclusion that ldquothe operator is best placed to assess and understand the risk [emphasis added]rdquo Lessons learned from the Montara Blowout case clearly show that PTTEPrsquos staff were not best placed to assess and understand the risk neither were they trained qualified or adequately staffed to make technically sound decisions related to well control In fact in the events leading up to the Montara blowout the rig operator and PTTEP consultants raised concerns about PTTEPrsquos well construction This is exactly why the Australian Government must have highly trained and qualified personnel on staff to aide in making technically sound and safe decisions as it relates to offshore oil and gas activities If Australia is not willing to resource its agencies to this level it should not allow offshore exploration and production to proceed

WWF does agree that the liability for any accident should be retained by the licensee and that the licensee should have adequate financial resources and insurance in place relative to any risks undertaken offshore

WWF agrees with Draft Government Responsersquos conclusion that ldquowell control issues should be reported to the Regulator in the daily drilling reportrdquo However WWF recommends that the Government also provide highly trained and qualified staff to be on duty overseeing offshore operations 24 hours per day 365 days per year Further anyone who has a well control concern or who has identified a well control problem should be required to contact those on duty staff in a timely manner

COI Recommendations 23 The Draft Government Response states that ldquothe Government will also consider if elements of the previously legislated Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004rdquo

WWF strongly supports a thorough technical expert review of the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production to identify which minimum standards should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004 WWFrsquos Reports identify numerous minimum standards that should be incorporated in the regulations as well as additional standards based on industry best practices

COI Recommendations 24 amp 28 COI Recommendation 24 states that ldquoa minimum of two barriers should be in place at all timesrdquo for well control ldquowhenever it is reasonably practicable to do sordquo WWF agrees that a minimum of two barriers should be in place at all times for well control We do not agree that there are times when it is reasonable to have fewer than two barriers in place WWF recommends that the clause ldquowhenever it is reasonably practicable to do sordquo be removed

COIrsquos Recommendation 28 reiterates that ldquotwo or more barriersrdquo should be a minimum standard WWF agrees

COI Recommendation 25-26 COI Recommendations 25-26 suggest a process for regulatory approval of one barrier instead of a minimum compliance standard of two barriers for well control The COI suggests that regulators be allowed to approve a one-barrier approach to well control if a ldquoproper risk assessment is carried outrdquo ldquoexceptional circumstances existrdquo and ldquorisks involved are reduced to as low as reasonably practicablerdquo WWF does not agree with this recommendation There is no technical reason that a two-barrier well control configuration cannot be achieved WWF recommends that a minimum two-barrier well control configuration be codified in regulation without exception

WWF is pleased to see the Draft Government Response acknowledges that ldquothe accepted industry practice is for two well barriers to be available during all well activities and operations including suspended and abandoned wellsrdquo Further WWF is pleased to see the Draft Government Response states that ldquothe Regulator has the power to requires additional barriers should it be considered necessaryrdquo

We are concerned that the Draft Government Response does not address the COI Recommendation to allow less than two minimum barriers WWF recommends that the Final Government Response clearly articulate that waivers allowing less than two barriers will not be granted If the Australian Government disagrees on this point finding that there are technical circumstances in which only one barrier can be installed it should explain its case and the level of risk Australia would be taking with its offshore resources when using such an approach

COI Recommendation 29 COI Recommendation 29 assigns development of best practice standards for well cementing to industry regulators and trainingresearch institutions While WWF agrees that industry should be involved in developing best practice standards for well cementing WWF recommends that minimum well cementing compliance standards be set in Australiarsquos regulations and clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators while not allowing industry to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well cementing standards obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well cementing standards should be routinely updated to ensure that best technology and practices remain current

COI Recommendation 30 COI Recommendation 30 suggests that cement problems and failures that occur offshore of Australia be tracked and analyzed WWF agrees with this recommendation and suggests that this task be assigned to the Australian Government WWF further suggests that the data should be compiled at least quarterly and made available to all offshore industry members and the public on a publically accessible website The website should also contain more immediate safety alerts and notifications issued by the Australian Government when immediate action is needed to ensure that a poor cementing technique is not duplicated in other offshore wells

COI Recommendation 32 COI Recommendation 32 recommends that ldquocement integrity should be evaluated wherever practicable by way of cement evaluation tests rather than relying on pre-operational calculations of cement and displacement fluid volumesrdquo WWF agrees that cement evaluation practices and standards should be improved However WWF recommends that cement conditions be examined using all three techniquesmdashpre-operational calculations of cement displacement fluid volumes and post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing)mdashin combination since all that data plays an important role in cement evaluation Additionally WWF recommends that the requirement to obtain post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing) be codified in regulation as a minimum standard

COI Recommendation 29-34 The Draft Government Response notes that in relation to COI Recommendations 29-34 NOPSA has increased its planned inspection frequency for manned drilling and production facilities from once to twice a year and that a recruitment program has been instigated to resource this higher inspection frequency WWF applauds the Governmentrsquos increased inspection program regime for manned drilling and production facilities but recommends that an increased inspection frequency also be applied to unmanned drilling and production facilities where risks can go unnoticed for long periods of time due to lack of onsite staffing

COI Recommendation 38 WWF agrees with the Draft Government Response conclusion that COI Recommendation 38 has some technical problems that need to be remedied COI Recommendation 38 suggests that a ldquohorizontal or high angle penetration of a reservoir should be avoided wherever practicable until such time as the apparent problems associated with the cementing of a casing shoe in these situations are satisfactorily overcomerdquo It would not be reasonable to restrict industry from drilling horizontal or high angle wells because this technology is needed in many cases to produce Australiarsquos oil and gas resources However there are technical remedies that need to be implemented to address lessons learned from the Montara H 1 well blowout Technical remedies include barrier requirements casing design and cementing practices as fully described in WWFrsquos Submission prepared by Susan Harvey Recommendations 18 148 149 167-170 174-175 178 179 and 181

COI Recommendations 66 and 77 WWF agrees with COI Recommendation 66 that ldquothe pendulum has swung too far away from prescriptive standardsrdquo and that ldquoin some areas relating to well integrity there needs to be minimum standardsrdquo WWF does not agree with the COIrsquos Recommendation 77 which suggests that the COI findings related to well integrity need be only included in a guidance manual WWF believes that those minimum standards need to be set in regulation not just included in a legally unenforceable guidance document

COI Finding 52 WWF does not agree with COI Finding 52 that concludes ldquoThe existing legislative regime is largely sufficient to allow effective monitoring and enforcement by regulators of offshore petroleum-related operations ndash the inadequacies identified by the Inquiry relate primarily to the implementation of this legislation However the Inquiry has identified some relatively minor amendments to applicable legislation which it considers would reduce the risk of an event such as the Blowout occurring again [emphasis added]rdquo

The Draft Government Response the COI Report and the WWF Reports all agree that minimum standards are needed to avoid another blowout However WWF recommends that Australia revise regulations to clearly articulate those minimum standards whereas the Government and COI recommend that industry again be tasked with determining those minimum standards without substantial regulatory amendment WWF strongly recommends against industry writing its own minimum standards

In 2004 the regulatory pendulum swung too far away from prescription and into a regime of almost exclusive self-regulation The 2004 Australian Petroleum (Submerged Lands) (Management of Well Operations) Regulations set a goal of promoting new technology and new best practices while requiring the Operator to demonstrate only that its application met ldquogood oilfield practicerdquo However the term ldquogood oilfield practicerdquo was not adequately defined in regulation leaving its application subject to government and industry interpretation and misapplication While the Draft Government Response the COI Report and the WWF Reports all agree that the term ldquogood oilfield practicerdquo needs to be clearly defined the Draft Government Response does not provide a plan to explicitly define this term in regulation

Because people with differing levels of experience and expertise will interpret the regulatory term ldquogood oilfield practicerdquo differently the term must be explicitly defined The revised definition should include human health safety and environmental (HSE) objectives and establish firm unambiguous and measurable compliance yardsticks

During the Inquiry industry staff with decades of experience struggled not only to define ldquogood oilfield practicerdquo but also to explain what that actually means in terms of the ldquonuts-and-boltsrdquo This confusion clearly indicates that the term ldquogood oil field practicerdquo needs further definition and that minimum technical standards must be set

Regulatory systems must have clearly articulated minimum standards that personnel with all levels of experience and expertise can easily understand and implement The rules must be clear simple measurable and verifiable Absent these criteria industry may opt to take shortcuts and regulators will not have clear standards to use in processing permits and measuring compliance

There needs to be consistency in standards interpretation and implementation across all offshore regulators Achieving consistency starts with establishing simple straightforward minimum standards for the government to implement and for industry to follow

While the best efforts should be made to codify minimum standards that will stand the test of time inevitably there will be some future technical innovations that will require revisions to regulatory standards WWF is concerned that the Draft Government Response does not include a long-range plan with procedures for updating regulations on a routine basis (eg every 3-5 years) or procedures to address waivers to minimum standards

WWF recommends that the Australian Government revise the regulations to codify minimum standards and codify corollary mechanisms to (1) update regulations on a routine basis and (2) establish a formal technical expert review process to examine any proposed waivers to the existing standards Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in Australiarsquos best interest to approve this technical innovation ahead of a regulatory amendment

COI Recommendations 2-4 COI Recommendations 2-4 and the Draft Government Response both suggest that the Well Operations Management Plan (WOMP) continue to be the primary framework document for achieving well integrity and that the WOMP should incorporate ldquonon-exhaustive minimum compliance standards in relation to well controlrdquo WWF agrees that a WOMP should continue to be

prepared by the well operator and that the plan should be reviewed and approved by the regulator However WWF does not agree that the well operator should define within each WOMP ldquonon-exhaustive minimum compliance standards in relation to well controlrdquo Instead WWF recommends that clearly articulated minimum compliance standards be set in Australiarsquos regulations for all operators to use in developing a WOMP This practice would ensure that the minimum standards are clear and consistent for all offshore operators while not allowing industry to set its own minimum standards

The Draft Government Response and COI Report conclude that the elimination of Australiarsquos prescriptive standards (Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production) was not a root cause of the blowout WWF disagrees WWF found that if the standards in the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production for well control barriers had remained in place the exchange of a 9-58rdquo Pressure Containing Control Cap (PCCC) for a 45m (148rsquo) long shallow-set cement plug barrier would not have been allowed likely adverting this disaster Instead the Montara WOMP included higher risk batch drilling procedures and was amended (via permit waivers issued by the Australian Government) to include use of higher risk well control barriers Because there were no minimum standards in place for measuring whether these procedures were ldquogood oilfield practicerdquo Australian regulators approved permits to carry out both these high risk procedures leading to the blowout

The Draft Government Response and the COI Report found that if the WOMP was correctly followed the blowout would have been averted WWF disagrees WWF found that PTTEP proposed and NT DoR approved an amendment to the permits allowing changes to the wellbore barrier configuration that were not good oilfield practice NT DoR staff lacked written engineering guidance or instruction to the assist in making the decision When questioned by the COI about what engineering guidance or instruction the other Designated Authorities (DAs) rely on to make permit decisions the DArsquos all referenced the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production If the engineering specifications written in the now-expired Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production are used by the DAs to make permit decisions those engineering specifications should be codified as minimum standards Alternatively the Australian Government can develop a new more updated list of minimum standards It is WWFrsquos position that the minimum standards must be clear and not left to industry neither must those minimum standards be left for various government engineers to guess at based on their experience or lack thereof

COI Recommendation 7 COI Recommendation 7 is incomplete The COI recommends an independent compliance review of well integrity a recommendation that WWF strongly supports However the frequency and the timing of an independent compliance review during the well construction process is unclear in the COI Recommendation WWF recommends that the independent compliance review occur during random audits of Well Operations Management Plans (WOMPs) and Final Well Construction and Drilling Records While an independent compliance review of each and every well plan and actual well construction execution would be optimal WWF recognizes that the funding for this level of oversight would be difficult to achieve Therefore WWF recommends that Australia commit to audit at least one of every ten wells drilled offshore and at least one well per year per offshore operator

COI Recommendation 8 The Draft Government Response rejected COI Recommendation 8 WWF agrees Wellbore gas bubbling should trigger immediate well control action at the rig location to secure the well

COI Recommendation 10 COI Recommendation 10 assigns development of a well control barrier manual to licensees rig operators and cementing contractors not to the Australian Government While WWF agrees that industry should be involved in developing a well control barrier manual that documents minimum standards and best technology WWF does not agree that the development of a well control barrier manual should be solely delegated to industry

WWF recommends that minimum well control barrier compliance standards be set in Australiarsquos regulations and that those standards are clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators and industry is not allowed to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well control barrier manual obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well control barrier manuals should be routinely updated to ensure that best technology and practices remain current

WWF takes exception with the Draft Government Response conclusion as it relates to COI Report Recommendation 10 where it states ldquoThe Government notes that the Montara incident was caused by lack of adherence by the operator to the accepted industry practicesrdquo WWF agrees that PTTEP did not follow accepted industry practices but it was not alone in fault The Government Response should also acknowledged that the government granted permit approvals that also did not conform to accepted industry practices (eg permits amending batch drilling program procedures and well barriers) which were causal factors in the blowout

COI Recommendations 20 COI Recommendation 2 states that ldquoIf a dispute arises between a licensee and a rig operator in relation to a well control issue and is not resolved between them the matter must be raised with the relevant regulator before discretionary operations proceed [emphasis added]rdquo The Draft Government Response rejects this recommendation concluding that ldquowell control issues need to be resolved quickly by the operator so the issue does not escalate furtherrdquo WWF agrees that well control issues need to be resolved quickly to avoid escalation to an unsafe point however a safe technically robust well control solution must be implemented Immediate well control actions would not be considered a ldquodiscretionary operationrdquo on a rig

WWF agrees with COIrsquos main point that is serious non-discretionary well control issues need resolution and if the licensee and operator disagree the issue needs to be raised to a higher authority for resolution The Australian Government is that higher authority and is responsible for protection of human health and the environment

WWF does not agree with the Draft Government Responsersquos conclusion that ldquothe operator is best placed to assess and understand the risk [emphasis added]rdquo Lessons learned from the Montara Blowout case clearly show that PTTEPrsquos staff were not best placed to assess and understand the risk neither were they trained qualified or adequately staffed to make technically sound decisions related to well control In fact in the events leading up to the Montara blowout the rig operator and PTTEP consultants raised concerns about PTTEPrsquos well construction This is exactly why the Australian Government must have highly trained and qualified personnel on staff to aide in making technically sound and safe decisions as it relates to offshore oil and gas activities If Australia is not willing to resource its agencies to this level it should not allow offshore exploration and production to proceed

WWF does agree that the liability for any accident should be retained by the licensee and that the licensee should have adequate financial resources and insurance in place relative to any risks undertaken offshore

WWF agrees with Draft Government Responsersquos conclusion that ldquowell control issues should be reported to the Regulator in the daily drilling reportrdquo However WWF recommends that the Government also provide highly trained and qualified staff to be on duty overseeing offshore operations 24 hours per day 365 days per year Further anyone who has a well control concern or who has identified a well control problem should be required to contact those on duty staff in a timely manner

COI Recommendations 23 The Draft Government Response states that ldquothe Government will also consider if elements of the previously legislated Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004rdquo

WWF strongly supports a thorough technical expert review of the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production to identify which minimum standards should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004 WWFrsquos Reports identify numerous minimum standards that should be incorporated in the regulations as well as additional standards based on industry best practices

COI Recommendations 24 amp 28 COI Recommendation 24 states that ldquoa minimum of two barriers should be in place at all timesrdquo for well control ldquowhenever it is reasonably practicable to do sordquo WWF agrees that a minimum of two barriers should be in place at all times for well control We do not agree that there are times when it is reasonable to have fewer than two barriers in place WWF recommends that the clause ldquowhenever it is reasonably practicable to do sordquo be removed

COIrsquos Recommendation 28 reiterates that ldquotwo or more barriersrdquo should be a minimum standard WWF agrees

COI Recommendation 25-26 COI Recommendations 25-26 suggest a process for regulatory approval of one barrier instead of a minimum compliance standard of two barriers for well control The COI suggests that regulators be allowed to approve a one-barrier approach to well control if a ldquoproper risk assessment is carried outrdquo ldquoexceptional circumstances existrdquo and ldquorisks involved are reduced to as low as reasonably practicablerdquo WWF does not agree with this recommendation There is no technical reason that a two-barrier well control configuration cannot be achieved WWF recommends that a minimum two-barrier well control configuration be codified in regulation without exception

WWF is pleased to see the Draft Government Response acknowledges that ldquothe accepted industry practice is for two well barriers to be available during all well activities and operations including suspended and abandoned wellsrdquo Further WWF is pleased to see the Draft Government Response states that ldquothe Regulator has the power to requires additional barriers should it be considered necessaryrdquo

We are concerned that the Draft Government Response does not address the COI Recommendation to allow less than two minimum barriers WWF recommends that the Final Government Response clearly articulate that waivers allowing less than two barriers will not be granted If the Australian Government disagrees on this point finding that there are technical circumstances in which only one barrier can be installed it should explain its case and the level of risk Australia would be taking with its offshore resources when using such an approach

COI Recommendation 29 COI Recommendation 29 assigns development of best practice standards for well cementing to industry regulators and trainingresearch institutions While WWF agrees that industry should be involved in developing best practice standards for well cementing WWF recommends that minimum well cementing compliance standards be set in Australiarsquos regulations and clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators while not allowing industry to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well cementing standards obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well cementing standards should be routinely updated to ensure that best technology and practices remain current

COI Recommendation 30 COI Recommendation 30 suggests that cement problems and failures that occur offshore of Australia be tracked and analyzed WWF agrees with this recommendation and suggests that this task be assigned to the Australian Government WWF further suggests that the data should be compiled at least quarterly and made available to all offshore industry members and the public on a publically accessible website The website should also contain more immediate safety alerts and notifications issued by the Australian Government when immediate action is needed to ensure that a poor cementing technique is not duplicated in other offshore wells

COI Recommendation 32 COI Recommendation 32 recommends that ldquocement integrity should be evaluated wherever practicable by way of cement evaluation tests rather than relying on pre-operational calculations of cement and displacement fluid volumesrdquo WWF agrees that cement evaluation practices and standards should be improved However WWF recommends that cement conditions be examined using all three techniquesmdashpre-operational calculations of cement displacement fluid volumes and post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing)mdashin combination since all that data plays an important role in cement evaluation Additionally WWF recommends that the requirement to obtain post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing) be codified in regulation as a minimum standard

COI Recommendation 29-34 The Draft Government Response notes that in relation to COI Recommendations 29-34 NOPSA has increased its planned inspection frequency for manned drilling and production facilities from once to twice a year and that a recruitment program has been instigated to resource this higher inspection frequency WWF applauds the Governmentrsquos increased inspection program regime for manned drilling and production facilities but recommends that an increased inspection frequency also be applied to unmanned drilling and production facilities where risks can go unnoticed for long periods of time due to lack of onsite staffing

COI Recommendation 38 WWF agrees with the Draft Government Response conclusion that COI Recommendation 38 has some technical problems that need to be remedied COI Recommendation 38 suggests that a ldquohorizontal or high angle penetration of a reservoir should be avoided wherever practicable until such time as the apparent problems associated with the cementing of a casing shoe in these situations are satisfactorily overcomerdquo It would not be reasonable to restrict industry from drilling horizontal or high angle wells because this technology is needed in many cases to produce Australiarsquos oil and gas resources However there are technical remedies that need to be implemented to address lessons learned from the Montara H 1 well blowout Technical remedies include barrier requirements casing design and cementing practices as fully described in WWFrsquos Submission prepared by Susan Harvey Recommendations 18 148 149 167-170 174-175 178 179 and 181

COI Recommendations 66 and 77 WWF agrees with COI Recommendation 66 that ldquothe pendulum has swung too far away from prescriptive standardsrdquo and that ldquoin some areas relating to well integrity there needs to be minimum standardsrdquo WWF does not agree with the COIrsquos Recommendation 77 which suggests that the COI findings related to well integrity need be only included in a guidance manual WWF believes that those minimum standards need to be set in regulation not just included in a legally unenforceable guidance document

COI Finding 52 WWF does not agree with COI Finding 52 that concludes ldquoThe existing legislative regime is largely sufficient to allow effective monitoring and enforcement by regulators of offshore petroleum-related operations ndash the inadequacies identified by the Inquiry relate primarily to the implementation of this legislation However the Inquiry has identified some relatively minor amendments to applicable legislation which it considers would reduce the risk of an event such as the Blowout occurring again [emphasis added]rdquo

prepared by the well operator and that the plan should be reviewed and approved by the regulator However WWF does not agree that the well operator should define within each WOMP ldquonon-exhaustive minimum compliance standards in relation to well controlrdquo Instead WWF recommends that clearly articulated minimum compliance standards be set in Australiarsquos regulations for all operators to use in developing a WOMP This practice would ensure that the minimum standards are clear and consistent for all offshore operators while not allowing industry to set its own minimum standards

The Draft Government Response and COI Report conclude that the elimination of Australiarsquos prescriptive standards (Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production) was not a root cause of the blowout WWF disagrees WWF found that if the standards in the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production for well control barriers had remained in place the exchange of a 9-58rdquo Pressure Containing Control Cap (PCCC) for a 45m (148rsquo) long shallow-set cement plug barrier would not have been allowed likely adverting this disaster Instead the Montara WOMP included higher risk batch drilling procedures and was amended (via permit waivers issued by the Australian Government) to include use of higher risk well control barriers Because there were no minimum standards in place for measuring whether these procedures were ldquogood oilfield practicerdquo Australian regulators approved permits to carry out both these high risk procedures leading to the blowout

The Draft Government Response and the COI Report found that if the WOMP was correctly followed the blowout would have been averted WWF disagrees WWF found that PTTEP proposed and NT DoR approved an amendment to the permits allowing changes to the wellbore barrier configuration that were not good oilfield practice NT DoR staff lacked written engineering guidance or instruction to the assist in making the decision When questioned by the COI about what engineering guidance or instruction the other Designated Authorities (DAs) rely on to make permit decisions the DArsquos all referenced the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production If the engineering specifications written in the now-expired Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production are used by the DAs to make permit decisions those engineering specifications should be codified as minimum standards Alternatively the Australian Government can develop a new more updated list of minimum standards It is WWFrsquos position that the minimum standards must be clear and not left to industry neither must those minimum standards be left for various government engineers to guess at based on their experience or lack thereof

COI Recommendation 7 COI Recommendation 7 is incomplete The COI recommends an independent compliance review of well integrity a recommendation that WWF strongly supports However the frequency and the timing of an independent compliance review during the well construction process is unclear in the COI Recommendation WWF recommends that the independent compliance review occur during random audits of Well Operations Management Plans (WOMPs) and Final Well Construction and Drilling Records While an independent compliance review of each and every well plan and actual well construction execution would be optimal WWF recognizes that the funding for this level of oversight would be difficult to achieve Therefore WWF recommends that Australia commit to audit at least one of every ten wells drilled offshore and at least one well per year per offshore operator

COI Recommendation 8 The Draft Government Response rejected COI Recommendation 8 WWF agrees Wellbore gas bubbling should trigger immediate well control action at the rig location to secure the well

COI Recommendation 10 COI Recommendation 10 assigns development of a well control barrier manual to licensees rig operators and cementing contractors not to the Australian Government While WWF agrees that industry should be involved in developing a well control barrier manual that documents minimum standards and best technology WWF does not agree that the development of a well control barrier manual should be solely delegated to industry

WWF recommends that minimum well control barrier compliance standards be set in Australiarsquos regulations and that those standards are clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators and industry is not allowed to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well control barrier manual obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well control barrier manuals should be routinely updated to ensure that best technology and practices remain current

WWF takes exception with the Draft Government Response conclusion as it relates to COI Report Recommendation 10 where it states ldquoThe Government notes that the Montara incident was caused by lack of adherence by the operator to the accepted industry practicesrdquo WWF agrees that PTTEP did not follow accepted industry practices but it was not alone in fault The Government Response should also acknowledged that the government granted permit approvals that also did not conform to accepted industry practices (eg permits amending batch drilling program procedures and well barriers) which were causal factors in the blowout

COI Recommendations 20 COI Recommendation 2 states that ldquoIf a dispute arises between a licensee and a rig operator in relation to a well control issue and is not resolved between them the matter must be raised with the relevant regulator before discretionary operations proceed [emphasis added]rdquo The Draft Government Response rejects this recommendation concluding that ldquowell control issues need to be resolved quickly by the operator so the issue does not escalate furtherrdquo WWF agrees that well control issues need to be resolved quickly to avoid escalation to an unsafe point however a safe technically robust well control solution must be implemented Immediate well control actions would not be considered a ldquodiscretionary operationrdquo on a rig

WWF agrees with COIrsquos main point that is serious non-discretionary well control issues need resolution and if the licensee and operator disagree the issue needs to be raised to a higher authority for resolution The Australian Government is that higher authority and is responsible for protection of human health and the environment

WWF does not agree with the Draft Government Responsersquos conclusion that ldquothe operator is best placed to assess and understand the risk [emphasis added]rdquo Lessons learned from the Montara Blowout case clearly show that PTTEPrsquos staff were not best placed to assess and understand the risk neither were they trained qualified or adequately staffed to make technically sound decisions related to well control In fact in the events leading up to the Montara blowout the rig operator and PTTEP consultants raised concerns about PTTEPrsquos well construction This is exactly why the Australian Government must have highly trained and qualified personnel on staff to aide in making technically sound and safe decisions as it relates to offshore oil and gas activities If Australia is not willing to resource its agencies to this level it should not allow offshore exploration and production to proceed

WWF does agree that the liability for any accident should be retained by the licensee and that the licensee should have adequate financial resources and insurance in place relative to any risks undertaken offshore

WWF agrees with Draft Government Responsersquos conclusion that ldquowell control issues should be reported to the Regulator in the daily drilling reportrdquo However WWF recommends that the Government also provide highly trained and qualified staff to be on duty overseeing offshore operations 24 hours per day 365 days per year Further anyone who has a well control concern or who has identified a well control problem should be required to contact those on duty staff in a timely manner

COI Recommendations 23 The Draft Government Response states that ldquothe Government will also consider if elements of the previously legislated Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004rdquo

WWF strongly supports a thorough technical expert review of the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production to identify which minimum standards should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004 WWFrsquos Reports identify numerous minimum standards that should be incorporated in the regulations as well as additional standards based on industry best practices

COI Recommendations 24 amp 28 COI Recommendation 24 states that ldquoa minimum of two barriers should be in place at all timesrdquo for well control ldquowhenever it is reasonably practicable to do sordquo WWF agrees that a minimum of two barriers should be in place at all times for well control We do not agree that there are times when it is reasonable to have fewer than two barriers in place WWF recommends that the clause ldquowhenever it is reasonably practicable to do sordquo be removed

COIrsquos Recommendation 28 reiterates that ldquotwo or more barriersrdquo should be a minimum standard WWF agrees

COI Recommendation 25-26 COI Recommendations 25-26 suggest a process for regulatory approval of one barrier instead of a minimum compliance standard of two barriers for well control The COI suggests that regulators be allowed to approve a one-barrier approach to well control if a ldquoproper risk assessment is carried outrdquo ldquoexceptional circumstances existrdquo and ldquorisks involved are reduced to as low as reasonably practicablerdquo WWF does not agree with this recommendation There is no technical reason that a two-barrier well control configuration cannot be achieved WWF recommends that a minimum two-barrier well control configuration be codified in regulation without exception

WWF is pleased to see the Draft Government Response acknowledges that ldquothe accepted industry practice is for two well barriers to be available during all well activities and operations including suspended and abandoned wellsrdquo Further WWF is pleased to see the Draft Government Response states that ldquothe Regulator has the power to requires additional barriers should it be considered necessaryrdquo

We are concerned that the Draft Government Response does not address the COI Recommendation to allow less than two minimum barriers WWF recommends that the Final Government Response clearly articulate that waivers allowing less than two barriers will not be granted If the Australian Government disagrees on this point finding that there are technical circumstances in which only one barrier can be installed it should explain its case and the level of risk Australia would be taking with its offshore resources when using such an approach

COI Recommendation 29 COI Recommendation 29 assigns development of best practice standards for well cementing to industry regulators and trainingresearch institutions While WWF agrees that industry should be involved in developing best practice standards for well cementing WWF recommends that minimum well cementing compliance standards be set in Australiarsquos regulations and clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators while not allowing industry to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well cementing standards obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well cementing standards should be routinely updated to ensure that best technology and practices remain current

COI Recommendation 30 COI Recommendation 30 suggests that cement problems and failures that occur offshore of Australia be tracked and analyzed WWF agrees with this recommendation and suggests that this task be assigned to the Australian Government WWF further suggests that the data should be compiled at least quarterly and made available to all offshore industry members and the public on a publically accessible website The website should also contain more immediate safety alerts and notifications issued by the Australian Government when immediate action is needed to ensure that a poor cementing technique is not duplicated in other offshore wells

