Senate Bill Could Hinder Flood Protection Lawsuit

On April 16, 2014, the Louisiana State Senate passed Senate Bill 553 which would unwind a carefully watched lawsuit against 97 oil and gas companies filed by the South Louisiana Flood Protection Authority - East ("SLFPA-E") for damages associated with coastal erosion. 

The suit filed by the SLFPA-E is being prosecuted by private attorneys, hired on a contingency fee basis, who maintain that canal building, dredging and other construction projects by oil and energy extraction and pipeline companies have caused extensive coastal damage and erosion.  In the unlikely event the suit is completely successful, the contingency fee agreement could result in hundreds of millions, if not billions, of dollars being paid to the small group of attorneys representing the SLFPA-E.

The fight is among the most contentious of the legislative session.  At issue is the best way to seek restoration money and whether the oil and gas industry should be held responsible for the destruction of Louisiana’s wetlands. 

Senate Bill 553 amends a current law which requires state boards and commissions to secure written approval of the Governor and the Attorney General to employ special counsel by expanding the law's application retroactively to regional flood protection authorities.  According to the Bill, it is the Legislature's intent that agreements that do not comply with this retroactive requirement are contrary to public policy and void ab initio.

The Senate Bill also amends the law to require certain state boards, commissions and flood protection authorities to obtain prior approval of contingency fee agreements for the engagement of special counsel from the Joint Legislative Committee on the Budget.  The Bill now moves to the House of Representatives for debate. 

The Louisiana Oil and Gas Association views the Senate's passage of Bill 553 as a positive first step in its effort to protect industry against a litigious legal climate which forces companies to spend millions of dollars on legal fees and court costs.  Meanwhile, environmentalists and coastal protection groups maintain the suit as a symbol of the state's environmental future and are urging their members to contact their representatives to vote against Senate Bill 553.           

There have been other bills introduced this legislative session designed to protect the oil and gas industry from an onslaught of similar lawsuits.  The topics of the bills vary (coastal management issues HB 862, legacy lawsuit reform SB 667, and attorney general bill HB 799, regarding contingency fees).  Nevertheless, it will be interesting to see whether SB 553 will remain fully intact following its debate in the House of Representatives and what impact, if any, the House debate will have on this oversized lawsuit against the Louisiana oil and gas industry.  

Despite Warming Climate, Still Many Hurdles to Drilling in the Arctic

One oft-cited benefit of rising global temperatures is that a warmer Arctic will open up vast, previously inaccessible tracts of the mineral rich Arctic Ocean for oil and gas exploration.  After years of litigation and protests dating back to the 1990s, Royal Dutch Shell was finally set to begin exploration this summer.  Even after delays related to barge certification and avoiding a 30-mile by 12-mile ice floe pushed back the expected start date, Shell remained optimistic.  

It turns out that the Arctic is even more unforgiving than the world's best engineers predicted.  Yesterday, the Chicago Tribune reported Shell's announcement that it will not drill into any oil reservoirs in the Chukchi Sea in 2012. (Article: http://trib.in/UhtXGd).  Apparently Shell's containment dome was damaged during tests and the required repairs could not be completed by the September 24th deadline set by the Department of the Interior and EPA.  Shell still plans to drill top holes in preparation for the 2013 drilling season before the October 31st deadline to halt all drilling operations for the winter.  Regardless, this is a setback in Shell's Arctic strategy as most engineers agree that actual production could begin in 2017 at the earliest, under ideal conditions.

While the Artic might be physically inhospitable, many energy companies are confident that drilling there can be profitable because of the relatively stable geopolitical climate in the region and enormous potential reserves.  Britain's Independent recently reported that geologists estimate there are 400 billion barrels of oil and gas underneath the frozen tundra of the Arctic Circle.  That is enough petroleum to power civilization as we know it for 125 years. 

