Merchant Marine Interest: The Path To Off  Shore Operational Excellence 

THE PATH TO OFF SHORE OPERATIONAL EXCELLENCE 

  
 Namazu, Former Japanese Demigod, Analyst

by the Great Namazu directing the AAB Research staff
Editors Note: Namazu finally got at least part of his wish for a cube farm full of researchers doing his bidding. For this assignment he was able to have the full services of the complete research staff for a temporary period.  Please patronize our advertisers Namazu will be insufferable to live with until we can afford to give him a personal staff.

U.S. Flag Offshore Service Vessels (OSVs) Battle the Blaze on the Foreign Flag  "DEEP WATER HORIZON" Official USCG Photo

Editors Note: The research assignment was to determine the state of operational safety in the offshore mineral extraction industry in the United States today and what it should be, especially in environmentally critical waters areas like the High Arctic. If the industry is shown to be not ready for critical area deployment, outline what must be done to get ready. We are actually in favor of offshore oil production but we want it conducted safely. This is our independent safety assessment of the industry. In summary the industry collectively is not ready to operate in unforgiving environments. The Gulf of Mexico, because of warm water conditions, the presence of natural seepage, and the evolution of crude oil eating organisms not found in colder seas has been a particularly forgiving environment. The U.S. Gulf is the only such maritime environment under the U.S. flag. Moving into the High Arctic is a totally different ball game. The companies that evolved in the U.S. Gulf and others do not appear ready by a long shot for the rigors of the High Arctic. In this post Namazu explains the why they are not ready and what they have to do in general terms to become ready.

The Path to Tragedy

"On April 20, 2010, the 126 workers on the BP Deepwater Horizon

were going about the routines of completing an exploratory 

oil well—unaware of impending disaster"...  "

The oil and gas industry, long lured by Gulf reserves and public incentives, 

progressively developed and deployed new technologies, at 

ever-larger scales, in pursuit of valuable energy supplies in 

increasingly deeper waters farther from the coastline. Regulators, 

however, failed to keep pace with the industrial expansion and 

new technology—often because of industry’s resistance to more 

effective oversight. The result was a serious, and ultimately 

inexcusable, shortfall in supervision of offshore drilling that 

played out in the Macondo well blowout and the catastrophic oil 

spill that followed."   (From Chapter I, DEEP WATER, The Gulf Oil Disaster and the Future of Offshore Drilling; Report to the President's National Commission on the BP Deepwater Horizon Oil spill and Offshore Drilling.)

http://docs.lib.noaa.gov/noaa_documents/NOAA_related_docs/oil_spills/DWH_report-to-president.pdf

THE PATH TO TRAGEDY IS LITTERED WITH "MINIMAL REGULATORY COMPLIANCE"

 We were able to monitor many of the Congressional hearings on the Deepwater Horizon tragedy either live from the Congressional hearing rooms or via the internet feed from Capitol Hill. One of the key operational errors explored by the various committees was the weight of the "drilling mud" used. "Drilling Mud" is a fluid mixture pumped down the well bore during drilling to cool the drill bit as it cuts through rock and brings up the resulting "slag" or rock shavings. As we recall, the the drilling contractor's (rig owner) senior man on scene was in favor of heavier mud, applied longer, while the "Company Man", the senior representative of the lease owner on scene; favored the cheaper alternative of a lighter less diligent application of mud.  Ultimately the side with the power of the purse (the lease holder) won out forging a link in the chain of causation that led to damages to the "commons" of the Gulf of Mexico that are still being felt today, still costing both the  responsible drilling contractor and lessee .

"The immediate causes of the Macondo well blowout can be traced to a series of 

identifiable mistakes made by BP, Halliburton, and Transocean that reveal such 
systematic failures in risk management that they place in doubt the safety culture of 
the entire industry. "  p.vii of the Presidential commission report previously cited

 We note that the commission cited "identifiable mistakes" not "regulatory violations" as the "immediate cause" of the disaster.  We cited the drilling mud disagreement as a single element of the kind of "identifiable mistake" the commission was speaking of". Drilling mud amounts and weights are not generally thought of as a "regulated matter". But really that depends on your definition of "regulated".


