Memorandum submitted
by the National Audit Office
INTRODUCTION
1. The National Audit Office has prepared this Memorandum
to help inform the House of Commons Energy and Climate Change
Committee's inquiry into the implications of the recent oil spill
in the Gulf of Mexico for UK deep water drilling. The oil spill
followed an explosion on BP's Deepwater Horizon oil rig, which
was operating in a water depth of some 5,000 feet. The explosion
killed 11 operators, and resulted in an estimated 4.9 million
barrels of oil leaking into the Gulf of Mexico. BP estimates that
it applied some 1.8 million gallons of dispersant to break up
the oil.[67]
2. The Committee wants to find out about the
safety and environmental regulation of oil and gas operations
on the UK continental shelf, especially in the deepwater to the
west of the Shetland Islands, and the potential positive and negative
impacts of a moratorium on deepwater drilling in UK waters. As
part of its inquiry, the Committee is considering the extent to
which the existing safety and environmental regulatory regime
that applies to UK deepwater drilling is fit for purpose.
3. This briefing provides an introductory description
of the regulation of deepwater drilling and an overview of general
regulatory principles that are relevant, but not specific to deepwater
drilling.
4. The briefing presents the general principles
and practices that characterise effective regulation, drawn from
a series of National Audit Office reports on regulation, some
of which were carried out jointly with the Better Regulation Executive.[68]
We have also considered the latest data on offshore injuries and
hydrocarbon releases, and reports by the Government Accountability
Office on the offshore oil and gas regulatory regime in the United
States. In this briefing we describe these principles and practices
for effective regulation, and their relevance to assessing whether
the regulation of UK deepwater drilling is fit for purpose. Based
on this review we do not offer an assessment of the effectiveness
of the regulatory regime for deepwater drilling.
OVERVIEW
OF THE
REGULATION OF
UK DEEPWATER DRILLING
5. The operators of fixed offshore installations
and the owners of mobile installations operating in UK waters
are required at all times to ensure that installations (including
wells) are designed, managed and decommissioned in such a way
to ensure the risks of unplanned escapes of oil, gas or other
fluids, and the risks to people and the environment, are as low
as reasonably practicable.[69]
They are also required to comply with requirements under relevant
European Community and international convention obligations that
require, for example, environmental assessments to be carried
out for oil and gas activities.[70]
6. The supporting regulatory regime for offshore
drilling is based on a system of safety cases, permits, notifications,
inspections and enforcement, under which environmental regulation
is carried out independently from safety regulation.
ENVIRONMENTAL REGULATION
7. The Department of Energy and Climate Change
("the Department") has primary responsibility for the
environmental regulation of offshore oil and gas activity including
offshore drilling. The regulatory regime is largely prescriptive,
with specific obligations detailed in the permits and other approvals
that are issued for offshore oil and gas exploration and production,
including the approvals of environmental impact assessments prepared
by offshore oil and gas operators.
8. The Department monitors regulatory compliance
and carries out environmental inspections to assess compliance
with the conditions imposed under relevant regulations, to identify
any preventative or remedial measures that may be required and
to hold operators to account when they fail to comply.
9. In considering whether to authorise offshore
drilling activities, the Department routinely seeks advice from
other Government departments and statutory nature conservation
agencies that also have a role in environmental regulation. The
main departments and agencies involved are:
¾ The
Department for the Environment, Food and Rural Affairs, through
its own agencies, and Devolved Authorities advise the Department
on the potential impact of offshore operations such as seismic
surveys, rig location, pipeline laying, drilling and production
operations, deposits in the sea and decommissioning, including
providing advice in relation to dispersant and chemical use. It
also represents the UK's environmental interests at OSPAR[71]
conventions, although responsibility for the OSPAR offshore oil
and gas industry work area is devolved to the Department of Energy
and Climate Change.
¾ The
Joint Nature Conservation Committee is the main government and
oil industry advisor on the potential impact of offshore operations
on conservation and protected habits and species during exploration,
drilling, production and decommissioning. The relevant inshore
statutory nature conservations bodies, such as Natural England,
are also consulted where appropriate.
¾ The
Maritime and Coastguard Agency is the main government advisor
on the potential impact of offshore operations on navigational
interests. It is responsible for counter pollution responses at
sea, and maintains the "National Contingency Plan for Marine
pollution from Shipping and Offshore Installations". All
operators of offshore installations are required to prepare oil
pollution emergency plans that must be approved by the Department
which consults with the Agency as part of the review process.
