On May 11, 2018, the Bureau of Safety and Environmental Enforcement (BSEE) issued a proposed rule to relax 59 of 342 elements of its 2016 blowout preventer (BOP) and well control rule, enacted in response to the Deepwater Horizon well blowout and oil spill in the Gulf of Mexico in 2010. The proposed changes seek to reduce what the administration considers redundant requirements for testing and paperwork submissions as well as making some provisions more flexible and clarifying the text of others. While we will not assess the merits of those individual adjustments given the high degree of expertise in petroleum engineering needed, we can discuss BSEE’s approach in amending the regulation using the cost-benefit analyses of the final 2016 well control rule and the proposed changes. In our view, BSEE took a measured and restrained approach in its aim to reduce the well control rule’s compliance costs as the agency chose not to pursue a number of more extreme changes.
There were several possible changes to the rule that BSEE could have easily justified using cost-benefit analysis that the agency still chose not to pursue. First, BSEE could have argued, based on the original cost-benefit analysis, that the cost savings from repealing the entire rule outweighed the forgone benefits of doing so. In our new paper on the costs and benefits of repealing this rule, we note that the BSEE’s cost-benefit analysis for the 2016 rule underestimated environmental benefits, so, initially, it inaccurately indicates that repeal will be net beneficial. Second, BSEE chose not to repeal or modify certain provisions that could have resulted in billions of dollars in cost savings over the next 10 years and were recommended for modification by industry.
Before we elaborate on those points, however, we’ll need to provide some background on the 2016 well control rule. In the 2016 rule’s cost-benefit analysis, BSEE admitted that it underestimated the environmental benefits of the rule by assuming that it would only reduce oil spill risk by 1 percent (resulting in environmental benefits of only $23 million over 10 years). The original rule was still highly beneficial on net, however, because of a deregulatory provision in the rule that reduced the BOP pressure testing frequency from once a week to every two weeks. That deregulatory provision resulted in benefits large enough (over $1 billion over 10 years) to offset the costs of all the regulatory provisions of the rule ($698 million over 10 years) without the environmental benefits. However, if this administration decided to repeal the rule, they could choose to repeal only the regulatory provisions and not the deregulatory provision. Thus, pairing the cost savings of repealing the regulatory provisions of the rule to only the forgone environmental benefits, BSEE could argue that the net benefits of its repeal would be $676 million over 10 years. But, in reality, forgone benefits from repealing the rule are unknown, primarily because the 2016 rule’s reduction of oil spill risk is unknown. For context, a risk reduction of over 30 percent would mean the cost savings break even with the forgone benefits. So, to the extent that it is possible the 2016 well control rule reduced the risk of oil spill by more than 30 percent, then repealing the rule would result in net costs. Even industry in its comments to the US Department of the Interior did not argue for this rule’s repeal, possibly because they do not want to risk being associated with a catastrophic spill.
BSEE also chose not to repeal a number of individual provisions that industry wanted removed, such as real-time monitoring requirements that account for almost half of the well control rule’s compliance costs. Industry argued that this provision and others are costly and that some could actually increase spill risks by, for example, wearing out equipment faster or confusing the chain of command. The agency also chose not to further reduce the BOP pressure testing frequency from once every two weeks to once every three weeks which could have resulted in $3.2 billion in cost savings over the next 10 years, but with unknown effects on risks. That the agency would choose to forgo such large cost savings implies that it places a high premium on any possible increases in the risk of an oil spill.
Instead, BSEE focused on a series of smaller adjustments that result in $824 million of cost savings over 10 years. The agency says that these changes will reduce “unnecessary requirements,” “increase flexibility,” and respond to technological changes in order to reduce costs without affecting benefits. Most of the changes, as summarized in the regulatory impact analysis, simply clarify and correct language in the text, with no accompanying cost savings. More than 95 percent of the proposed rule’s cost savings come from just three changes (with one change resulting in almost three-quarters of the proposed rule’s cost savings). The change with the most cost savings (at $690 million over 10 years, undiscounted) is to a blowout preventer requirement (different than the one we mention above). The two other changes include making it easier for BSEE to approve remedial actions and plans in the case of an inadequate cement job (about $89 million in total undiscounted cost savings) and being able to alternate the use of test stations for BOP tests ($13 million in cost savings). A summary of the changes BSEE made can be found in the RIA or in the agency’s rule revision fact sheet.
While we can’t say if these technical changes increase risks, we can say that the changes BSEE did not make—changes that could have saved industry billions—provide evidence that the agency took a measured approach to revising the well control rule. We do note that these changes are proposed, and BSEE could make modifications industry requested in a final rule.
Note: This rule was finalized shortly after our blog was published. Check out Alan Krupnick's commentary here.
