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Oil-Drilling Regulator May Need ‘Impenetrable Wall’

President Barack Obama’s bid to end what he called a “cozy relationship” between energy companies and drilling regulators may not be enough, the co-chairman of a panel investigating BP Plc’s spill said.

Obama may need further action to remove potential conflicts among regulators, William K. Reilly said today at a meeting in Washington of the National Commission on the BP Deepwater Horizon Oil Spill. The panel also sought to dispel the idea that BP alone is to blame for the April 20 blast that killed 11 workers, spewed crude for 87 days and shut a third of the Gulf of Mexico to fishing.

Less than a month after the blowout, Obama vowed to upend a system in which regulators enforcing safety and environmental rules also awarded leases and collected fees. Interior Secretary Ken Salazar began reorganizing the agency on May 19.

“Secretary Salazar has recognized the need to separate leasing and revenue generation from the environmental and safety regulation,” Reilly said. “We will consider today whether to recommend that he go further and construct an impenetrable wall with environmental and safety regulators insulated from those who auction leases.”

In revamping the agency, Salazar replaced the Minerals Management Service, which generated about $13 billion a year by partnering with companies such as BP and Exxon Mobil Corp. to develop oil and natural gas, with separate offices that oversee leases, drilling safety and fee collection. The heads of the new offices report to Salazar’s associate directors.

Outside Interior

At a Sept. 27 commission hearing, Reilly asked Salazar if he had considered shifting some authority outside of the department.

“I know it’s unfair to ask a Cabinet officer to talk about how seriously he might have considered moving an enterprise outside his own agency, but has that come up?” Reilly said.

Salazar responded: “The reorganization which we have put forward essentially is an effort to deconflict the missions.”

In May, the Interior Department inspector general said that employees in the unit’s Lake Charles, Louisiana, office, including some assigned to inspect offshore drilling platforms, accepted gifts from oil and gas companies. The agency, created in 1982, is too close to the companies it regulates, Representative Darrell Issa, a California Republican who will lead the House Oversight Committee in the new Congress starting next year, said in May.

The oil-spill commission, appointed by Obama, plans to release its recommendations in January.

‘Glacial Pace’

“Anything that sounds like more reform and additional regulation serves to further slow the already glacial pace of permitting at Interior,” Michael McKenna, a Republican oil- industry lobbyist and president of MWR Strategies Inc. in Washington, said in an interview. Regulators need to “stop shuffling around, set some things in stone, and alert their workforce that it is OK to begin moving forward.”

Obama in September asked Congress for $100 million for the Bureau of Ocean Energy Management, the unit Salazar set up to oversee offshore leasing. Funding would come from doubling inspection fees paid by offshore oil and gas operations and transfers from Interior Department accounts, Obama said. Congress failed to act on the request.

“To protect the public interest, the Interior Department will require more funds, more inspectors, more engineers,” Reilly said, urging Congress to authorize funds. “The money from oil and gas leases should be more than sufficient to finance the agency reformation that is needed.”

Chronic Issues

In a presentation, the commission’s staff said BP safety lapses appear to be chronic, and the company’s culture still needs improvement.

“BP’s history of cost-cutting and resulting problems across all business segments and over many years suggests systemic corporate culture issues,” the staff said.

Reilly said responsibility for the spill at the well, called Macondo, must be shared among BP and its two main contractors. Transocean Ltd. owned the rig that exploded, and Halliburton Co. supplied cement to plug the well.

The three companies “were heavily involved in the decisions that are most questionable,” Reilly said. “This perception in some quarters of the oil and gas industry that Macondo was the consequence of one company’s bad decisions simply doesn’t stand.”

Halliburton’s Cement

In October, the commission found that Halliburton knew cement it mixed for the doomed well was unstable as much as two months before the April blowout. Halliburton disputed the finding, saying cement that was cited for flaws in February was different from the mix used to plug the well.

Commission staff recommended raising the liability limits drillers face in the event of a spill. Congress has debated measures that would remove a $75 million cap in place since 1990.

“The current system is just totally inadequate,” said Frances Beinecke, a commission member and president of the New York-based Natural Resources Defense Council environmental group. “It’s just fortunate the company was of a size that it could make a commitment to the American public to meet these obligations.”

BP agreed in June to establish the $20 billion fund that will compensate victims of the Gulf spill.

Commissioner Frances Ulmer, chancellor of the University of Alaska Anchorage and a former Alaska lieutenant governor, said limits on payments from a fund authorized in 1990, after the Exxon Valdez tanker spill, also need to be raised.

While more than $1.6 billion remained in the Oil Spill Liability Trust Fund at the end of September, the law limits disbursements for one incident to $1 billion, even if oil companies reimburse the government for the costs. An 8-cent-per- barrel petroleum tax finances the fund.

To contact the reporters on this story: Katarzyna Klimasinska in Washington at kklimasinska@bloomberg.net; Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net.

To contact the editor responsible for this story: Larry Liebert at lliebert@bloomberg.net.

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