¾ The
Environment Agency and Devolved Authorities have statutory responsibility
for issuing authorisations, licences and consents for emissions
and discharges into UK coastal waters, as well as responsibility
for monitoring, compliance and enforcement with the regulations
covering such discharges. However, as its responsibilities only
extend up to a three mile limit, it is not routinely involved
in the regulation of any oil and gas activities.
10. In August 2010, the Health and Safety Executive
published its annual offshore statistics for 2009-10. These included
the numbers of major and significant hydrocarbon releases, regarded
as potential precursors to a major incident.[72]
The number of hydrocarbon releases each year has followed a falling
trend from 2001-02 to 2008-09 but increased in 2009-10 (Figure
1). The Health and Safety Executive has recently increased the
level of its offshore investigations of all major and significant
hydrocarbon releases to ensure that operators identify and address
the causes of the increase. The statistics on hydrocarbon releases,
which are provisional, do not identify the incidents that would
have given rise to a loss of liquid hydrocarbon into the sea.
The Department of Energy and Climate Change requires operators
to separately supply it with details of such spills. During 2009,
the Department was notified of 56 crude oil spills resulting in
some six tonnes of crude oil being released to sea, which was
a significant reduction on the previous year when 83 crude oil
spills were notified and some 20 tonnes of oil were released.
Figure 1
OFFSHORE HYDROCARBON RELEASES 2001-02 TO
2009-10
Source: Health and Safety
Executive, Offshore safety statistics bulletin 2009-10.
Health and safety regulation
11. The regulation of offshore health and safety
is the responsibility of the Health and Safety Executive. It took
on this responsibility from the former Department of Energy, following
recommendations resulting from Lord Cullen's inquiry into the
1988 Piper Alpha oil rig disaster in the North Sea that claimed
167 lives. There are specific regulations that apply to offshore
drilling.[73]
12. The health and safety regulations for offshore
oil and gas are based on an approach that places the onus for
health and safety on those who own, manage and work in offshore
installations. The regime requires operators to prepare individual
written safety cases and risk assessments for the design, operation
and decommissioning of each oil and gas installation in UK waters,
which must demonstrate that major accident hazards are adequately
controlled and systems for managing safety are suitable. The Health
and Safety Executive must accept safety cases before installations
can be brought into use.
GENERAL
PRINCIPLES OF
EFFECTIVE REGULATION
13. The National Audit Office has not previously
examined the effectiveness of the regulation of offshore oil and
gas operations, but we have examined the general principles and
practices that characterise effective regulation in a series of
reports, some of which were carried out jointly with the Better
Regulation Executive.[74]
Our assessments of regulatory effectiveness have been informed
by a model we developed (Figure 2) which identified the following
six key elements for sound regulation:
¾ strategy,
risk assessment and resource allocation;
¾ regulatory
design;
¾ influencing
industry;
¾ advice
and guidance;
¾ inspections;
and
¾ sanctions.
14. The following sections describe the principles
and practices that we consider characterise effective regulation
under each of the six headings in our model and based on those
principles, key features we would expect to see in place in the
regulation of deepwater drilling.
Figure 2
A REGULATORY COMPLIANCE MODEL
Notes: This model was
informed by the principles set out by Philip Hampton in Reducing
administrative burdens: effective inspection and enforcement,
HM Treasury, March 2005.
Source: C&AG's Report,
Regulatory quality: how regulators are implementing the Hampton
Vision, July 2008.
STRATEGY, RISK
ASSESSMENT AND
RESOURCE ALLOCATION
15. Regulators should use a comprehensive risk
assessment to concentrate their resources on areas that need them
most. Their assessments should inform all aspects of the regulatory
lifecycle, from selection and development of appropriate regulatory
and policy instruments, through to data collection, inspection
and prosecution of individual operators. Effective risk assessments
require good quality data, should be kept up to date and implemented
uniformly and impartially.
16. Regulators use a variety of models for assessing
regulatory risk associated with individual types of business,
which typically assess the potential danger or hazard, businesses'
ability to manage the risk posed and their compliance history.
Good information is essential to these assessments, and regulators
therefore need to make effective use of all potential sources
of information and intelligence about the businesses they regulate.
Supporting information systems are needed to enable the efficient
capture, collation, sharing and effective use of this information.
17. Risk assessments must also be kept up-to-date
to address changes in underlying risk factors. Historically, most
UK offshore drilling operations have been located in shallow waters,
but the expansion of oil exploration in deeper waters to the west
and north of the Shetland Islands could introduce new risks.