COI Recommendation 32 COI Recommendation 32 recommends that ldquocement integrity should be evaluated wherever practicable by way of cement evaluation tests rather than relying on pre-operational calculations of cement and displacement fluid volumesrdquo WWF agrees that cement evaluation practices and standards should be improved However WWF recommends that cement conditions be examined using all three techniquesmdashpre-operational calculations of cement displacement fluid volumes and post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing)mdashin combination since all that data plays an important role in cement evaluation Additionally WWF recommends that the requirement to obtain post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing) be codified in regulation as a minimum standard

COI Recommendation 29-34 The Draft Government Response notes that in relation to COI Recommendations 29-34 NOPSA has increased its planned inspection frequency for manned drilling and production facilities from once to twice a year and that a recruitment program has been instigated to resource this higher inspection frequency WWF applauds the Governmentrsquos increased inspection program regime for manned drilling and production facilities but recommends that an increased inspection frequency also be applied to unmanned drilling and production facilities where risks can go unnoticed for long periods of time due to lack of onsite staffing

COI Recommendation 38 WWF agrees with the Draft Government Response conclusion that COI Recommendation 38 has some technical problems that need to be remedied COI Recommendation 38 suggests that a ldquohorizontal or high angle penetration of a reservoir should be avoided wherever practicable until such time as the apparent problems associated with the cementing of a casing shoe in these situations are satisfactorily overcomerdquo It would not be reasonable to restrict industry from drilling horizontal or high angle wells because this technology is needed in many cases to produce Australiarsquos oil and gas resources However there are technical remedies that need to be implemented to address lessons learned from the Montara H 1 well blowout Technical remedies include barrier requirements casing design and cementing practices as fully described in WWFrsquos Submission prepared by Susan Harvey Recommendations 18 148 149 167-170 174-175 178 179 and 181

COI Recommendations 66 and 77 WWF agrees with COI Recommendation 66 that ldquothe pendulum has swung too far away from prescriptive standardsrdquo and that ldquoin some areas relating to well integrity there needs to be minimum standardsrdquo WWF does not agree with the COIrsquos Recommendation 77 which suggests that the COI findings related to well integrity need be only included in a guidance manual WWF believes that those minimum standards need to be set in regulation not just included in a legally unenforceable guidance document

COI Finding 52 WWF does not agree with COI Finding 52 that concludes ldquoThe existing legislative regime is largely sufficient to allow effective monitoring and enforcement by regulators of offshore petroleum-related operations ndash the inadequacies identified by the Inquiry relate primarily to the implementation of this legislation However the Inquiry has identified some relatively minor amendments to applicable legislation which it considers would reduce the risk of an event such as the Blowout occurring again [emphasis added]rdquo

WWF recommends that minimum well control barrier compliance standards be set in Australiarsquos regulations and that those standards are clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators and industry is not allowed to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well control barrier manual obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well control barrier manuals should be routinely updated to ensure that best technology and practices remain current

WWF takes exception with the Draft Government Response conclusion as it relates to COI Report Recommendation 10 where it states ldquoThe Government notes that the Montara incident was caused by lack of adherence by the operator to the accepted industry practicesrdquo WWF agrees that PTTEP did not follow accepted industry practices but it was not alone in fault The Government Response should also acknowledged that the government granted permit approvals that also did not conform to accepted industry practices (eg permits amending batch drilling program procedures and well barriers) which were causal factors in the blowout

COI Recommendations 20 COI Recommendation 2 states that ldquoIf a dispute arises between a licensee and a rig operator in relation to a well control issue and is not resolved between them the matter must be raised with the relevant regulator before discretionary operations proceed [emphasis added]rdquo The Draft Government Response rejects this recommendation concluding that ldquowell control issues need to be resolved quickly by the operator so the issue does not escalate furtherrdquo WWF agrees that well control issues need to be resolved quickly to avoid escalation to an unsafe point however a safe technically robust well control solution must be implemented Immediate well control actions would not be considered a ldquodiscretionary operationrdquo on a rig

WWF agrees with COIrsquos main point that is serious non-discretionary well control issues need resolution and if the licensee and operator disagree the issue needs to be raised to a higher authority for resolution The Australian Government is that higher authority and is responsible for protection of human health and the environment

WWF does not agree with the Draft Government Responsersquos conclusion that ldquothe operator is best placed to assess and understand the risk [emphasis added]rdquo Lessons learned from the Montara Blowout case clearly show that PTTEPrsquos staff were not best placed to assess and understand the risk neither were they trained qualified or adequately staffed to make technically sound decisions related to well control In fact in the events leading up to the Montara blowout the rig operator and PTTEP consultants raised concerns about PTTEPrsquos well construction This is exactly why the Australian Government must have highly trained and qualified personnel on staff to aide in making technically sound and safe decisions as it relates to offshore oil and gas activities If Australia is not willing to resource its agencies to this level it should not allow offshore exploration and production to proceed

WWF does agree that the liability for any accident should be retained by the licensee and that the licensee should have adequate financial resources and insurance in place relative to any risks undertaken offshore

WWF agrees with Draft Government Responsersquos conclusion that ldquowell control issues should be reported to the Regulator in the daily drilling reportrdquo However WWF recommends that the Government also provide highly trained and qualified staff to be on duty overseeing offshore operations 24 hours per day 365 days per year Further anyone who has a well control concern or who has identified a well control problem should be required to contact those on duty staff in a timely manner

COI Recommendations 23 The Draft Government Response states that ldquothe Government will also consider if elements of the previously legislated Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004rdquo

WWF strongly supports a thorough technical expert review of the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production to identify which minimum standards should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004 WWFrsquos Reports identify numerous minimum standards that should be incorporated in the regulations as well as additional standards based on industry best practices

COI Recommendations 24 amp 28 COI Recommendation 24 states that ldquoa minimum of two barriers should be in place at all timesrdquo for well control ldquowhenever it is reasonably practicable to do sordquo WWF agrees that a minimum of two barriers should be in place at all times for well control We do not agree that there are times when it is reasonable to have fewer than two barriers in place WWF recommends that the clause ldquowhenever it is reasonably practicable to do sordquo be removed

COIrsquos Recommendation 28 reiterates that ldquotwo or more barriersrdquo should be a minimum standard WWF agrees

COI Recommendation 25-26 COI Recommendations 25-26 suggest a process for regulatory approval of one barrier instead of a minimum compliance standard of two barriers for well control The COI suggests that regulators be allowed to approve a one-barrier approach to well control if a ldquoproper risk assessment is carried outrdquo ldquoexceptional circumstances existrdquo and ldquorisks involved are reduced to as low as reasonably practicablerdquo WWF does not agree with this recommendation There is no technical reason that a two-barrier well control configuration cannot be achieved WWF recommends that a minimum two-barrier well control configuration be codified in regulation without exception

WWF is pleased to see the Draft Government Response acknowledges that ldquothe accepted industry practice is for two well barriers to be available during all well activities and operations including suspended and abandoned wellsrdquo Further WWF is pleased to see the Draft Government Response states that ldquothe Regulator has the power to requires additional barriers should it be considered necessaryrdquo

We are concerned that the Draft Government Response does not address the COI Recommendation to allow less than two minimum barriers WWF recommends that the Final Government Response clearly articulate that waivers allowing less than two barriers will not be granted If the Australian Government disagrees on this point finding that there are technical circumstances in which only one barrier can be installed it should explain its case and the level of risk Australia would be taking with its offshore resources when using such an approach

COI Recommendation 29 COI Recommendation 29 assigns development of best practice standards for well cementing to industry regulators and trainingresearch institutions While WWF agrees that industry should be involved in developing best practice standards for well cementing WWF recommends that minimum well cementing compliance standards be set in Australiarsquos regulations and clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators while not allowing industry to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well cementing standards obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well cementing standards should be routinely updated to ensure that best technology and practices remain current

COI Recommendation 30 COI Recommendation 30 suggests that cement problems and failures that occur offshore of Australia be tracked and analyzed WWF agrees with this recommendation and suggests that this task be assigned to the Australian Government WWF further suggests that the data should be compiled at least quarterly and made available to all offshore industry members and the public on a publically accessible website The website should also contain more immediate safety alerts and notifications issued by the Australian Government when immediate action is needed to ensure that a poor cementing technique is not duplicated in other offshore wells

COI Recommendation 32 COI Recommendation 32 recommends that ldquocement integrity should be evaluated wherever practicable by way of cement evaluation tests rather than relying on pre-operational calculations of cement and displacement fluid volumesrdquo WWF agrees that cement evaluation practices and standards should be improved However WWF recommends that cement conditions be examined using all three techniquesmdashpre-operational calculations of cement displacement fluid volumes and post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing)mdashin combination since all that data plays an important role in cement evaluation Additionally WWF recommends that the requirement to obtain post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing) be codified in regulation as a minimum standard

COI Recommendation 29-34 The Draft Government Response notes that in relation to COI Recommendations 29-34 NOPSA has increased its planned inspection frequency for manned drilling and production facilities from once to twice a year and that a recruitment program has been instigated to resource this higher inspection frequency WWF applauds the Governmentrsquos increased inspection program regime for manned drilling and production facilities but recommends that an increased inspection frequency also be applied to unmanned drilling and production facilities where risks can go unnoticed for long periods of time due to lack of onsite staffing

COI Recommendation 38 WWF agrees with the Draft Government Response conclusion that COI Recommendation 38 has some technical problems that need to be remedied COI Recommendation 38 suggests that a ldquohorizontal or high angle penetration of a reservoir should be avoided wherever practicable until such time as the apparent problems associated with the cementing of a casing shoe in these situations are satisfactorily overcomerdquo It would not be reasonable to restrict industry from drilling horizontal or high angle wells because this technology is needed in many cases to produce Australiarsquos oil and gas resources However there are technical remedies that need to be implemented to address lessons learned from the Montara H 1 well blowout Technical remedies include barrier requirements casing design and cementing practices as fully described in WWFrsquos Submission prepared by Susan Harvey Recommendations 18 148 149 167-170 174-175 178 179 and 181

COI Recommendations 66 and 77 WWF agrees with COI Recommendation 66 that ldquothe pendulum has swung too far away from prescriptive standardsrdquo and that ldquoin some areas relating to well integrity there needs to be minimum standardsrdquo WWF does not agree with the COIrsquos Recommendation 77 which suggests that the COI findings related to well integrity need be only included in a guidance manual WWF believes that those minimum standards need to be set in regulation not just included in a legally unenforceable guidance document

COI Finding 52 WWF does not agree with COI Finding 52 that concludes ldquoThe existing legislative regime is largely sufficient to allow effective monitoring and enforcement by regulators of offshore petroleum-related operations ndash the inadequacies identified by the Inquiry relate primarily to the implementation of this legislation However the Inquiry has identified some relatively minor amendments to applicable legislation which it considers would reduce the risk of an event such as the Blowout occurring again [emphasis added]rdquo

COI Recommendations 23 The Draft Government Response states that ldquothe Government will also consider if elements of the previously legislated Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004rdquo

WWF strongly supports a thorough technical expert review of the Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production to identify which minimum standards should be incorporated in the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004 WWFrsquos Reports identify numerous minimum standards that should be incorporated in the regulations as well as additional standards based on industry best practices

COI Recommendations 24 amp 28 COI Recommendation 24 states that ldquoa minimum of two barriers should be in place at all timesrdquo for well control ldquowhenever it is reasonably practicable to do sordquo WWF agrees that a minimum of two barriers should be in place at all times for well control We do not agree that there are times when it is reasonable to have fewer than two barriers in place WWF recommends that the clause ldquowhenever it is reasonably practicable to do sordquo be removed

COIrsquos Recommendation 28 reiterates that ldquotwo or more barriersrdquo should be a minimum standard WWF agrees

COI Recommendation 25-26 COI Recommendations 25-26 suggest a process for regulatory approval of one barrier instead of a minimum compliance standard of two barriers for well control The COI suggests that regulators be allowed to approve a one-barrier approach to well control if a ldquoproper risk assessment is carried outrdquo ldquoexceptional circumstances existrdquo and ldquorisks involved are reduced to as low as reasonably practicablerdquo WWF does not agree with this recommendation There is no technical reason that a two-barrier well control configuration cannot be achieved WWF recommends that a minimum two-barrier well control configuration be codified in regulation without exception

WWF is pleased to see the Draft Government Response acknowledges that ldquothe accepted industry practice is for two well barriers to be available during all well activities and operations including suspended and abandoned wellsrdquo Further WWF is pleased to see the Draft Government Response states that ldquothe Regulator has the power to requires additional barriers should it be considered necessaryrdquo

We are concerned that the Draft Government Response does not address the COI Recommendation to allow less than two minimum barriers WWF recommends that the Final Government Response clearly articulate that waivers allowing less than two barriers will not be granted If the Australian Government disagrees on this point finding that there are technical circumstances in which only one barrier can be installed it should explain its case and the level of risk Australia would be taking with its offshore resources when using such an approach

COI Recommendation 29 COI Recommendation 29 assigns development of best practice standards for well cementing to industry regulators and trainingresearch institutions While WWF agrees that industry should be involved in developing best practice standards for well cementing WWF recommends that minimum well cementing compliance standards be set in Australiarsquos regulations and clearly articulated for all operators to use in developing a WOMP In this manner the minimum standards are clear and consistent for all offshore operators while not allowing industry to set its own minimum standards WWF recommends that Australia set a very aggressive schedule for completing this important technical work WWF also recommends that Australia hire well construction experts to aide in drafting the well cementing standards obtaining industry input and crafting minimum compliance standards that should be codified in regulation The well cementing standards should be routinely updated to ensure that best technology and practices remain current

COI Recommendation 30 COI Recommendation 30 suggests that cement problems and failures that occur offshore of Australia be tracked and analyzed WWF agrees with this recommendation and suggests that this task be assigned to the Australian Government WWF further suggests that the data should be compiled at least quarterly and made available to all offshore industry members and the public on a publically accessible website The website should also contain more immediate safety alerts and notifications issued by the Australian Government when immediate action is needed to ensure that a poor cementing technique is not duplicated in other offshore wells

COI Recommendation 32 COI Recommendation 32 recommends that ldquocement integrity should be evaluated wherever practicable by way of cement evaluation tests rather than relying on pre-operational calculations of cement and displacement fluid volumesrdquo WWF agrees that cement evaluation practices and standards should be improved However WWF recommends that cement conditions be examined using all three techniquesmdashpre-operational calculations of cement displacement fluid volumes and post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing)mdashin combination since all that data plays an important role in cement evaluation Additionally WWF recommends that the requirement to obtain post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing) be codified in regulation as a minimum standard

COI Recommendation 29-34 The Draft Government Response notes that in relation to COI Recommendations 29-34 NOPSA has increased its planned inspection frequency for manned drilling and production facilities from once to twice a year and that a recruitment program has been instigated to resource this higher inspection frequency WWF applauds the Governmentrsquos increased inspection program regime for manned drilling and production facilities but recommends that an increased inspection frequency also be applied to unmanned drilling and production facilities where risks can go unnoticed for long periods of time due to lack of onsite staffing

COI Recommendation 38 WWF agrees with the Draft Government Response conclusion that COI Recommendation 38 has some technical problems that need to be remedied COI Recommendation 38 suggests that a ldquohorizontal or high angle penetration of a reservoir should be avoided wherever practicable until such time as the apparent problems associated with the cementing of a casing shoe in these situations are satisfactorily overcomerdquo It would not be reasonable to restrict industry from drilling horizontal or high angle wells because this technology is needed in many cases to produce Australiarsquos oil and gas resources However there are technical remedies that need to be implemented to address lessons learned from the Montara H 1 well blowout Technical remedies include barrier requirements casing design and cementing practices as fully described in WWFrsquos Submission prepared by Susan Harvey Recommendations 18 148 149 167-170 174-175 178 179 and 181

COI Recommendations 66 and 77 WWF agrees with COI Recommendation 66 that ldquothe pendulum has swung too far away from prescriptive standardsrdquo and that ldquoin some areas relating to well integrity there needs to be minimum standardsrdquo WWF does not agree with the COIrsquos Recommendation 77 which suggests that the COI findings related to well integrity need be only included in a guidance manual WWF believes that those minimum standards need to be set in regulation not just included in a legally unenforceable guidance document

COI Finding 52 WWF does not agree with COI Finding 52 that concludes ldquoThe existing legislative regime is largely sufficient to allow effective monitoring and enforcement by regulators of offshore petroleum-related operations ndash the inadequacies identified by the Inquiry relate primarily to the implementation of this legislation However the Inquiry has identified some relatively minor amendments to applicable legislation which it considers would reduce the risk of an event such as the Blowout occurring again [emphasis added]rdquo

COI Recommendation 30 COI Recommendation 30 suggests that cement problems and failures that occur offshore of Australia be tracked and analyzed WWF agrees with this recommendation and suggests that this task be assigned to the Australian Government WWF further suggests that the data should be compiled at least quarterly and made available to all offshore industry members and the public on a publically accessible website The website should also contain more immediate safety alerts and notifications issued by the Australian Government when immediate action is needed to ensure that a poor cementing technique is not duplicated in other offshore wells

COI Recommendation 32 COI Recommendation 32 recommends that ldquocement integrity should be evaluated wherever practicable by way of cement evaluation tests rather than relying on pre-operational calculations of cement and displacement fluid volumesrdquo WWF agrees that cement evaluation practices and standards should be improved However WWF recommends that cement conditions be examined using all three techniquesmdashpre-operational calculations of cement displacement fluid volumes and post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing)mdashin combination since all that data plays an important role in cement evaluation Additionally WWF recommends that the requirement to obtain post-cementing evaluation tests (including running cement bond logs cement evaluation tools and pressure testing) be codified in regulation as a minimum standard

COI Recommendation 29-34 The Draft Government Response notes that in relation to COI Recommendations 29-34 NOPSA has increased its planned inspection frequency for manned drilling and production facilities from once to twice a year and that a recruitment program has been instigated to resource this higher inspection frequency WWF applauds the Governmentrsquos increased inspection program regime for manned drilling and production facilities but recommends that an increased inspection frequency also be applied to unmanned drilling and production facilities where risks can go unnoticed for long periods of time due to lack of onsite staffing

COI Recommendation 38 WWF agrees with the Draft Government Response conclusion that COI Recommendation 38 has some technical problems that need to be remedied COI Recommendation 38 suggests that a ldquohorizontal or high angle penetration of a reservoir should be avoided wherever practicable until such time as the apparent problems associated with the cementing of a casing shoe in these situations are satisfactorily overcomerdquo It would not be reasonable to restrict industry from drilling horizontal or high angle wells because this technology is needed in many cases to produce Australiarsquos oil and gas resources However there are technical remedies that need to be implemented to address lessons learned from the Montara H 1 well blowout Technical remedies include barrier requirements casing design and cementing practices as fully described in WWFrsquos Submission prepared by Susan Harvey Recommendations 18 148 149 167-170 174-175 178 179 and 181

COI Recommendations 66 and 77 WWF agrees with COI Recommendation 66 that ldquothe pendulum has swung too far away from prescriptive standardsrdquo and that ldquoin some areas relating to well integrity there needs to be minimum standardsrdquo WWF does not agree with the COIrsquos Recommendation 77 which suggests that the COI findings related to well integrity need be only included in a guidance manual WWF believes that those minimum standards need to be set in regulation not just included in a legally unenforceable guidance document

COI Finding 52 WWF does not agree with COI Finding 52 that concludes ldquoThe existing legislative regime is largely sufficient to allow effective monitoring and enforcement by regulators of offshore petroleum-related operations ndash the inadequacies identified by the Inquiry relate primarily to the implementation of this legislation However the Inquiry has identified some relatively minor amendments to applicable legislation which it considers would reduce the risk of an event such as the Blowout occurring again [emphasis added]rdquo

WWF does not agree with this finding because the COI report lists a number of recommendations that point to the need for improvements in minimum standards The fact that minimum standards were not and still are not clearly articulated in Australian regulation is a major deficiency in the regulatory regime not a deficiency merely requiring minor amendments As explained above WWF does not agree that making minor amendments to Australian regulation and again handing over the reins to industry to set those necessary minimum standards is a good approach WWF believes that it is Australiarsquos role and obligation to set minimum standards in regulation and to inspect and audit industry activities to ensure compliance with those standards

If minimum standards are not clearly articulated in Australia regulation both industry and government staff will be uncertain how to measure compliance and it will be impossible to enforce a standard that is not clearly articulated The lack of clear minimum standards was a major deficiency in the Montara case and must be remedied While the COI concludes that some of the Designated Authorities were more technically competent than others in reviewing well permits it does not change the fact that even the more competent Designated Authorities relied on the outdated Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production as the minimum technical standards to make their decisions Some technical standards must be in place for government staff to measure the adequacy of a well permit or compliance If Australia does not set those minimum standards then the yardstick will vary considerably across government staff

Minimum Standards for Well Control Training amp Competencies

COI Recommendations 58-59 COI Recommendations 58-59 suggest that a mandatory well control training program be put in place WWF agrees that mandatory well control training programs should be put in place but suggests that this recommendation be strengthened by assigning the Australian Government the lead role in developing a well control training program Mandatory well control training should include both Australian regulatory staff and industry staff WWF does not agree with the Draft Government Response that states that well control is ldquoprimarily an industry operations matterrdquo Well control should be of paramount importance to both government and industry and both entities should have trained and qualified staff to address it

The Australian Government should review and approve industry training programs to ensure that the programs are technically robust conform to Australian requirements and hold consistent high-standards across companies operating in Australia

Additionally WWF recommends that minimum well control training standards (including course content who must attend the course course frequency and certification requirements) should be codified in Australia regulation

COI Recommendations 60-63 COI Recommendations 60-63 seek to remedy a key problem found in the Montara Well blowout incident by suggesting that well control competency standards be established and that staff need to be certified in these important operational standards WWF agrees that well control competency standards need to be established but does not agree that industry should define the standard WWF recommends that the Australian Government establish the well control competency standards and routinely audit industryrsquos compliance with those standards

Minimum Standards for Emergency Pre-Planning

COI Findings 66-68 COI Findings 66-68 conclude that it is neither practical nor cost effective to require an operator to ensure that a rig is always on standby to assist by drilling a relief well in the event of a

blowout The COI recommends that industry retain flexibility in identifying a relief well rig before the blowout occurs WWF disagrees with this finding

WWF recommended four specific courses of action (Recommendations 1146-1149) for emergency pre-planning and relief wells in its June 2010 report WWFrsquos recommendations include the need to develop an emergency response plan the need to put in place a contract retainer with a well control expert and memorandums of understanding for mutual response with other operators and the need to identify a drilling rig that would be capable of drilling a relief well in a timely manner WWF does not agree that these steps are impractical or ineffective

First development of emergency response plan and government approval of that plan is a very logical step Advanced agency approval of emergency response plans (including well control actions) will enable quick decision-making to ensure that the window of opportunity to implement well control techniques does not expire during protracted deliberations The COI Findings at 55-61 clearly articulate the fact that the operator and government had not agreed in advance on a logical course of action nor did the government have technical staff that understood the potential benefits and risks of more expedient well control options such as deluge operations and well capping COI Recommendation 83 agrees with WWF when pointing to the need for emergency pre-planning But Recommendation 83 is in conflict COI Findings 55-61

Technical issues related to blowout response need to be ironed out between industry and the government in a written approved emergency response plan in advance of drilling the well If this occurred the Montara Blowout Response would have been more efficient For example NOPSA and PTTEP wasted precious response time debating the merits of deluge and well capping operations If NOPSArsquos position is that deluge and well capping operations will never be approved in response to an offshore blowout then that needs to be clearly articulated in an approved blowout response plan The absence of deluge and well capping operations leaves relief well drilling as the primary well control method thus the importance of identifying a relief well rig is elevated The fact that these technical issues were not ironed out in advance led to delays in the Montara Blowout Response This important issue must be remedied and not ignored

Second a well control expert should be identified and retained Many countries require a well driller to have an emergency response well control expert on retainer and some companies even have one or more emergency response well control experts on site during drilling operations This is a logical affordable and common sense solution to minimize the time it would take to enter into a contract with an emergency response well control expert at the onset of a blowout Immediate advice is needed at the onset of a blowout not hours or days later after a contract is put in place

Third it is reasonable to require offshore operators to put in place Memorandums of Agreement for mutual aid response and emergency assistance with other offshore operators working nearby Doing so ensures that immediate assistance can be provided without major delays in negotiating the legal liabilities or providing emergency response to another operator

Fourth it is practical and cost effective to identify a relief well rig prior to drilling a well WWF is not recommending that the relief well rig be moved into position nearby the active drilling rig sitting idle while waiting for a well blowout to occur that would be impractical and not cost effective Instead WWF is recommending that the drilling operator identify in advance its plans to efficiently and timely obtain a relief well rig That plan could include immediate access to a nearby rig used by the operator or another operator The nearby rig would need to safely suspend the well it is working on and move over to assist as quickly as possible

Another important thing is to locate a rig in advance that is actually capable of drilling a relief well not all rigs have equivalent capabilities

Well control of a catastrophic well blowout is serious highly technical dangerous work During a catastrophic emergency there is insufficient time to search for relief well rigs or negotiate contracts for relief well rigs This work should be done and can be done in advance to expedite an emergency response WWF believes that the operator must do more than ldquomake meaningful enquires as to the availability of potential rigs on a contingency basisrdquo

In other countries including Canada and the US the operator is required to identify a rig that would be capable of drilling a relief well The operator is also required to provide information on the amount of time it would take for that rig to suspend operation at its location at the time of the blowout and move into position to drill a relief well This information provides industry and the government with a clearly articulated plan identifying which rig is put on retainer and confirming a commitment from that rig to suspend its operation and move to assist The information also verifies in advance that the rig is even capable of drilling the required relief well (not all rigs would be capable of drilling relief wells at some depths)

For example if a drilling operator submitted a pre-drill plan to the Australian Government that said the nearest relief well rig was three months away and it was uncertain if the rig operator would be able to suspend operations and come to assist then that drilling plan should not be approved

Because there was no pre-drill emergency blowout relief well plan submitted for the Montara Well or approved by the Australian Government this problem was only discovered after the blowout occurred when little could be done to improve the flawed plan or lack thereof

It would be a great risk to drill the original well with knowledge that a relief well could not be constructed in a timely manner This information is critical to development of any Safety Case Review to approve a well construction Safety Case without it would be improvident

Recommendations Made in WWFrsquos June 2010 Report That Warrant Further Consideration by the Australian Government

WWFrsquos June 2010 Report included 180 Findings and Recommendations including a number that we feel warrant further consideration by the Australian Government

Recommendation 115 Simultaneous high risk operations should not be conducted by the same drilling crew

Recommendation 139 A list of approved barriers should be established in regulation and that list should be updated on a routine basis to incorporate new technology as it is developed

Recommendation 140 A final as-built engineering drawing of the completed well should be developed to accurately document all subsurface well construction equipment piping and cement locations A completed accurate well file should be maintained by the onshore drilling engineer serving as a reference for engineers who may later design well completion or well workover projects

Recommendation 141 Minimum training and qualification standards should be set for well control barrier installation and removal

Recommendation 149 Regulatory standards should be clear about intermediate casing depth the required number of intermediate strings and cementing and pressure testing criteria Intermediate casing serves the important function of sealing off anomalous pressure zones lost circulation zones and other

drilling hazards If intermediate casing is set in the production zone it must be treated as production casing and held to the same standards

Recommendation 152 Regulations need to include unequivocal BOP and wellhead control standards The standards should specify when BOPs andor wellhead control systems must be in place and when they can be removed

Recommendation 153 Well control manuals and instructions need to address blowout control during drilling completion and all well re-entry operations including well tie-ins Most well control manuals and training focus on well control (BOP and mud systems) while drilling and do not allocate sufficient technical guidance for rig staff on well control during batch drilling well tie-ins and well workovers More instruction on these points is needed

Recommendation 154 Government inspectors are needed to witness and verify BOP testing

Recommendation 155 Minimum standards should be set that require a through technical review of vendor equipment compatibility as part of the well construction design

Recommendation 166 Government oversight (via inspections and audits) is needed to verify compliance with permit conditions

Recommendation 167 Regulatory standards should be established to ensure the following (1) that there is adequate cement in the annulus (2) that the casing shoe is properly cemented (or additional barriers are set to account for a failed casing shoe) and (3) that high pressure hydrocarbon and thief zones are isolated

Recommendation 168 High angle sections of casing are notoriously difficult to cement High angle casing strings often require additional remedial cementing treatment careful evaluation and intervention if a cement seal is not initially obtained

Recommendation 169 Because cement plugs placed in high angle sections of casing are notoriously difficult to cement a three barrier system should be required for this type of system setting two additional plugs above the high angle well section to ensure well control