With such large estimated reserves it should come as no surprise that the nations with coastlines on the Arctic have made a myriad of competing territorial claims.  For every country besides the United States (as the US has not ratified the treaty), territorial rights in the Arctic Ocean are governed by the United Nations' On the Law of the Sea Convention.  The convention provides that out to 200 nautical miles, within the exclusive economic zone, Arctic nations have absolute control over petroleum resources.  Out past 200 nm, Arctic nations retain their rights over seabed resources if they can demonstrate scientifically that the ocean floor is a 'natural prolongation' of the continental shelf closer to shore.  This is why Russia planted a flag on the sea floor at the North Pole in 2007; it claims the Lomonosov Ridge is an extension of its continental ocean floor territory.  These potential disputes are an issue to keep an eye on in the long term.

But well before those competing international claims can come to a head, energy companies must first drill exploratory wells to determine more exactly the location and size of the petroleum/natural gas deposits.  The large number of setbacks for virtually every company operating in the region combined with the global economic slowdown raises the question of whether crude oil prices will support the increased costs of extracting oil and gas from the artic.  Shell is making a significant bet that Arctic oil is indeed worth the price.  Since 2006 Shell's Arctic strategy has cost the company $4.5 Billion, one-sixth of its annual capital spending budget.  Though Shell will not discuss its production costs in the Arctic, some analysts put the costs at around $70-$80 per barrel while others put it closer to $30.  Going forward, those costs compared to the price of crude will dictate the pace of exploration in the Arctic.

Court Rejects Challenge to Shell's Central Gulf Exploration Permit

In an opinion issued June 22, 2012, the United States Court of Appeals for the Eleventh Circuit denied a petition filed by several environmental organizations challenging a Bureau of Ocean Energy Management (BOEM) decision to approve Shell's exploration plan (EP) for ten exploratory wells between 7,100 and 7,300 feet deep off the shore of Alabama in the central Gulf of Mexico.  Shell Gulf of Mexico, Inc., American Petroleum Institute, and the States of Louisiana, Alabama, and Mississippi intervened in the appeal.  The petitioners alleged that BOEM violated the National Environmental Policy Act (NEPA) and the Endangered Species Act (ESA). Eleventh Circuit Opinion.pdf

The Court's Ruling

The court determined that BOEM met all of NEPA's requirements.  The court rejected petitioner's arguments that BOEM failed to include a site-specific analysis of potential catastrophic spills and underestimated the likelihood of a spill.  The court concluded that BOEM's environmental assessment “extensively analyzes the risks and consequences of such an event.

The court also rejected petitioner's ESA arguments, which focused on BOEM's reliance on biological opinions issued before the BP oil spill in 2007 by the National Marine Fisheries Service and the Fish and Wildlife Service.  Those opinions determined that Shell's EP “is not likely to jeopardize” any endangered or threatened species or destroy or adversely affect endangered species' habitat.  The petitioners argued that BOEM was required to delay approval of the Shell EP pending issuance of new or updated biological opinions accounting for the effects of the BP oil spill.  The court disagreed and found BOEM's position that the 2007 biological opinions remained in effect pending the issuance of new or updated opinions to be reasonable “under the facts of this case.” 

The court denied the petition ruling:

 “For the reasons stated above, we conclude that BOEM's decision to approve the Shell EP was not arbitrary or capricious and instead reflects the agency's balance of environmental concerns with the expeditious and orderly exploration of resources in the Gulf of Mexico.”

Louisiana Applauds the Decision

In a press release issued by the Louisiana Department of Natural Resources, Secretary Scott Angelle praised the court's decision.

“The regulatory burdens called for in that suit would have jeopardized everything this state has worked for, and that many working families in this state have prayed for, in restoring a pace of permitting and drilling in the Gulf of Mexico that continues to support new jobs and new economic growth,” Angelle said. “I am pleased to see that the Court’s decision was based in some of the same values we have promoted in our efforts to work with the industry and federal regulators to create a stable and efficient permitting process – the critical need to approach regulation in a manner that balances the need for energy, the need for economic development and the need to maintain safety and a clean environment.”

