Performance versus prescription in new US Arctic rules: Fuel for Thought

In its new rules for oil and gas drilling in the Arctic, the US has taken the biggest step yet toward a performance-based system that sets clear standards, but allows industry flexibility in how to meet them.

That’s a big difference from most US offshore regulation, which is prescriptive in nature, specifying in almost minute detail how operators must comply and leaving little room for deviation.

It’s an important development, both in the evolution of offshore safety since the devastating 2010 Deepwater Horizon disaster, and in how regulators approach an industry that is using more complex technology to tackle increasingly dangerous frontier environments.

While there are many reasons why operators might return to US Arctic waters, the shift to performance-based standards could help.

Prescriptive rules are sometimes derisively referred to as “checklist” regulation, reflecting their reactive nature that relies on inspectors checking the boxes during inspections.

Performance-based rules, sometimes called a “safety case” approach, by contrast, are proactive, requiring operators to identify upfront the specific risks associated with each new well and then propose how to mitigate those risks.

Last year, the National Petroleum Council, in a study on Arctic potential chaired by ExxonMobil CEO Rex Tillerson, strongly advised adopting a more flexible approach to regulation.

It said that prescriptive rules “can act as a serious barrier” to innovation. And it concluded that a more performance-based system “puts the burden on operators to demonstrate that the technologies and operating  practices...achieve or surpass the specified regulatory objective.”

A similar conclusion was reached by the National Commission on the BP Deepwater Horizon Oil Spill, which reviewed performance, or “risk-based” models in the United Kingdom and Norway.

“The commission saw and was attracted to and impressed by how the performance-based approach requires industry to think more creatively and allows industry to be more innovative,” Commission member Fran Ulmer said in an interview. “Undoubtedly, the Interior Department got educated by the Deepwater Horizon spill.”

The Interior Department’s Bureau of Safety and Environmental Enforcement (BSEE) has been embracing a hybrid approach, adopting a more performance-based approach where appropriate.

But what works so well in Norway and other places may not always work in the US.

“It’s a matter of scale,” BSEE Director Brian Salerno told Platts. “In many countries that use the safety case, they don’t have the volume of activity—the number of facilities operating offshore.”

Arctic challenges open way for new approaches

The smaller, less developed Arctic region also lends itself to a different regulatory approach.

Earlier this year, BSEE issued its well control rule, which sets standards for, among other things, blowout preventers—those massive sets of valves and shearing blades that are the last line of defense in controlling well blowouts. That rule leaned more toward the prescriptive side of the hybrid approach.

The well control rule applies across the entire US Outer Continental Shelf—which is mainly the Gulf of Mexico—”where you have a multitude of players of different sizes, different capacities to effectively operate,” as well as different financial abilities to afford such innovation, Ulmer said. “Given the breadth of the players, it’s more appropriate to be consistent with a prescriptive approach.

“In the Arctic, you have a smaller number of players with the financial and technical capacity,” to respond to a risk-based approach. “It’s easier to apply performance based rules in the Arctic,” she said.

The other big difference between performance-based and prescriptive rules is the technical expertise required of the regulator.

Performance-based rules require a regulator staffed with sophisticated engineers who can evaluate new technologies to be sure they meet or exceed the safety standards. In this system, much of the heavy lifting is done upfront, before the well is ever spud, whereas the more traditional prescriptive system relies more heavily on inspectors checking for compliance after the fact.

It costs lots of money to attract that sort of talent. Congress has given BSEE the authority to pay salaries that exceed normal government limits. But retaining that talent is always a challenge.

“When the industry rebounds, as it eventually will, we’ll be in a much more competitive mode regarding talent,” Salerno said. “We’re always in competition for talent.”