Recommendation 175 Minimum Wait on Cement (WOC) standards should be established to ensure cement reaches its maximum compressive strength prior to pressure testing it as a barrier

Recommendation 179 Cement evaluation logs should be run in wells where the risk and consequences of poor cementing practices are unacceptable

Recommendation 181 Regulations should be supported with technical standards and guidance that agency staff can use to make consistent and technically sound permit decisions and to verify compliance These standards should be available to industry so the standards and expectations are clear

Recommendation 1107 Oil and gas consultants contractors and vendors need a confidential outlet or government provided avenue to report gross permit deviations safety violations or potentially hazardous situations

Recommendation 1112 The regulatory term ldquogood oilfield practicerdquo needs to be more explicitly defined The revised definition should include health safety and environmental objectives and establish firm and unambiguous compliance yardsticks

Recommendation 1128 A team of Australian and international industry experts could be gathered to identify a list of critical minimum standards that should be codified in regulation to meet health safety and environmental objectives

Recommendation 1129 A system can be established to update regulations on a routine basis to take into account technical innovation A formal technical expert review process can be established to examine any proposed waivers to the existing standards Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum

standard and that it is in Australiarsquos best interest to approve this technical innovation ahead of a regulatory amendment

Recommendation 1132 Blowouts are reasonably foreseeable consequences of offshore drilling and completion operations Pre-drill environmental assessments should include a risk and impact assessment of the worst-case blowout scenario Human error and mechanical failure scenarios should be included

Recommendation 1134 If the operator is unwilling to address or resolve health safety or environmental concerns the drilling contractor should be required to report the problem to the appropriate agencies for immediate resolution

Recommendation 1135 Legal protections should be in place for individual employees as well as companies to freely report safety concerns and prevent repercussions to those reporting safety violations

Recommendation 1139 Government must ensure that there is a system in place to compel contractors stop unsafe acts and immediately report and remedy unsafe operations There should be incentives and protections in place for contractors that report and there should be penalties for those that donrsquot

Recommendation 1140 Contractorrsquos legal requirements rights and responsibilities to report safety and permit violations warrant examination

Recommendation 1142 Routine onsite inspections and audits are a critical component of a high quality regulatory program Crafting stringent regulations is only one step in the process Routine inspections and audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Recommendation 1151 PTTEP assigned staff involved in the H1 blowout to drill the H1 relief well and conduct emergency response activities Good oilfield practice is to grant leave to staff involved in events leading up to a blowout because they will be understandably very shaken and not in a position to do complicated dangerous and serious work

Recommendation 1158 Regulations should specify the training and qualifications needed to safely operate offshore

Recommendation 1161 Agencies need adequate technical and financial resources to review and approve drilling and completion programs There were inadequate agency resources assigned to the Montara Program

Recommendation 1173 Financial responsibility requirements for offshore operators should be clearly articulated in the regulation such that staff can verify compliance

Finding 192 The Montara Platform Topside Module installation delay should have triggered a multi-agency safety and environmental assessment to examine the potential risks associated with the newly proposed batch drilling program and new Topside Module installation plans The inability to immediately tie newly drilled wells in to the platform wellhead control system significantly increased the risk factor for the Montara wells The lack of a coordinated peer-reviewed technical safety and environmental assessment to evaluate and identify the risks of this major design change appears to have contributed to the incident

Finding 194 NOPSA and the DA should have considered delaying the drilling program until the Topside Module was available or have required additional risk mitigation for the batch drilling program

Finding 195 The November 2008 West Atlas Drilling Rig Safety Case Revision (SCR) included information on the barrier and well control risks yet that analysis was incomplete because the Montara Drilling Program Plans were not yet completed Furthermore NOPSA who is responsible for reviewing the SCR did not enlist any technical review of the SCR from the DA or independent consultants on the barrier and well control risks identified in the preliminary plan

Finding 196 The November 2008 Safety Case Revision (SCR) should not have been approved by NOPSA absent the well plans for the Montara wells to be drilled in early 2009 Insufficient well data and risk analysis was included in the SCR for agency decision making The Safety Case Revision process should have been suspended until a complete set of well plans was available

Finding 197 The approved Safety Case Revision was based on a BOP in place for well control Yet no BOP was in place Compounding the problem the DA approved well plans that provided for well re-entry and tie-in with no BOP The SCR identified the BOP as a critical Health Safety and Environment (HSE) piece of equipment yet the BOP was not installed on H1 during re-entry

Finding 199 NOPSA should not have approved the November 2008 SCR absent HAZID assessments for the Montara well plans Insufficient well data and risk analysis was included in the SCR for agency decision making

Finding 1108 The elimination of Australiarsquos prescriptive standards was a root cause of this incident If Australiarsquos 2004 prescriptive standards for well control barriers were still in place the exchange of a 9-58rdquo PCCC for a 45m (148rsquo) long shallow-set cement plug barrier would not have been allowed likely adverting this disaster

Finding 1110 The regulatory pendulum swung too far away from prescription into a regulatory regime of almost exclusive self-regulation Australiarsquos regulations are unique in that they weigh heavily on ldquoself- regulationrdquo

Finding 1111 The term ldquogood oilfield practicerdquo is not adequately defined in Australian regulation leaving its application subject to unlimited government and industry interpretation This opened the door for potential misapplication

Finding 1113 The lack of minimum prescriptive standards is even echoed by PTTEPrsquos Well Construction Manager as his own three decades of experience show that ldquogood oilfield practicerdquo is ambiguous widely interpreted and is in large part a function of a personrsquos expertise and experience

Finding 1114 Where regulatory standards do not exist or are vague the door is open to shortcuts and cost-cutting measures that can increase risk

Finding 1115 There was insufficient DA staff to review approve and oversee Timor Sea offshore drilling operations

Finding 1119 The DA had no formal written standard operating procedures for conducting technical reviews or making risk-based decisions While the DA relied in part on the now revoked Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production as guidance the schedule was not strictly adhered to and deviations were causal blowout factors

Finding 1123 A policy balance between prescriptive standards and technical innovation and flexibility must be achieved As governments develop regulations that aim to strike that balance a stead-fast eye must be kept on the ultimate goal of human health safety and environmental protection

Finding 1125 Whether they are called ldquominimum standardsrdquo or ldquoprinciple-based regulationsrdquo a basic set of minimum standards is necessary to protect health safety and the environment (HSE) and give government regulators a baseline for determining compliance

Finding 1126 The 2004 regulatory reform for Australian oil and gas exploration and development did not achieve a balance between prescriptive standards and latitude for innovation It eliminated all levels of prescription defaulting to an undefined standard of ldquogood oilfield practicerdquo This left government officials with an ambiguous standard to rely on to approve permits or measure compliance

Finding 1127 Prescriptive regulations are only effective if coupled with an inspection audit and enforcement system that ensures compliance

Audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Finding 1143 On August 21 2009 the Montara H1 well blowout commenced Over one year had passed since the Montara Wellhead Platform was installed in July 2008 and not even one onsite inspection had taken place by the DA NOPSA or DEWHA

Marine Bioregional Planning and Oil and Gas Exploration and Production in Commonwealth Waters

WWF notes that in paragraph 665 the COI identifies a number of deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills as articulated in point 665 WWF believes that this should be a priority for both the Federal Environment department and the new regulatory Authority and that the proposed measures to address the deficiencies identified in the COI should be made available for public comment as a matter of priority and that the following recommendation be adopted Recommendation The Australian Government conduct a whole of Government review of its environmental regulatory regime and oil spill response arrangements in order to improve Australiarsquos capacity to respond to any future offshore oil spills

665 In an era of growth in the offshore petroleum sector in Australia the Blowout provides an important reminder of the very real environmental risks that accompany the substantial economic benefits from this development It underlines the need for a more effective environmental regulatory structure bearing on well integrity issues backed by an emergency response framework that will ensure that environment protection and sustainable development objectives can be achieved This episode has revealed a number of major deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills WWF notes that in paragraph 666 the COI notes the importance of the biodiversity values of the North-west Marine region which has biodiversity affinities with the Indo-Pacific tropical marine ecosystems Paragraph 667 notes that the North-west region is currently undergoing marine bioregional planning one goal of which is to establish a Comprehensive Adequate and Representative system of marine protected areas for the region with the aim of protecting and safe-guarding the full suite of species communities habitats and ecosystems found within the region The reefs shelves atolls shallow and deepwater habitats and ecosystems of the North-west region support a diverse range of unique and critically important ecological features species habitats communities and ecosystems as well as supporting important ecological processes and being home of migration routes feeding grounds breeding grounds and aggregation sites for many migratory species of national and global importance as well as much loved flagship species such as whales dolphins seabirds and marine turtles These species communities and habitats would have been impacted by the blowout and will be put at risk through further exploration and production activities associated with the oil and gas industry particularly if there is not a set of

large marine sanctuary areas that provide areas free from oil and gas activities WWF believes the natural marine values of the North-west region may be some of the most intact and biodiverse examples of tropical marine biodiversity remaining on the planet with close links to the Coral Triangle region found to the North The effective conservation of these marine resources is a priority not just for Australia but is a matter of global importance WWF notes that currently less than 1 of this region is under formal protection in highly protected marine reserves that prohibit extractive activities such as oil and gas exploration and protection WWF suggests that an additional recommendation from the Australian Government in its response to the COI be as follows

Recommendation The creation of a world-class network of comprehensive adequate and representative highly protected marine protected is a critical step in securing the future health of Australiarsquos Commonwealth waters and is an essential risk management strategy in the face of events such as the Montara blowout in Australia and the BP Deepwater Horizon incident in the Gulf of Mexico The identification of the boundaries for such a network is a priority for the Australian Government and will preceed the establishment of the new regulatory agency

666 The Montara Oilfield is located in remote Commonwealth waters within the North‐west Marine Region The region has a rich marine environment which supports a number of commercial recreational and indigenous fisheries 667 DEWHA is currently preparing the North‐west Region Marine Bioregional Plan which is expected to be released this year It will identify key habitats flora and fauna natural processes human uses and benefits and threats to the long‐term ecological sustainability of the region DEWHA released a North‐west Bioregional Profile in 2008 to bring together the best available

information for the region554

but there will remain gaps in baseline survey data for many species

and ecosystems in the region which will only be practical to fill over time555

Annex 1

US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling Report January 12 2011

Key Recommendations Made That Also Apply to Offshore Oil amp Gas Drilling in Australia Key US Commission Findings of Interest to Australiarsquos Reform Efforts

1 Government staff were not trained and qualified in petroleum engineering safety and oil spill response to a degree sufficient to avert the disaster or to ensure an efficient response

2 Government had limited regulatory resources and did not have sufficient trained and qualified staff to oversee offshore operations

3 Industry accepted the role of drafting its own standards but those standards fell short of needed reform

4 Industry staff were not trained and qualified to determine cement success

5 Necessary Cement Evaluation Tool (CET) logs were not run to diagnose the cement condition

6 Industry has not and will not propose more extensive mandatory cement evaluation because of the incremental costs despite the well-known cement integrity challenges and risks on offshore wells

7 Industry staff and contractors were rushed and resorted to shortcuts because the well was over budget and behind schedule

8 An inadequate amount of cement was pumped and BP did not follow its own cementing best practices for the Macondo well

9 New techniques and procedures were used by industry and approved by government officials without rigorous technical reviews or risk assessments

10 Halliburton laboratory results for the Macondo well showed the cement was not properly designed for well conditions and was a causal factor in the blowout

11 Poor cement design and lack of technical expertise and guidance from the cementing contractor (Halliburton) was causal factor in the blowout

12 Government staff had a conflict of interest in trying to promote oil and gas development while regulating it

13 Investments made to reap the benefits of offshore revenue extraction were not proportionate to investments made in drilling safety and response planning

14 Quote from the US Commission Report ldquoThe Australian Government report is focused on keeping prescriptive standards out of the regulations so as not to stifle innovation However the clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advancerdquo

15 A lack of effective well control barriers was a causal factor in the blowout

16 Float valve failure was a causal factor in the blowout

17 Failure of industry management and communication was a causal factor in the blowout

18 Industry used and the government allowed methods procedures and equipment that were less costly but not proven equally safe or effective to the minimum regulatory standards

19 Government officials allowed deviations to government standards without knowing whether it was safe to do so Officials approved those deviations within minutes of industryrsquos requests without completing any serious level of technical review or analysis

20 Contractor errors and lack of contractor oversight training and qualifications were causal factors in the blowout

21 There are serious problems with allowing industry to develop its own safety and technical standards American Petroleum Institute (API)-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words standards that almost all operators could readily achieve are seriously undermining the entire US federal regulatory system for offshore oil and gas exploration and production

22 API resisted the Safety Case approach therefore the Safety Case requirements were not required in the US despite its success in other countries

23 US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

blowout The COI recommends that industry retain flexibility in identifying a relief well rig before the blowout occurs WWF disagrees with this finding

WWF recommended four specific courses of action (Recommendations 1146-1149) for emergency pre-planning and relief wells in its June 2010 report WWFrsquos recommendations include the need to develop an emergency response plan the need to put in place a contract retainer with a well control expert and memorandums of understanding for mutual response with other operators and the need to identify a drilling rig that would be capable of drilling a relief well in a timely manner WWF does not agree that these steps are impractical or ineffective

First development of emergency response plan and government approval of that plan is a very logical step Advanced agency approval of emergency response plans (including well control actions) will enable quick decision-making to ensure that the window of opportunity to implement well control techniques does not expire during protracted deliberations The COI Findings at 55-61 clearly articulate the fact that the operator and government had not agreed in advance on a logical course of action nor did the government have technical staff that understood the potential benefits and risks of more expedient well control options such as deluge operations and well capping COI Recommendation 83 agrees with WWF when pointing to the need for emergency pre-planning But Recommendation 83 is in conflict COI Findings 55-61

Technical issues related to blowout response need to be ironed out between industry and the government in a written approved emergency response plan in advance of drilling the well If this occurred the Montara Blowout Response would have been more efficient For example NOPSA and PTTEP wasted precious response time debating the merits of deluge and well capping operations If NOPSArsquos position is that deluge and well capping operations will never be approved in response to an offshore blowout then that needs to be clearly articulated in an approved blowout response plan The absence of deluge and well capping operations leaves relief well drilling as the primary well control method thus the importance of identifying a relief well rig is elevated The fact that these technical issues were not ironed out in advance led to delays in the Montara Blowout Response This important issue must be remedied and not ignored

Second a well control expert should be identified and retained Many countries require a well driller to have an emergency response well control expert on retainer and some companies even have one or more emergency response well control experts on site during drilling operations This is a logical affordable and common sense solution to minimize the time it would take to enter into a contract with an emergency response well control expert at the onset of a blowout Immediate advice is needed at the onset of a blowout not hours or days later after a contract is put in place

Third it is reasonable to require offshore operators to put in place Memorandums of Agreement for mutual aid response and emergency assistance with other offshore operators working nearby Doing so ensures that immediate assistance can be provided without major delays in negotiating the legal liabilities or providing emergency response to another operator

Fourth it is practical and cost effective to identify a relief well rig prior to drilling a well WWF is not recommending that the relief well rig be moved into position nearby the active drilling rig sitting idle while waiting for a well blowout to occur that would be impractical and not cost effective Instead WWF is recommending that the drilling operator identify in advance its plans to efficiently and timely obtain a relief well rig That plan could include immediate access to a nearby rig used by the operator or another operator The nearby rig would need to safely suspend the well it is working on and move over to assist as quickly as possible

Another important thing is to locate a rig in advance that is actually capable of drilling a relief well not all rigs have equivalent capabilities

Well control of a catastrophic well blowout is serious highly technical dangerous work During a catastrophic emergency there is insufficient time to search for relief well rigs or negotiate contracts for relief well rigs This work should be done and can be done in advance to expedite an emergency response WWF believes that the operator must do more than ldquomake meaningful enquires as to the availability of potential rigs on a contingency basisrdquo

In other countries including Canada and the US the operator is required to identify a rig that would be capable of drilling a relief well The operator is also required to provide information on the amount of time it would take for that rig to suspend operation at its location at the time of the blowout and move into position to drill a relief well This information provides industry and the government with a clearly articulated plan identifying which rig is put on retainer and confirming a commitment from that rig to suspend its operation and move to assist The information also verifies in advance that the rig is even capable of drilling the required relief well (not all rigs would be capable of drilling relief wells at some depths)

For example if a drilling operator submitted a pre-drill plan to the Australian Government that said the nearest relief well rig was three months away and it was uncertain if the rig operator would be able to suspend operations and come to assist then that drilling plan should not be approved

Because there was no pre-drill emergency blowout relief well plan submitted for the Montara Well or approved by the Australian Government this problem was only discovered after the blowout occurred when little could be done to improve the flawed plan or lack thereof

It would be a great risk to drill the original well with knowledge that a relief well could not be constructed in a timely manner This information is critical to development of any Safety Case Review to approve a well construction Safety Case without it would be improvident

Recommendations Made in WWFrsquos June 2010 Report That Warrant Further Consideration by the Australian Government

WWFrsquos June 2010 Report included 180 Findings and Recommendations including a number that we feel warrant further consideration by the Australian Government

Recommendation 115 Simultaneous high risk operations should not be conducted by the same drilling crew

Recommendation 139 A list of approved barriers should be established in regulation and that list should be updated on a routine basis to incorporate new technology as it is developed

Recommendation 140 A final as-built engineering drawing of the completed well should be developed to accurately document all subsurface well construction equipment piping and cement locations A completed accurate well file should be maintained by the onshore drilling engineer serving as a reference for engineers who may later design well completion or well workover projects

Recommendation 141 Minimum training and qualification standards should be set for well control barrier installation and removal

Recommendation 149 Regulatory standards should be clear about intermediate casing depth the required number of intermediate strings and cementing and pressure testing criteria Intermediate casing serves the important function of sealing off anomalous pressure zones lost circulation zones and other

drilling hazards If intermediate casing is set in the production zone it must be treated as production casing and held to the same standards

Recommendation 152 Regulations need to include unequivocal BOP and wellhead control standards The standards should specify when BOPs andor wellhead control systems must be in place and when they can be removed

Recommendation 153 Well control manuals and instructions need to address blowout control during drilling completion and all well re-entry operations including well tie-ins Most well control manuals and training focus on well control (BOP and mud systems) while drilling and do not allocate sufficient technical guidance for rig staff on well control during batch drilling well tie-ins and well workovers More instruction on these points is needed

Recommendation 154 Government inspectors are needed to witness and verify BOP testing

Recommendation 155 Minimum standards should be set that require a through technical review of vendor equipment compatibility as part of the well construction design

Recommendation 166 Government oversight (via inspections and audits) is needed to verify compliance with permit conditions

Recommendation 167 Regulatory standards should be established to ensure the following (1) that there is adequate cement in the annulus (2) that the casing shoe is properly cemented (or additional barriers are set to account for a failed casing shoe) and (3) that high pressure hydrocarbon and thief zones are isolated

Recommendation 168 High angle sections of casing are notoriously difficult to cement High angle casing strings often require additional remedial cementing treatment careful evaluation and intervention if a cement seal is not initially obtained

Recommendation 169 Because cement plugs placed in high angle sections of casing are notoriously difficult to cement a three barrier system should be required for this type of system setting two additional plugs above the high angle well section to ensure well control

Recommendation 175 Minimum Wait on Cement (WOC) standards should be established to ensure cement reaches its maximum compressive strength prior to pressure testing it as a barrier

Recommendation 179 Cement evaluation logs should be run in wells where the risk and consequences of poor cementing practices are unacceptable

Recommendation 181 Regulations should be supported with technical standards and guidance that agency staff can use to make consistent and technically sound permit decisions and to verify compliance These standards should be available to industry so the standards and expectations are clear

Recommendation 1107 Oil and gas consultants contractors and vendors need a confidential outlet or government provided avenue to report gross permit deviations safety violations or potentially hazardous situations

Recommendation 1112 The regulatory term ldquogood oilfield practicerdquo needs to be more explicitly defined The revised definition should include health safety and environmental objectives and establish firm and unambiguous compliance yardsticks

Recommendation 1128 A team of Australian and international industry experts could be gathered to identify a list of critical minimum standards that should be codified in regulation to meet health safety and environmental objectives

Recommendation 1129 A system can be established to update regulations on a routine basis to take into account technical innovation A formal technical expert review process can be established to examine any proposed waivers to the existing standards Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum

standard and that it is in Australiarsquos best interest to approve this technical innovation ahead of a regulatory amendment

Recommendation 1132 Blowouts are reasonably foreseeable consequences of offshore drilling and completion operations Pre-drill environmental assessments should include a risk and impact assessment of the worst-case blowout scenario Human error and mechanical failure scenarios should be included

Recommendation 1134 If the operator is unwilling to address or resolve health safety or environmental concerns the drilling contractor should be required to report the problem to the appropriate agencies for immediate resolution

Recommendation 1135 Legal protections should be in place for individual employees as well as companies to freely report safety concerns and prevent repercussions to those reporting safety violations

Recommendation 1139 Government must ensure that there is a system in place to compel contractors stop unsafe acts and immediately report and remedy unsafe operations There should be incentives and protections in place for contractors that report and there should be penalties for those that donrsquot

Recommendation 1140 Contractorrsquos legal requirements rights and responsibilities to report safety and permit violations warrant examination

Recommendation 1142 Routine onsite inspections and audits are a critical component of a high quality regulatory program Crafting stringent regulations is only one step in the process Routine inspections and audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Recommendation 1151 PTTEP assigned staff involved in the H1 blowout to drill the H1 relief well and conduct emergency response activities Good oilfield practice is to grant leave to staff involved in events leading up to a blowout because they will be understandably very shaken and not in a position to do complicated dangerous and serious work

Recommendation 1158 Regulations should specify the training and qualifications needed to safely operate offshore

Recommendation 1161 Agencies need adequate technical and financial resources to review and approve drilling and completion programs There were inadequate agency resources assigned to the Montara Program

Recommendation 1173 Financial responsibility requirements for offshore operators should be clearly articulated in the regulation such that staff can verify compliance

Finding 192 The Montara Platform Topside Module installation delay should have triggered a multi-agency safety and environmental assessment to examine the potential risks associated with the newly proposed batch drilling program and new Topside Module installation plans The inability to immediately tie newly drilled wells in to the platform wellhead control system significantly increased the risk factor for the Montara wells The lack of a coordinated peer-reviewed technical safety and environmental assessment to evaluate and identify the risks of this major design change appears to have contributed to the incident

Finding 194 NOPSA and the DA should have considered delaying the drilling program until the Topside Module was available or have required additional risk mitigation for the batch drilling program

Finding 195 The November 2008 West Atlas Drilling Rig Safety Case Revision (SCR) included information on the barrier and well control risks yet that analysis was incomplete because the Montara Drilling Program Plans were not yet completed Furthermore NOPSA who is responsible for reviewing the SCR did not enlist any technical review of the SCR from the DA or independent consultants on the barrier and well control risks identified in the preliminary plan

Finding 196 The November 2008 Safety Case Revision (SCR) should not have been approved by NOPSA absent the well plans for the Montara wells to be drilled in early 2009 Insufficient well data and risk analysis was included in the SCR for agency decision making The Safety Case Revision process should have been suspended until a complete set of well plans was available

Finding 197 The approved Safety Case Revision was based on a BOP in place for well control Yet no BOP was in place Compounding the problem the DA approved well plans that provided for well re-entry and tie-in with no BOP The SCR identified the BOP as a critical Health Safety and Environment (HSE) piece of equipment yet the BOP was not installed on H1 during re-entry

Finding 199 NOPSA should not have approved the November 2008 SCR absent HAZID assessments for the Montara well plans Insufficient well data and risk analysis was included in the SCR for agency decision making

Finding 1108 The elimination of Australiarsquos prescriptive standards was a root cause of this incident If Australiarsquos 2004 prescriptive standards for well control barriers were still in place the exchange of a 9-58rdquo PCCC for a 45m (148rsquo) long shallow-set cement plug barrier would not have been allowed likely adverting this disaster

Finding 1110 The regulatory pendulum swung too far away from prescription into a regulatory regime of almost exclusive self-regulation Australiarsquos regulations are unique in that they weigh heavily on ldquoself- regulationrdquo

Finding 1111 The term ldquogood oilfield practicerdquo is not adequately defined in Australian regulation leaving its application subject to unlimited government and industry interpretation This opened the door for potential misapplication

Finding 1113 The lack of minimum prescriptive standards is even echoed by PTTEPrsquos Well Construction Manager as his own three decades of experience show that ldquogood oilfield practicerdquo is ambiguous widely interpreted and is in large part a function of a personrsquos expertise and experience

Finding 1114 Where regulatory standards do not exist or are vague the door is open to shortcuts and cost-cutting measures that can increase risk

Finding 1115 There was insufficient DA staff to review approve and oversee Timor Sea offshore drilling operations

Finding 1119 The DA had no formal written standard operating procedures for conducting technical reviews or making risk-based decisions While the DA relied in part on the now revoked Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production as guidance the schedule was not strictly adhered to and deviations were causal blowout factors

Finding 1123 A policy balance between prescriptive standards and technical innovation and flexibility must be achieved As governments develop regulations that aim to strike that balance a stead-fast eye must be kept on the ultimate goal of human health safety and environmental protection

Finding 1125 Whether they are called ldquominimum standardsrdquo or ldquoprinciple-based regulationsrdquo a basic set of minimum standards is necessary to protect health safety and the environment (HSE) and give government regulators a baseline for determining compliance

Finding 1126 The 2004 regulatory reform for Australian oil and gas exploration and development did not achieve a balance between prescriptive standards and latitude for innovation It eliminated all levels of prescription defaulting to an undefined standard of ldquogood oilfield practicerdquo This left government officials with an ambiguous standard to rely on to approve permits or measure compliance

Finding 1127 Prescriptive regulations are only effective if coupled with an inspection audit and enforcement system that ensures compliance

Audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Finding 1143 On August 21 2009 the Montara H1 well blowout commenced Over one year had passed since the Montara Wellhead Platform was installed in July 2008 and not even one onsite inspection had taken place by the DA NOPSA or DEWHA

Marine Bioregional Planning and Oil and Gas Exploration and Production in Commonwealth Waters

WWF notes that in paragraph 665 the COI identifies a number of deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills as articulated in point 665 WWF believes that this should be a priority for both the Federal Environment department and the new regulatory Authority and that the proposed measures to address the deficiencies identified in the COI should be made available for public comment as a matter of priority and that the following recommendation be adopted Recommendation The Australian Government conduct a whole of Government review of its environmental regulatory regime and oil spill response arrangements in order to improve Australiarsquos capacity to respond to any future offshore oil spills

665 In an era of growth in the offshore petroleum sector in Australia the Blowout provides an important reminder of the very real environmental risks that accompany the substantial economic benefits from this development It underlines the need for a more effective environmental regulatory structure bearing on well integrity issues backed by an emergency response framework that will ensure that environment protection and sustainable development objectives can be achieved This episode has revealed a number of major deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills WWF notes that in paragraph 666 the COI notes the importance of the biodiversity values of the North-west Marine region which has biodiversity affinities with the Indo-Pacific tropical marine ecosystems Paragraph 667 notes that the North-west region is currently undergoing marine bioregional planning one goal of which is to establish a Comprehensive Adequate and Representative system of marine protected areas for the region with the aim of protecting and safe-guarding the full suite of species communities habitats and ecosystems found within the region The reefs shelves atolls shallow and deepwater habitats and ecosystems of the North-west region support a diverse range of unique and critically important ecological features species habitats communities and ecosystems as well as supporting important ecological processes and being home of migration routes feeding grounds breeding grounds and aggregation sites for many migratory species of national and global importance as well as much loved flagship species such as whales dolphins seabirds and marine turtles These species communities and habitats would have been impacted by the blowout and will be put at risk through further exploration and production activities associated with the oil and gas industry particularly if there is not a set of

large marine sanctuary areas that provide areas free from oil and gas activities WWF believes the natural marine values of the North-west region may be some of the most intact and biodiverse examples of tropical marine biodiversity remaining on the planet with close links to the Coral Triangle region found to the North The effective conservation of these marine resources is a priority not just for Australia but is a matter of global importance WWF notes that currently less than 1 of this region is under formal protection in highly protected marine reserves that prohibit extractive activities such as oil and gas exploration and protection WWF suggests that an additional recommendation from the Australian Government in its response to the COI be as follows

Recommendation The creation of a world-class network of comprehensive adequate and representative highly protected marine protected is a critical step in securing the future health of Australiarsquos Commonwealth waters and is an essential risk management strategy in the face of events such as the Montara blowout in Australia and the BP Deepwater Horizon incident in the Gulf of Mexico The identification of the boundaries for such a network is a priority for the Australian Government and will preceed the establishment of the new regulatory agency