"MINIMAL REGULATORY COMPLIANCE" IS NOT THE STANDARD OF "DUE DILIGENCE", IT MAY NOT EVEN BE THE STANDARD OF "MINIMAL REGULATORY COMPLIANCE"

 When we polled the various maritime professionals of the American Admiralty Informational Systems (AAIS) net work who have been direct employees or consultants to offshore drilling contractors safety, and compliance programs we found the consensus of opinion to be that all present day drilling contractors operate below "minimal regulatory compliance". This appears to be true even of apparently well meaning companies that have established post BP Disaster "Excellence in Operations Programs". To begin with, most Mobile Offshore Drilling Units today, including those operating off of  U.S. Outer Continental (OCS) Shelf Waters and elsewhere within the U.S. Exclusive Economic Zone (EEZ) are foreign registered. More over the foreign registrations are with "open registries" such as Panama, Liberia, or the Marshal Islands. "Open registries" allow ship owners to register vessels which are not built in the nation granting the registry ("flag state") and don't require that the officers or crew of such ships be citizens of such nations. There are two reasons why American owned or controlled shipping goes to these "flags".  Particularly in the case of offshore drilling operations it can be a political/economic necessity in those many places in the world where America is hated. A U.S. flag vessel could be politically prohibited or targeted. This is also one of the reasons why most of America's offshore drilling contractors that started life as Texas corporations are now Swiss corporations. 

 Unfortunately there is no avoidance that the other reasons for flagging with open registries include tax avoidance and shelter from effective regulations which drilling contractor management regards as intrusive and excessive. The point made abundantly clear in the Presidential Commission Report is that this supposedly intrusive and excessive regulatory safety net was grossly inadequate to prevent the BP disaster since it failed to address "identifiable mistakes" that were the leading factors in the causation chain. Or did it?

 American regulation often incorporates certain codes and standards by reference in the body of the regulations. For example marine engineering regulations may simply require that certain equipment operations and installations comply with certain features of the National Fire Protection Association (NFPA) Code. The NFPA is not a government organization, but by incorporating a section of their code in regulation the government gives that section the force of law in the narrow context of the specific regulation. The referenced non government code becomes an enforceable part of the law, though the specifics are never printed in the law itself, only a reference to the code. By contrast the open registries entire maritime codes are often little more than the incorporation by reference of the entire SOLAS, IMO, etc. international codes, often noting that their latest edition applies. This  reference to the latest edition saves the national legislature , interested only in the revenues from the ship registry, any future work in keeping the national maritime code up to date or in compliance with international conventions that the flag state is signatory to. It would require a lot deeper legal research than anyone has apparently attempted to date to assure that the "identifiable mistakes" mentioned in the Presidential Commission report were in fact not regulatory violation of provisions "incorporated by reference". However it is not just flag state regulation that must be examined to determine "minimal regulatory compliance".

 A foreign registered vessel running an "industrial operation"* ( *from American regulatory language)
in the waters under the jurisdiction of another state must comply with such marine safety requirements as the "Port State Control"* (*from American regulatory language) State chooses to impose from its own domestic law. Where the host state's offshore licensing authority is separate and distinct from any of the maritime safety regulators, the vessel operator must also comply with all lease provisions of the offshore area lease. These leases often contain additional safety provisions enforceable under contract law. In all cases "compliance" means not only compliance with the letter of the applicable statutes, regulations, and lease provisions of the flag state and the Port State Control nation, but also all codes and standards incorporated by reference. It is normally a recognized duty to maintain class while on station on an offshore lease, so the vessel must also comply with all rules of its classification society. Finally, regardless of any incorporation by reference by either the flag or Port State Control nation, all such vessels must conform to the applicable international conventions. 

  A waiver of a particular convention item by a flag state has no effect on the Convention, or its status as a source of codes and standards that a court might look to in a test of post accident liability, neither does it have to be recognized by the Port State Control national authorities. Such a waiver is a unilateral act applicable only to vessels registered to the nation granting the waiver and really only enforceable in their own waters. 

 Since the first rule in the employment of open registries is "never visit the flag state", one has to wonder why so many vessel owners so often spend more time, energy , and actual expense to get back up equipment requirements waived by flag states , when the waiver may be meaningless in terms of the areas of operation and may actually enhance liability in a post accident litigation.   None the less open registry operators request waivers of scant safety requirements regularly, and for a decent sounding written argument accompanied by a filing fee, most open registry administrations are happy to accommodate such requests.

