Beyond belts and suspenders: Promoting private risk management in offshore drilling

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© 2012 University of Pennsylvania Press. All rights reserved. On April 20, 2010, eleven workers were killed in an explosion on the Deepwater Horizon rig in the pro cess of drilling the Macondo well off the Gulf of Mexico. The blowout resulted in between four and five million barrels of oil leaking into the Gulf of Mexico. Early estimates of the damages from the oil spill are in the range of $20 billion with an additional $17 billion in fines (Economist 2010). There are many entities at blame for the significant human and environmental disaster in the Gulf, and regulators have not escaped unscathed. Regulators at the Minerals Management Ser vice (MMS), the federal agency charged with issuing permits and overseeing safety of offshore oil drilling, appeared compromised by conflicts of interest and unqualified to ensure safety in operations (CNN 2010; Leonnig 2010; U.S. Department of the Interior 2010). The magnitude of the damages from the Gulf oil spill, combined with perceptions of regulatory capture at MMS, has brought into question the sufficiency of current regulatory approaches to offshore oil drilling. Prior to the Gulf oil spill, the primary form of regulation that applied to offshore oil drilling was a set of highly prescriptive command-andcontrol regulations requiring significant redundancy in safety systems, an approach I call "belts and suspenders." The belts-and-suspenders regulations were coupled with a strict liability regime where the operating company-BP in this case-was strictly liable for damages up to $75 million, with additional damages covered by a government pool of funds generated through taxes on oil (Hargreaves 2010). Arguably, this coupling of regulatory systems should have created the correct incentives for companies to manage risks. The required safety technologies should have been in place and, given the financial liability for damages, BP and its contractors should have had the incentives to ensure that all these systems were working properly. Nonetheless, a disaster occurred. To advance the search for better ways to prevent such disasters in the future, I analyze in this chapter three ways of regulating offshore drilling in the United States. The first approach is the belts-and-suspenders approach used both prior to and in response to the Gulf oil spill. I argue that the belts-and-suspenders approach is flawed because it fails to account for the inherent risk derived from drilling technologies' dependence on human control. The belts-and-suspenders approach may even encourage greater risk taking by human operators because it creates the impression that multiple safety systems will catch any errors before a significant accident occurs. The second approach is management-based regulation, which requires drilling operators to develop detailed safety and risk management plans. This approach has been used to regulate offshore drilling in other countries and has been adopted by the United States as a supplemental response to the Gulf oil spill. I consider the suitability and likely effectiveness of management-based regulation for regulating offshore drilling, concluding that such an approach by itself does little to ensure that risk management plans are fully implemented. The third approach would be to apply a deposit-discount-refund system, which would require an up-front establishment of a project-level "safety deposit." Operators can earn "discounts" on the size of their safety deposit by earning high grades on in de pen dent third-party assessments of their safety management plans. And upon successful completion of the project, the safety deposit is refunded to the company. In this way, the deposit-discount-refund system provides an incentive for companies to carry out effective risk management practices.

Duke Authors

Cited Authors

  • Bennear, LS

Published Date

  • January 1, 2012

Volume / Issue

  • 9780812207491 /

Book Title

  • Regulatory Breakdown: The Crisis of Confidence in U.S. Regulation

Start / End Page

  • 49 - 67

International Standard Book Number 13 (ISBN-13)

  • 9780812244601

Citation Source

  • Scopus