Monday, March 11, 2013

Editorial Note: 1/11/2015 Since First Publication Shell was not blocked long term by any government action but did not make an attempt on the Arctic in 2014. They may in 2015 but they still are clinging to the fundamental concepts that caused their initial failure and the federal Government still hasn't addressed the key issue. Shell's main drilling contractor Nobel Drilling Corporation, a former Texas corporation now headquartered in Switzerland, has refurbished the aging foreign flag drill ship Discoverer for the next attempt. So once again Shell and its lieutenants propose to go into America's most dangerous and environmentally sensitive waters with second hand, second rate , non- American equipment, repaired in foreign yards avoiding the scrutiny that would have been applied to such vessels if  they had been built in America , classified by the American Bureau of shipping, and inspected by the U.S. Coast Guard. Amazingly U.S. built and American manned vessels are required in this trade by the Jones Act which for some reason the Congress seems reluctant t o insist that the President, U.S. Coast Guard a d Customs Service enforce. If there is no attempt on the Arctic in 2015 it won't be because the government imposed any common sense of Shell warmed up to the idea that should be a best of equipment and men effort. It will simply be the low prices at the pump for the time being. Even taking all of the short cuts that are obvious in the Shell/Nobel Drilling Plan, Arctic oil will never be cheap to produce and with prices in many places now below $2 a gallon for gasoline and crude oil at $50 a barrel, sometimes less, all parties might opt out this spring ...temporarily. Whenever the game is on, we see a major disaster causation matrix forming that will make BP's problems in the Gulf of Mexico pale by comparison. We could spend many pages explaining the unfolding accident causation matrix, but really item one explains it all. No one should attempt to enter the world's most dangerous and difficult, most environmentally sensitive environment with aging equipment , with some crew members certified by some dubious foreign agencies, and an organization created from the start to diffuse responsibility.


KULLUK Drilling Barge Aground Off Kodiak Island Alaska
Official USCG Photo

Coast Guard Personnel Oversee the Heavy Lift Operation of the XIANG YEN KOU  As She Brings Aboard The Drill Ship NOBLE DISCOVERER In Steward Alaska.
EDITOR'S NOTE: Over the weekend some of the on line trade journals carried headlines similar to our lead in. Opponents of Arctic drilling are indeed seeking a delay or ban on further drilling activity. Two recent incidents involving the Shell /Noble Arctic efforts are worthy of analysis to show why not only the usual suspects like Green Peace are up in arms about Arctic drilling but even those of us who are  usually part of the "Drill Baby Drill" chorus are having second thoughts. 

One thing became crystal clear in the Congressional Hearings and court cases that followed the BP oil spill in the Gulf of Mexico.The big oil producing companies like BP and Shell or Exxon generally don't do their own offshore drilling. They use drilling contractors,companies that own and operate mobile offshore drilling units (MODUs) to do the drilling for them. Another thing that was very clear from these hearings is that U.S. law holds the lease holder  ultimately responsible for any and all damages that occur as the result of a drilling accident. In the finger pointing that followed the BP case into the admiralty courts it was clearly revealed that the ordinary practice of the industry is for the lease holder, the BP or Shell Oil type companies to contract out the drilling and insert into the contract a "hold harmless and defend"clause in which the smaller and financially weaker drilling contractor agrees to not only pay all damages resulting from drilling accidents but also to "hold harmless" the more powerful  oil company and provide it with a legal defense against all claimants. The BP case in the Gulf of Mexico off of Louisiana indicates that these "hold harmless and defend" clauses aren't worth the paper they are written on. Most of these drilling contractors can handle the $75,000,000 regulatory cap on damages but no where near the actual hundreds of billions of dollars in damages that finally result and that the courts find a way around any regulatory caps in assigning. My old torts professor used to say :

"You need three parties to make a tort. The first is the tort feasor, the party that did something harmful. The second is the tort victim who suffered the resulting harm caused by the tort  feasor. The third is the 'Deep Pocket" the party responsible for paying the damages and this party may or may not be the actual tort feasor. If any one of these parties is missing, but most especially the 'Deep Pocket' you do not have a case."