"MINIMAL REGULATORY COMPLIANCE" MEANS COMPLIANCE WITH NOT ONLY FLAG STATE REGULATIONS,  BUT ALSO THE NATIONAL AND LOCAL REGULATIONS IN THE ACTUAL AREA OF OPERATION, ALL CODES AND STANDARDS INCORPORATED BY REFERENCE, AND ALL  APPLICABLE INTERNATIONAL CONVENTION CODES OR RECOMMENDATIONS.

ACHIEVING "MINIMAL REGULATORY COMPLIANCE" STILL LEAVES A VESSEL OWNER FAR SHORT OF ACHIEVING THE "DUE DILIGENCE" THAT A COURT WILL TEST FOR.

"DUE DILIGENCE" STARTS WITH "ROBUST REGULATORY COMPLIANCE", COUPLED WITH STRICT ADHERENCE TO APPLICABLE AND RECOGNIZED CODES AND STANDARDS, AND THE APPLICABLE "ORDINARY PRUDENT PRACTICES OF SEAMEN"* (*From British and American Admiralty law)

"DUE DILIGENCE" CAN HELP A VESSEL OWNER ESCAPE THE CONSEQUENCES OF A FINDING OF GROSS NEGLIGENCE. COUPLED WITH PRE-PLANNED AND RAPIDLY EXECUTED CORRECTIVE ACTION, IT CAN HELP AN OWNER ESCAPE BEING JUDGED CULPABLE OF THE SORT OF "AGGRAVATING FACTORS" THAT LEAD TO PUNITIVE DAMAGES IN CIVIL SUITS, AND CRIMINAL CHARGES AGAINST MANAGERIAL PERSONNEL . BUT "DUE DILIGENCE" IS A LONG WAY FROM "OPERATIONAL EXCELLENCE".

OPERATIONAL EXCELLENCE IS THE PRODUCT OF DUE DILIGENCE PLUS A SERIOUS CORPORATE EFFORT AT FORESIGHT WITH RESULTING INCIDENT/ACCIDENT PREVENTATIVE POLICIES THAT ARE AHEAD OF THE REGULATORY PROCESS AND THE PRESENTLY RELEVANT CODES AND STANDARDS, PLUS A CONSTANT ON GOING PERFORMANCE AUDIT FOLLOWED BY MONITORED CORRECTIVE ACTION.

IN OUR EXPERIENCE MOST DRILLING CONTRACTORS TODAY, YEARS AFTER THE DEEP WATER HORIZON DISASTER MAY HAVE PROGRAMS LABELED "OPERATIONAL EXCELLENCE", AND MAY HAVE ON GOING "SAFETY AUDITS" , AND "COMPLIANCE DEPARTMENTS", BUT BASICALLY THEY HAVE YET TO ACHIEVE EVEN MINIMAL FLAG STATE REGULATORY COMPLIANCE.
  
 One example that our group sees is common. A number of self propelled MODU owners have applied successfully to Liberia, Panama, and the Marshal Islands for waivers of convention requirements for the carriage of non electronic navigation equipment such as sextants, magnetic compasses, Chronometers, and the related paper charts and publication required to use these non electronic instruments for accurate navigation. The owners usually plead that they have redundant electronic means of navigation. Liberia has been generous in granting such waivers. 

 Unfortunately the Liberian administration has sometimes over looked the issue of independent power requirements. In one actual situation that we became aware of through a maritime insurance blog a drill ship with such a waiver lost all three electronic systems in a lightening strike. The ship was navigated home by a very skilled and astute captain using such outdated paper charts as were still aboard, personal drafting instruments, and a wrist watch magnetic compass of unknown deviation. Thus the navigational accuracy of the ship went from near pin point to plus or minus at best 200 yards in confined waters in sight of land and during the sea crossing for much of certain days the estimated position along the general track line could have been off by as much as 200 miles for hours, even days in extremely cloudy weather. Had the ship run aground while being navigated in this manner it would more probably than not have been judged "unseaworthy" in an admiralty court, any possession of a flag state waiver of the non electronic navigation equipment carriage requirement not withstanding.

 Two forces acting in tandem seem to drive the downward safety spiral, the first comes from the internal drilling contractor line management view of regulations from any quarter as "burdensome", and a dampener on profits. So the accepted target is minimal regulatory compliance with the flag state's requirements on the theory that failure to achieve such compliance is the fastest route to a stop drilling order. Line management of most of the oil companies that hire off shore drilling contractors also are on record as regarding regulation as "burdensome" and a dampener on profits. However, the two influential managerial groups don't always share the same view of regulations in actual daily practice. The actual vessel owners, the drilling contractors, may view certain practices as in the best interest of protecting their investment and won't hesitate to point to regulation if the practice is enshrined there when defending such practices as the oil production and distribution company executives may find onerous.

