US To Regulate Offshore Drilling Contractors In ‘Select’ Cases

WASHINGTON (Dow Jones)–U.S. officials are pursuing a relatively narrow approach to regulating offshore drilling contractors and service providers, such as Transocean Ltd. (RIG) and Halliburton Co. (HAL), after reviewing their scope of authority over such companies in the wake of the Deepwater Horizon spill.

Speaking to lawmakers in recent weeks, the head of the U.S. Bureau of Ocean Energy Management, Regulation and Enforcement has said his agency will continue to hold primary operators responsible for drilling in the Gulf of Mexico and other areas in the Outer Continental Shelf.

But in some cases, where the actions of companies hired to do specific tasks is “egregious,” the bureau will pursue fines, penalties or charges against the contractor directly, said bureau Director Michael Bromwich.

“I don’t think it makes sense to say we will never, under any circumstances, proceed to take regulatory action against a contractor no matter how egregious its conduct may be in one incident or a series of incidents,” Bromwich said Friday during a hearing of the House Natural Resources Committee.

Historically, the federal government has developed safety standards for primary operators, such BP PLC (BP) or Exxon Mobil Corp. (XOM), and then relied on the operators to make sure their contractors followed the rules. The possible role of contractors working on the Macondo well, however, raised questions about that approach.

Speaking to reporters Friday, Bromwich said his agency will continue in most cases to work within the chain of command between operators and contractors and will only go after contractors “in a select number of cases.”

This represents an expansion of the bureau’s current enforcement authority, but a relatively conservative approach when compared with other actions the bureau could take.

In April, Bromwich said his bureau was looking at applying “any” or “all” of its rules to the contractors.

The bureau is taking this step after determining it has the legal right to directly regulate contractors and other service providers.

Despite Bromwich’s vows to regulate contractors in isolated incidences, lawmakers and industry representatives are criticizing the bureau’s actions.

In an interview, Rep. Jeff Landry (R., La.) said the bureau didn’t need to step up its oversight of contractors because operators were capable of ensuring those companies followed the rules.

“Once we allow that crack in the door, [the bureau] won’t just open the door all the way, they will blow the door off the hinges,” Landry said.

Contractors, meanwhile, say the bureau’s actions will create confusion in determining liability for oil drilling projects. Contractors could also find it difficult to get insurance and, as a result, opt to do more business in foreign waters, said Brian Petty, executive vice president of government affairs for the International Association of Drilling Contractors.

The bureau “doesn’t have the experience or resources to regulate this whole arena of contractors,” Petty said. “At the end of the day, it’s up to the operator to inspect any flaw or episode.”

Bromwich said Friday that lawmakers and industry lobbyists who think the bureau’s new oversight of contractors is “going to be a revolution” or become the “new dominant strain in our regulation” are misunderstanding the bureau’s plans.

-By Tennille Tracy, Dow Jones Newswires