666 The Montara Oilfield is located in remote Commonwealth waters within the North‐west Marine Region The region has a rich marine environment which supports a number of commercial recreational and indigenous fisheries 667 DEWHA is currently preparing the North‐west Region Marine Bioregional Plan which is expected to be released this year It will identify key habitats flora and fauna natural processes human uses and benefits and threats to the long‐term ecological sustainability of the region DEWHA released a North‐west Bioregional Profile in 2008 to bring together the best available

information for the region554

but there will remain gaps in baseline survey data for many species

and ecosystems in the region which will only be practical to fill over time555

Annex 1

US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling Report January 12 2011

Key Recommendations Made That Also Apply to Offshore Oil amp Gas Drilling in Australia Key US Commission Findings of Interest to Australiarsquos Reform Efforts

1 Government staff were not trained and qualified in petroleum engineering safety and oil spill response to a degree sufficient to avert the disaster or to ensure an efficient response

2 Government had limited regulatory resources and did not have sufficient trained and qualified staff to oversee offshore operations

3 Industry accepted the role of drafting its own standards but those standards fell short of needed reform

4 Industry staff were not trained and qualified to determine cement success

5 Necessary Cement Evaluation Tool (CET) logs were not run to diagnose the cement condition

6 Industry has not and will not propose more extensive mandatory cement evaluation because of the incremental costs despite the well-known cement integrity challenges and risks on offshore wells

7 Industry staff and contractors were rushed and resorted to shortcuts because the well was over budget and behind schedule

8 An inadequate amount of cement was pumped and BP did not follow its own cementing best practices for the Macondo well

9 New techniques and procedures were used by industry and approved by government officials without rigorous technical reviews or risk assessments

10 Halliburton laboratory results for the Macondo well showed the cement was not properly designed for well conditions and was a causal factor in the blowout

11 Poor cement design and lack of technical expertise and guidance from the cementing contractor (Halliburton) was causal factor in the blowout

12 Government staff had a conflict of interest in trying to promote oil and gas development while regulating it

13 Investments made to reap the benefits of offshore revenue extraction were not proportionate to investments made in drilling safety and response planning

14 Quote from the US Commission Report ldquoThe Australian Government report is focused on keeping prescriptive standards out of the regulations so as not to stifle innovation However the clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advancerdquo

15 A lack of effective well control barriers was a causal factor in the blowout

16 Float valve failure was a causal factor in the blowout

17 Failure of industry management and communication was a causal factor in the blowout

18 Industry used and the government allowed methods procedures and equipment that were less costly but not proven equally safe or effective to the minimum regulatory standards

19 Government officials allowed deviations to government standards without knowing whether it was safe to do so Officials approved those deviations within minutes of industryrsquos requests without completing any serious level of technical review or analysis

20 Contractor errors and lack of contractor oversight training and qualifications were causal factors in the blowout

21 There are serious problems with allowing industry to develop its own safety and technical standards American Petroleum Institute (API)-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words standards that almost all operators could readily achieve are seriously undermining the entire US federal regulatory system for offshore oil and gas exploration and production

22 API resisted the Safety Case approach therefore the Safety Case requirements were not required in the US despite its success in other countries

23 US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Another important thing is to locate a rig in advance that is actually capable of drilling a relief well not all rigs have equivalent capabilities

Well control of a catastrophic well blowout is serious highly technical dangerous work During a catastrophic emergency there is insufficient time to search for relief well rigs or negotiate contracts for relief well rigs This work should be done and can be done in advance to expedite an emergency response WWF believes that the operator must do more than ldquomake meaningful enquires as to the availability of potential rigs on a contingency basisrdquo

In other countries including Canada and the US the operator is required to identify a rig that would be capable of drilling a relief well The operator is also required to provide information on the amount of time it would take for that rig to suspend operation at its location at the time of the blowout and move into position to drill a relief well This information provides industry and the government with a clearly articulated plan identifying which rig is put on retainer and confirming a commitment from that rig to suspend its operation and move to assist The information also verifies in advance that the rig is even capable of drilling the required relief well (not all rigs would be capable of drilling relief wells at some depths)

For example if a drilling operator submitted a pre-drill plan to the Australian Government that said the nearest relief well rig was three months away and it was uncertain if the rig operator would be able to suspend operations and come to assist then that drilling plan should not be approved

Because there was no pre-drill emergency blowout relief well plan submitted for the Montara Well or approved by the Australian Government this problem was only discovered after the blowout occurred when little could be done to improve the flawed plan or lack thereof

It would be a great risk to drill the original well with knowledge that a relief well could not be constructed in a timely manner This information is critical to development of any Safety Case Review to approve a well construction Safety Case without it would be improvident

Recommendations Made in WWFrsquos June 2010 Report That Warrant Further Consideration by the Australian Government

WWFrsquos June 2010 Report included 180 Findings and Recommendations including a number that we feel warrant further consideration by the Australian Government

Recommendation 115 Simultaneous high risk operations should not be conducted by the same drilling crew

Recommendation 139 A list of approved barriers should be established in regulation and that list should be updated on a routine basis to incorporate new technology as it is developed

Recommendation 140 A final as-built engineering drawing of the completed well should be developed to accurately document all subsurface well construction equipment piping and cement locations A completed accurate well file should be maintained by the onshore drilling engineer serving as a reference for engineers who may later design well completion or well workover projects

Recommendation 141 Minimum training and qualification standards should be set for well control barrier installation and removal

Recommendation 149 Regulatory standards should be clear about intermediate casing depth the required number of intermediate strings and cementing and pressure testing criteria Intermediate casing serves the important function of sealing off anomalous pressure zones lost circulation zones and other

drilling hazards If intermediate casing is set in the production zone it must be treated as production casing and held to the same standards

Recommendation 152 Regulations need to include unequivocal BOP and wellhead control standards The standards should specify when BOPs andor wellhead control systems must be in place and when they can be removed

Recommendation 153 Well control manuals and instructions need to address blowout control during drilling completion and all well re-entry operations including well tie-ins Most well control manuals and training focus on well control (BOP and mud systems) while drilling and do not allocate sufficient technical guidance for rig staff on well control during batch drilling well tie-ins and well workovers More instruction on these points is needed

Recommendation 154 Government inspectors are needed to witness and verify BOP testing

Recommendation 155 Minimum standards should be set that require a through technical review of vendor equipment compatibility as part of the well construction design

Recommendation 166 Government oversight (via inspections and audits) is needed to verify compliance with permit conditions

Recommendation 167 Regulatory standards should be established to ensure the following (1) that there is adequate cement in the annulus (2) that the casing shoe is properly cemented (or additional barriers are set to account for a failed casing shoe) and (3) that high pressure hydrocarbon and thief zones are isolated

Recommendation 168 High angle sections of casing are notoriously difficult to cement High angle casing strings often require additional remedial cementing treatment careful evaluation and intervention if a cement seal is not initially obtained

Recommendation 169 Because cement plugs placed in high angle sections of casing are notoriously difficult to cement a three barrier system should be required for this type of system setting two additional plugs above the high angle well section to ensure well control

Recommendation 175 Minimum Wait on Cement (WOC) standards should be established to ensure cement reaches its maximum compressive strength prior to pressure testing it as a barrier

Recommendation 179 Cement evaluation logs should be run in wells where the risk and consequences of poor cementing practices are unacceptable

Recommendation 181 Regulations should be supported with technical standards and guidance that agency staff can use to make consistent and technically sound permit decisions and to verify compliance These standards should be available to industry so the standards and expectations are clear

Recommendation 1107 Oil and gas consultants contractors and vendors need a confidential outlet or government provided avenue to report gross permit deviations safety violations or potentially hazardous situations

Recommendation 1112 The regulatory term ldquogood oilfield practicerdquo needs to be more explicitly defined The revised definition should include health safety and environmental objectives and establish firm and unambiguous compliance yardsticks

Recommendation 1128 A team of Australian and international industry experts could be gathered to identify a list of critical minimum standards that should be codified in regulation to meet health safety and environmental objectives

Recommendation 1129 A system can be established to update regulations on a routine basis to take into account technical innovation A formal technical expert review process can be established to examine any proposed waivers to the existing standards Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum

standard and that it is in Australiarsquos best interest to approve this technical innovation ahead of a regulatory amendment

Recommendation 1132 Blowouts are reasonably foreseeable consequences of offshore drilling and completion operations Pre-drill environmental assessments should include a risk and impact assessment of the worst-case blowout scenario Human error and mechanical failure scenarios should be included

Recommendation 1134 If the operator is unwilling to address or resolve health safety or environmental concerns the drilling contractor should be required to report the problem to the appropriate agencies for immediate resolution

Recommendation 1135 Legal protections should be in place for individual employees as well as companies to freely report safety concerns and prevent repercussions to those reporting safety violations

Recommendation 1139 Government must ensure that there is a system in place to compel contractors stop unsafe acts and immediately report and remedy unsafe operations There should be incentives and protections in place for contractors that report and there should be penalties for those that donrsquot

Recommendation 1140 Contractorrsquos legal requirements rights and responsibilities to report safety and permit violations warrant examination

Recommendation 1142 Routine onsite inspections and audits are a critical component of a high quality regulatory program Crafting stringent regulations is only one step in the process Routine inspections and audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Recommendation 1151 PTTEP assigned staff involved in the H1 blowout to drill the H1 relief well and conduct emergency response activities Good oilfield practice is to grant leave to staff involved in events leading up to a blowout because they will be understandably very shaken and not in a position to do complicated dangerous and serious work

Recommendation 1158 Regulations should specify the training and qualifications needed to safely operate offshore

Recommendation 1161 Agencies need adequate technical and financial resources to review and approve drilling and completion programs There were inadequate agency resources assigned to the Montara Program

Recommendation 1173 Financial responsibility requirements for offshore operators should be clearly articulated in the regulation such that staff can verify compliance

Finding 192 The Montara Platform Topside Module installation delay should have triggered a multi-agency safety and environmental assessment to examine the potential risks associated with the newly proposed batch drilling program and new Topside Module installation plans The inability to immediately tie newly drilled wells in to the platform wellhead control system significantly increased the risk factor for the Montara wells The lack of a coordinated peer-reviewed technical safety and environmental assessment to evaluate and identify the risks of this major design change appears to have contributed to the incident

Finding 194 NOPSA and the DA should have considered delaying the drilling program until the Topside Module was available or have required additional risk mitigation for the batch drilling program

Finding 195 The November 2008 West Atlas Drilling Rig Safety Case Revision (SCR) included information on the barrier and well control risks yet that analysis was incomplete because the Montara Drilling Program Plans were not yet completed Furthermore NOPSA who is responsible for reviewing the SCR did not enlist any technical review of the SCR from the DA or independent consultants on the barrier and well control risks identified in the preliminary plan

Finding 196 The November 2008 Safety Case Revision (SCR) should not have been approved by NOPSA absent the well plans for the Montara wells to be drilled in early 2009 Insufficient well data and risk analysis was included in the SCR for agency decision making The Safety Case Revision process should have been suspended until a complete set of well plans was available

Finding 197 The approved Safety Case Revision was based on a BOP in place for well control Yet no BOP was in place Compounding the problem the DA approved well plans that provided for well re-entry and tie-in with no BOP The SCR identified the BOP as a critical Health Safety and Environment (HSE) piece of equipment yet the BOP was not installed on H1 during re-entry

Finding 199 NOPSA should not have approved the November 2008 SCR absent HAZID assessments for the Montara well plans Insufficient well data and risk analysis was included in the SCR for agency decision making

Finding 1108 The elimination of Australiarsquos prescriptive standards was a root cause of this incident If Australiarsquos 2004 prescriptive standards for well control barriers were still in place the exchange of a 9-58rdquo PCCC for a 45m (148rsquo) long shallow-set cement plug barrier would not have been allowed likely adverting this disaster

Finding 1110 The regulatory pendulum swung too far away from prescription into a regulatory regime of almost exclusive self-regulation Australiarsquos regulations are unique in that they weigh heavily on ldquoself- regulationrdquo

Finding 1111 The term ldquogood oilfield practicerdquo is not adequately defined in Australian regulation leaving its application subject to unlimited government and industry interpretation This opened the door for potential misapplication

Finding 1113 The lack of minimum prescriptive standards is even echoed by PTTEPrsquos Well Construction Manager as his own three decades of experience show that ldquogood oilfield practicerdquo is ambiguous widely interpreted and is in large part a function of a personrsquos expertise and experience

Finding 1114 Where regulatory standards do not exist or are vague the door is open to shortcuts and cost-cutting measures that can increase risk

Finding 1115 There was insufficient DA staff to review approve and oversee Timor Sea offshore drilling operations

Finding 1119 The DA had no formal written standard operating procedures for conducting technical reviews or making risk-based decisions While the DA relied in part on the now revoked Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production as guidance the schedule was not strictly adhered to and deviations were causal blowout factors

Finding 1123 A policy balance between prescriptive standards and technical innovation and flexibility must be achieved As governments develop regulations that aim to strike that balance a stead-fast eye must be kept on the ultimate goal of human health safety and environmental protection

Finding 1125 Whether they are called ldquominimum standardsrdquo or ldquoprinciple-based regulationsrdquo a basic set of minimum standards is necessary to protect health safety and the environment (HSE) and give government regulators a baseline for determining compliance

Finding 1126 The 2004 regulatory reform for Australian oil and gas exploration and development did not achieve a balance between prescriptive standards and latitude for innovation It eliminated all levels of prescription defaulting to an undefined standard of ldquogood oilfield practicerdquo This left government officials with an ambiguous standard to rely on to approve permits or measure compliance

Finding 1127 Prescriptive regulations are only effective if coupled with an inspection audit and enforcement system that ensures compliance

Audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Finding 1143 On August 21 2009 the Montara H1 well blowout commenced Over one year had passed since the Montara Wellhead Platform was installed in July 2008 and not even one onsite inspection had taken place by the DA NOPSA or DEWHA

Marine Bioregional Planning and Oil and Gas Exploration and Production in Commonwealth Waters

WWF notes that in paragraph 665 the COI identifies a number of deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills as articulated in point 665 WWF believes that this should be a priority for both the Federal Environment department and the new regulatory Authority and that the proposed measures to address the deficiencies identified in the COI should be made available for public comment as a matter of priority and that the following recommendation be adopted Recommendation The Australian Government conduct a whole of Government review of its environmental regulatory regime and oil spill response arrangements in order to improve Australiarsquos capacity to respond to any future offshore oil spills

665 In an era of growth in the offshore petroleum sector in Australia the Blowout provides an important reminder of the very real environmental risks that accompany the substantial economic benefits from this development It underlines the need for a more effective environmental regulatory structure bearing on well integrity issues backed by an emergency response framework that will ensure that environment protection and sustainable development objectives can be achieved This episode has revealed a number of major deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills WWF notes that in paragraph 666 the COI notes the importance of the biodiversity values of the North-west Marine region which has biodiversity affinities with the Indo-Pacific tropical marine ecosystems Paragraph 667 notes that the North-west region is currently undergoing marine bioregional planning one goal of which is to establish a Comprehensive Adequate and Representative system of marine protected areas for the region with the aim of protecting and safe-guarding the full suite of species communities habitats and ecosystems found within the region The reefs shelves atolls shallow and deepwater habitats and ecosystems of the North-west region support a diverse range of unique and critically important ecological features species habitats communities and ecosystems as well as supporting important ecological processes and being home of migration routes feeding grounds breeding grounds and aggregation sites for many migratory species of national and global importance as well as much loved flagship species such as whales dolphins seabirds and marine turtles These species communities and habitats would have been impacted by the blowout and will be put at risk through further exploration and production activities associated with the oil and gas industry particularly if there is not a set of

large marine sanctuary areas that provide areas free from oil and gas activities WWF believes the natural marine values of the North-west region may be some of the most intact and biodiverse examples of tropical marine biodiversity remaining on the planet with close links to the Coral Triangle region found to the North The effective conservation of these marine resources is a priority not just for Australia but is a matter of global importance WWF notes that currently less than 1 of this region is under formal protection in highly protected marine reserves that prohibit extractive activities such as oil and gas exploration and protection WWF suggests that an additional recommendation from the Australian Government in its response to the COI be as follows

Recommendation The creation of a world-class network of comprehensive adequate and representative highly protected marine protected is a critical step in securing the future health of Australiarsquos Commonwealth waters and is an essential risk management strategy in the face of events such as the Montara blowout in Australia and the BP Deepwater Horizon incident in the Gulf of Mexico The identification of the boundaries for such a network is a priority for the Australian Government and will preceed the establishment of the new regulatory agency

666 The Montara Oilfield is located in remote Commonwealth waters within the North‐west Marine Region The region has a rich marine environment which supports a number of commercial recreational and indigenous fisheries 667 DEWHA is currently preparing the North‐west Region Marine Bioregional Plan which is expected to be released this year It will identify key habitats flora and fauna natural processes human uses and benefits and threats to the long‐term ecological sustainability of the region DEWHA released a North‐west Bioregional Profile in 2008 to bring together the best available

information for the region554

but there will remain gaps in baseline survey data for many species

and ecosystems in the region which will only be practical to fill over time555

Annex 1

US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling Report January 12 2011

Key Recommendations Made That Also Apply to Offshore Oil amp Gas Drilling in Australia Key US Commission Findings of Interest to Australiarsquos Reform Efforts

1 Government staff were not trained and qualified in petroleum engineering safety and oil spill response to a degree sufficient to avert the disaster or to ensure an efficient response

2 Government had limited regulatory resources and did not have sufficient trained and qualified staff to oversee offshore operations

3 Industry accepted the role of drafting its own standards but those standards fell short of needed reform

4 Industry staff were not trained and qualified to determine cement success

5 Necessary Cement Evaluation Tool (CET) logs were not run to diagnose the cement condition

6 Industry has not and will not propose more extensive mandatory cement evaluation because of the incremental costs despite the well-known cement integrity challenges and risks on offshore wells

7 Industry staff and contractors were rushed and resorted to shortcuts because the well was over budget and behind schedule

8 An inadequate amount of cement was pumped and BP did not follow its own cementing best practices for the Macondo well

9 New techniques and procedures were used by industry and approved by government officials without rigorous technical reviews or risk assessments

10 Halliburton laboratory results for the Macondo well showed the cement was not properly designed for well conditions and was a causal factor in the blowout

11 Poor cement design and lack of technical expertise and guidance from the cementing contractor (Halliburton) was causal factor in the blowout

12 Government staff had a conflict of interest in trying to promote oil and gas development while regulating it

13 Investments made to reap the benefits of offshore revenue extraction were not proportionate to investments made in drilling safety and response planning

14 Quote from the US Commission Report ldquoThe Australian Government report is focused on keeping prescriptive standards out of the regulations so as not to stifle innovation However the clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advancerdquo

15 A lack of effective well control barriers was a causal factor in the blowout

16 Float valve failure was a causal factor in the blowout

17 Failure of industry management and communication was a causal factor in the blowout

18 Industry used and the government allowed methods procedures and equipment that were less costly but not proven equally safe or effective to the minimum regulatory standards

19 Government officials allowed deviations to government standards without knowing whether it was safe to do so Officials approved those deviations within minutes of industryrsquos requests without completing any serious level of technical review or analysis

20 Contractor errors and lack of contractor oversight training and qualifications were causal factors in the blowout

21 There are serious problems with allowing industry to develop its own safety and technical standards American Petroleum Institute (API)-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words standards that almost all operators could readily achieve are seriously undermining the entire US federal regulatory system for offshore oil and gas exploration and production

22 API resisted the Safety Case approach therefore the Safety Case requirements were not required in the US despite its success in other countries

23 US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

drilling hazards If intermediate casing is set in the production zone it must be treated as production casing and held to the same standards

Recommendation 152 Regulations need to include unequivocal BOP and wellhead control standards The standards should specify when BOPs andor wellhead control systems must be in place and when they can be removed

Recommendation 153 Well control manuals and instructions need to address blowout control during drilling completion and all well re-entry operations including well tie-ins Most well control manuals and training focus on well control (BOP and mud systems) while drilling and do not allocate sufficient technical guidance for rig staff on well control during batch drilling well tie-ins and well workovers More instruction on these points is needed

Recommendation 154 Government inspectors are needed to witness and verify BOP testing

Recommendation 155 Minimum standards should be set that require a through technical review of vendor equipment compatibility as part of the well construction design

Recommendation 166 Government oversight (via inspections and audits) is needed to verify compliance with permit conditions

Recommendation 167 Regulatory standards should be established to ensure the following (1) that there is adequate cement in the annulus (2) that the casing shoe is properly cemented (or additional barriers are set to account for a failed casing shoe) and (3) that high pressure hydrocarbon and thief zones are isolated

Recommendation 168 High angle sections of casing are notoriously difficult to cement High angle casing strings often require additional remedial cementing treatment careful evaluation and intervention if a cement seal is not initially obtained

Recommendation 169 Because cement plugs placed in high angle sections of casing are notoriously difficult to cement a three barrier system should be required for this type of system setting two additional plugs above the high angle well section to ensure well control

Recommendation 175 Minimum Wait on Cement (WOC) standards should be established to ensure cement reaches its maximum compressive strength prior to pressure testing it as a barrier

Recommendation 179 Cement evaluation logs should be run in wells where the risk and consequences of poor cementing practices are unacceptable

Recommendation 181 Regulations should be supported with technical standards and guidance that agency staff can use to make consistent and technically sound permit decisions and to verify compliance These standards should be available to industry so the standards and expectations are clear

Recommendation 1107 Oil and gas consultants contractors and vendors need a confidential outlet or government provided avenue to report gross permit deviations safety violations or potentially hazardous situations

Recommendation 1112 The regulatory term ldquogood oilfield practicerdquo needs to be more explicitly defined The revised definition should include health safety and environmental objectives and establish firm and unambiguous compliance yardsticks

Recommendation 1128 A team of Australian and international industry experts could be gathered to identify a list of critical minimum standards that should be codified in regulation to meet health safety and environmental objectives

Recommendation 1129 A system can be established to update regulations on a routine basis to take into account technical innovation A formal technical expert review process can be established to examine any proposed waivers to the existing standards Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum

standard and that it is in Australiarsquos best interest to approve this technical innovation ahead of a regulatory amendment

Recommendation 1132 Blowouts are reasonably foreseeable consequences of offshore drilling and completion operations Pre-drill environmental assessments should include a risk and impact assessment of the worst-case blowout scenario Human error and mechanical failure scenarios should be included

Recommendation 1134 If the operator is unwilling to address or resolve health safety or environmental concerns the drilling contractor should be required to report the problem to the appropriate agencies for immediate resolution

Recommendation 1135 Legal protections should be in place for individual employees as well as companies to freely report safety concerns and prevent repercussions to those reporting safety violations

Recommendation 1139 Government must ensure that there is a system in place to compel contractors stop unsafe acts and immediately report and remedy unsafe operations There should be incentives and protections in place for contractors that report and there should be penalties for those that donrsquot

Recommendation 1140 Contractorrsquos legal requirements rights and responsibilities to report safety and permit violations warrant examination

Recommendation 1142 Routine onsite inspections and audits are a critical component of a high quality regulatory program Crafting stringent regulations is only one step in the process Routine inspections and audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Recommendation 1151 PTTEP assigned staff involved in the H1 blowout to drill the H1 relief well and conduct emergency response activities Good oilfield practice is to grant leave to staff involved in events leading up to a blowout because they will be understandably very shaken and not in a position to do complicated dangerous and serious work

Recommendation 1158 Regulations should specify the training and qualifications needed to safely operate offshore

Recommendation 1161 Agencies need adequate technical and financial resources to review and approve drilling and completion programs There were inadequate agency resources assigned to the Montara Program

Recommendation 1173 Financial responsibility requirements for offshore operators should be clearly articulated in the regulation such that staff can verify compliance

Finding 192 The Montara Platform Topside Module installation delay should have triggered a multi-agency safety and environmental assessment to examine the potential risks associated with the newly proposed batch drilling program and new Topside Module installation plans The inability to immediately tie newly drilled wells in to the platform wellhead control system significantly increased the risk factor for the Montara wells The lack of a coordinated peer-reviewed technical safety and environmental assessment to evaluate and identify the risks of this major design change appears to have contributed to the incident

Finding 194 NOPSA and the DA should have considered delaying the drilling program until the Topside Module was available or have required additional risk mitigation for the batch drilling program

Finding 195 The November 2008 West Atlas Drilling Rig Safety Case Revision (SCR) included information on the barrier and well control risks yet that analysis was incomplete because the Montara Drilling Program Plans were not yet completed Furthermore NOPSA who is responsible for reviewing the SCR did not enlist any technical review of the SCR from the DA or independent consultants on the barrier and well control risks identified in the preliminary plan

Finding 196 The November 2008 Safety Case Revision (SCR) should not have been approved by NOPSA absent the well plans for the Montara wells to be drilled in early 2009 Insufficient well data and risk analysis was included in the SCR for agency decision making The Safety Case Revision process should have been suspended until a complete set of well plans was available

Finding 197 The approved Safety Case Revision was based on a BOP in place for well control Yet no BOP was in place Compounding the problem the DA approved well plans that provided for well re-entry and tie-in with no BOP The SCR identified the BOP as a critical Health Safety and Environment (HSE) piece of equipment yet the BOP was not installed on H1 during re-entry

Finding 199 NOPSA should not have approved the November 2008 SCR absent HAZID assessments for the Montara well plans Insufficient well data and risk analysis was included in the SCR for agency decision making

Finding 1108 The elimination of Australiarsquos prescriptive standards was a root cause of this incident If Australiarsquos 2004 prescriptive standards for well control barriers were still in place the exchange of a 9-58rdquo PCCC for a 45m (148rsquo) long shallow-set cement plug barrier would not have been allowed likely adverting this disaster

Finding 1110 The regulatory pendulum swung too far away from prescription into a regulatory regime of almost exclusive self-regulation Australiarsquos regulations are unique in that they weigh heavily on ldquoself- regulationrdquo

Finding 1111 The term ldquogood oilfield practicerdquo is not adequately defined in Australian regulation leaving its application subject to unlimited government and industry interpretation This opened the door for potential misapplication

Finding 1113 The lack of minimum prescriptive standards is even echoed by PTTEPrsquos Well Construction Manager as his own three decades of experience show that ldquogood oilfield practicerdquo is ambiguous widely interpreted and is in large part a function of a personrsquos expertise and experience

Finding 1114 Where regulatory standards do not exist or are vague the door is open to shortcuts and cost-cutting measures that can increase risk

Finding 1115 There was insufficient DA staff to review approve and oversee Timor Sea offshore drilling operations

Finding 1119 The DA had no formal written standard operating procedures for conducting technical reviews or making risk-based decisions While the DA relied in part on the now revoked Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production as guidance the schedule was not strictly adhered to and deviations were causal blowout factors

Finding 1123 A policy balance between prescriptive standards and technical innovation and flexibility must be achieved As governments develop regulations that aim to strike that balance a stead-fast eye must be kept on the ultimate goal of human health safety and environmental protection

Finding 1125 Whether they are called ldquominimum standardsrdquo or ldquoprinciple-based regulationsrdquo a basic set of minimum standards is necessary to protect health safety and the environment (HSE) and give government regulators a baseline for determining compliance

Finding 1126 The 2004 regulatory reform for Australian oil and gas exploration and development did not achieve a balance between prescriptive standards and latitude for innovation It eliminated all levels of prescription defaulting to an undefined standard of ldquogood oilfield practicerdquo This left government officials with an ambiguous standard to rely on to approve permits or measure compliance

Finding 1127 Prescriptive regulations are only effective if coupled with an inspection audit and enforcement system that ensures compliance

Audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Finding 1143 On August 21 2009 the Montara H1 well blowout commenced Over one year had passed since the Montara Wellhead Platform was installed in July 2008 and not even one onsite inspection had taken place by the DA NOPSA or DEWHA

Marine Bioregional Planning and Oil and Gas Exploration and Production in Commonwealth Waters

WWF notes that in paragraph 665 the COI identifies a number of deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills as articulated in point 665 WWF believes that this should be a priority for both the Federal Environment department and the new regulatory Authority and that the proposed measures to address the deficiencies identified in the COI should be made available for public comment as a matter of priority and that the following recommendation be adopted Recommendation The Australian Government conduct a whole of Government review of its environmental regulatory regime and oil spill response arrangements in order to improve Australiarsquos capacity to respond to any future offshore oil spills