A MODU AGROUND OFF ALASKA

 A recent news worthy example of this synergistic negative impact on safety was the recent Southern Alaska grounding of a  MODU  in late December  of 2012.  Oil company executives said the MODU sustained damage to its hull when it was grounded on tiny Sitkalidak Island during a fierce storm in late December. Seawater also caused electrical damage. Apparently the Modu wasn't owned by the relevant oil exploration and production company  but by a drilling contractor. You can bet that discussions of tug horse power, number of tugs to use, and similar technical details were discussed between the Oil Company  and the MODU provider before the move. Clearly no experienced vessel owner with competent maritime professionals in their employ would have planned the move as it actually occurred. The movement with the actual horsepower and rigging employed in the weather  actually encountered was virtually assured to result in exactly what happened.

 But we surmise that the Oil Company must have dominated prior decisions such as when in the season to stop drilling ( as late as possible, not the wise choice in terms of navigating the MODU off station for wintering over). We don't have knowledge of course, of any internal discussions, but the departure date is in the media coverage, and  we have enough ship masters on staff to know how voyages are properly planned.   After dominating that critical decision the contractor faces a choice if  the Charter party (oil company) demanded cost savings on the towage out of area. The MODU owner, assuming different from the Charter party, could quickly agree to a towing plan that was barely adequate if good weather prevailed, or possibly be left to moving at their own expense in the worst of weather as the season deteriorated.  

 The voyage would take longer than the reliable weather predictions could forecast so probably an economic decision under duress was made and the Charter party (oil company) voyage plan adopted. Of course that is simply forensic speculation on our part; but the result was predictable to real Master Mariners, but not to MBAs making the decisions ashore.  In order to save a few hundred thousand in towing costs The charter party gambled on and lost the entire 2013 drilling season in the region, with no guarantee that they can pick up where they left off in 2014. That charter party, the oil company has spent over $4.5 billion (U.S.) on Alaskan / High Arctic region drilling so far and is in some tangible danger of losing the entire pile. Your grandparents would have called that towing decision "penny wise and pound foolish".  

 Now the truly scary part of the failed movement of this particular  MODU  is that this MODU was slated for service in the High Arctic this summer and it had already approached or exceeded a normal service life for vessels in less arduous service than High Arctic drilling. This was an old rig. Why would anyone supposedly attempting to project an image of a company pursuing "operational excellence" in the harshest maritime environment imaginable start operations with old vessels?  The regulators would like to believe that the oil company and its drilling contractors are trust worthy in what is surely a zero defect operating environment.  To believe that one would think that just as a matter of common sense , the oil company would enter the area with new purpose designed equipment. Instead their plan, agreed to by  the owners of the MODU, was to start off the 2013 season with a old rig.  Of course if The MODU didn't make it as it turned out, the oil company had another MODU on contract, a drill ship. That's it in the image below being loaded aboard a heavy lift ship for transport to the Far East for repairs after a experiencing mechanical difficulties in Alaska.

Official USCG Photo

FROM THE ALASKA DISPATCH:

 "The vessel dipicted above was held by the Coast Guard in the Southcentral Alaska port of Seward on Nov. 29 when the drill ship was towed into port following a problem with its propulsion system. Coast Guard inspectors boarded the vessel and discovered some "pretty serious" issues, a spokesman for the agency said at the time. The ship was cleared to leave port beginning on Dec. 19, though it still needed to be towed for repairs that were originally to be performed in Washington state but will now take place in Asia. The drill ship will eventually be towed across the Pacific Ocean along with another primary drilling rig, the same one, which was grounded on a beach south of Kodiak Island on New Year's Eve where it remained for several days until it could be towed to a safer location."Full Story uncensored from Alaska Dispatch
*Text modified from the original press coverage in our paraphrasing above eliminating the names of the pertinent companies and vessels due to on going government investigations and litigation. We are using what happened as an example of the issues facing High Arctic oil exploration, we do not wish our analysis and opinion to be referred to in litigation. For those who must have names the uncensored press report is linked to. 