 In the BP case we learned just how reluctant a federal court can be to let the deepest deep pocket just walk out of court. BP is still paying damages and fines as we write this and the costs are in the billions not anything like $75,000,000.  British Petroleum's attempt to lay the costs at the feet of its hapless drilling contractor Transocean and key supplier Haliburton didn't get much play in court or in public opinion. Despite the usual "hold harmless and defend" clauses in their contracts Transocean and Haliburton were not held solely responsible for the DEEP WATER HORIZON oil spill.  British Petroleum was held in the case and assigned the lion's share of the liability though no one got off without staggering damages assessments.  If the courts taught one lesson in both the 1990 Alaska Oil Tanker Spill and the Deep Water Horizon well loss it is that when you do horrific damage to the commons with economic consequences spreading far and wide among the general populace, there is no limiting liability, there is no escape from liability, all potential "deep pockets" stay in the case until the end.  BP didn't decide to "volunteer" to decide to accept unlimited liability and to pay every dime in damages out of the goodness of their heart. It was a sound business decision. By setting up their own claims department they are able to examine each claim, negotiate a settlement or deny the claim and start it through an appeals system. Payments are spaced out, annual expenditures reduced, probably the overall size of the total of claims paid reduced, fines reduced. Most importantly BP still owns the lease, and as we now know, the lease has enough oil in it to eventually pay BP back every dime it is putting out in claims.

 The situation in the High Arctic between Shell Oil and its major drilling contractor Noble Corporation has a different and dangerous potential. The drilling contractor has had two accidents already in southern Alaska with equipment ultimately meant for employment in the High Arctic. Fortunately there was no pollution involved. Now suppose there is an accident in the High Arctic that does massive environmental damage but doesn't involve any real probability of a big oil find and Shell retaining the lease? Will there be a willingness on the part of Shell to shoulder all of the liability like BP eventually did in the Gulf or will there be an attempt to evade and avoid liability first by trying to push everything off on the smaller Noble Corporation, then by using every dodge available through foreign incorporation and perhaps sovereign immunity arguments to avoid jurisdiction by U.S. courts?

Deepwater Horizon oil spill - May 24, 2010 - with locator.jpg

 The reasons for the U.S. Courts not allowing limitation of liability or upholding "hold harmless and defend" contract provisions are not complex. The joint and several liabilities of all parties and the ultimate liabilities of the lease holder are spelled out in U.S. statutes, regulations and lease provisions. Second there is the custom of the industry of keeping a "Company Man" on board contracted drilling units nearly 24/7. The "Tool Pusher" or Drill Ship "Captain" may have complete command and final responsibility for all navigational, positioning, and drilling functions as far as the drilling contractor is concerned but the ultimate "power of the purse" resides with the oil company's (lease holder's) "Company man". If the drill ship captain thinks he needs extra tugs he usually needs the "Company man's" approval to hire extra tugs. If the drill ship Captain thinks he needs an ice pilot, if such an individual service was not provided for in the initial drilling contract, the master needs an approval from the "Company man" for the expense. The average company man may have lots of drilling, but virtually no real maritime training or experience and will rarely think twice before denying drilling contractor requests for additional safety related equipment or service. Lease holding oil companies base their performance evaluations of "Company men" on the over head they save. A "good company man" can often save an oil company hundreds of thousands of dollars on a given project. but a single denial of a single safety measure that fits anywhere in a causation chain for a run away well is going to cost the oil company at least tens of millions of dollars. In the BP disaster the Company man had been involved in not only marine operational decisions but directly in such drilling technology decisions as the specific weight of drilling "mud" to use. The Company man relationship with the key drilling contractor personnel has not been revised for the operations in the Arctic and remains as it had for "Deep Water" operations.