18. In assessing whether the regulation of deepwater
drilling is fit for purpose, we would therefore expect to see
evidence of:
¾ a standardised
approach to risk assessment;
¾ effective
use of information; and
¾ risk
assessments regularly updated to reflect new information.
REGULATORY
DESIGN
19 Regulatory design processes should be transparent,
and should consider a range of design approaches, drawing on evidence
of their likely effectiveness and cost-benefit. Regulations should
be easily understood, implemented, enforced and proportionate.
Regulators should monitor their effectiveness, and identify any
opportunities for improving regulations where they have become
out of date, or are not working effectively.
20. Trends in the number and nature of incidents
provide one measure of the effectiveness of regulatory design.
Any weaknesses in management information on compliance levels,
enforcement activities and costs will make it difficult to readily
quantify the total level of non-compliance, justify the level
of resources required to tackle non-compliance or prove that resources
are directed to where they have most impact.
21. A regulatory design that involves a number
of regulators requires a clear approach to co-ordinating their
activities. Regular contact is needed to provide opportunities
to discuss matters such as joint-working arrangements, matters
of common interest and, where appropriate, information sharing.
22. Over time, regulations can become out of
date, for example where they fail to match current business practice
or technology, or if organisational arrangements in regimes involving
a number of regulators are not working effectively. In addition,
some regulations simply do not work very well or impose disproportionate
burdens on business compared to the benefits. Some regulators
carry out post-implementation reviews of new regulations after
a few years of operation. However, we have previously found that
regulators do not always deal effectively with their back catalogue
of existing regulations, assuming perhaps that regulations are
useful or, at least, not harmful unless there is lobbying from
business or other stakeholders for change.
23. In assessing the design of the regulation
of deepwater drilling, we would therefore expect to see evidence
that regulators are:
¾ co-ordinating
their activities through effective governance arrangements;
¾ collecting
and analysing information on the operation of the regime, to assess
its effectiveness; and
¾ identifying
opportunities to improve the design of regulations, if appropriate.
INFLUENCING
INDUSTRY
24. The provision of advice and guidance, and
the threat of sanctions, can encourage businesses to comply with
regulations. However, regulators should also aim to persuade business
that it is in their interest to comply with regulations through
informal means, for example, by working with trade associations.
25. Regulators employ a range of different methods
aimed at influencing the business community. This can include
consulting extensively with industry, to help businesses recognise
the potential benefits to them and their employees of complying
with relevant regulations. Some regulators have established committees
that include industry representatives to provide forums for sharing
information and promoting improved standards.
26. Regulators are also increasingly making information
available to the public about the performance of regulated businesses,
for example by publishing information on the type and location
of pollution incidents, and rating the performance of individual
companies in meeting environmental or safety regulations.
27. In assessing the effectiveness of regulators'
ability to influence the offshore drilling industry, we would
expect to see evidence that:
¾ they
are making effective use of using a range of approaches that go
beyond issuing formal guidance; and
¾ using
the threat of sanctions to encourage compliance.
ADVICE
AND GUIDANCE
28. Regulators typically place strong emphasis
on providing advice and guidance to enable businesses understand
what they need to do to comply with relevant regulations. Advice
and guidance need to be clear; written in plain English and seek
to make complicated legislative requirements comprehensible. They
also need to be underpinned by an overarching strategy that shows
what the provision of advice is intended to achieve, and how its
effectiveness will be measured.
29. We have found in our assessments of individual
regulators examples of good practice in the provision of advice
and guidance. These include working with industry to determine
what advice and guidance is most useful to business, how the guidance
can be simplified to convey its meaning most clearly and what
format to provide it in.
30. In assessing the
effectiveness of advice and guidance for deepwater drilling, we
would expect to see evidence that:
¾ guidance
is readily accessible, simple and clear and unambiguous in explaining
the obligations that individual businesses have;
¾ resources
are targeted at forms of communication that are the most effective
and efficient; and
¾ regulators
have worked with industry to check that guidance meets their needs.
INSPECTIONS
31 Our reviews of regulators in sectors other
than oil and gas have identified that regulators place reliance
on inspections as their principal means of monitoring and enforcing
compliance. Inspections should follow a risk-based approach, so
that companies and activities more likely to breach regulations
are targeted more often for inspection, and the regulatory burden
on companies which comply is minimised. Selection criteria and
the inspection approach should reflect the risk of non-compliance,
taking into account the nature of a business, systems for managing
risk and past performance. We have identified that regulators
have not always been successful in integrating their risk assessments
with inspection activity or, where two or more regulators are
inspecting the same company, coordinating risk-based inspections.