Court Bars Greenpeace from Interfering with Oil Exploration off Alaska's Coast

On March 28, a federal court in Alaska issued a preliminary injunction that bars Greenpeace USA from interfering with ships that Shell is using to support its plans to drill in the Beaufort and Chukchi Seas off the northwestern coast of Alaska, where Shell holds oil and gas leases it obtained from the federal government.

Shell filed its suit in late February, after Greenpeace activists illegally boarded and occupied a drilling ship that Shell had contracted for use in its Alaska drilling program.  The ship was located in New Zealand at the time, and Greenpeace stated to the media that "we can't let this ship get to the Arctic." 

Greenpeace opposed Shell's request for a preliminary injunction, but the court rejected each of Greenpeace's main arguments.  For example, Greenpeace USA asserted that there are multiple Greenpeace organizations, that the Greenpeace group that boarded Shell's ship in New Zealand was a different group than Greenpeace USA, and that the other group's conduct could not justify an injunction against Greenpeace USA.  The court concluded, however, that evidence demonstrated that Greenpeace USA had "fully endorsed the New Zealand activists."  Further, Greenpeace described itself on its website as including "more than 40 Greenpeace offices around the world, with international coordination through our headquarters in Amsterdam."  Moreover, Greenpeace USA's general counsel testified at the preliminary injunction  hearing that illegal activity is one of the tools in the organization's "toolkit of tactics."

Greenpeace USA also argued that a preliminary injunction was improper because Shell had offered nothing more than speculation that Greenpeace USA might attempt to interfere with Shell's drilling.  The court disagreed, stating that Shell had proven "by a preponderance of the evidence that it is likely Greenpeace USA would intend to commit tortious or illegal acts against Shell's Arctic drilling operations in the absence of preliminary injunctive relief."  Although the court relied primarily on statements on Greenpeace USA's website and the organization's endorsement of the illegal boarding committed by Greenpeace activists in New Zealand, the court stated that it also had "accorded a minor degree of weight" to Greenpeace USA's failure to offer any testimony whatsoever denying that it intended to improperly interfere with Shell's ships.

This court finds that the natural response by Greenpeace USA to Shell's accusations against it would have been to deny any intention to commit illegal or tortious acts against Shell.  But no such response has been made by Greenpeace in the record."

Accordingly, the court entered a preliminary injunction that bars Greenpeace from interfering with Shell's ships while they are in coastal and U.S. territorial waters.  Specifically, the injunction bars Greenpeace USA an those who act in concert with it from approaching nearer than 500 or 1000 meters from 19 specifically-listed ships that Shell intends to use in supports of its exploration off the Alaska coast (a specific distance is listed for each ship).  The preliminary injunction is scheduled to last until October 31, 2012 or until the court issues an order otherwise, while the parties continue to litigate whether the court should make the injunction permanent.

As noted in a prior post in the Oil & Gas Law Brief, Shell obtained offshore leases from the federal government several years ago for various tracts in the Beaufort and Chukchi Seas.  Shell presented an exploration plan and environmental assessment to regulators, who reviewed that information and recently gave Shell permission to proceed with exploration.   

Mississippi Publishes Proposed Rules for Offshore Drilling in State Waters

Earlier this week, the Mississippi Development Authority (MDA) published proposed rules for seismic exploration and state leasing for offshore oil and gas drilling in the state's coastal waters.

As shown on map available at the MDA's website, drilling would only be allowed in certain portions of the state's waters.  The MDA's press release stated: "Offshore mineral leasing, exploration and production can only take place in certain areas approved by the State Legislature.  In 2004, the Legislature restricted the leasable blocks to areas predominantly south of the barrier islands so production platforms would not be seen from the vast majority of coastal communities and would not obstruct the scenic views from the Mississippi mainland."

The MDA's statement quoted Governor Haley Barbour as saying, "Offshore natural gas exploration and production will help us meet our nation's energy needs, while generating jobs and hundreds of millions of dollars in revenue for education and conservation here in Mississippi."

The MDA's website has pages that include a factual background relating to offshore drilling and the proposed rules, benefits of offshore drilling, and frequently asked questions.  Experts believe that the areas beneath Mississippi coastal waters likely contain natural gas. 