 From our view point Shell is leading the way into the High Arctic ready or not, and leading their key drilling contractor Noble Drilling down the primrose path. Noble hasn't made it to the actual Arctic shore yet but has already experienced an in harbor grounding  (NOBLE DISCOVERER incident) and a loss of tow resulting in grounding (KULLUK incident)  and has simply been lucky in that neither incident resulted in any serious pollution. We are in no position to examine the Noble / Shell master contract but the fact that Noble was towing the KULLUK as late in the season as it was, and that there was a crew on board, tells us there was some sort of economic calculus driving the decision.  A tow of this sort, this late in the season, in those latitudes, with a crew aboard the tow, is not a decision by prudent mariners. This is exactly the sort of decision that ordinarily prudent mariners are sometimes forced into by imprudent desk bound, inexperienced in seafaring cost conscious managers. This type of decision making is not at all unlike the type of decision making that reduces drilling mud weight despite the best advice of drillers to shave costs in the BP case.  The BP disaster demonstrated exactly where that type of drilling decision can lead.  Yet clearly in the Shell /Noble push into the High Arctic the exact same corporate culture is tightly in place and driving the operational decision making and they are having accidents before even getting through the Bering Strait much less onto the North Slope. It is also clear that the U.S. Coast Guard and Bureau of Ocean Energy Management and Regulation are still blind to the role of this corporate culture as a major contributor to the accident causation matrix.

090831-G-8744K-113  Cutter Healy (For Release)
The High Arctic is no place for amateurs, Here the USCGC HEALY  underway, USCG Photo.
Can we count on the Shell/ Noble team or any other to exhibit the kind of discipline that the USCG High Arctic Teams do when their leases, permits, contracts, and corporate cultures drive operations towards the same short cuts as the DEEP WATER HORIZON?  If we re going to do the same thing over again why do we expect different results?

 Here are a few observations and related opinions  that prudent and professional mariners with experience in the offshore drilling industry see in the recent events involving Shell's Alaskan operations with Noble as drilling contractor/ drill vessel operator.

1. The KULLUK was over  30 years old. That's ten years older than the typical design life expectancy of most steel vessels meant for arduous duty in a tough environment. We don't care how much of a retro fitting was done, at that age some of the refitting amounted to rouge on a corpse. If you are ready to be a prime time player you bring the best of the best equipment to a game like the High Arctic. You bring new purpose built equipment.

2.Both the KULLUK and the NOBLE DISCOVERER were foreign flagged.  One of the main points that the Congressional hearings into the BP oil disaster made was that the U.S. Gulf had become over run by foreign flag Mobile Offshore Drilling Units (MODUs) in what should be a Jones Act protected domestic trade. In the face of insightful examination by representative Gene Taylor  (D- Mississippi) Transocean pretty much told the tale of how MODUs were literally invented by American companies based out of Houston Texas and first built in American yards and deployed on the American Outer Continental Shelf (OCS). After billions in profit were made these same companies began reorganizing under foreign, usually Swiss incorporation and using the profits they made in American waters to fund the building of MODUS in places like Korea. After creating this artificial "shortage" of American built equipment these newly reinvented foreign corporations plead "the American shortage" of "proper equipment" for exceptions to Jones Act requirements until the presence of foreign registered MODUS was simply the norm on the OCS of the United States. 

 In the BP disaster not only was the MODU foreign flagged but it was not even the same flag state as the nation in which the drilling contractor was incorporated.  MODU flags these days are the usual assortment of "open registries" known for their willingness to assign nationality documents to a vessel absent any real national connection to the vessel's ownership. There are only three purposes behind the selection of open registries (1) avoidance of regulations (2) reduction of initial construction and subsequent operational , especially crew costs and tax expenses. (3) avoidance of liability. We wonder if British Petroleum would have claimed some form of sovereign immunity due to some tenuous relationship to the Crown if the accident itself had not revealed the presence of pay dirt to the lease holder. Basically the DEEP WATER HORIZON HAS THE POTENTIAL FOR BP TO BOTH PAY ALL THE DAMAGES AND DELIVER A PROFIT ONCE THEY BEGIN PRODUCING AND SELLING THE OIL. 