665 In an era of growth in the offshore petroleum sector in Australia the Blowout provides an important reminder of the very real environmental risks that accompany the substantial economic benefits from this development It underlines the need for a more effective environmental regulatory structure bearing on well integrity issues backed by an emergency response framework that will ensure that environment protection and sustainable development objectives can be achieved This episode has revealed a number of major deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills WWF notes that in paragraph 666 the COI notes the importance of the biodiversity values of the North-west Marine region which has biodiversity affinities with the Indo-Pacific tropical marine ecosystems Paragraph 667 notes that the North-west region is currently undergoing marine bioregional planning one goal of which is to establish a Comprehensive Adequate and Representative system of marine protected areas for the region with the aim of protecting and safe-guarding the full suite of species communities habitats and ecosystems found within the region The reefs shelves atolls shallow and deepwater habitats and ecosystems of the North-west region support a diverse range of unique and critically important ecological features species habitats communities and ecosystems as well as supporting important ecological processes and being home of migration routes feeding grounds breeding grounds and aggregation sites for many migratory species of national and global importance as well as much loved flagship species such as whales dolphins seabirds and marine turtles These species communities and habitats would have been impacted by the blowout and will be put at risk through further exploration and production activities associated with the oil and gas industry particularly if there is not a set of

large marine sanctuary areas that provide areas free from oil and gas activities WWF believes the natural marine values of the North-west region may be some of the most intact and biodiverse examples of tropical marine biodiversity remaining on the planet with close links to the Coral Triangle region found to the North The effective conservation of these marine resources is a priority not just for Australia but is a matter of global importance WWF notes that currently less than 1 of this region is under formal protection in highly protected marine reserves that prohibit extractive activities such as oil and gas exploration and protection WWF suggests that an additional recommendation from the Australian Government in its response to the COI be as follows

Recommendation The creation of a world-class network of comprehensive adequate and representative highly protected marine protected is a critical step in securing the future health of Australiarsquos Commonwealth waters and is an essential risk management strategy in the face of events such as the Montara blowout in Australia and the BP Deepwater Horizon incident in the Gulf of Mexico The identification of the boundaries for such a network is a priority for the Australian Government and will preceed the establishment of the new regulatory agency

666 The Montara Oilfield is located in remote Commonwealth waters within the North‐west Marine Region The region has a rich marine environment which supports a number of commercial recreational and indigenous fisheries 667 DEWHA is currently preparing the North‐west Region Marine Bioregional Plan which is expected to be released this year It will identify key habitats flora and fauna natural processes human uses and benefits and threats to the long‐term ecological sustainability of the region DEWHA released a North‐west Bioregional Profile in 2008 to bring together the best available

information for the region554

but there will remain gaps in baseline survey data for many species

and ecosystems in the region which will only be practical to fill over time555

Annex 1

US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling Report January 12 2011

Key Recommendations Made That Also Apply to Offshore Oil amp Gas Drilling in Australia Key US Commission Findings of Interest to Australiarsquos Reform Efforts

1 Government staff were not trained and qualified in petroleum engineering safety and oil spill response to a degree sufficient to avert the disaster or to ensure an efficient response

2 Government had limited regulatory resources and did not have sufficient trained and qualified staff to oversee offshore operations

3 Industry accepted the role of drafting its own standards but those standards fell short of needed reform

4 Industry staff were not trained and qualified to determine cement success

5 Necessary Cement Evaluation Tool (CET) logs were not run to diagnose the cement condition

6 Industry has not and will not propose more extensive mandatory cement evaluation because of the incremental costs despite the well-known cement integrity challenges and risks on offshore wells

7 Industry staff and contractors were rushed and resorted to shortcuts because the well was over budget and behind schedule

8 An inadequate amount of cement was pumped and BP did not follow its own cementing best practices for the Macondo well

9 New techniques and procedures were used by industry and approved by government officials without rigorous technical reviews or risk assessments

10 Halliburton laboratory results for the Macondo well showed the cement was not properly designed for well conditions and was a causal factor in the blowout

11 Poor cement design and lack of technical expertise and guidance from the cementing contractor (Halliburton) was causal factor in the blowout

12 Government staff had a conflict of interest in trying to promote oil and gas development while regulating it

13 Investments made to reap the benefits of offshore revenue extraction were not proportionate to investments made in drilling safety and response planning

14 Quote from the US Commission Report ldquoThe Australian Government report is focused on keeping prescriptive standards out of the regulations so as not to stifle innovation However the clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advancerdquo

15 A lack of effective well control barriers was a causal factor in the blowout

16 Float valve failure was a causal factor in the blowout

17 Failure of industry management and communication was a causal factor in the blowout

18 Industry used and the government allowed methods procedures and equipment that were less costly but not proven equally safe or effective to the minimum regulatory standards

19 Government officials allowed deviations to government standards without knowing whether it was safe to do so Officials approved those deviations within minutes of industryrsquos requests without completing any serious level of technical review or analysis

20 Contractor errors and lack of contractor oversight training and qualifications were causal factors in the blowout

21 There are serious problems with allowing industry to develop its own safety and technical standards American Petroleum Institute (API)-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words standards that almost all operators could readily achieve are seriously undermining the entire US federal regulatory system for offshore oil and gas exploration and production

22 API resisted the Safety Case approach therefore the Safety Case requirements were not required in the US despite its success in other countries

23 US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

standard and that it is in Australiarsquos best interest to approve this technical innovation ahead of a regulatory amendment

Recommendation 1132 Blowouts are reasonably foreseeable consequences of offshore drilling and completion operations Pre-drill environmental assessments should include a risk and impact assessment of the worst-case blowout scenario Human error and mechanical failure scenarios should be included

Recommendation 1134 If the operator is unwilling to address or resolve health safety or environmental concerns the drilling contractor should be required to report the problem to the appropriate agencies for immediate resolution

Recommendation 1135 Legal protections should be in place for individual employees as well as companies to freely report safety concerns and prevent repercussions to those reporting safety violations

Recommendation 1139 Government must ensure that there is a system in place to compel contractors stop unsafe acts and immediately report and remedy unsafe operations There should be incentives and protections in place for contractors that report and there should be penalties for those that donrsquot

Recommendation 1140 Contractorrsquos legal requirements rights and responsibilities to report safety and permit violations warrant examination

Recommendation 1142 Routine onsite inspections and audits are a critical component of a high quality regulatory program Crafting stringent regulations is only one step in the process Routine inspections and audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Recommendation 1151 PTTEP assigned staff involved in the H1 blowout to drill the H1 relief well and conduct emergency response activities Good oilfield practice is to grant leave to staff involved in events leading up to a blowout because they will be understandably very shaken and not in a position to do complicated dangerous and serious work

Recommendation 1158 Regulations should specify the training and qualifications needed to safely operate offshore

Recommendation 1161 Agencies need adequate technical and financial resources to review and approve drilling and completion programs There were inadequate agency resources assigned to the Montara Program

Recommendation 1173 Financial responsibility requirements for offshore operators should be clearly articulated in the regulation such that staff can verify compliance

Finding 192 The Montara Platform Topside Module installation delay should have triggered a multi-agency safety and environmental assessment to examine the potential risks associated with the newly proposed batch drilling program and new Topside Module installation plans The inability to immediately tie newly drilled wells in to the platform wellhead control system significantly increased the risk factor for the Montara wells The lack of a coordinated peer-reviewed technical safety and environmental assessment to evaluate and identify the risks of this major design change appears to have contributed to the incident

Finding 194 NOPSA and the DA should have considered delaying the drilling program until the Topside Module was available or have required additional risk mitigation for the batch drilling program

Finding 195 The November 2008 West Atlas Drilling Rig Safety Case Revision (SCR) included information on the barrier and well control risks yet that analysis was incomplete because the Montara Drilling Program Plans were not yet completed Furthermore NOPSA who is responsible for reviewing the SCR did not enlist any technical review of the SCR from the DA or independent consultants on the barrier and well control risks identified in the preliminary plan

Finding 196 The November 2008 Safety Case Revision (SCR) should not have been approved by NOPSA absent the well plans for the Montara wells to be drilled in early 2009 Insufficient well data and risk analysis was included in the SCR for agency decision making The Safety Case Revision process should have been suspended until a complete set of well plans was available

Finding 197 The approved Safety Case Revision was based on a BOP in place for well control Yet no BOP was in place Compounding the problem the DA approved well plans that provided for well re-entry and tie-in with no BOP The SCR identified the BOP as a critical Health Safety and Environment (HSE) piece of equipment yet the BOP was not installed on H1 during re-entry

Finding 199 NOPSA should not have approved the November 2008 SCR absent HAZID assessments for the Montara well plans Insufficient well data and risk analysis was included in the SCR for agency decision making

Finding 1108 The elimination of Australiarsquos prescriptive standards was a root cause of this incident If Australiarsquos 2004 prescriptive standards for well control barriers were still in place the exchange of a 9-58rdquo PCCC for a 45m (148rsquo) long shallow-set cement plug barrier would not have been allowed likely adverting this disaster

Finding 1110 The regulatory pendulum swung too far away from prescription into a regulatory regime of almost exclusive self-regulation Australiarsquos regulations are unique in that they weigh heavily on ldquoself- regulationrdquo

Finding 1111 The term ldquogood oilfield practicerdquo is not adequately defined in Australian regulation leaving its application subject to unlimited government and industry interpretation This opened the door for potential misapplication

Finding 1113 The lack of minimum prescriptive standards is even echoed by PTTEPrsquos Well Construction Manager as his own three decades of experience show that ldquogood oilfield practicerdquo is ambiguous widely interpreted and is in large part a function of a personrsquos expertise and experience

Finding 1114 Where regulatory standards do not exist or are vague the door is open to shortcuts and cost-cutting measures that can increase risk

Finding 1115 There was insufficient DA staff to review approve and oversee Timor Sea offshore drilling operations

Finding 1119 The DA had no formal written standard operating procedures for conducting technical reviews or making risk-based decisions While the DA relied in part on the now revoked Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production as guidance the schedule was not strictly adhered to and deviations were causal blowout factors

Finding 1123 A policy balance between prescriptive standards and technical innovation and flexibility must be achieved As governments develop regulations that aim to strike that balance a stead-fast eye must be kept on the ultimate goal of human health safety and environmental protection

Finding 1125 Whether they are called ldquominimum standardsrdquo or ldquoprinciple-based regulationsrdquo a basic set of minimum standards is necessary to protect health safety and the environment (HSE) and give government regulators a baseline for determining compliance

Finding 1126 The 2004 regulatory reform for Australian oil and gas exploration and development did not achieve a balance between prescriptive standards and latitude for innovation It eliminated all levels of prescription defaulting to an undefined standard of ldquogood oilfield practicerdquo This left government officials with an ambiguous standard to rely on to approve permits or measure compliance

Finding 1127 Prescriptive regulations are only effective if coupled with an inspection audit and enforcement system that ensures compliance

Audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Finding 1143 On August 21 2009 the Montara H1 well blowout commenced Over one year had passed since the Montara Wellhead Platform was installed in July 2008 and not even one onsite inspection had taken place by the DA NOPSA or DEWHA

Marine Bioregional Planning and Oil and Gas Exploration and Production in Commonwealth Waters

WWF notes that in paragraph 665 the COI identifies a number of deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills as articulated in point 665 WWF believes that this should be a priority for both the Federal Environment department and the new regulatory Authority and that the proposed measures to address the deficiencies identified in the COI should be made available for public comment as a matter of priority and that the following recommendation be adopted Recommendation The Australian Government conduct a whole of Government review of its environmental regulatory regime and oil spill response arrangements in order to improve Australiarsquos capacity to respond to any future offshore oil spills

665 In an era of growth in the offshore petroleum sector in Australia the Blowout provides an important reminder of the very real environmental risks that accompany the substantial economic benefits from this development It underlines the need for a more effective environmental regulatory structure bearing on well integrity issues backed by an emergency response framework that will ensure that environment protection and sustainable development objectives can be achieved This episode has revealed a number of major deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills WWF notes that in paragraph 666 the COI notes the importance of the biodiversity values of the North-west Marine region which has biodiversity affinities with the Indo-Pacific tropical marine ecosystems Paragraph 667 notes that the North-west region is currently undergoing marine bioregional planning one goal of which is to establish a Comprehensive Adequate and Representative system of marine protected areas for the region with the aim of protecting and safe-guarding the full suite of species communities habitats and ecosystems found within the region The reefs shelves atolls shallow and deepwater habitats and ecosystems of the North-west region support a diverse range of unique and critically important ecological features species habitats communities and ecosystems as well as supporting important ecological processes and being home of migration routes feeding grounds breeding grounds and aggregation sites for many migratory species of national and global importance as well as much loved flagship species such as whales dolphins seabirds and marine turtles These species communities and habitats would have been impacted by the blowout and will be put at risk through further exploration and production activities associated with the oil and gas industry particularly if there is not a set of

large marine sanctuary areas that provide areas free from oil and gas activities WWF believes the natural marine values of the North-west region may be some of the most intact and biodiverse examples of tropical marine biodiversity remaining on the planet with close links to the Coral Triangle region found to the North The effective conservation of these marine resources is a priority not just for Australia but is a matter of global importance WWF notes that currently less than 1 of this region is under formal protection in highly protected marine reserves that prohibit extractive activities such as oil and gas exploration and protection WWF suggests that an additional recommendation from the Australian Government in its response to the COI be as follows

Recommendation The creation of a world-class network of comprehensive adequate and representative highly protected marine protected is a critical step in securing the future health of Australiarsquos Commonwealth waters and is an essential risk management strategy in the face of events such as the Montara blowout in Australia and the BP Deepwater Horizon incident in the Gulf of Mexico The identification of the boundaries for such a network is a priority for the Australian Government and will preceed the establishment of the new regulatory agency

666 The Montara Oilfield is located in remote Commonwealth waters within the North‐west Marine Region The region has a rich marine environment which supports a number of commercial recreational and indigenous fisheries 667 DEWHA is currently preparing the North‐west Region Marine Bioregional Plan which is expected to be released this year It will identify key habitats flora and fauna natural processes human uses and benefits and threats to the long‐term ecological sustainability of the region DEWHA released a North‐west Bioregional Profile in 2008 to bring together the best available

information for the region554

but there will remain gaps in baseline survey data for many species

and ecosystems in the region which will only be practical to fill over time555

Annex 1

US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling Report January 12 2011

Key Recommendations Made That Also Apply to Offshore Oil amp Gas Drilling in Australia Key US Commission Findings of Interest to Australiarsquos Reform Efforts

1 Government staff were not trained and qualified in petroleum engineering safety and oil spill response to a degree sufficient to avert the disaster or to ensure an efficient response

2 Government had limited regulatory resources and did not have sufficient trained and qualified staff to oversee offshore operations

3 Industry accepted the role of drafting its own standards but those standards fell short of needed reform

4 Industry staff were not trained and qualified to determine cement success

5 Necessary Cement Evaluation Tool (CET) logs were not run to diagnose the cement condition

6 Industry has not and will not propose more extensive mandatory cement evaluation because of the incremental costs despite the well-known cement integrity challenges and risks on offshore wells

7 Industry staff and contractors were rushed and resorted to shortcuts because the well was over budget and behind schedule

8 An inadequate amount of cement was pumped and BP did not follow its own cementing best practices for the Macondo well

9 New techniques and procedures were used by industry and approved by government officials without rigorous technical reviews or risk assessments

10 Halliburton laboratory results for the Macondo well showed the cement was not properly designed for well conditions and was a causal factor in the blowout

11 Poor cement design and lack of technical expertise and guidance from the cementing contractor (Halliburton) was causal factor in the blowout

12 Government staff had a conflict of interest in trying to promote oil and gas development while regulating it

13 Investments made to reap the benefits of offshore revenue extraction were not proportionate to investments made in drilling safety and response planning

14 Quote from the US Commission Report ldquoThe Australian Government report is focused on keeping prescriptive standards out of the regulations so as not to stifle innovation However the clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advancerdquo

15 A lack of effective well control barriers was a causal factor in the blowout

16 Float valve failure was a causal factor in the blowout

17 Failure of industry management and communication was a causal factor in the blowout

18 Industry used and the government allowed methods procedures and equipment that were less costly but not proven equally safe or effective to the minimum regulatory standards

19 Government officials allowed deviations to government standards without knowing whether it was safe to do so Officials approved those deviations within minutes of industryrsquos requests without completing any serious level of technical review or analysis

20 Contractor errors and lack of contractor oversight training and qualifications were causal factors in the blowout

21 There are serious problems with allowing industry to develop its own safety and technical standards American Petroleum Institute (API)-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words standards that almost all operators could readily achieve are seriously undermining the entire US federal regulatory system for offshore oil and gas exploration and production

22 API resisted the Safety Case approach therefore the Safety Case requirements were not required in the US despite its success in other countries

23 US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Finding 196 The November 2008 Safety Case Revision (SCR) should not have been approved by NOPSA absent the well plans for the Montara wells to be drilled in early 2009 Insufficient well data and risk analysis was included in the SCR for agency decision making The Safety Case Revision process should have been suspended until a complete set of well plans was available

Finding 197 The approved Safety Case Revision was based on a BOP in place for well control Yet no BOP was in place Compounding the problem the DA approved well plans that provided for well re-entry and tie-in with no BOP The SCR identified the BOP as a critical Health Safety and Environment (HSE) piece of equipment yet the BOP was not installed on H1 during re-entry

Finding 199 NOPSA should not have approved the November 2008 SCR absent HAZID assessments for the Montara well plans Insufficient well data and risk analysis was included in the SCR for agency decision making

Finding 1108 The elimination of Australiarsquos prescriptive standards was a root cause of this incident If Australiarsquos 2004 prescriptive standards for well control barriers were still in place the exchange of a 9-58rdquo PCCC for a 45m (148rsquo) long shallow-set cement plug barrier would not have been allowed likely adverting this disaster

Finding 1110 The regulatory pendulum swung too far away from prescription into a regulatory regime of almost exclusive self-regulation Australiarsquos regulations are unique in that they weigh heavily on ldquoself- regulationrdquo

Finding 1111 The term ldquogood oilfield practicerdquo is not adequately defined in Australian regulation leaving its application subject to unlimited government and industry interpretation This opened the door for potential misapplication

Finding 1113 The lack of minimum prescriptive standards is even echoed by PTTEPrsquos Well Construction Manager as his own three decades of experience show that ldquogood oilfield practicerdquo is ambiguous widely interpreted and is in large part a function of a personrsquos expertise and experience

Finding 1114 Where regulatory standards do not exist or are vague the door is open to shortcuts and cost-cutting measures that can increase risk

Finding 1115 There was insufficient DA staff to review approve and oversee Timor Sea offshore drilling operations

Finding 1119 The DA had no formal written standard operating procedures for conducting technical reviews or making risk-based decisions While the DA relied in part on the now revoked Schedule of Specific Requirements as to Offshore Petroleum Exploration and Production as guidance the schedule was not strictly adhered to and deviations were causal blowout factors

Finding 1123 A policy balance between prescriptive standards and technical innovation and flexibility must be achieved As governments develop regulations that aim to strike that balance a stead-fast eye must be kept on the ultimate goal of human health safety and environmental protection

Finding 1125 Whether they are called ldquominimum standardsrdquo or ldquoprinciple-based regulationsrdquo a basic set of minimum standards is necessary to protect health safety and the environment (HSE) and give government regulators a baseline for determining compliance

Finding 1126 The 2004 regulatory reform for Australian oil and gas exploration and development did not achieve a balance between prescriptive standards and latitude for innovation It eliminated all levels of prescription defaulting to an undefined standard of ldquogood oilfield practicerdquo This left government officials with an ambiguous standard to rely on to approve permits or measure compliance

Finding 1127 Prescriptive regulations are only effective if coupled with an inspection audit and enforcement system that ensures compliance

Audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Finding 1143 On August 21 2009 the Montara H1 well blowout commenced Over one year had passed since the Montara Wellhead Platform was installed in July 2008 and not even one onsite inspection had taken place by the DA NOPSA or DEWHA

Marine Bioregional Planning and Oil and Gas Exploration and Production in Commonwealth Waters

WWF notes that in paragraph 665 the COI identifies a number of deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills as articulated in point 665 WWF believes that this should be a priority for both the Federal Environment department and the new regulatory Authority and that the proposed measures to address the deficiencies identified in the COI should be made available for public comment as a matter of priority and that the following recommendation be adopted Recommendation The Australian Government conduct a whole of Government review of its environmental regulatory regime and oil spill response arrangements in order to improve Australiarsquos capacity to respond to any future offshore oil spills

665 In an era of growth in the offshore petroleum sector in Australia the Blowout provides an important reminder of the very real environmental risks that accompany the substantial economic benefits from this development It underlines the need for a more effective environmental regulatory structure bearing on well integrity issues backed by an emergency response framework that will ensure that environment protection and sustainable development objectives can be achieved This episode has revealed a number of major deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills WWF notes that in paragraph 666 the COI notes the importance of the biodiversity values of the North-west Marine region which has biodiversity affinities with the Indo-Pacific tropical marine ecosystems Paragraph 667 notes that the North-west region is currently undergoing marine bioregional planning one goal of which is to establish a Comprehensive Adequate and Representative system of marine protected areas for the region with the aim of protecting and safe-guarding the full suite of species communities habitats and ecosystems found within the region The reefs shelves atolls shallow and deepwater habitats and ecosystems of the North-west region support a diverse range of unique and critically important ecological features species habitats communities and ecosystems as well as supporting important ecological processes and being home of migration routes feeding grounds breeding grounds and aggregation sites for many migratory species of national and global importance as well as much loved flagship species such as whales dolphins seabirds and marine turtles These species communities and habitats would have been impacted by the blowout and will be put at risk through further exploration and production activities associated with the oil and gas industry particularly if there is not a set of

large marine sanctuary areas that provide areas free from oil and gas activities WWF believes the natural marine values of the North-west region may be some of the most intact and biodiverse examples of tropical marine biodiversity remaining on the planet with close links to the Coral Triangle region found to the North The effective conservation of these marine resources is a priority not just for Australia but is a matter of global importance WWF notes that currently less than 1 of this region is under formal protection in highly protected marine reserves that prohibit extractive activities such as oil and gas exploration and protection WWF suggests that an additional recommendation from the Australian Government in its response to the COI be as follows

Recommendation The creation of a world-class network of comprehensive adequate and representative highly protected marine protected is a critical step in securing the future health of Australiarsquos Commonwealth waters and is an essential risk management strategy in the face of events such as the Montara blowout in Australia and the BP Deepwater Horizon incident in the Gulf of Mexico The identification of the boundaries for such a network is a priority for the Australian Government and will preceed the establishment of the new regulatory agency

666 The Montara Oilfield is located in remote Commonwealth waters within the North‐west Marine Region The region has a rich marine environment which supports a number of commercial recreational and indigenous fisheries 667 DEWHA is currently preparing the North‐west Region Marine Bioregional Plan which is expected to be released this year It will identify key habitats flora and fauna natural processes human uses and benefits and threats to the long‐term ecological sustainability of the region DEWHA released a North‐west Bioregional Profile in 2008 to bring together the best available

information for the region554

but there will remain gaps in baseline survey data for many species

and ecosystems in the region which will only be practical to fill over time555

Annex 1

US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling Report January 12 2011

Key Recommendations Made That Also Apply to Offshore Oil amp Gas Drilling in Australia Key US Commission Findings of Interest to Australiarsquos Reform Efforts

1 Government staff were not trained and qualified in petroleum engineering safety and oil spill response to a degree sufficient to avert the disaster or to ensure an efficient response

2 Government had limited regulatory resources and did not have sufficient trained and qualified staff to oversee offshore operations

3 Industry accepted the role of drafting its own standards but those standards fell short of needed reform

4 Industry staff were not trained and qualified to determine cement success

5 Necessary Cement Evaluation Tool (CET) logs were not run to diagnose the cement condition

6 Industry has not and will not propose more extensive mandatory cement evaluation because of the incremental costs despite the well-known cement integrity challenges and risks on offshore wells

7 Industry staff and contractors were rushed and resorted to shortcuts because the well was over budget and behind schedule

8 An inadequate amount of cement was pumped and BP did not follow its own cementing best practices for the Macondo well

9 New techniques and procedures were used by industry and approved by government officials without rigorous technical reviews or risk assessments

10 Halliburton laboratory results for the Macondo well showed the cement was not properly designed for well conditions and was a causal factor in the blowout

11 Poor cement design and lack of technical expertise and guidance from the cementing contractor (Halliburton) was causal factor in the blowout

12 Government staff had a conflict of interest in trying to promote oil and gas development while regulating it

13 Investments made to reap the benefits of offshore revenue extraction were not proportionate to investments made in drilling safety and response planning

14 Quote from the US Commission Report ldquoThe Australian Government report is focused on keeping prescriptive standards out of the regulations so as not to stifle innovation However the clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advancerdquo

15 A lack of effective well control barriers was a causal factor in the blowout

16 Float valve failure was a causal factor in the blowout

17 Failure of industry management and communication was a causal factor in the blowout

18 Industry used and the government allowed methods procedures and equipment that were less costly but not proven equally safe or effective to the minimum regulatory standards

19 Government officials allowed deviations to government standards without knowing whether it was safe to do so Officials approved those deviations within minutes of industryrsquos requests without completing any serious level of technical review or analysis

20 Contractor errors and lack of contractor oversight training and qualifications were causal factors in the blowout

21 There are serious problems with allowing industry to develop its own safety and technical standards American Petroleum Institute (API)-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words standards that almost all operators could readily achieve are seriously undermining the entire US federal regulatory system for offshore oil and gas exploration and production

22 API resisted the Safety Case approach therefore the Safety Case requirements were not required in the US despite its success in other countries

23 US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Audits are needed to ensure that regulations and permit stipulations are followed and to identify technical safety or environmental issues

Finding 1143 On August 21 2009 the Montara H1 well blowout commenced Over one year had passed since the Montara Wellhead Platform was installed in July 2008 and not even one onsite inspection had taken place by the DA NOPSA or DEWHA

Marine Bioregional Planning and Oil and Gas Exploration and Production in Commonwealth Waters

WWF notes that in paragraph 665 the COI identifies a number of deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills as articulated in point 665 WWF believes that this should be a priority for both the Federal Environment department and the new regulatory Authority and that the proposed measures to address the deficiencies identified in the COI should be made available for public comment as a matter of priority and that the following recommendation be adopted Recommendation The Australian Government conduct a whole of Government review of its environmental regulatory regime and oil spill response arrangements in order to improve Australiarsquos capacity to respond to any future offshore oil spills

665 In an era of growth in the offshore petroleum sector in Australia the Blowout provides an important reminder of the very real environmental risks that accompany the substantial economic benefits from this development It underlines the need for a more effective environmental regulatory structure bearing on well integrity issues backed by an emergency response framework that will ensure that environment protection and sustainable development objectives can be achieved This episode has revealed a number of major deficiencies in Australiarsquos environmental regulatory regime and oil spill response arrangements that should be addressed with a view to improving Australiarsquos capacity to respond to any future offshore oil spills WWF notes that in paragraph 666 the COI notes the importance of the biodiversity values of the North-west Marine region which has biodiversity affinities with the Indo-Pacific tropical marine ecosystems Paragraph 667 notes that the North-west region is currently undergoing marine bioregional planning one goal of which is to establish a Comprehensive Adequate and Representative system of marine protected areas for the region with the aim of protecting and safe-guarding the full suite of species communities habitats and ecosystems found within the region The reefs shelves atolls shallow and deepwater habitats and ecosystems of the North-west region support a diverse range of unique and critically important ecological features species habitats communities and ecosystems as well as supporting important ecological processes and being home of migration routes feeding grounds breeding grounds and aggregation sites for many migratory species of national and global importance as well as much loved flagship species such as whales dolphins seabirds and marine turtles These species communities and habitats would have been impacted by the blowout and will be put at risk through further exploration and production activities associated with the oil and gas industry particularly if there is not a set of

large marine sanctuary areas that provide areas free from oil and gas activities WWF believes the natural marine values of the North-west region may be some of the most intact and biodiverse examples of tropical marine biodiversity remaining on the planet with close links to the Coral Triangle region found to the North The effective conservation of these marine resources is a priority not just for Australia but is a matter of global importance WWF notes that currently less than 1 of this region is under formal protection in highly protected marine reserves that prohibit extractive activities such as oil and gas exploration and protection WWF suggests that an additional recommendation from the Australian Government in its response to the COI be as follows

Recommendation The creation of a world-class network of comprehensive adequate and representative highly protected marine protected is a critical step in securing the future health of Australiarsquos Commonwealth waters and is an essential risk management strategy in the face of events such as the Montara blowout in Australia and the BP Deepwater Horizon incident in the Gulf of Mexico The identification of the boundaries for such a network is a priority for the Australian Government and will preceed the establishment of the new regulatory agency

666 The Montara Oilfield is located in remote Commonwealth waters within the North‐west Marine Region The region has a rich marine environment which supports a number of commercial recreational and indigenous fisheries 667 DEWHA is currently preparing the North‐west Region Marine Bioregional Plan which is expected to be released this year It will identify key habitats flora and fauna natural processes human uses and benefits and threats to the long‐term ecological sustainability of the region DEWHA released a North‐west Bioregional Profile in 2008 to bring together the best available

information for the region554

but there will remain gaps in baseline survey data for many species

and ecosystems in the region which will only be practical to fill over time555

Annex 1

US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling Report January 12 2011