 According to the drill ship owner's own web site the depicted drill ship is about 36 years old. The ship owner however, owns some new and highly advanced equipment. Why did the Oil Company contract for a 36 year old vessel that turned out to not only have an equipment failure but apparently couldn't meet the minimal regulatory compliance test?  Is a this oil company/drilling contractor team, the team the United States wants to open the Arctic? According to the marine engineering and ship yard trade journals the ship owner has spent considerable money correcting design flaws with certain drill ships obtained in their takeover of another drilling contractor's fleet. What they did went far beyond "minimal regulatory compliance" so there may be a true attempt at pursuing operational excellence at the top of this organization.  However, given other compliance issues that have made it into the trade journals concerning the relevant company we doubt that the entire management has bought into a corporate culture of operational excellence. The sad fact of the matter is that the offshore drilling contractor, with a formal "operational excellence plan" has as yet failed to achieve even minimal regulatory compliance fleet wide. The really bad news for an oil hungry world is that we really don't see any materially better offshore drilling fleets out there. The 2013 High Arctic drilling season is a bust. No matter who is allowed to start the 2014 season, if anyone, the Coast Guard, the Bureau of Ocean Energy Management, and the State of Alaska need to assure themselves of several things:

• Contracts between lease holders  and drilling contractors/vessel or facility operators  must give iron clad control over navigation, position keeping, and drilling safety decisions without economic pressure, to the person in charge of actual operations.  No "company man" for the lease holder should be able to bully anyone on scene into making a decision that marginalizes safety. Lease provisions by the BOEM may be used to impose severe penalties on lease holders who force safeguards.
• All hulls and equipment must be less than four years old and ruggedized for Arctic service as they start service in the High Arctic. Equipment nearing 19 years of service should be removed from the High Arctic
• Joint Coast Guard. BOEM, Classification Society, Flag State inspection in a Southern Alaskan port before final permit to proceed to the drilling grounds should be consucted.
• Oil spill containment equipment should be pre-staged in the area.
• Run away well and subsea well head damage plan should be pre-filed and equipment pre-staged including one drilling unit expressly held in reserve for the drilling of any relief well if needed.
• Subsea containment equipment for subsea well head failure should be pre fabricated and stored in the immediate area.
• The cessation of drilling for the season and winterizing of any equipment for lay over must be completed two weeks earlier than the record for early freeze up.

One oil company has already been caught attempting to explore the Arctic on the cheap. Unlike the Gulf of Mexico spilled oil in the High Arctic won't biodegrade in the life time of anyone alive today. One drilling contractor was caught in less than minimal regulatory compliance operating aging equipment and knuckling under to the unsafe demands of of the Oil company. Neither business was an American corporation and neither major vessel was registered in the United States. High Arctic work whether off of Alaska, Canada, Greenland, Iceland, or the Scandinavian nations is going to require teams dedicated to "Operational excellence", not the minimum level of safety they can get away with.  Russia we don't even want to think about, thug states generally aren't green states. As we monitor the trade journals of the offshore oil and gas industry and communicate with our readers and members we just can't seem to identify a drilling contractor who has even met much less exceeded "minimal regulatory compliance". No one but the "operationally excellent" should ever be allowed in the High Arctic. That definition is worth revisiting. 

OPERATIONAL EXCELLENCE IS THE PRODUCT OF DUE DILIGENCE PLUS A SERIOUS CORPORATE EFFORT AT FORESIGHT WITH RESULTING INCIDENT/ACCIDENT PREVENTATIVE POLICIES THAT ARE AHEAD OF THE REGULATORY PROCESS AND THE PRESENTLY RELEVANT CODES AND STANDARDS, PLUS A CONSTANT ON GOING PERFORMANCE AUDIT FOLLOWED BY MONITORED CORRECTIVE ACTION.

Contrary to the dominant corporate culture in the industry today, real "operational excellence" is profitable and efficient. Why is it in the present observable corporate culture 
there is never time to "do it right", but in the end there is always time to do it over? Recent mistakes in safety have cost companies billions usually over safety costs shavings of just a few hundred thousand, if not tens of thousands of dollars, if that much.  How is skirting safety economic?  The start down the path to true operational excellence is the real buy in by management and supervisors that safety is critical to production and not in the way of production. Effective regulatory over sight reduces the internal audit expense involved in attaining real operational excellence and improves the perception of accuracy. Lease holders with oil leases in critical environments will want the operationally excellent contractors, even if the lease holder is a cost cutter, operationally excellent contractors are the cheapest form of "insurance". Verifiable operational excellence is a strong marketing tool. In short "SAFETY PAYS".