3. If the British Petroleum / Transocean  lease development plans revealed the model of how not to do drilling in a difficult environment and we think the Congressional hearings demonstrate exactly that, then isn't it pertinent to ask in the wake of granting High Arctic permits to the Shell/Noble arrangement how their arrangements are different from the very system that brought us the BP disaster? We invite our readers to check out the corporate identity of Royal Dutch Shell and Noble Corporation   .  Now check out the flag states of the
MODUs KULLUK and NOBLE DISCOVERER and a bit of their operational histories:   

To anyone with common sense it is obvious that once again the U.S.Government is leasing our most environmentally sensitive mineral deposits to corporate and contractual arrangements designed to avoid and evade safety costs and the associated liabilities associated with safety failures.  The Shell / Noble arrangement can't even get through a winter below the Bering strait without predictable and avoidable accidents. We the professionals of AAIS find ourselves in the curious position of agreeing with such radical organizations as Green Peace , an organization which we abhor for its methods, in calling for cancellation of all leasing and permit arrangements between the U.S. and Shell. Yet we are in favor of drilling for our own oil. But only a fool would let the present and now highly visible arrangement go forward. Ideally we would like to see an American lease holder permitted to explore the High Arctic with new purpose built American registered equipment. But we are unwilling to hold our breath for Congress to undo the damage through neglect that they have done to the Jones Act before bringing Arctic oil to market. We think the present Shell / Noble arrangement is grossly inadequate and all permits should be cancelled . We would not object to any new applicants including reapplication by the Shell / Noble arrangement that could meet the following minimum conditions.

(1) All new  or nearly new purpose built ice strengthened MODUs built anywhere, but under American Bureau of Shipping classification. All such MODUS to be modified to meet all U.S. Coast Guard standards for American registered MODUS. No MODUS classified under any classification society other than the American Bureau of Shipping are to be allowed to service U.S. High Arctic leases.

(2) Lease holder shall agree to lease/permit conditions that do not allow for "hold harmless and defend clauses" in drilling and drilling operational support contracts. Lease provisions should deal directly with the relationship between the contractor's "company man" and senior drilling contractor drilling and marine department personnel on scene. Lease provisions should provide that a licensed U.S. Merchant Marine Officer in the employ of the drilling contractor /MODU operating company shall be the senior person on scene and may not be over ruled in any matter involving marine or drilling safety by any resident "company man" of the lease holder. Such officer shall be informed in writing of his status and the fact that his employment , even if on board a foreign registered MODU is under the authority of his Coast Guard license and is subject to the traditional discipline of the U.S. Merchant Marine with all reporting, logging, and cooperation with inspectors provision intact as though the MODU was an American flag vessel for so long as the vessel is operating in U.S. waters.

(3) A U.S. Licensed Merchant Marine Officer shall have the lead shore side management functions for all MODU operations and all subsequent production operations that involve vessels for the drilling contractor or other vessel provider that is not part of the lease holder's operation. All fixed offshore platform operations shall be under the charge of a U.S. Coast Guard licensed "Offshore Facilities Manager".  At the executive level the overall management of fixed platform operations must be under the charge of a USCG licensed "Off Shore Facilities Manager".  Each individual required by the lease provisions to have a U.S. Coast Guard license whether serving on scene, afloat, or ashore in management shall be informed in writing that they are working under the authority of their U.S.Coast Guard issued occupational licenses.

(4) No drilling is to commence until a Coast Guard approved oil spill contingency plan is in place, with all required equipment and vessels staged in the area.