Key Recommendations Made That Also Apply to Offshore Oil amp Gas Drilling in Australia Key US Commission Findings of Interest to Australiarsquos Reform Efforts

1 Government staff were not trained and qualified in petroleum engineering safety and oil spill response to a degree sufficient to avert the disaster or to ensure an efficient response

2 Government had limited regulatory resources and did not have sufficient trained and qualified staff to oversee offshore operations

3 Industry accepted the role of drafting its own standards but those standards fell short of needed reform

4 Industry staff were not trained and qualified to determine cement success

5 Necessary Cement Evaluation Tool (CET) logs were not run to diagnose the cement condition

6 Industry has not and will not propose more extensive mandatory cement evaluation because of the incremental costs despite the well-known cement integrity challenges and risks on offshore wells

7 Industry staff and contractors were rushed and resorted to shortcuts because the well was over budget and behind schedule

8 An inadequate amount of cement was pumped and BP did not follow its own cementing best practices for the Macondo well

9 New techniques and procedures were used by industry and approved by government officials without rigorous technical reviews or risk assessments

10 Halliburton laboratory results for the Macondo well showed the cement was not properly designed for well conditions and was a causal factor in the blowout

11 Poor cement design and lack of technical expertise and guidance from the cementing contractor (Halliburton) was causal factor in the blowout

12 Government staff had a conflict of interest in trying to promote oil and gas development while regulating it

13 Investments made to reap the benefits of offshore revenue extraction were not proportionate to investments made in drilling safety and response planning

14 Quote from the US Commission Report ldquoThe Australian Government report is focused on keeping prescriptive standards out of the regulations so as not to stifle innovation However the clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advancerdquo

15 A lack of effective well control barriers was a causal factor in the blowout

16 Float valve failure was a causal factor in the blowout

17 Failure of industry management and communication was a causal factor in the blowout

18 Industry used and the government allowed methods procedures and equipment that were less costly but not proven equally safe or effective to the minimum regulatory standards

19 Government officials allowed deviations to government standards without knowing whether it was safe to do so Officials approved those deviations within minutes of industryrsquos requests without completing any serious level of technical review or analysis

20 Contractor errors and lack of contractor oversight training and qualifications were causal factors in the blowout

21 There are serious problems with allowing industry to develop its own safety and technical standards American Petroleum Institute (API)-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words standards that almost all operators could readily achieve are seriously undermining the entire US federal regulatory system for offshore oil and gas exploration and production

22 API resisted the Safety Case approach therefore the Safety Case requirements were not required in the US despite its success in other countries

23 US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

large marine sanctuary areas that provide areas free from oil and gas activities WWF believes the natural marine values of the North-west region may be some of the most intact and biodiverse examples of tropical marine biodiversity remaining on the planet with close links to the Coral Triangle region found to the North The effective conservation of these marine resources is a priority not just for Australia but is a matter of global importance WWF notes that currently less than 1 of this region is under formal protection in highly protected marine reserves that prohibit extractive activities such as oil and gas exploration and protection WWF suggests that an additional recommendation from the Australian Government in its response to the COI be as follows

Recommendation The creation of a world-class network of comprehensive adequate and representative highly protected marine protected is a critical step in securing the future health of Australiarsquos Commonwealth waters and is an essential risk management strategy in the face of events such as the Montara blowout in Australia and the BP Deepwater Horizon incident in the Gulf of Mexico The identification of the boundaries for such a network is a priority for the Australian Government and will preceed the establishment of the new regulatory agency

666 The Montara Oilfield is located in remote Commonwealth waters within the North‐west Marine Region The region has a rich marine environment which supports a number of commercial recreational and indigenous fisheries 667 DEWHA is currently preparing the North‐west Region Marine Bioregional Plan which is expected to be released this year It will identify key habitats flora and fauna natural processes human uses and benefits and threats to the long‐term ecological sustainability of the region DEWHA released a North‐west Bioregional Profile in 2008 to bring together the best available

information for the region554

but there will remain gaps in baseline survey data for many species

and ecosystems in the region which will only be practical to fill over time555

Annex 1

US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling Report January 12 2011

Key Recommendations Made That Also Apply to Offshore Oil amp Gas Drilling in Australia Key US Commission Findings of Interest to Australiarsquos Reform Efforts

1 Government staff were not trained and qualified in petroleum engineering safety and oil spill response to a degree sufficient to avert the disaster or to ensure an efficient response

2 Government had limited regulatory resources and did not have sufficient trained and qualified staff to oversee offshore operations

3 Industry accepted the role of drafting its own standards but those standards fell short of needed reform

4 Industry staff were not trained and qualified to determine cement success

5 Necessary Cement Evaluation Tool (CET) logs were not run to diagnose the cement condition

6 Industry has not and will not propose more extensive mandatory cement evaluation because of the incremental costs despite the well-known cement integrity challenges and risks on offshore wells

7 Industry staff and contractors were rushed and resorted to shortcuts because the well was over budget and behind schedule

8 An inadequate amount of cement was pumped and BP did not follow its own cementing best practices for the Macondo well

9 New techniques and procedures were used by industry and approved by government officials without rigorous technical reviews or risk assessments

10 Halliburton laboratory results for the Macondo well showed the cement was not properly designed for well conditions and was a causal factor in the blowout

11 Poor cement design and lack of technical expertise and guidance from the cementing contractor (Halliburton) was causal factor in the blowout

12 Government staff had a conflict of interest in trying to promote oil and gas development while regulating it

13 Investments made to reap the benefits of offshore revenue extraction were not proportionate to investments made in drilling safety and response planning

14 Quote from the US Commission Report ldquoThe Australian Government report is focused on keeping prescriptive standards out of the regulations so as not to stifle innovation However the clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advancerdquo

15 A lack of effective well control barriers was a causal factor in the blowout

16 Float valve failure was a causal factor in the blowout

17 Failure of industry management and communication was a causal factor in the blowout

18 Industry used and the government allowed methods procedures and equipment that were less costly but not proven equally safe or effective to the minimum regulatory standards

19 Government officials allowed deviations to government standards without knowing whether it was safe to do so Officials approved those deviations within minutes of industryrsquos requests without completing any serious level of technical review or analysis

20 Contractor errors and lack of contractor oversight training and qualifications were causal factors in the blowout

21 There are serious problems with allowing industry to develop its own safety and technical standards American Petroleum Institute (API)-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words standards that almost all operators could readily achieve are seriously undermining the entire US federal regulatory system for offshore oil and gas exploration and production

22 API resisted the Safety Case approach therefore the Safety Case requirements were not required in the US despite its success in other countries

23 US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Annex 1

US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling Report January 12 2011

Key Recommendations Made That Also Apply to Offshore Oil amp Gas Drilling in Australia Key US Commission Findings of Interest to Australiarsquos Reform Efforts

1 Government staff were not trained and qualified in petroleum engineering safety and oil spill response to a degree sufficient to avert the disaster or to ensure an efficient response

2 Government had limited regulatory resources and did not have sufficient trained and qualified staff to oversee offshore operations

3 Industry accepted the role of drafting its own standards but those standards fell short of needed reform

4 Industry staff were not trained and qualified to determine cement success

5 Necessary Cement Evaluation Tool (CET) logs were not run to diagnose the cement condition

6 Industry has not and will not propose more extensive mandatory cement evaluation because of the incremental costs despite the well-known cement integrity challenges and risks on offshore wells

7 Industry staff and contractors were rushed and resorted to shortcuts because the well was over budget and behind schedule

8 An inadequate amount of cement was pumped and BP did not follow its own cementing best practices for the Macondo well

9 New techniques and procedures were used by industry and approved by government officials without rigorous technical reviews or risk assessments

10 Halliburton laboratory results for the Macondo well showed the cement was not properly designed for well conditions and was a causal factor in the blowout

11 Poor cement design and lack of technical expertise and guidance from the cementing contractor (Halliburton) was causal factor in the blowout

12 Government staff had a conflict of interest in trying to promote oil and gas development while regulating it

13 Investments made to reap the benefits of offshore revenue extraction were not proportionate to investments made in drilling safety and response planning

14 Quote from the US Commission Report ldquoThe Australian Government report is focused on keeping prescriptive standards out of the regulations so as not to stifle innovation However the clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advancerdquo

15 A lack of effective well control barriers was a causal factor in the blowout

16 Float valve failure was a causal factor in the blowout

17 Failure of industry management and communication was a causal factor in the blowout

18 Industry used and the government allowed methods procedures and equipment that were less costly but not proven equally safe or effective to the minimum regulatory standards

19 Government officials allowed deviations to government standards without knowing whether it was safe to do so Officials approved those deviations within minutes of industryrsquos requests without completing any serious level of technical review or analysis

20 Contractor errors and lack of contractor oversight training and qualifications were causal factors in the blowout

21 There are serious problems with allowing industry to develop its own safety and technical standards American Petroleum Institute (API)-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words standards that almost all operators could readily achieve are seriously undermining the entire US federal regulatory system for offshore oil and gas exploration and production

22 API resisted the Safety Case approach therefore the Safety Case requirements were not required in the US despite its success in other countries

23 US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

19 Government officials allowed deviations to government standards without knowing whether it was safe to do so Officials approved those deviations within minutes of industryrsquos requests without completing any serious level of technical review or analysis

20 Contractor errors and lack of contractor oversight training and qualifications were causal factors in the blowout

21 There are serious problems with allowing industry to develop its own safety and technical standards American Petroleum Institute (API)-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words standards that almost all operators could readily achieve are seriously undermining the entire US federal regulatory system for offshore oil and gas exploration and production

22 API resisted the Safety Case approach therefore the Safety Case requirements were not required in the US despite its success in other countries

23 US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Key US Commission Recommendations for Consideration by the Australian Government beyond the COI Recommendations

1 The ldquohuman factorrdquo was a major causal factor in both the US and Australia blowouts Regulatory reform must be matched with sufficient resources to ensure that there are trained and qualified personnel in both industry (licensee and contractors) and government

2 Improved training and qualification standards are needed for government and industry staff (including contractors)

3 Regulatory reform must ensure the political autonomy necessary to overcome powerful commercial interests

4 Government revenue collection staff must be separate and distinct from oversight staff to avoid conflicts of interest

5 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards reflective of best international practices should be used to regulate offshore oil and gas activities

6 Critical standards for well construction integrity verification and safety must be articulated in government regulations Government cannot remain ldquosilentrdquo it has an obligation to articulate minimum standards for industry to follow

7 There is a clear benefit to defining minimum technical standards to clearly articulate the ldquotried and truerdquo engineering methods and technology

8 Because industry did not develop its own rigorous safety and environmental standards government must do the hard work of developing the minimum standards and Safety Case requirements Government should not allow industry to set minimum standards unilaterally

9 Regulations should be updated at least once every five (5) years to keep pace with new technology

10 The approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation

11 Companies should not implement new technology without ensuring there is adequate technical merit associated with the new technology Industry must be required to defend its selection of new technologyndashwith thorough supportndashto verify that it is in fact better Companies should also ensure that staff are trained and qualified to implement the new technology

12 Government must require more extensive cement evaluation including use of Cement Evaluation Tools (CET) as a minimum standard for offshore wells

13 Industry should be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings and to minimize rig time and keep the project on schedule at risk to human health and the environment

14 Employees and contractors should be rewarded for identifying safety concerns Regulations need improvement in the area of offshore oil and gas activity whistleblower protections

15 Well service contractors are a critical part of successfully executing a well Contractors must be held accountable for their roles and responsibilities including being required to conduct risk assessments for their activities

16 The American Petroleum Institute (API) is culturally ill suited to drive a safety revolution in the industry An industry safety institute needs to be formed specific to offshore oil and gas activities

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

that would have complete command of technical expertise and complete freedom from other interests and agendas

17 Industry needs to benchmark safety and environmental practices against recognized global best practices

18 New and improved technology is needed to capture oil from a subsea blowout when a subsea BOP has failed The US is working with industry to develop a marine containment system and plans to make this equipment a regulatory obligation on future projects

19 New regulations should be built using independent engineering experts

20 Industry should be required to contribute to safety and environmental research and development

21 Government needs to build technical and safety expertise related offshore oil and gas activities

22 A new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight

23 An independent agency is needed that has enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) This agency would also have enforcement authority over the structural and operational integrity of all offshore energy production facilities including oil and gas production

24 Industry should be required to pay regulatory fees sufficient to ensure adequate regulatory oversight and to hire experienced engineers inspectors scientists and first responders

25 Improved BOP technology should be developed (potentially mandate another set of shear rams in the BOP stack)

26 Offshore operators should be required to provide detailed plans for source control as part of their oil spill response plans and their applications for permits to drill The plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective

27 Improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information Wells should be designed to mitigate risks to well integrity during post-blowout containment efforts

28 The liability cap and financial responsibility requirements should be increased for offshore facilities

29 Additional inspections and audits should occur including oversight of the lessee and its contractors

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Key Quotes from the US Commission Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia Forward p vii ldquoTo assure human safety and environmental protection regulatory oversight of leasing energy exploration and production require reforms even beyond those significant reforms already initiated since the Deepwater Horizon disaster Fundamental reform will be needed in both the structure of those in charge of regulatory oversight and their internal decision making process to ensure their political autonomy technical expertise and their full consideration of environmental protection concerns [emphasis added]rdquo Forward p vii ldquo Because regulatory oversight alone will not be sufficient to ensure adequate safety the oil and gas industry will need to take its own unilateral steps to increase dramatically safety throughout the industry including self-policing mechanisms that supplement governmental enforcement [emphasis added]rdquo Forward p ix ldquoThe Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight and made important recommendations for changes in legal authority regulations investments in expertise and managementrdquo p 2 ldquoAs of April 20 BP and the Macondo well were almost six weeks behind schedule and more than $58 million over budgetrdquo Note The Macondo well and the Montara well shared the same problem staff were rushing and taking shortcuts because both wells were over budget and behind schedule p 2 Schlumbergerrsquos more advanced cement evaluation was not run to save $128K and rig time Halliburton and BP staff reported cementing a success Note The Macondo well and the Montara well shared the same problem staff were not trained and qualified to determine cement success shortcuts were taken to eliminate more advanced cement evaluation logging and testing in order to save contract cost and rig time p 56 ldquoThe origins of MMS vividly illustrate that political compromise Secretary of the Interior James Watt created the agency with great fanfare in January 1982 aiming from the outset to promote domestic energy supplies by dramatically expanding drilling on the outer continental shelf He combined in one entity authority for regulatory oversight with responsibility for collecting for the US Treasury the billions of dollars of revenues obtained from lease sales and royalty payments from producing wells5 From birth MMS had a built-in incentive to promote offshore drilling in sharp tension with its mandate to ensure safe drilling and environmental protection Revenue generationmdashenjoyed both by industry and governmentmdashbecame the dominant objectiverdquo Note The Macondo well and the Montara well shared the same problem government staff had a conflict of interest in trying to promote oil and gas development while at the same time regulating it p 56 ldquo Any revenue increases dependent on moving drilling further offshore and into much deeper waters came with a corresponding increase in the safety and environmental risks of such drilling Those increased risks however were not matched by greater more sophisticated regulatory oversight Industry regularly and intensely resisted such oversight and neither Congress nor any of a series of presidential administrations mustered the political support necessary to overcome that opposition Nor despite their assurances to the contrary did the oil and gas industry take the initiative to match its massive investments in oil and gas development and production with comparable investments in drilling safety and oil-spill containment technology and contingency response planning in case of an

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

accident On April 20 the inherent risks of decades of inadequate regulation insufficient investment and incomplete planning were realized in tragic fashion [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem investments made to reap the benefits of offshore revenues extraction were not proportionate to investments made in drilling safety and response planning p 57 ldquoThe overall picture of MMS that has emerged since April 20 is distressing MMS became an agency systematically lacking the resources technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner For a regulatory agency to fall so short of its essential safety mission is inexcusable [emphasis added]rdquo Note The Macondo well and the Montara well shared the same problem government staff were not trained and qualified in petroleum engineering safety and oil spill response matters to a sufficient degree to advert the disaster or to ensure an efficient response p 67 ldquoThe federal government has never lacked the sweeping authority required to control whether when and how valuable oil and gas resources located on the outer continental shelf are leased explored or developed As described at the outset the governmentrsquos authority is virtually without limitation traceable to both its authority as proprietor and as sovereign then further bolstered by the Presidentrsquos inherent authority as Chief Executive and Commander-in-Chief to ensure the security of the nation The root problem has instead been that political leaders within both the Executive Branch and Congress have failed to ensure that agency regulators have had the resources necessary to exercise that authority including personnel and technical expertise and no less important the political autonomy needed to overcome the powerful commercial interests that have opposed more stringent safety regulation [emphasis added]rdquo Note The Macondo well and the Montara well blowouts resulted from the same systemic causes While the COI report is very damning regarding NT DoR staff the NT DoR staff training resources and staffing levels were set at higher levels within the government Regulatory reform in Australia must be matched with sufficient resources to ensure personnel are trained and qualified and to ensure the political autonomy to overcome powerful commercial interests p 68 ldquoBy the early 1990s some MMS officials had begun to rethink the agencyrsquos approach to safety oversight of the offshore industry In the wake of an accumulation of accidents in US waters and several devastating accidents elsewhere around the globe they had come to appreciate that a command and control prescriptive approach to regulation did not adequately address the risks generated by the offshore industryrsquos new technologies and exploration development and production activities including industrial expansion into deeper waters The Norwegian government responded to the loss of the Alexander Kielland by transforming its approach to industry operations Under the new regime rather than relying solely on prescribed operational and safety standards the government required the industry to demonstrate thorough consideration of all risks associated with the structures and operations for a drilling or production plan The regulator no longer ldquoapprovedrdquo operations Shifting the burden of demonstrating safety to the operator the regulator would instead now ldquoconsentrdquo to development activity proceeding only upon the operatorrsquos demonstration that sufficient safety and risk management systems were in place The Piper Alpha accident and the subsequent investigation led by Lord Cullen had a similar impact on United Kingdom regulation As in Norway the previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risks

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

All these foreign regulatorsmdashthe United Kingdom Norway and Canadamdashhad previously relied on the kind of prescriptive approach used in the United States but in the aftermath of these fatal accidents in harsh remote offshore environments authorities elsewhere concluded that adding a risk-based approach was essential They faulted reliance on the ldquoprescriptive regulation with inspection modelrdquo for being fundamentally reactive and therefore incapable of driving continuous improvement in policies and practices According to Magne Ognedal the Director General of the Norwegian Petroleum Safety Authority the prescription-only model engendered hostility between the parties and put the riskmdashlegal and moralmdashonto the regulator to accommodate changing technology geology and location rather than onto the operator where the responsibility rightly belonged Under the new safety-management model minimum standards for structural and operational integrity (well control prevention of fires and explosions and worker safety) remained in place But the burden now rested on industry to assess the risks associated with offshore activities and demonstrate that each facility had the policies plans and systems in place to manage those risks In the United Kingdom such risk management plans were called a ldquoSafety Caserdquo [emphasis added]rdquo Note As explained in WWFrsquos June 2010 Report a combination of an objective-based approach and minimum standards is needed Please note above that in Norway ldquothe previous prescriptive regulatory approach evolved into one where regulations were supplemented with a requirement for companies to demonstrate to the regulator that they had undertaken a thorough assessment of risks associated with an activity and they had adequate safety and risk management systems to address those risksrdquo The key word is ldquosupplementedrdquo The minimum standards were not abandoned in Norway instead they were supplemented with and enhanced by the additional Safety Case approach A combination approach is needed to set the lowest and upper most bars p 71 ldquoMMS nonetheless tried to take the initiative for regulatory reform In July 1991 in response to the Marine Board report and MMSrsquos own internal task force report MMS published a notice requesting comments on alternative strategies to promote safety and environmental protection specifically a requirement that outer continental shelf lessees andor operators develop maintain and implement ldquoa safety and environmental management program (SEMP) similar to the United Kingdomrsquos Formal Safety Assessmentor Norwayrsquos Concept Safety Evaluation programsrdquo Declaring that lessees and operators already had ldquofull responsibility to plan and prepare for the overall safety and reliability of Outer Continental Shelf operationsrdquo MMS asserted that requiring SEMP would help to enhance offshore safety and environmental protection At the time of the Macondo blowoutmdashalmost 20 years after its original proposalmdashMMS had still not published a rule mandating that all operators have plans to manage safety and environmental risks The agencyrsquos efforts to adopt a more rigorous and effective risk-based safety regulatory regime were repeatedly revisited refined delayed and blocked alternatively by industry or skeptical agency political appointees MMS thus never achieved the reform of its regulatory oversight of drilling safety consonant with practices that most other countries had embraced decades earlier Industry served as an initial impediment to MMS reform effortsmdashand has largely remained so In late 1991 the American Petroleum Institute asked the agency to postpone action in order to allow the institute itself to develop an offshore safety standard MMS agreed and actively participated in the institutersquos committee-based process over the next two years The American Petroleum Institutersquos ldquorecommended practicerdquo guidance document was published in May 1993mdashthe same month that the UK Safety Case regulations came into force Missing from the first edition of the Institutersquos guideline however was a keyelement of standard process safety managementmdashnor did it even cover drilling rigs clearly an integral element in operating offshore [emphasis added]rdquo Note In the US case industry accepted the role of drafting its own standards Industry standards fell short of the needed reform This is a key reason why WWF does not support turning over best practice and minimum standard development to industry The Government must do the hard work of developing minimums standards and Safety Case requirements

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

p 72 ldquoDuring the 1990s the resources available to MMS decreased precipitously just as it faced a dramatic increase in the offshore activity it was charged with overseeingmdashand matters only deteriorated thereafter Perversely MMSrsquos budget reached its lowest point in November 1996 just as major development activities in deepwater were expanding [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it also had limited regulatory resources and therefore could not hire sufficient personnel or train existing personnel p 74 ldquo With increasing industry activity MMS regulators could not possibly keep pace The oil and gas industry works 247 but MMS regulators generally work regular office hours requiring ldquoon-callrdquo responsibility to be assigned to individual senior engineers From 2005 to 2009 the number of applications for drilling permits in just the MMS New Orleans District increased 71 percent from 1246 to 2136 Without enough engineers in the Gulf of Mexico district office to process all the applications some operators literally ldquoshop aroundrdquo They ldquocontact district offices outside the appropriate jurisdictional area to find an engineer who will eventually give approval [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same resource limitations The NT DoR testified it could not keep up with the pace of oversight with just one engineer on staff and a supervisor without engineering skills with no backup for either position The lack of NT DoR resources was not highlighted in the COI Report but was covered in the Draft Government Response The Draft Government Response sets forth plans to boost technical support to the NT DoR but does not establish clear training and qualification standards for government staff The Draft Government Response needs to be strengthened in this area p 74 ldquoWhen Interior Secretary Watt moved regulatory oversight of offshore energy exploration and production to a new entity that was also responsible for collecting revenue from the activity it regulated he created a new agency that inexorably came to be dominated by its focus on maximizing that revenue For at least the past 15 years every former MMS Director has freely acknowledged that the royalty issues have taken most of the Directorrsquos timemdashat the expense of offshore regulatory oversight [emphasis added]rdquo Note A key lesson learned is the need to separate the government revenue collection staff from the oversight staff p 74 ldquo Agency personnel naturally look to agency leadership to signal what constitutes their primary mission including the expertise and experience that such leaders bring with them In the case of MMS those signals were profoundly disturbing yet nonetheless consistent over time No one who has led MMS since it was created almost 30 years ago has possessed significant training or experience in petroleum engineering or petroleum geology or any significant technical expertise related to drilling safety In the absence of a clear statement from the top about the necessity for such expertise to ensure drilling safety it should be no surprise that MMS personnel have suffered from the loss of essential expertise throughout their ranks Indeed the lack of requisite training is abysmal According to a recent survey conducted at the request of the Secretary of the Interior ldquo[a]lmost half of the [MMS] inspectors surveyed do not believe they have received sufficient training [emphasis added]rdquo MMS unlike Interiorrsquos Bureau of Land Management (which inspects onshore oil and gas drilling operations) has no ldquooil and gas inspection certification programrdquo and no exam ldquois required of each inspector in order to be certifiedrdquo MMS ldquodoes not provide formal training specific to the inspections process and does not keep up with changing technology Some inspectors noted that they rely on industry representatives to explain the technology at a facility [emphasis added]rdquo ldquoThe Macondo well blowout makes all too clear the cost of such a departure from the standards of excellence that the nation expects from its public servants As described in Chapter 4 the MMS

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

personnel responsible for reviewing the permit applications submitted to MMS for the Macondo well were neither required nor prepared to evaluate the aspects of that drilling operation that were in fact critical to ensuring well safety The regulations did not mandate that MMS regulators inquire into the specifics of ldquorupture disksrdquo ldquolong stringrdquo well designs cementing process the use of centralizers lockdown sleeves or the temporary abandonment procedures (see Chapter 4) And no doubt for that same reason the MMS personnel responsible for deciding whether the necessary drilling permits were granted lacked the expertise that would have been necessary in any event to determine the relative safety of the well based on any of these factors [emphasis added]rdquo Note The Macondo well and the Montara well suffered from the same lack of trained and qualified government staff overseeing the drilling operations Government staff testified that key NT DoR management did not hold the technical skills or expertise to know whether to sign the permits and approvals they were tasked with approving The Draft Government Response needs to be strengthened on this point Government needs to hire trained qualified staff and keep them trained and qualified during the tenure of their position p 78 ldquoPerhaps because of the cumulative lack of adequate resources absence of a sustained agency mission or sheer erosion of professional culture within some offices MMS came progressively to suffer from serious deficiencies of organization and management the fundamental traits of any effective institution According to the Outer Continental Shelf Safety Oversight Board MMS lacks ldquoa formal bureau-wide compilation of rules regulations policies or practices pertinent to inspections nor does it have a comprehensive handbook addressing inspector roles and responsibilitiesrdquo As a result the Board concluded ldquopolicies and enforcement mechanisms vary among the [Gulf of Mexico] districts and the regions and there is no formal process to promote standardization consistency and operational efficiency [emphasis added]rdquo Note The need for government policies procedures and standards is also an issue for Australia p 79 ldquoUltimately MMS was unable to ensure that its staffing capabilities and competencies kept pace with the changing risks and volume of offshore activity As the Safety Oversight Board concluded the Gulf of Mexico ldquodistrict offices did not have a sufficient number of engineers to efficiently and effectively conduct permit reviewsrdquo As the Chief of the US Geological Surveyrsquos Conservation Division had warned nearly 30 years earlier salariesmdash for engineers stuck in the midranges of the federal pay scalemdashwere far too low to attract individuals possessing the experience and expertise needed to oversee the increasingly complicated oil and gas drilling activities in the deepwater Gulf At the most elementary level MMS frequently lacked defined qualifications that new employees must meet before they start performing their jobs or clear procedures for on-the-job training The Boar report further observed that the ldquoamount of time and the structure of this training vary from office to office and from inspector to inspectorrdquo and it concluded that the on-the-job training ldquodoes not address the need for substantive consistent training in all aspects of the job [emphasis added]rdquo Note Lack of resources and qualified government officials was also an issue for Australia p 99 ldquo Given the variety of things that can go wrong with a cement job it is hardly surprising that a 2007 MMS study identified cementing problems as one of the ldquomost significant factorsrdquo leading to blowouts between 1992 and 2006rdquo Even following best practices a cement crew can never be certain how a cement job at the bottom of the well is proceeding as it is pumped Cement does its work literally miles away from the rig floor and the crew has no direct way to see where it is whether it is contaminated or whether it has sealed off the well To gauge progress the crew must instead rely on subtle indirect indicators like pressure and volume they know how much cement and mud they have sent down the well and how hard the pumps are working to push it The crew can use these readings to check whether each barrel of cement pumped into the well displaces an equal volume of drilling mudmdashproducing ldquofull returnsrdquo They can also check for pressure spikes to confirm that ldquowiper plugsrdquo (used to separate the cement from the surrounding drilling

