The Risk and Regulation of Deepwater Offshore Drilling

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The fourteenth in the Canada Institute’sOne Issue, Two Voices series
featuring:
Alexander MacDonald, managing partner, Cox & Palmer (St. John’s, Newfoundland)
James Coan, research associate, Baker Institute, Rice University
Moderator:
David Longly Bernhardt, Brownstein Hyatt Farber Schreck, LLP (Washington)

The explosion of the Deepwater Horizon oil rig in the Gulf of Mexico in April 2010 sparked an intense debate about the viability and safety of deepwater offshore drilling. To discuss how Canada and the United States regulate their offshore drilling industries, the Wilson Center’s Canada Institute invited Amy Jaffe and James Coan of Rice University’s Baker Institute, and Alexander MacDonald and Nicholas Crosbie of the law firm Cox & Palmer to investigate the issue. Coan and MacDonald presented their findings at events in both Calgary and Washington to launch the 14th publication in the One Issue, Two Voices series, on “The Risk and Regulation of Deepwater Offshore Drilling.” 

Coan concluded that the recently revised U.S. regulations are satisfactory to prevent a disaster like Deepwater in the future. He stated that the main issue with prior oversight was an inherent conflict of interest within the Mineral Management Service (MMS) of the U.S. Department of the Interior, whose duty was to both and enforce regulation as well as to collect revenue. MMS could not perform both tasks without explicitly or implicitly focusing on one function. Post-Deepwater reforms included dissolving MMS and creating two new bodies, the Office of Natural Resources Revenue and the Bureau of Ocean Energy Management, Regulation and Enforcement, the latter which itself was later split in two to form the Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement. Coan asserted that this restructuring has removed the conflict of interest that led to the Deepwater Horizon disaster. He also noted other regulatory changes, including moving towards goal-based regulations, increased funding, more inspectors, and better training for inspectors.

MacDonald discussed various kinds of risk involved with offshore drilling, noting the risk to the economy if supply is not kept up. He argued that moratoriums on drilling (off British Columbia) merely transferred risk to other areas (Atlantic Canada, and potentially, the Arctic). MacDonald said that the Canadian system of regulation is more likely to prevent a disaster such as Deepwater Horizon. Rather than using a wholly federal regulatory regime, as is the case in the United States, Canada uses a partnership between the provinces and the federal government to regulate offshore drilling. Under the Canadian system, the federal government owns the resource but the provinces retain the royalties from the drilling that takes place off their shores. MacDonald argued that by completely bypassing the inherent conflict of interest in the American system, the Canadian system produces better protections while also engaging local populations in energy production.

Asked about Canadian and American cooperation in Arctic exploration and how the different systems could interact, Coan explained that some complications could slow exploration, the most significant being the United States’ refusal to ratify the Law of the Sea convention, which would give more definite boundaries to the various claims in the Arctic. Both panelists also pointed out that due to harsh conditions in the Arctic, it was imperative for both nations to work together to ensure safe and successful exploration and extraction.

Coan and MacDonald discussed liability cap rules in both countries, noting that in the United States, liability is currently capped at $75 million. In Canada, there is no cap for negligent behavior, allowing communities effected by spills to be compensated more justly. Both panelists agreed that the Canadian standard was much fairer and better for responding to issues caused by spills.

The panel discussed prescriptive and goal-based regulation and the effectiveness of each to improve safety. While both Coan and Alexander agreed that goal-oriented regulations probably produced more effective rules in the long run, there was still a need for prescriptive rules.

This program was produced in partnership with the Government of Canada.