 What we see now is simply a replay of the same contractual arrangements and corporate culture that brought the Gulf of Mexico the DEEP WATER HORIZON disaster. What we propose is the responsible adult alternative with real individual and corporate responsibilities spelled out and key supervisor and executive judgments protected from the corporate cost cutting , safety as overhead culture. By putting the key operational supervisors and managers under the authority of their Merchant Marine Officer licenses we make these decision makers the owner's of important operational authorities. Executives higher up the corporate ladders inclined to replace these maritime professionals who are taught to consider safety a necessary part of production and not to be done on the cheap, would not be free to simply replace them at will. To remove such an officer is to also temporarily eliminate operating authority. Such a removal also opens the door to complaint by the officer to the U.S. Coast Guard challenging the employer for cause. The Coast Guard may not be able to reinstate a fired officer but it is able to suspend operations while investigating any safety related issues the reporting officer describes in his correspondence with the Coast Guard.  

 Unlike Green Peace, we don't want Arctic oil exploration to simply stop. Unlike the U.S. Coast Guard and the newly formed Bureau of Ocean Energy Management Regulation and Enforcement  we have actually worked in and observed closely the relevant corporate cultures. We have participated in investigations of various types of accidents in the offshore oil industry over the years . We can see that the present arrangement is the same old tired arrangement that  brought us the Deep Water Horizon Disaster.

  Now keep in mind that all concerned in the Deep Water disaster  received a big break from Mother Nature. The near tropical water temperatures and the naturally occurring sea bottom oil seeps in the area had been conducive to oil eating bacteria. Once the leak was finally capped the bio-degradation rate in the near tropical climate was much faster than any one anticipated. That's not going to happen under the ice or in those far northern waters, the oil will be around for decades and all of it will have to be mechanically removed. We simply can not have a spill in the first place but we are allowing in exactly the same corporate culture and contract arrangements that brought us the DEEP WATER HORIZON. 

The High Arctic is not an environment that can biodegrade pollution, USGS Photo

We want to to support Arctic drilling but can't until we see basic changes in the approach to leasing and regulation as we have outlined them. The height of stupidity is to keep doing the same thing over and over again and expecting different results. Responsible drilling starts with clearly identifiable responsible parties , new purpose built equipment, workable contingency plans and emergency equipment deployments.  With two failed movements below the Bering Strait already, the Shell/Noble system doesn't seem to meet the minimum basic requirements. We seriously doubt that the failure is solely or even principally the fault of Noble which appears to have somewhere in its inventory the right equipment, and appears to have the operational experience to indicate the presence of some competent seamen within their system. The old form of partnership with the lease holder having veto power over the professional considered actions of contracted hired professionals will drive any maritime operation to ruin every time. We don't join all of the protesters and dooms day advocates such as Green Peace in condemning drilling, but we have to join the chorus in demanding a return to the drawing board. The first team to take the field failed and is so flawed in basic structure that a second try with the team as presently organized can only lead to more failure, probably with worse results. The other teams that need reform are the new Bureau of Ocean Energy Management, Regulation and Enforcement  and the USCG they seem to have failed completely at recognizing the previously demonstrated seeds of failure and went right ahead and permitted, leased, inspected and certified equipment bound to fail. Responsible companies, responsible competent clearly identified people in charge, clear lines of responsibility and authority with the power of the purse exercised by the person directly responsible for operations, adequate capitalization,  relatively new purpose built equipment for this unique environment, viable contingency and damage control and containment plans and equipment strategically placed and ready. These things need to be checked for first before the government agencies start looking at specific equipment and lease sites. The lease,permit holder/ drilling team has to be properly vetted for its general organization before anything else is considered. Shell management was not ready to go to the Arctic and Noble's management wasn't ready to buck Shell. Shell can always find another drilling contractor to risk life limb and environment if their first choice insists on good seamanship. Vessel owners and operators won't buck lease holders until government regulators start checking for a willingness to do just that before issuing leases. To drill safely in the High Arctic Mariners and Drillers must lead the way, not MBA's, CPA's and Investment bankers. If the reserves won't return a profit on oil safely extracted, they should remain under ground.

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