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Well Control Final Rule

April 20, 2016

Summary and Analysis

The U.S. Department of Interior’s Bureau of Safety and Environmental Enforcement (“BSEE”) has released its final Well Control Rule for off-shore rigs (“Rule”).  The Rule is intended to reduce the risk of an offshore blowout, building on findings and recommendations from several investigations and reports concerning the root causes of the Deepwater Horizon incident.

The Rule addresses a variety of well control issues, including more stringent design requirements and operational procedures for critical well control equipment used in oil and gas operations on the U.S. Outer Continental Shelf.  The Rule provides some flexibility on implementation in response to industry comment received after the Rule was first proposed last year.  Some industrial commentators believe the Rule will cost as much as $25 billion to implement over the next 10 years (versus the BSEE’s estimate of $900 million).

Rule Summary

The Rule builds on existing regulations by incorporating the most recent industry standards for the design, manufacture, repair, and maintenance of blowout preventers (“BOP”), and by requiring more frequent and stringent reviews of repair and maintenance records by a BSEE approved third party, with the goal of ensuring that BOPs are maintained pursuant to Original Equipment Manufacturer (“OEM”) requirements and good engineering practices.

Specifically, the Rule:

  • Establishes minimum baseline requirements for the design, manufacture, repair, and maintenance of BOPs based on most recent industry standards. 
    • The new requirements are intended to improve the reliability of surface BOP stacks that typically have been in service much longer than subsea BOP stacks. 
  • Sets forth additional requirements for the maintenance and repair of BOPs. 
    • Requires an annual Mechanical Integrity Assessment Report to be completed on certain BOPs by a BSEE approved verification organization.  This report includes, but is not limited to, BOP repair and maintenance records, documentation of the equipment service life, and a comprehensive assessment of the overall system.  The intent is to ensure traceability of the equipment, even if it is serviced or repaired in a foreign jurisdiction. 
    • Establishes a performance requirement that the equipment be maintained pursuant to OEM requirements, good engineering practices, and industry standards. 
    • Includes personnel training requirements for repairs and maintenance. 
    • Requires the complete breakdown and detailed physical inspection of the BOP at intervals no longer than every five years.  The complete breakdown and inspection may be performed in phased intervals. 
  • Requires the use of dual shear rams in deep water BOPs, which is now included in a baseline industry standard (API Standard 53). 
    • Includes requirements for dual shear rams for surface BOPS on floating facilities. 
  • Requires that BOP systems include a technology that allows the drill pipe to be centered during shearing operations. 
    • This provision goes into effect three years from rule promulgation. 
  • Requires more rigorous third party certification of the shearing capability of BOPs. 
    • This provision is intended to increase oversight and consistency of the shearing verification process and criteria used to establish shearing performance. 
  • Expands accumulator capacity and operational capabilities for increased functionality. 
  • Requires real time monitoring capability for deep water and high temperature, high pressure drilling activities. 
    • The requirement also applies to shallow water operators involved in high risk operations. 
  • Establishes criteria for the testing and inspection of subsea well containment equipment. 
  • Increases the reporting of BOP failure data to BSEE and the OEMs. 
  • Adopts criteria for safe drilling margins consistent with recommendations arising out of the Deepwater Horizon incident. 
  • Requires the use of accepted engineering principles and establishes general performance criteria for drilling and completion equipment. 
    • Requires that permanently installed packers and bridge plugs meet industry standards. 
    • Requires the use of recognized engineering practices when operating on the (“OCS”) to reduce risks. 
    • Requires the use of equipment that has been designed, tested, and rated for the maximum environmental and operational conditions to which it may be exposed while in service. 
  • Establishes additional requirements for using remotely operated vehicles (“ROV”), adopting industry standards on ROV intervention capabilities with the goal of standardizing equipment. 
  • Requires adequate centralization of casing during cementing. 
    • Creates a general performance obligation to ensure that the operator provides the centralization needed to ensure proper cementing of the well. 
  • Makes the testing frequency of BOPs used on workover and decommissioning operations the same as drilling operations. 
  • The BSEE District Manager has the discretion to require additional information needed to clarify or evaluate drilling operations, and to increase the frequency of BOP testing.  BSEE also retains discretion for case by case approval of site-specific drilling margins.

Most of the requirements will not become effective until 90 days after publication of the Rule.  Several requirements have more extended timeframes for compliance.  Publication is expected in the Federal Register in the near future.

Industry Reaction

Industry comment has been limited, in part due to the 500+ pages of rule language and explanation.  Many view the Rule as being in alignment with leading industry practices regarding safety.  
Industry representatives voiced support for provisions that would leave operational decision making with rig site personnel, as opposed to shifting responsibilities to on shore personnel as an earlier draft version of the rule had contemplated. 

Industry was also supportive of the implementation time provided for retrofitting existing equipment and implementing new technology.

A provision receiving somewhat less support involves drilling margins.  Provisions of the new rule set a drilling margin that would apply under most conditions, and allow for case by case approval of a site specific drilling margin.

Costs

The Interior Department estimates the total annual cost per small entity at about $328,000, with the overall ten year cost to industry estimated at $890,000,000.

Conclusion

Industry is still analyzing the Rule, which will certainly increase the cost of oil extraction, while potentially reducing risks and liabilities associated with oil well operations.


This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Eric Rothenberg, an O'Melveny partner licensed to practice law in New York, Kelly McTigue, an O'Melveny partner licensed to practice law in California, and Bob Nicksin, an O'Melveny counsel licensed to practice law in California,contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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