32. The quality of inspections is dependent on
the skill and experience of inspectors, and suitable training
frameworks must be maintained to ensure that inspectors develop
and maintain the right skills and experience. Inspection skills
can vary between, and within individual regulators, which can
result in inconsistencies in the way inspections are planned and
conducted and in businesses receiving less value from the inspection.
33. A significant factor determining the resources
regulators apply to inspection activity is their view of the usefulness
of inspections in delivering their overall outcomes. Regulators,
in the sectors we have examined have, however, typically found
it difficult to "prove" that inspection works due to
the influence of external factors. It is therefore largely a matter
of judgement to decide what the right level of inspections should
be. In making these judgements, regulators take account of their
perception of public attitudes to risk and the need to provide
assurance that they are sufficiently investigating and prosecuting
companies that fail to comply with regulations. Following the
Deepwater Horizon incident, the Secretary of State announced in
June 2010 plans to double the number of annual environmental inspections
of mobile drilling units undertaken by the Department.[75]
34. Increased interest in oil and gas exploration
west of the Shetland Islands is likely to lead to an increase
in deepwater drilling activity in UK waters as more oil and gas
companies seek to exploit those resources and search for new reserves.
The resourcing and targeting of inspections will need to take
into account any increases in the number of companies involved
that are seeking to explore and drill in new sites.
35. In assessing the
effectiveness of the inspection of deepwater drilling activities,
we would expect to see evidence that:
¾ inspections
are targeted according to risk and changes in risk;
¾ the
reasons for any changes in inspection activity are clear; and
¾ inspection
programmes are adequately resourced with the right number of inspectors
possessing the right skills.
SANCTIONS
36. Sanctions should act as an effective deterrent
and penalties should be proportionate to both the seriousness
of the breach and any commercial gain resulting from it. If businesses
persistently break regulations, they should be identified quickly
and face proportionate and meaningful sanctions. If sanctions
are insufficient or if regulators delay in applying sanctions,
companies may be more likely to take the view that non-compliance
is financially viable.
37. Regulators need to have systems that ensure
sanctions are applied on a fair and consistent basis. We found
that the systems used by the regulators we examined generally
do work. Regulators apply a graduated response to breaches of
regulation in accordance with their published policies, which
set out the types of factors they consider in escalating their
response from written warning to civil injunction or prosecution,
such as nature of the breach, the harm caused and previous history.
38. Sanctions must offer a sufficient level of
deterrence compared with any potential benefits of not complying
if they are to be effective. Where prosecution and fines imposed
by the courts have not provided an effective deterrent, regulators
may have recourse to civil powers. We have found that the use
of non-financial sanctions, such as suspending licences, can sometimes
provide a more effective deterrent against non-compliance, particularly
for repeat offenders.
39. In assessing the effectiveness of sanctions
for deepwater drilling, we would expect to see evidence that:
¾ sanctions
are acting as an effective deterrent; and
¾ regulators
are using civil and non-financial sanctions, where available,
if there is evidence to suggest that fines are too low to act
as an effective deterrent.
October 2010
67 See http://www.deepwaterhorizonresponse.com/go/site/2931/
Back
68
See http://www.nao.gk/sectors/rulation,_nsumers/hampton_reviews.aspx
Back
69
Offshore Installations and Wells (Design and Construction, etc.)
Regulations 1996, No. 913. Back
70
The 1985 Council Directive on the Assessment of the Effects of
Certain Public and Private Activities on the Environment
(85/337/EEC). Back
71 OSPAR:
Oslo and Paris Conventions for the protection of the marine environment
of the North-East Atlantic. Back
72
See http://www.hse.gov.uk/press/2010/hse-offshorestats.htm
Back
73
Currently, the Offshore Installations (Safety Case) Regulations
2005. Back
74
See C&AG's report Regulatory quality: how regulators are
implementing the Hampton Vision, July 2008 which brought together
the findings from the first five reviews. Since that report, the
Better Regulation Executive has carried out further reviews, with
assistance from the National Audit Office, which we draw on in
this briefing. Back
75
Department of Energy and Climate Change Press Release, UK Increases
north sea rig inspections, June 2010. Back
| 