The MDA is accepting written public comments relating to the draft rules until January 20, 2012 at 5 p.m., either via email to  minerallease@mississippi.org, or by mail addressed to the State Mineral Leasing Office, Mississippi Development Authority, P.O. Box 849, Jackson, Mississippi 39205.

BOEMRE splits -- becomes BSEE and BOEM

Effective October 1, 2011, the United States Department of Interior replaced its Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) with two new bureaus -- the Bureau of Safety and Environmental Enforcement (BSEE) and the Bureau of Ocean Energy Management (BOEM).  The Department of Interior recently announced the reorganization, which the Department described as the culmination of a process to replace the former Minerals Management Service (MMS) with three separate organizations -- BSEE, BOEM, and the Office of Natural Resources Revenue (ONRR), each with separate functions.

The former MMS had responsibility for overseeing the development of resources from the outer continental shelf, as well as the responsibility for regulating and overseeing the safety of such development.  About a month after the April 20, 2010 explosion aboard the Deepwater Horizon, Secretary of the Interior Ken Salazar directed that MMS be split into BSEE, BOEM, and ONRR. 

The reorganization has proceeded in three steps.  The first step was simply the renaming of MMS, which became BOEMRE in June 2010.  Second, ONRR became a separate office within the Department of Interior on October 1, 2010, with responsibility of collecting revenue from mineral leases covering federal lands.  The third step is the split of BOEMRE into BSEE and BOEM. 

The new BSEE has the responsibility for overseeing safety and environmental regulations for oil and gas operations on the outer continental shelf.  Pending completion of a "national search" for a permanent director of BSEE, the new bureau will be led by Michael Bromwich, who lead BOEMRE up until its split.

BOEM will be led by Tommy Beaudreau, and will be responsible for managing the development of resources on the outer continental shelf.

Senator Vitter to Block Nominee Until Leases Extended

Louisiana Senator David Vitter announced on August 3, 2011 that he will block the nomination of Rebecca Wodder to serve as Assistant Secretary for Fish and Wildlife and Parks in the U.S. Department of Interior until the agency extends the terms for hundreds of leases for drilling in the Gulf of Mexico that are set to expire this year.

Oil and gas leases generally have clauses providing for expiration of the lease after a specific term unless the leaseholder is drilling, or producing oil or gas from one or more wells previously drilled in the leased area.  But the moratorium that followed the Deepwater Horizon incident, and the slow pace of the Bureau of Ocean Energy Management, Regulation and Enforcement in granting permits for drilling have prevent many leaseholders from drilling.  Senator Vitter explained:

Since the moratorium, oil and gas exploration in the Gulf of Mexico has been dramatically curtailed,” Vitter said. “In 2011 alone, more than 300 offshore leases in the Gulf of Mexico are due to expire. If these leases are allowed to expire, they will revert to the federal government, killing jobs and cutting off potential revenue from exploration and production. The U.S. economy will greatly benefit by allowing the offshore energy industry to get to work and stay working. Even President Obama said he’d extend the leases, and I intend to hold the administration to that."

BOEMRE Issues Conditional Approval for Shell's Plan for Drilling in Beaufort Sea

On August 4, 2011, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) announced that it has granted conditional approval for Shell's revised Exploration Plan to drill as many as four shallow water exploration wells in Alaska's Beaufort Sea beginning in July 2012.  The area where the drilling would take place is covered by leases acquired by Shell in lease sales conducted in 2005 and 2007.  The conditions that accompany the approval include requirements that Shell secure all necessary permits from other agencies, including the Environmental Protection Agency, the U.S. Fish & Wildlife Service, and the National Marine Fisheries Service.

In early May, this blog reported that Shell had filed a revised Exploration Plan for drilling n the Beaufort Sea, which is located off Alaska's northern coast.

BOEMRE's approval of Shell's exploration plan follows the bureau's completion of a site-specific Environmental Assessment to examine potential environmental impacts of the drilling.  BOEMRE's announcement stated that the bureau had "found no evidence that the proposed action would significantly affect the quality of the human environment."  For that reason, BOEMRE stated that an Environmental Impact Statement would not be required.