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

mud) have landed on time as expected at the bottom of the well And they can look for ldquolift pressurerdquomdasha steady increase in pump pressure signifying that the cement has turned the corner at the bottom of the well and is being pushed up into the annular space against gravity While they suggest generally that the job has gone as planned these indicators say little specific about the location and quality of the cement at the bottom of the well None of them can take the place of pressure testing and cement evaluation logging [emphasis added]rdquo Note For these reasons it is imperative to require more extensive cement evaluation as a minimum standard Industry will not and has not proposed it because of the incremental costs despite the well-known cement integrity challenges and risks The government must require more extensive cement evaluation as a minimum standard for offshore wells p 100 ldquo BP made a third compromise by limiting the volume of cement that Halliburton would pump down the well Pumping more cement is a standard industry practice to insure against uncertain cementing conditions more cement means less risk of contamination and less risk that the cement job will be compromised by slight errors in placement But more cement at Macondo would mean a higher cement column in the annulus which in turn would exert more pressure on the fragile formation below Accordingly BP determined that the annular cement column should extend only 500 feet above the uppermost hydrocarbon-bearing zone (and 800 feet above the main hydrocarbon zones) and that this would be sufficient to fulfill MMS regulations of ldquo500 feet above the uppermost hydrocarbon-bearing zonerdquo However it did not satisfy BPrsquos own internal guidelines which specify that the top of the annular cement should be 1000 feet above the uppermost hydrocarbon zone As designed BP would have Halliburton pump a total of approximately 60 barrels of cement down the wellmdasha volume that its own engineers recognized would provide little margin for error [emphasis added]rdquo Note In both the Macondo and Montara wells an inadequate amount of cement was pumped And like the Montara Case where PTTEP did not follow its WOMP BP did not follow its own cementing best practices for the Macondo well In both cases there was insufficient government oversight p 100 ldquoFinally in close consultation with Halliburton BP chose to use ldquonitrogen foam cementrdquomdasha cement formula that has been leavened with tiny bubbles of nitrogen gas injected into the cement slurry just before it goes down the well This formula was chosen to lighten the resulting slurry from approximately 167 ppg to 145 ppgmdashthereby reducing the pressure the cement would exert on the fragile formation The bubbles in theory would also help to balance the pore pressure in the formation and clear the annular space of mud as the cement flowed upward Halliburton is an industry leader in foam cementing but BP appears to have had little experience with foam technology for cementing production casing in the Gulf of Mexico [emphasis added]rdquo Note BP chose to use a new cement type that it was unfamiliar with on a high risk well similar to the problem that occurred when PTTEP opted for PCCCrsquos without thorough experience in and understanding of their use The lesson learned here is that the company needs to gain experience with new technology in a careful well thought out process with serious technical evaluation Companies should not implement new technology without ensuring there is adequate technical merit associated with that technology and without ensuring that staff are trained and qualified to implement the new technology Industry should also be required to demonstrate to government officials that the new technology is in fact better and safer New technologies should not be implemented ldquoon-the-flyrdquo as a cost savings measure andor to minimize rig time and keep the project on schedule at risk to human health and the environment p 101-102 Halliburton had lab data to show that the tests were problematic and yet it did not share that information with BP or advise them of the problems Note The Macondo well and the Montara well suffered from the same lack of technical support from Halliburton Halliburton was the cementing expert on the job and should be providing solid technical advice to the well operator In both cases Halliburtonrsquos staff failed to inform or identify cement

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

problems While the COI Report does not attribute any blame to Halliburton WWFrsquos June 2010 Report disagrees The US Commission report also assigns responsibility to Halliburton Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee should be required to demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome Cement Evaluation Tool (CET) logs were not run in either the Macondo or Montara wells but should have been run to diagnose the cement condition Cement evaluation should be included as a minimum standard in offshore well integrity regulation p 106 ldquoWhile drilling crews routinely use water-based spacer fluids to separate oil-based drilling mud from seawater the spacer BP chose to use during the negative pressure test was unusual BP had directed M-I SWACO mud engineers on the rig to create a spacer out of two different lost-circulation materials left over on the rigmdashthe heavy viscous drilling fluids used to patch fractures in the formation when the crew experiences lost returns M-I SWACO had previously mixed two different unused batches or ldquopillsrdquo of lost-circulation materials in case there were further lost returns BP wanted to use these materials as spacer in order to avoid having to dispose of them onshore as hazardous waste pursuant to the Resource and Conservation Recovery Act exploiting an exception that allows companies to dump waterbased ldquodrilling fluidsrdquo overboard if they have been circulated down through a well At BPrsquos direction M-I SWACO combined the materials to create an unusually large volume of spacer that had never previously been used by anyone on the rig or by BP as a spacer nor been thoroughly tested for that purpose The crew then attempted a third time to bleed off the pressure from the drill pipe and was again able to get it down to 0 psi When the crew shut the well back in however the pressure increased to 1400 psi At this point the crew had bled the drill-pipe pressure down three times but each time it had built back up For a successful negative-pressure test the pressure must remain at 0 psi when the pipe is closed after the pressure is bled offrdquo p 109 ldquobut based on available information the 1400 psi reading on the drill pipe could only have been caused by a leak into the well Nevertheless at 8 pm BP Well Site Leaders in consultation with the crew made a key error and mistakenly concluded the second negative test procedure had confirmed the wellrsquos integrity They declared the test a success and moved on to the next step in temporary abandonment [emphasis added]rdquo Note BP chose to use a new type of spacer fluid in the negative pressure test to test whether the cement plug in the bottom of the hole was holding This new type of fluid has not been used by anyone on the rig or by anyone at BP as a spacer nor has it been tested for that purpose Use of this new untested spacer led BP to believe that the negative test procedure was successful when in fact the procedure had failed The clear lesson learned from the Macondo well blowout is that new methods can result in catastrophic results if not properly engineered tested and approved in advance Both the Macondo and Montara well blowouts included causal factors where new technology or procedures were used without appropriate technical vetting There is a clear benefit to defining minimum technical standards to clearly articulate ldquotried and truerdquo engineering methods and technology and then requiring industry to defend its selection of new technology ndash with thorough support to verify that it is in fact better p 115 ldquoAs this narrative suggests the Macondo blowout was the product of several individual missteps and oversights by BP Halliburton and Transocean which government regulators lacked the authority the necessary resources and the technical expertise to prevent [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Note The lack of trained and qualified government officials was a causal factor in both the Macondo well and the Montara well blowouts p 115 ldquoThe immediate cause of the Macondo blowout was a failure to contain hydrocarbon pressures in the well Three things could have contained those pressures the cement at the bottom of the well the mud in the well and in the riser and the blowout preventer But mistakes and failures to appreciate risk compromised each of those potential barriers steadily depriving the rig crew of safeguards until the blowout was inevitable and at the very end uncontrollable [emphasis added]rdquo Note The lack effective well control barriers was a causal factor in both the Macondo well and the Montara well blowouts p 116 ldquoFloat-valve conversion and circulating pressure Whether the float valves converted let alone whether ldquounconvertedrdquo float valves contributed to the eventual blowout has not yet been and may never be established with certainty But what is certain is that BPrsquos team again failed to take time to consider whether and to what extent the anomalous pressure readings may have indicated other problems or increased the risk of the upcoming cement job BPrsquos team appears not to have seriously examined why it had to apply over four times the 750 psi design pressure to convert the float valves More importantly the team assumed that the sharp drop from 3142 psi meant the float valves had in fact converted That was not at all certain The auto-fill tube was designed to convert in response to flow-induced pressure Without the required rate of flow an increase in static pressure no matter how great will not dislodge the tube While BPrsquos Macondo team focused on the peak pressure reading of 3142 psi and the fact that circulation was reestablished it does not appear the team ever considered whether sufficient mud flow rate had been achieved to convert the float valves They should have considered this issue Because of ECD concerns BPrsquos engineers had specified a very low circulating pump ratemdashlower than the flow rate necessary to convert the float valves BP does not appear to have accounted for this fact [emphasis added]rdquo Note Float valve failure appears to be a causal factor in the Macondo well blowout and was verified to be a causal factor in the Montara well blowout p 117 ldquoCement evaluation log decision The BP team erred by focusing on full returns as the sole criterion for deciding whether to run a cement evaluation log Receiving full returns was a good indication that cement or other fluids had not been lost to the weakened formation But full returns provided at best limited or no information about (1) the precise location where the cement had ended up (2) whether channeling had occurred (3) whether the cement had been contaminated or (4) whether the foam cement had remained stable Although other indicatorsmdashsuch as on-time arrival of the cement plugs and observation of expected lift pressuremdashwere reassuring they too provided limited information Other cement evaluation tools could have provided more direct information about cementing success Cement evaluation logs plainly have their limitations particularly at Macondo But while many companies do not run cement evaluation logs until the completion phase BP should have run one heremdashor sought other equivalent indications of cement quality in light of the many issues surrounding and leading up to the cement job BPrsquos own report agrees [emphasis added]rdquo Note Running Cement Evaluation Tools (CET) to verify cement integrity issues before proceeding with well suspension may have averted both the Macondo and Montara well blowouts p 118 ldquoEven more serious Halliburton documents strongly suggest that the final foam stability test results indicating a stable slurry may not even have been available before Halliburton pumped the

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

primary cement job at Macondo If true Halliburton pumped foam cement into the well at Macondo at a time when all available test data showed the cement would be in fact unstable [emphasis added]rdquo Note Use of a cement that was not designed for the well conditions was a causal factor in both the Macondo and Montara well blowouts Halliburton laboratory results for the Macondo well showed the cement was not properly designed for the well conditions In the Montara case a higher temperature cement should have been used p 118 ldquoThose decisions and risk factors included among other things bull Difficult drilling conditions including serious lost returns in the cementing zone bull Difficulty converting float equipment and low circulating pressure after purported conversion bull No bottoms up circulation bull Less than recommended number of centralizers bull Low rate of cement flow and bull Low cement volume Based on evidence currently available there is nothing to suggest that BPrsquos engineering team conducted a formal disciplined analysis of the combined impact of these risk factors on the prospects for a successful cement job There is nothing to suggest that BP communicated a need for elevated vigilance after the job And there is nothing to indicate that Halliburton highlighted to BP or others the relative difficulty of BPrsquos cementing plan before during or after the job or that it recommended any post-cementing measures to confirm that the primary cement had in fact isolated the high-pressure hydrocarbons in the pay zone [emphasis added]rdquo Note Poor cement design and lack of technical expertise and guidance from the cementing contractor (in both cases Halliburton) was causal factor in both the Macondo well and the Montara well blowouts p 122 ldquo The most significant failure at Macondomdashand the clear root cause of the blowoutmdashwas a failure of industry management Most if not all of the failures at Macondo can be traced back to underlying failures of management and communication Better management of decision making processes within BP and other companies better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident BP and other operators must have effective systems in place for integrating the various corporate cultures internal procedures and decisionmaking protocols of the many different contractors involved in drilling a deepwater well [emphasis added]rdquo p 123 ldquo Halliburton and BPrsquos management processes did not ensure that cement was adequately tested Halliburton had insufficient controls in place to ensure that laboratory testing was performed in a timely fashion or that test results were vetted rigorously in-house or with the client In fact it appears that Halliburton did not even have testing results in its possession showing the Macondo slurry was stable until after the job had been pumped It is difficult to imagine a clearer failure of management or communication BP Transocean and Halliburton failed to communicate adequately Information appears to have been excessively compartmentalized at Macondo as a result of poor communication BP did not share important information with its contractors or sometimes internally even with members of its own team Contractors did not share important information with BP or each other As a result individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical) For example many BP and Halliburton employees were aware of the difficulty of the primary cement job But those issues were for the most part not communicated to the rig crew that conducted the negative-pressure test and monitored the well [emphasis added]rdquo Note Failure of industry management and communication was a causal factor in both the Macondo well and the Montara well blowouts

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

p 125 ldquoThere is nothing inherently wrong with choosing a less-costly or less-time-consuming alternativemdashas long as it is proven to be equally safe The problem is that at least in regard to BPrsquos Macondo team there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe None of BPrsquos (or the other companiesrsquo) decisions in Figure 410 appear to have been subject to a comprehensive and systematic risk-analysis peer-review or management of change process The evidence now available does not show that the BP team members (or other companiesrsquo personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives [emphasis added]rdquo p 126 ldquoCorporations understandably encourage cost-saving and efficiency But given the dangers of deepwater drilling companies involved must have in place strict policies requiring rigorous analysis and proof that less-costly alternatives are in fact equally safe If BP had any such policies in place it does not appear that its Macondo team adhered to them [emphasis added]rdquo Note Approval of proposed waivers should be based on an applicantrsquos ability to demonstrate that it has developed a technology that meets or exceeds the minimum standards and that it is in governmentrsquos best interest to approve this technical innovation Use of less expensive methods procedures and equipment that were not proven equally safe or effective compared to more expensive proven techniques was causal factor in both the Macondo well and the Montara well blowouts ldquoUnless companies create and enforce such policies there is simply too great a risk that financial pressures will systematically bias decisionmaking in favor of time- and cost savings It is also critical (as described in greater length in Chapter 8) that companies implement and maintain a pervasive top-down safety culture (such as the ones described by the ExxonMobil and Shell CEOs at the Commissionrsquos hearing on November 9 2010) that reward employees and contractors who take action when there is a safety concern even though such action costs the company time and money [emphasis added]rdquo Note The US Commission recommends rewarding employees and contractors for identifying safety concerns ldquoOf course some decisions will have shorter timelines than others and a full-blown peer reviewed risk analysis is not always practicable But even where decisions need to be made in relatively short order there must be systems in place to ensure that some sort of formal risk analysis takes place when procedures are changed and that the analysis considers the impact of the decision in the context of all system risks If it turns out there is insufficient time to perform such an analysis only proven alternatives should be considered [emphasis added]rdquo ldquoGovernment also failed to provide the oversight necessary to prevent these lapses in judgment and management by private industry [emphasis added]rdquo Note Lack of government oversight was a causal factor in both the Macondo well and the Montara well blowouts ldquoBut even if MMS had the resources and political support needed to promulgate the kinds of regulations necessary to reduce risk it would still have lacked personnel with the kinds of expertise and training needed to enforce those regulations effectively The significance of inadequate training is underscored by MMSrsquos approval of BPrsquos request to set its temporary abandonment plug 3300 feet below the mud line At least in this instance there was a MMS regulation that potentially applied MMS regulations state that cement plugs for temporary abandonment should normally be installed ldquono more than 1000 feet below the mud linerdquo but also allow the agency to approve ldquoalternate requirements for subsea wells case-by-caserdquo Crucially alternate procedures ldquomust provide a level of safety and environmental protection that equals or surpasses current MMS requirementsrdquo [emphasis added]rdquo Note Lack of government staff technical expertise was a causal factor in both the Macondo well and the Montara well blowouts

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

p 127 ldquo BP asked for permission to set its unusually deep cement plug in an April 16 permit application to MMS BP stated that it needed to set the plug deep in the well to minimize potential damage to the lockdown sleeve and said it would increase the length of the cement plug to compensate for the added depth An MMS official approved the request in less than 90 minutes The official did so because after speaking with BP he was persuaded that 3000 feet was needed to accommodate setting the lockdown sleeve which he thought was important to do It is not clear what if any steps the official took to determine whether BPrsquos proposed procedure would ldquoprovide a level of safety that equal[ed] or surpass[ed]rdquo a procedure in which the plug would have been set much higher up in the well MMSrsquos cursory review of the temporary abandonment procedure mirrors BPrsquos apparent lack of controls governing certain key engineering decisions Like BP MMS focused its engineering review on the initial well design and paid far less attention to key decisions regarding procedures during the drilling of the well Also like BP MMS did not assess the full set of risks presented by the temporary abandonment procedure The limited scope of the regulations is partly to blame But MMS did not supplement the regulations with the training or the processes that would have provided its permitting official with the guidance and knowledge to make an adequate determination of the procedurersquos safety [emphasis added]rdquo Note In both the Macondo well and the Montara well blowouts government officials allowed deviations to government standards without knowing whether it was safe to do so Government officials approved these changes within minutes of industryrsquos request without completing any serious level of technical review or analysis p 223 ldquoNo single companymdashnot even at the major integrated oil companiesmdashperforms the full panoply of activities required for oil and gas drilling All contract out for the services of other companies for critical aspects of their operations For this same reason whatever the specific contractual relationships operating safely in this environment clearly demands a safety culture that encompasses every element of the extended drilling services and operating industry [emphasis added]rdquo Note Contractor errors lack of oversight and lack of training and qualifications were causal factors Macondo well and the Montara well blowouts p 224 ldquoHalliburton BPrsquos other major contractor for the Macondo well is one of the worldrsquos largest providers of products and services to the energy industry It has offices in 70 countries and Halliburton-affiliated companies have participated in the majority of producing deepwater wells and contributed to most of the worldrsquos deepwater well completions Yet notwithstanding its clear experience and expertise in cementingmdasha $17 billion business for the company in 200941mdashHalliburton prepared cement for the Macondo well that had repeatedly failed Halliburtonrsquos own laboratory tests (see Chapter 4) And then despite those test results Halliburton managers onshore let its crew and those of Transocean and BP on the Deepwater Horizon continue with the cement job apparently without first ensuring good stability results Halliburton also was the cementer on a well that suffered a blowout in August 2009 in the Timor Sea off Australia The Montara rig caught fire and a well leaked tens of thousands of barrels of oil over two and a half months before it was shut down The leak occurred because the cement seal failed the government report into the accident found However the report said it would not be appropriate to criticize Halliburton because the operator ldquoexercised overall control over and responsibility for cementing operationsrdquo The inquiry concluded that ldquoHalliburton was not required or expected to lsquovalue addrsquo by doing more than complying with [the operatorrsquos] instructionsrdquo In this Montara offers yet another example of a lack of communication between operators and service providers and of the gaps between the silos of expertise that exist in the deepwater oil and gas industry [emphasis added]rdquo Note The US Commission faults Halliburton for its failed cementing expertise The COI did not fault Halliburton but instead faulted PTTEP finding that Halliburton is not required or expected to do more than comply with the operatorrsquos instructions This is an important difference in regulatory approach the

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

US approach requires all contributors to the well construction program to take technical responsibility for their work and advice Well service contractors are a critical part of successfully executing a well and need to be held accountable for their role and responsibility If Halliburton or other cementing contractors do not want to perform the cementing expert role then the licensee must demonstrate to the government that it has its own highly trained and qualified cementing experts on staff to oversee the cementing operations and the licensee must take responsibility for the outcome p 225 ldquo The American Petroleum Institute expert or advocate In the United States the American Petroleum Institute (API) has played a dominant role in developing safety standards for the oil and gas industry And it clearly possesses significant longstanding technical expertise API produces standards recommended practices specifications codes technical publications reports and studies that cover the industry and are utilized around the world In conjunction with APIrsquos Quality Programs many of these standards form the basis of API certification programs And the US Department of the Interior has historically adopted those recommended practices and standards developed by technical experts within API as formal agency regulations Based on this Commissionrsquos multiple meetings and discussions with leading members of the oil and gas industry however it is clear that APIrsquos ability to serve as a reliable standard-setter for drilling safety is compromised by its role as the industryrsquos principal lobbyist and public policy advocate Because they would make oil and gas industry operations potentially more costly API regularly resists agency rulemakings that government regulators believe would make those operations safer and API favors rulemaking that promotes industry autonomy from government oversight According to statements made by industry officials to the Commission APIrsquos proffered safety and technical standards were a major casualty of this conflicted role As described by one representative API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquomdashin other words a standard that almost all operators could readily achieve Because moreover the Interior Department has in turn relied on API in developing its own regulatory safety standards APIrsquos shortfalls have undermined the entire federal regulatory system [emphasis added]rdquo Note The US Commission points out the serious potential problems with allowing industry to develop its own safety and technical standards noting that API-proposed safety standards have increasingly failed to reflect ldquobest industry practicesrdquo and have instead expressed the ldquolowest common denominatorrdquo In other words a standard that almost all operators could readily achieve seriously undermines the entire US federal regulatory system for offshore oil and gas exploration and production p 225 ldquoAs described in Chapter 4 the inadequacies of the resulting federal standards are evident in the decisions that led to the Macondo well blowout Federal authorities lacked regulations covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well For instance notwithstanding the enormously important role cementing plays in well constructionmdashespecially in the high-pressure conditions often present in deepwater drillingmdashthere were no meaningful regulations governing the requirements for cementing a well and testing the cement used Nor were there regulations governing negative-pressure testing of the wellrsquos integritymdasha fundamental check against dangerous hydrocarbon incursions into an underbalanced well On many of these critical matters the federal regulations either failed to account for the particular challenges of deepwater drilling or were silent altogether [emphasis added]rdquo Note The US Commission finds that critical well construction integrity verification and safety issues must be clearly articulated in government regulations The government cannot remain ldquosilentrdquo and has an obligation to articulate minimum standards for industry to follow p 228 ldquoFor years API also led the effort to persuade the Minerals Management Service not to adopt a new regulatory approachmdashthe Safety and Environmental Management System (SEMS)mdashand instead has favored relying on voluntary recommended safety practices Safety and environmental management systems are used in similar forms in other parts of the world and many credit them with the

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

better safety records achieved outside US waters (see Chapter 3) Beginning early in the last decade the trade organization steadfastly resisted MMSrsquos efforts to require all companies to demonstrate that they have a complete safety and environmental management system in addition to meeting more traditional prescriptive regulationsmdashdespite the fact that this is the direction taken in other countries in response to the Piper Alpha rig explosion in the late 1980s Indeed many operators in the Gulf were used to this safety-based approach on their rigs in the North Sea and Canada It was not until this past Septembermdashafter the Macondo blowoutmdashthat the Department of the Interior was finally able to announce a new mandatory Safety and Environmental Management System almost two decades after the approach was adopted in the United Kingdom where it is called the ldquosafety caserdquo Moreover API opposed revisions to the incident reporting rule that would have helped better identify safety risks [emphasis added]rdquo Note The US Commission found that the American Petroleum Institute (API) resisted the Safety Case approach supplemented with prescriptive regulations a method found to be successful in other countries p 241 ldquo Like the nuclear power industry in 1979mdashin the immediate aftermath of the Three Mile Island accidentmdashthe nationrsquos oil and gas industry needs now to embrace the potential for an industry safety institute to supplement government oversight of industry operations Akin to INPO such a new safety institute can provide the nation with the assurances of safety necessary to allow the oil and gas industry access to the nationrsquos energy resources on the outer continental shelf Credibility To be credible any industry-created safety institute would need to have complete command of technical expertise available through industry sourcesmdashand complete freedom from any suggestion that its operations are compromised by multiple other interests and agendas As a consensus-based organization the American Petroleum Institute (API) is culturally ill-suited to drive a safety revolution in the industry For this reason it is essential that the safety enterprise operate apart from the API [emphasis added]rdquo Note The US Commission found that the API is culturally ill suited to drive a safety revolution in the industry The Commission further found that an industry safety institute is needed that has complete command of technical expertise and complete freedom from any suggestion that its operations are compromised by other interests and agendas p 242 ldquo An initial set of standards and scope of operation The industry needs to benchmark safety and environmental practice rules against recognized global best practices The Safety and Environmental Management Program Recommended Practice 75 (API RP 75) developed in 1993 by the API and incorporated by reference in the Department of the Interiorrsquos new workplace safety rules adopted in October 2010 is a reasonable starting point Updates to those safety rules are needed immediately but a new industry safety institution could make a credible start by requiring members to adopt all safety standards promptlymdashand mandating that the companies in turn require that their contractors and service providers comply with the new safety rules [emphasis added]rdquo Note The US Commission found industry needs to benchmark safety and environmental practices against recognized global best practices p 243 ldquoIndustry Responsibilities for Containment and Response Industryrsquos responsibilities do not end with efforts to prevent blowouts like that at the Macondo well They extend to efforts to contain any such incidents as quickly as possible and to mitigate the harm caused by spills through effective response efforts As described in Chapter 5 once a spill occurs the government must be capable of taking charge of those efforts But government depends upon the resources and expertise of private industry to contain a blown-out well and to respond to a massive subsea oil spill Chapter 5 also explains how woefully unprepared both government and industry were to contain or respond to a deepwater well blowout like that at Macondo All parties lacked adequate contingency planning and neither government nor industry had invested sufficiently in research development and demonstration to improve containment or response technology [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Note The US Commission found that both the US government and industry were unprepared to respond to a disaster of the Macondo well blowoutrsquos magnitude The COI made similar findings about the inefficiencies and lack of preparedness for dealing with the Montara well blowout p 2-45 ldquo The primary long-term goal of a spill containment company or consortia should be to ensure that an appropriate containment system is readily available to contain quickly spills in the Gulf of Mexico with the best available technology [emphasis added]rdquo Note The US Commission concluded that there is a need to develop new and improved technology to capture oil from a subsea blowout when a subsea BOP has failed The US will be requiring a marine containment system and is planning to make this tool a regulatory obligation on future projects p 251 ldquoAs described in Chapter 3 and staff working papers neither the industryrsquos nor the federal governmentrsquos approaches to managing and overseeing the leasing and development of offshore resources have kept pace with rapid changes in the technology practices and risks associated with the different geological and ocean environments being explored and developed for oil and gas production Nor do these approaches reflect the significant changes that have occurred in the structure of the oil and gas industry itselfmdashespecially the rise of specialized service contractors and the general trend toward outsourcing multiple functions When the operator directly regulated by the government does not itself perform many of the activities critical to well safety regulators face additional challenges due to the separation of these functions However MMS did not change its regulatory oversight to respond to these industry changes by making the service companies more accountable [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable p 251 ldquo Government agencies that regulate offshore activity should reorient their regulatory approaches to integrate more sophisticated risk assessment and risk management practices into their oversight of energy developers operating offshore They should shift their focus from prescriptive regulations covering only the operator to a foundation of augmented prescriptive regulations including those relating to well design and integrity supplemented by a proactive risk-based performance approach that is specific to individual facilities operations and environments This would be similar to the ldquosafety caserdquo approach that is used in the North Sea which requires the operator and drilling rig owners to assess the risks associated with a specific operation develop a coordinated plan to manage those risks integrate all involved contractors in a safety management system and take responsibility for developing and managing the risk management process [emphasis added]rdquo Note The US Commission concluded that service companies that perform work at oil and gas operations should be held more accountable that includes requiring service companies to conduct risk assessments for their activities Chapter 9 Recommendations Recommendation A1 ldquoThe Department of the Interior should supplement the risk-management program with prescriptive safety and pollution-prevention standards that are developed and selected in consultation with international regulatory peers and that are at least as rigorous as the leasing terms and regulatory requirements in peer oil-producing nations [emphasis added]rdquo Note The US Commission concluded a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices should be used to regulate US offshore oil and gas activities Recommendation A3 ldquoWorking with the International Regulatorsrsquo Forum and other organizations Congress and the Department of the Interior should identify those drilling production and emergency-response standards that best protect offshore workers and the environment and initiate new standards and revisions to fill gaps and correct deficiencies These standards should be applied