BOEMRE's website has a page with links to various important documents relating to the drilling project, including Shell's 198-page revised Exploration Plan, BOEMRE's 238-page Environmental Assessment, BOEMRE's Finding of No Significant Environmental Impact.

Shell's Arctic Drilling Plans

Yesterday, Shell Oil filed plans with the Bureau of Ocean Energy Management, Regulation, and Enforcement to drill as many as four exploration wells in the Beaufort Sea off Alaska's northern coast.  And, the Houston Chronicle reports that next week Shell plans to file a separate plan to drill as many as six exploratory wells off Alaska's northwest coast in the Chukchi Sea.  Shell acquired leases in the Beaufort area in 2005 and in the Chuckchi area in 2008.  According to Bloomberg, Shell already has spent more than $2 billion in acquiring the federal leases and approximately $1.5 billion on exploration.  Federal officials estimate that the seabed of Arctic waters hold significant quantities of oil and natural gas.  Shell hopes to begin drilling in 2012.  Drilling would be limited to summer months because of waters becoming iced over during other times.

Environmentalists have challenged the drilling proposals in court previously, and have managed to delay drilling plans.  Environmentalists have argued that drilling would disturb wildlife and that a spill in the Arctic Ocean would be harder to clean up than a spill in the Gulf of Mexico.  Environmentalists also assert that it would take much longer for crude oil to naturally break down in the colder Arctic waters than in the warmer Gulf of Mexico waters. 

Shell has responded to environmental concerns by committing to having two drill ships available, so that if a blowout occurs and there is a problem with one ship, another ship would be available to promptly start drilling a relief well.  Shell also has committed to developing a containment system and basing it in Alaska.  This would be a containment system similar to the ones developed by separate consortia of oil companies -- the Marine Well Containment Company and the Helix Well Containment Group -- for basing in the Gulf of Mexico area for blowout containment.  Shell also notes that the proposed drilling in the Beaufort Sea area is in relatively shallow waters.  The proposed Beaufort Sea drilling would be in approximately 150 feet water, much shallower than the approximately 5000 feet of water where the BP Macondo Well was located.

Arctic drilling could boost domestic production of oil and gas, decreasing our dependence on imports.  Also, The New York Times has quoted Governor of Alaska as explaining that Arctic drilling holds potential benefits for the Trans-Alaska Pipeline System (TAPS).  The pipeline is easier to maintain when it contains a steady flow of oil.  The production rate of oil from land-based drilling on Alaska's North Slope is in decline, and therefore the demand for pipeline shipments is decreasing.  Production of oil from the Arctic would help fill the pipeline and therefore help minimize corrosion issues.

Environmentalists are sure to continue fighting Shell's plans, so it will be interesting to watch how this develops.

Offshore drilling

Last week, President Obama gave a speech in which he called for reducing oil imports by a third over the next ten years.  The President urged increased use of natural gas and increased domestic production of oil as two steps that can be taken to help reduce oil imports.  Both steps have merit, but the federal government itself has taken actions that are undermining efforts to increase production of domestic oil. 

For example, a planned March 2011 sale of new lease tracts in the Gulf of Mexico was postponed by the Department of Interior because the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) still is analyzing possible environmental impacts.  Richard Thompson has written an article that discusses these issues.  Thompson presents the viewpoints of all sides -- the federal government, industry, environmentalists, and others.  But perhaps the most practical point was made by Eric Smith, associate director of the Tulane Energy Institute.  Smith said:

Every barrel that we do not produce at home is another barrel that we're going to have to import."

Offshore drilling regulations already have been tightened, but reporter Bruce Alpert notes that many environmentalists are using the upcoming anniversary of the Deepwater Horizon tragedy as a basis to push for still more restrictions on drilling.  Let's hope that BOEMRE avoids the overreaction urged by some environmentalists, and allows industry to get back to a normal pace of drilling operations in the Gulf.  Unless that happens, it is hard to imagine that we can cut oil imports by a third.