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

throughout the Gulf of Mexico in the Arctic and globally wherever the international industry operates Standards should be updated at least every five years as under the formal review process of the International Organization for Standardization (ISO) More specifically the following actions are needed to truly transition to a proactive riskbased performance approach bull Engage a competent independent engineering consultant to review existing regulations for adequacy and ldquofit for purposerdquo as a first step toward benchmarking US regulations against the highest international standards Following this review develop and implement regulations for safety and environmental protection that are at least as rigorous as the regulations in peer oil-producing nations A new regulatory entity for safety and environment (as described below) should ensure that while engaged in petroleum activities all drilling and production platforms are certified and operating at the highest level of international regulatory practice bullFor both new and transferred leases require the operator to participate in a new safety institute or agree to expert audits and to contribute to safety and environmental research and development Approval to transfer leases sold prior to this requirement should be conditioned on the new requirements based on risk factors related to the specific requirements of the lease The lease stipulation should also include the requirement that the operator possess adequate capability to contain and respond to an oil spill and sufficient financial capacity to compensate for damages caused by a spill [emphasis added]rdquo Note The US Commission concluded that new regulations need to be developed using a combined approach of risk-based management prescriptive safety and pollution prevention standards reflective of best international practices and updated at least once every 5 years The Commission further concluded that those regulations should be built using independent engineering experts that a safety institute be developed and that industry be required to contribute to safety and environmental research and development p 253 ldquoTo cultivate and maintain government expertise on offshore drilling safety (1) Establish a process under the auspices of the National Academy of Engineering to identify criteria for high-risk wells and develop methodology to assess those risks This process should include to the extent that the National Academy deems appropriate input from experts in the US Geological Survey the Department of Energy NOAA and academia Furthermore the Department of the Interior should develop in-house competence to perform such sophisticated risk assessments Such evaluations could guide the transition to a system where all operators and contractors are required to demonstrate an integrated proactive risk management approach prior to leases being granted or receiving permits for exploration wells and major development projects As noted above these efforts should initially focus on areas with complex geology ultra-deep water and any other frontier or high-risk areasmdashsuch as the Arctic [emphasis added]rdquo Note The US Commission concluded the US government needs to build technical and safety expertise related offshore oil and gas activities by hiring qualified government personnel and training them ldquo(2) Establish a coordinated interagency research effort to develop safer systems equipment and practices to prevent failures of both design and equipment in the future The federal government has relevant expertise in areas such as the application of remote sensing and diagnostics sensors and instrumentation and command electronics that could and should be transferred to the offshore industry The Ultra- Deepwater and Unconventional Natural Gas and Other Petroleum Resources Program an existing research and development program created by statute and managed by the Secretary of Energy should be refocused toward mitigating the risks of offshore operations [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Note The US Commission concluded that a new offshore research and development program is needed to continue to improve offshore technical and safety standards and oversight P 254 ldquoProvide protection for ldquowhistleblowersrdquo who notify authorities about lapses in safety All offshore workers have a duty to ensure safe operating practices to prevent accidents To ensure all workers regardless of employer will take appropriate action whenever necessary Congress should amend the Outer Continental Shelf Lands Act or specific safety statutes to provide the same whistleblower protection that workers are guaranteed in other comparable settings [emphasis added]rdquo Note The US Commission concluded US regulations need improvement in the area of offshore oil and gas activity whistleblower protections p 255 ldquoAll of these problems were compounded by an outdated organizational structure a chronic shortage of resources a lack of sufficient technological expertise and the inherent difficulty of coordinating effectively with all the other government agencies that had statutory responsibility for some aspect of offshore oil and gas activities [emphasis added]rdquo A4 ldquoCongress and the Department of the Interior should create an independent agency within the Department of the Interior with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) as well as the structural and operational integrity of all offshore energy production facilities including both oil and gas production and renewable energy production [emphasis added]rdquo Note The US Commission and Australian Government both concluded there is a need to create an independent agency with enforcement authority to oversee all aspects of offshore drilling safety (operational and occupational) That agency would also oversee structural and operational integrity of all offshore energy production facilities including oil and gas production A5 ldquo Congress and the Department of the Interior should provide a mechanism including the use of lease provisions for the payment of regulatory fees for adequate stable and secure funding to the key regulatory agenciesmdashInterior Coast Guard and NOAAmdashto ensure that they can perform their duties expedite permits and reviews as needed and hire experienced engineers inspectors scientists and first responders [emphasis added]rdquo Note The US Commission recommended that industry be required to pay regulatory fees sufficient to ensure adequate regulatory oversight Those fees should also be sufficient to hire experienced engineers inspectors scientists and first responders p 272 ldquoAs described in Chapter 5 the most obvious immediately consequential and plainly frustrating shortcoming of the oil spill response set in motion by the events of April 20 2010 was the simple inabilitymdashof BP of the federal government or of any other potential intervenermdashto contain the flow of oil from the damaged Macondo well Clearly improving the technologies and methods available to cap or control a failed well in the extreme conditions thousands of feet below the sea is critical to restoring the publicrsquos confidence that deepwater oil and gas production can continue and even expand into new areas in a manner that does not pose unacceptable risks of another disaster Better technology and methods are also needed to gather accurate information in the event of an accident or failure This section discusses the Commissionrsquos recommendations for advancing well-containment capabilities in the wake of the Macondo well blowout [emphasis added]rdquo Note The US Commission recommended that improved BOP and well containment technology be developed While the Montara well blowout was different because there was a lack of a BOP in place on the well not a failed BOP this recommendation is still relevant to other offshore operations in Australia p 273 ldquoD2 The Department of the Interior should require offshore operators to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Consistent with the enhanced planning process described above in Recommendation C1 oil spill response plans should be required to include detailed plans for source control These plans should demonstrate that an operatorrsquos containment technology is immediately deployable and effective (BOEMRE has recently issued a Notice to Lessees requiring operators to demonstrate as part of the spill response planning process that they have ldquoaccess to and can deploy surface and subsea containment resources that would be adequate to promptly respond to a blowout or other loss of well controlrdquo20 In enforcing this Notice BOEMRE must ensure that operators provide detailed descriptions of their technology and demonstrate that it is deployable and effective) In applications for permits to drill the Department of the Interior should require operators to provide a specific source-control analysis for each well The analysis must demonstrate that an operatorrsquos containment technology is compatible with the well (The Department of the Interior could implement this requirement through amendments to existing regulations or through a Notice to Lessees The latter option could be implemented more quickly though the former might be more permanent) [emphasis added]rdquo Note The US Commission recommended that offshore operators be required to provide detailed plans for source control as part of their oil spill response plans and applications for permits to drill The Commission further recommended that the plans demonstrate that an operatorrsquos containment technology is immediately deployable and effective p 274 ldquo4 The Need for a More Robust Well Design and Approval Process Among the problems that complicated the Macondo well-containment effort was a lack of reliable diagnostic tools The Deepwater Horizon blowout preventer had one pressure gauge accurate to plus or minus 400 pounds per square inch This meant BP and the government could not get accurate pressure readings which in turn hampered their ability to estimate the oil flow rate undertake reservoir modeling and plan for source control operations In addition the blowout preventer lacked a means of indicating whether and to what extent its rams and annular preventers had closed Without such instruments the government and BP expended significant resources on basic data-collection such as obtaining gamma-ray images of the blowout preventer and adding pressure sensors to the top hat after it was deployed Meanwhile the presence of rupture disks in the Macondo wellrsquos 16-inch casing led to concerns about well integrity that further complicated the source-control effort BP had not considered the impact of these disks on post-blowout containment when it designed the well D4 The Department of the Interior should require offshore operators seeking its approval of proposed well design to demonstrate that bull Well components including blowout preventer stacks are equipped with sensors or other tools to obtain accurate diagnostic informationmdashfor example regarding pressures and the position of blowout preventer rams bull Wells are designed to mitigate risks to well integrity during post-blowout containment efforts [emphasis added]rdquo Note The US Commission found that improved well designs are needed for future offshore wells to ensure BOPs and other well components are equipped with sensors or other tools to obtain accurate diagnostic information The Commission further recommended that wells be designed to mitigate risks to well integrity during post-blowout containment efforts p 284 ldquoRecommendation F1 Congress should significantly increase the liability cap and financial responsibility requirements for offshore facilities [emphasis added]rdquo Note The US Commission found that the liability cap and financial responsibility requirements should be increased for offshore facilities p 286 ldquoRecommendation F3 The Department of the Interior should enhance auditing and evaluation of the risk of offshore drilling activities by individual participants (operator driller other service companies) The Department of the Interior insurance underwriters or other independent entities should

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

evaluate and monitor the risk of offshore drilling activities to promote enhanced risk management in offshore operations and to discourage unqualified companies from remaining in the market [emphasis added]rdquo Note The US Commission found that additional inspections and audits should occur including oversight of the lessee and its contractors p 290 ldquoRecommendation G2 Congress should enact legislation creating a mechanism for offshore oil and gas operators to provide ongoing and regular funding of the agencies regulating offshore oil and gas development [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Annex 2

UK House of Commons Energy and Climate Change Committee Report January 6 2011 Key Findings amp Recommendations

That Also Apply to Offshore Oil amp Gas Drilling in A ustralia Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia

30 A combined approach of risk-based management (Safety Case) and minimum safety and pollution prevention standards should be used to regulate offshore oil and gas activities Standards should be reflective of best international practices

31 Improved BOP technology should be developed including a new minimum prescriptive standard of two blind shear rams in each BOP ldquoWhile the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disastersrdquo

Note The difference in approach between the US Commission and the UK Committee recommendation is that the UK Committee identified minimum levels of prescription for critical safety devices such as blowout preventers The UK Committee recommended a new minimum standard of two blind shear rams in each offshore BOP There is currently only one blind shear ram in a BOP Industry has opposed installation of a second blind shear ram because in most cases that would require a new BOP to be manufacturer (unless the BOP is configured with extra room for a second blind shear ram) In Canada offshore operators are currently negotiating with the Canadian National Energy Board (NEB) over whether the requirement for a same season relief well can be eliminated Some operators have proposed adding a blind shear ram but only in return for elimination of the same season relief well requirement The important point for Australia is that the UK Committee has more strongly recommended an additional blind shear ram be installed in offshore BOPs as a minimum prescriptive oil spill prevention standard The UK was concerned that the US is placing more emphasis on developing well containment (well capping systems to control the blowout) than to improving the BOP itself They recommend priority placed on optimizing the BOP oil spill prevention function

32 The UK Committee welcomed development of new capping and containment systems capable of dealing with a subsea blowout However it found that ldquothe absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to high consequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that in its regulatory regime these systems are not a substitute for fully functioning blowout preventersrdquo

33 Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations

34 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK the UK Committee was concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability event Therefore industry must evaluate plan for and mitigate risks associated with high-impact low-probability events in licensing and permitting The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios

35 UK operators are now required to carry out additional modeling for deepwater drilling installations including an extended assessment of oil spill beaching predictions

36 Employees and contractors should be rewarded for identifying safety concerns Regulations may be need improvement in the area of offshore oil and gas activity whistleblower and reporting protections

37 The amount of oil spill liability for offshore oil and gas operations needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation

38 Additional inspections and audits should occur The UK doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors Inspections are risk based with more inspections targeted at offshore operations that can spill oil (versus gas only operations)

39 All BOP backup systems must be inspected and verified to be functional Deadman switch batteries must be maintained and inspected to activate the blind shear rams to secure the well

40 Offshore regulations must address well completion designs and those well designs must be reviewed by independent engineering experts BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout

41 Annual drilling rig inspections were doubled

42 Cutting corners and poor decision making were causal factors in the BP blowout

43 In the UK the safety and licensing aspects are handled by two separate regulatory bodies

44 Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so

45 We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy

46 We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

47 There needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur

Key Quotes from the UK Commissions Findings of Interest to Australiarsquos Reform Efforts

Notes in blue font draw parallels between the Macondo and Montara blowouts or to point out key findings that may also apply to other offshore operations in Australia p 3 ldquoAs demonstrated by BPrsquos response to the blowout in the Gulf of Mexico the offshore oil and gas industry was clearly not prepared for a sub-sea blowout of a well The industry felt that it had mitigated away the risks associated with high-impact low-probability events and so did not need to plan for themmdash it needs to revisit scenarios that it thought were too unlikely to occur The Government needs to ensure that offshore oil and gas exploration companies have considered such outcomes as part of the process by which they obtain a licence to drill [emphasis added]rdquo p 3 ldquoThe blowout in the Gulf of Mexico could have been prevented if the last-line of defencemdashthe blind shear ram on the blowout preventer located at the well head on the ocean floormdash had activated and crushed the drill pipe Given the importance of this equipment and the evident dangers of relying on a single device we urge the HSE to consider prescribing specifically that blowout preventers on the UK Continental Shelf should have two blind shear rams [emphasis added]rdquo Note Blowout preventers should have two blind shear rams in place BOPrsquos currently are designed with one p 3 ldquoThe blind shear ram on the Macondo Well appears to have failed in part due to the absence of simple checksmdashsuch as whether the batteries had sufficient charge The UKrsquos offshore inspection regime should never allow such simple potential failures to go unchecked [emphasis added]rdquo Note Deadman switch batteries must be maintained and inspected to close the blind shear rams p 3 ldquo BPrsquos internal investigation into the incident in the Gulf of Mexicomdashthe ldquoBly Reportrdquomdashcontains controversial conclusions surrounding the design of the well We recommend the Government consider the Bly Reportrsquos conclusions in parallel with the observations of other companies involved and alongside recommendations of US agencies [emphasis added]rdquo Note Offshore regulations must address well completion designs BPrsquos design was complex and unconventional Many experts believe the well design was a causal factor in the blowout p 3 ldquoWe believe that should an oil spill resulting from drilling activities occur in the UK there needs to be absolute clarity as to the identity of the responsible party and liability legislation needs to ensure that those affected are compensated as soon as possible Given the high costs of the Gulf of Mexico incident we believe that the Offshore Pollution Liability Association (OPOL) limit of $250 million is insufficient [emphasis added]rdquo Note The amount of oil spill liability needs to be increased above $250 million in the UK and compensation speed both need to be revised in UK legislation p 5 ldquo In light of the incident the Department of Energy and Climate Change (DECC) conducted a review of the existing safety and environmental regulatory regimes in the UK and found them to be ldquofit for purposerdquo However it announced that annual inspections of drilling rigs were to double and insurance requirements were to be reviewed [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

Note Annual drilling rig inspections were doubled and insurance requirements are under review for increase p 5 ldquoWe believe that the offshore industry needs to revisit scenarios that they previously thought were too extreme and unlikely to occur As demonstrated by BPrsquos response in the Gulf of Mexico the industry was not prepared for a sub-sea blowout They incorrectly believed that they had mitigated away the risks associated with high-consequence low probability events and failed to plan for them [emphasis added]rdquo p 5 ldquoWe conclude that BP appears to have cut corners during its operations to make the Macondo well ready for production We are concerned that the poor decisions made in the run up to the blowout [emphasis added]rdquo p 6 ldquoWe found it interesting to note Mr Webbrsquos observation that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at ldquoabout 500 feet [150m]rdquo as this seems to be an obvious threshold for deepwater operations [emphasis added]rdquo Note Deepwater defined as deeper than 500rsquo (150m) p 9 ldquoCharles Hendry MP Minister of State for DECC told us ldquothe regime we have in place in the North Sea is one of the most robust in the worldrdquo The offshore safety regime was revised following the Cullen Inquiry into the 1988 Piper Alpha disaster leading to a tripartite arrangement for offshore regulation [emphasis added]rdquo Note In general the UK Committee concluded that the UK safety case regulations are sufficient except increase government inspection and liability amounts and speed of payment p 10 ldquoMr Walker Head of the HSErsquos Offshore Safety Division told us lsquoBefore an operator brings a drilling rig into the UK or operates a fixed platform they have to prepare a safety case for the Health and Safety Executive to approversquo The Operator or Licence Holder (for example BP in the Deepwater Horizon incident) is subject to separate and additional verification requirements under the Design and Construction Regulations in the form of well examinations carried out by an independent and competent person (ICP) All parties involved have legal duties to cooperate with both the OIM and the well Operator when the well is under construction The Safety Case Duty Holder and the well Operator must demonstrate how their safety management systems will operate together who has primacy in an emergency and who has overall responsibility [emphasis added]rdquo p 10 ldquoThe UKrsquos goal-setting safety regulations allow a flexible approach in the choice of technology and systems to meet safety standards Oil and Gas UK the industry association described the goal-setting regime to us The UKrsquos goal-setting safety regime requires a systematic approach to the identification of hazards and through the application of quality engineered solutions and systems ensures that risks are reduced to as low as reasonably practicable (ALARP) This is in contrast to the prescriptive regulatory regime that the Deepwater Horizon operated under in the United States A prescriptive regime has specific obligations on the types of equipment required and the degree to which a risk has to be mitigated [emphasis added]rdquo p 10 ldquoThey also highlighted the following differences in regulation between the US and the UK in the UK the safety and licensing aspects are handled by two separate regulatory bodies the HSE and DECC respectivelymdashby contrast until the Deepwater Horizon incident both safety and licensing fell under the remit of the US Minerals Management Service MMS design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

company and the safety casemdashrequired for all UK installations and introduced following the recommendations of the Cullen Report into the 1998 Piper Alpha disaster [emphasis added]rdquo Note In the UK the safety and licensing aspects are handled by two separate regulatory bodies Design of all UKCS wells requires clearance by an independent competent person (ICP) who is contracted and paid for by the oil and gas exploration company and a safety case must be prepared and approved p 11 ldquoAmong the interim steps taken in the UK since the Deepwater Horizon incident DECC doubled the number of annual environmental inspections to drilling rigs and recruited three additional inspectors This brought the total number of inspectors to ten (including one senior inspector) Given DECCrsquos less extensive areas of responsibility compared to the HSE it and its predecessor Departments have all operated with fewer inspectors than the HSEmdashthe HSE Offshore Division has 1145 specialist inspectors while DECC has ten environmental inspectors DECC inspectors visit offshore installations and onshore offices to inspect records and management systems as well as interviewing people and observing site conditions standards and practices DECC told us that the increased number of inspectors will allow ldquoDECC to double the number of environmental inspections carried out on mobile drilling rigs in the UKCS from an average of eight to at least sixteen on annual basis with immediate effectrdquo The Minister referred to the movement of inspectors between the public and private sectors This may make it difficult for DECC to recruit and maintain high-quality inspectors in the future [emphasis added]rdquo p 12 ldquoDECCrsquos Offshore Inspectorate describe their environmental inspection strategy as ldquorisk basedrdquo Of the rigs currently undertaking drilling activities (approximately 24 according to DECC) about 20 are on gas reservoirs which DECC say ldquoinherently pose less of a potential risk to the environment compared with those working on oil reservoirsrdquo Taking this into account along with the location of the rig and the nature of the well DECC targets inspections on rigs undertaking drilling activity on specific oil reservoirs [emphasis added]rdquo p 12 ldquoWe heard from oil and gas industry representatives that they were not aware of anyone on their boards who had a background in environmental consultancy Given the potential environmental impactsmdashand the large associated costsmdashthat we have seen in the Gulf of Mexico as a result of an offshore incident we are surprised that companies have not seen fit to include such expertise on their boards Oil company boards lack members with environmental experience The industry should take steps to remedy this and the Government should encourage them to do so [emphasis added]rdquo p 12 ldquoOil Pollution Emergency Plans (OPEPs) set out the arrangements for responding to oil spill incidents that have the potential to cause marine pollution They aim to prevent such pollution and reduce or minimise its effects should it occur OPEPs are risk assessments that are relevant to a specific field or installation The plans focus on the worst-case scenario following the Gulf of Mexico incident UK operators are now required to carry out additional modelling for deepwater drilling installations including an extended assessment of oil spill beaching predictions The plans are also reviewed by Maritime Coastguard Agency and relevant consultees such as the Marine Management Organisation (or relevant devolved authority) the Joint Nature Conservation Committee and the relevant inshore statutory body [emphasis added]rdquo p 13 ldquoThere is a sense that the industry seems to be responding to disasters after they have happened rather than anticipating and planning for high-consequence low probability events Dr Hayward agreed that ldquothere is no doubt that the inability of BP and the industry to intervene because it wasnrsquot properly prepared was unacceptablerdquo He went on to observe that ldquothe occurrence of black swans [high-impact low-probability events] seems to be more often than not these daysrdquo Mr McAllister admitted that ldquoas an industry if we do something better it is to make sure that we do not take maybe such an introverted view of our operations [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

p 13 ldquoWe conclude that the UK has high offshore regulatory standards as exemplified by the Safety Case Regime that was set up in response to the Piper Alpha tragedy in 1998 The UK regulatory framework is based on flexible goal-setting principles that are superior to those under which the Deepwater Horizon operated Nevertheless despite the high regulatory standards in the UK we are concerned that the offshore oil and gas industry is responding to disasters rather than anticipating worst-case scenarios and planning for high-consequence low-probability events [emphasis added]rdquo p 14 ldquo40 The blind shear ram is described as the ldquoultimate fail-safe devicerdquo The Deepwater Horizon had a single blind shear ram located inside the 155m tall BOP stack at the wellhead on the seafloor An April 2000 report Risk Assessment of the Deepwater Horizon BOP Control System carried out by EQE International for Cameron Controls Corporation (the manufacturer of the BOP for Transocean owner of the rig) concluded that The major contributor to the failure likelihood associated with the BOP control system results from the selected stack configuration With only one shear ram capable of sealing the well in it is extremely difficult to remove all the single failure points from the control system The final shuttle valve which supplies the hydraulics to the blind shear ram represents such a single point failure [] and accounts for 56 of the failure likelihood of the system to perform an EDS (Emergency Disconnect Sequence) A further concern is that with a single blind shear ram there is a risk it could close on one of the extremely strong joints that connect the sections of drilling pipe and be unable to collapse it Such a risk is mitigated by the use of two blind shear rams Deepwater Horizonrsquos single blind shear ram malfunctioned and never fully closed [emphasis added]rdquo p 14 ldquo Given that the failure of the single blind-shear ram to fire on the Deepwater Horizonrsquos blowout preventer seems to have been one of the main causes of the blowout of the Macondo well we recommend that the Health and Safety Executive specifically examine the case for prescribing that blowout preventers on the UK Continental Shelf are equipped with two blind shear rams [emphasis added]rdquo p 15 At an advanced stage in the inquiry it came to our attention that an incident had occurred on a Transocean platform on 23 December 2009 The Sedco 711 platform was being operated for Shell in the North Sea Bardolino Field According to Tom Fielden of the BBC [] key indicators that something was going badly wrong were either misinterpreted or discounted [] A major spill was averted only when the BOP or blowout preventer was activated capping-off the well on the sea floor Once this incident was brought to the public attention Shell issued a statement on the incident that had been updated from 18 August 2010 Shell said ldquothe well was successfully closed using the BOP [] Three barrels of oil-based drilling mud were released into the sea no people were injured and there was no loss of asset integrityrdquo Shell pointed out that the well involved ldquodiffers from the Gulf of Mexico in that it is not in deepwater and it is not a high pressure wellrdquo [emphasis added]rdquo p 16 48 We asked Transocean and the HSE to provide further information on the nature of the incident that took place on 23 December 2009 Transocean noted that the Sedco 711 incident was a ldquomatter of public recordrdquo and that they had ldquoreported the incident to the HSE [] on 24 Decemberrdquo Regarding reports that there was ldquonot enough heavy mud available to pump back down into the wellrdquo to control it Transocean explained that The mud displaced from the hole after the blowout preventer was closed was contaminated with hydrocarbons [oil and gas] and not suitable to pump back in the hole As a result good mud needed to be brought back onboard from a supply vessel However given that there will always be a risk that drilling mud could become contaminated with hydrocarbons during a loss-of-well-control event it is not clear why Transocean did not have sufficient ingredients for kill-weight mud on the platform According to the oilfield services provider Schlumberger ldquoKill-weight mud when needed must be available quickly to avoid loss of control of the well or a blowoutrdquo We see

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

this as yet another example of the offshore industry not planning for high-impact low probability events The HSE told us There is no specific prescriptive requirement to have mud of the required density that could kill the well onboard a drilling installation at all times [] It is therefore good industry practice to have sufficient weighting agents onboard the installation that can raise the mudrsquos density to kill the well if required However the HSE stated that the ldquoperformance of the crew prior to the incident was not satisfactoryrdquo and ldquoproblems caused by not having sufficient mud at the correct mud weight available should have been foreseeable planned for and dealt with better by the offshore and onshore managementrdquo In light of the Sedco 711 event Shell and Transocean implemented ldquocorrective actionsrdquo that the HSE told us ldquoaddressed the shortcomings that led to this incident [emphasis added]rdquo p 17 ldquo While the flexibility of the UK safety regulation regime appears to have worked well we recommend that for fail-safe devices such as the blowout preventer the Government should adopt minimum prescriptive safety standards or demonstrate that these would not be a cost-effective last-resort against disasters [emphasis added]rdquo p 17 ldquoWhile Unlike the US regulations under which the Deepwater Horizon operated design of all wells on the UK Continental Shelf (UKCS) requires clearance by an independent competent person (ICP) UK companies are also required by law to ensure that their well is managed in such a way that there can be no unplanned escape of oil or gas (or any other well fluids) and that risks to people and the environment are as low as reasonably practicable This requirement is set out in the Offshore Installations and Wells (Design and Construction etc) Regulations 1996 (DCR) covering all stages of a wellrsquos life including design modification commission construction (drilling) operation maintenance suspension of activities and abandonment A key component of the regulations is the requirement for a formal well examination scheme and the appointment of an independent well examiner who must verify the design construction and maintenance of a well An operator must have arrangements in place for a well examination scheme by such an ICP before starting on a new well design The ICP monitors all stages of the wellrsquos life from planning through to execution and operation It is also the ICPrsquos role to examine how the operator controls the pressure in the well and to ensure that the pressure containment equipment that forms part of the well is suitable for this purpose A wellrsquos ICP is normally employed by a separate specialist company and must be sufficiently knowledgeable and separate from the immediate line management of the well operations These details must be available for inspection by HSE Well designs are usually peer-reviewed by in-house and external bodies at each stage Chevron state that their well design process is now subject to an additional peer review by ldquoexperienced drilling staff from our Gulf of Mexico Deep Water business unitrdquo The final well design is presented to and examined by the independent Well Examiner and the HSE [emphasis added]rdquo p 19 ldquoDue to the enormous commercial pressures to keep a drilling rig operating we are concerned that employees who try to draw attention to safety problems may bemdashor feelmdash intimidated by their managerhellipHowever Mr Webb of Oil and Gas UK tried to assure us that the offshore workforce are ldquofree and able to intervene on issues of safety and without fear of retributionrdquo This assurance was repeated to us by other members of the industry However the HSE Offshore Divisionrsquos Specialist Inspection Report for 2009 indicated that Transocean rig staff were subject to ldquobullying aggression harassment humiliation and intimidationrdquo from offshore managementhellip We find some conflict in the reports from the HSE about bullying and harassment on rigs and the assurances of the industry that sincere whistleblowers will be heard and protected We recommend that the Government should discuss with the industry and unions what further steps are needed to prevent safety representatives from being or feeling intimidated into not reporting a hazard potential or otherwise [emphasis added]rdquo p 21 ldquo To demonstrate operating at the same standard but under different regulatory requirements Mr Festor of Total described to us the assumptions that were made when designing the well-casing under different regulatory regimes These assumptions define the load that will be applied on the casings In the US the sealed well is assumed to be half full of liquid and half full of gas In the UK it

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

is assumed to be full of gas The UK assumption is more conservative leading to the casing being able to withstand a greater load as under the US assumption the liquid offsets a greater proportion of the upward pressure from the oil and gas in the reservoir [emphasis added]rdquo p 21 ldquo We recommend that the Government monitor any changes in the US regulatory regime to see ifmdashin the light of the response to the Deepwater Horizon incidentmdashthe US establishes a new gold-standard of regulation as the UK and Norway did after the Piper Alpha tragedy We would urge the Government to work with regulators in other offshore oil and gas provinces to ensure that the highest standards of safety can be achieved globally through an exchange of best practice lessons [emphasis added]rdquo p 23 ldquo The Bly ReportmdashBPrsquos internal investigation into the Deepwater Horizon incidentmdash does not contain a root-cause analysis of the events that led to the blowout of the Macondo well the loss of 11 men on the Deepwater Horizon and the release of 49 million barrels of oil into the Gulf of Mexico We urge the Government not to rely extensively on the Bly Report given the controversy surrounding the responsibility for the incident and the design of the Macondo well but rather to consider its conclusions in parallel with the observations of other companies involved with the incident and with the recommendations of US agencies investigating the incident [emphasis added]rdquo p 23 ldquo We believe that the environmental impacts of a sub-sea well blowout need to be understood and taken into account when a drilling licence is issued in the UK We urge the Government to ensure that the licensing regime takes full account of high consequence low probability eventshellipWe recommend that as part of the drilling-licence process the Government require companies to consider their responses to high-consequences low-probability eventsmdash such as a blowout The Government should not automatically accept claims that companies have mitigated away the risk of such worst-case scenarios We urge the Government to introduce this requirement as drilling ventures into increasingly extreme environments [emphasis added]rdquo p 24 ldquo The liability and compensation provisions in the UK could be inadequate given the high costs of dealing with the blowout of the Macondo well hellip existing EU directives on environmental liability would likely ldquobe of limited application in the case of a big spill in European waters [emphasis added]rdquo p 26 ldquo Given the high costs of the incident in the Gulf of Mexico we believe that the OPOL (Offshore Pollution Liability Association) limit of $250 million is insufficient We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of ldquodirect damagerdquo is unclear While membership of OPOL remains voluntarymdashdespite it being a pre-requisite for a licencemdashits voluntary nature weakens its legality and the control and deployment of its funds We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect and therefore do not qualify for compensation We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government and hence the taxpayer do not have to pay for the consequences of offshore incidents We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments [emphasis added]rdquo p 32 ldquo We welcome the development of new capping and containment systems capable of dealing with a subsea blowout However we feel that the absence of these devices before the Macondo incident is indicative of the industryrsquos and the regulatorrsquos flawed approach to highconsequence low-probability events Prevention is better than cure and we recommend once again the Government recognise that

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo

in its regulatory regime these systems are not a substitute for fully functioning blowout preventers [emphasis added]rdquo p 48 ldquo Despite Halliburtonrsquos and BPrsquos own predictions of a gas flow problem caused by an incomplete cement job BP decided not to run a 9ndash12 hour procedure known as a ldquocement bond logrdquo to assess the integrity of the cement seal dismissing the Schlumberger contractors who had been hired to undertake the test This acoustic test would have determined whether the cement had bonded to the casing and surrounding formations [emphasis added]rdquo p 49 ldquo One of the Bly Reportrsquos key findings was that readings taken during the ldquonegative pressure testrdquo to determine well integrity indicated that there was a flow of oil and gas from the reservoir into the well even though the ldquoTransocean rig crew and BP well site leadersrdquo thought the test was a success and well integrity had been established Dr Hayward told us ldquowe know that with the benefit of hindsight that the negative test was erroneously interpretedrdquo This test simulates the temporary abandonment of the well after drilling and prior to production when a proportion of the well is displaced to sea water BPrsquos Group Head of Safety and Operations Mr Bly added ldquoThere are records of the information that would have been available so we know that [information on the drill pipe pressure increasing when it should have been decreasing] was there We canrsquot explain why they didnrsquot see it [emphasis added]rdquo