Transcript Convertible Debt Offering Presentation

World Class
Senior Vice President, General
Counsel and Chief Compliance Officer
ww.herculesoffshore.com
Executive Director
Shallow Water Energy Security Coalition
www.shallowwaterenergy.org
twitter: @shallowwaternrg
James W. Noe
The Post-Macondo World
40388
Topics
 The Regulatory and Legislative Aftermath in the
Post-Macondo World
 Contract Risk Management in the Post-Macondo
World
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Regulatory and Legislative Aftermath in the PostMacondo World
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Regulatory and Legislative Aftermath in the PostMacondo World

In the aftermath of Macondo, both the Obama Administration and the thenDemocratic controlled Congress reacted in a broad and restrictive manner
 Administration imposed sweeping, across-the-board offshore drilling
moratorium
 Ultimately lifted moratorium on shallow water and then deep water
 de facto moratorium replaced the express moratorium
 “Dynamic regulatory environment” imposed
 All resulting in a dramatic slowing of pace of permitting
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Shallow Water Permitting Activity
U.S. GOM Shallow Water Total Permits Approval History (1)
40
38
36
36
35
32
25
29
28
30
27
26
22
26
21
21
19
16
15
17
15
27
24
22
20
10
26
8
12
17
15
15
11
Jul
Aug
11
12
5
14
12
2
0
Jan
Feb
Mar
Apr
May
3-Year Avg (07-09)
Jun
2010
Sep
Oct
Nov
Dec
2011
 Permit issuances down by roughly half since new regulations in June 2010
 Year-to-date, 37% of permits issued are for new wells, up from 30% during June thru
December 2010
 Backlog of permits seeking approval at the highest level, post Macondo (2)
(1)
(2)
Source: Bureau of Ocean Energy Management, Regulation and Enforcement as of August 24, 2011
As of August 24, 2011, there were 29 shallow water permits pending, with another 14 permits returned to operators seeking additional information
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Time Delays in Permit Review


Prior to new
regulations, it took
operators less than two
weeks to receive a
permit for new wells
Since the new
regulations, it takes
operators almost two
months to receive a
permit for new wells
Time delays create
operator confusion and
frustration with new
regulations
Approval Time for Permits to Drill New Wells
(Average Days)
70.0
57.9
60.0
50.0
(Number of days)

40.0
30.0
20.0
13.3
10.0
Jan '09 thru May '10
Jun '10 thru Sep '11
Source: Bureau of Ocean Energy Management, Regulation and Enforcement
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Regulatory and Policy Actions

BOEMRE: “The Obama Administration launched the most aggressive and
comprehensive reforms to offshore oil and gas regulation and oversight in U.S.
history”
Drilling Safety
 NTL-06 – operators required to demonstrate that they are prepared to deal
with a blowout and the “worst-case discharge”
 Drilling Safety Rule – “codifying” NTL-05 – permit applications for drilling
projects must meet new standards for well-design, casing and cement and be
independently certified by professional engineer
 NTL-10 – operators must provide a corporate compliance statement and
review of subsea blowout containment resources for deepwater drilling
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Regulatory and Policy Actions (cont’d.)
Workplace Safety
 Workplace Safety Rule – operators must maintain comprehensive safety and
environmental programs. Mandates implementation of a Safety and
Environmental Management System (SEMS)
 September, 2011 – announced proposed revisions requiring
 Stop work authority
 Identification of ultimate authority
 Employee participation in development of SEMS
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Regulatory and Policy Actions (cont’d.)
Reorganization of former MMS
 Three separate agencies
 Office of Natural Resources Revenue – collection of revenue and lease
bonus payments
 Bureau of Ocean Energy Management (BOEM) – to manage
development of offshore resources – leasing, plans, environmental studies,
NEPA analysis, geological risk analysis
 Bureau of Safety Environmental Enforcement (BSEE) – issue permits,
enforce safety and environmental regulations, inspections, oil spill
response, training and compliance
 Recusal policy implemented
 Ocean Energy Safety Advisory Committee – DOI/BOEMRE established
permanent advisory group consisting of scientific, engineering and technical
experts to provide guidance on improving offshore drilling safety, well
containment and spill response
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Legislative Actions – Background of Existing Law
Oil Pollution Act of 1990
 Responsible party liable for removal costs, clean-up costs and damages
 Damages
 Injuries to natural resources
 Loss of subsistence use of natural resources
 Lost government revenues resulting form destruction of property or
natural resource injury
 Lost profits and earnings resulting form property loss or resource injury
 Cost of providing extra public services during or after spill response
33 U.S.C. 2702(b)
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“Liability Cap”


Total of all removal costs plus $75 million.
33 U.S.C. 2704(a)
Cap does not apply if spill caused by
 Gross negligence
 Willful misconduct
 Violation of an applicable federal safety, construction or operating
regulation
33 U.S.C. 2704(c)
 Fines and liability under state law
33 U.S.C. 2718
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Legislative Actions – 111th Congress


HR 3534 – Consolidated Land, Energy and Aquatic Resources Act of 2009
(“Clear Act”) (passed House only)
 Amended various regulations regarding well engineering, well design, BOP
testing and spill response and containment
 Amended OPA 90 to repeal limits on liability for certain vessels and
offshore facilities
 Increased minimum COFR amounts to $300 million, with ability of
President to lower to $105 million for offshore facility seaward of state’s
boundary
 Expanded liability to include damages to human health
S 3663 – Clean Energy Jobs and Oil Company Accountability Act (introduced
by then-Senate Majority Leader Reid – no Senate action)
 Amended OPA 90 to remove limits of liability for offshore facilities
 Repeal Limitation of Liability Act for claim for wages or pollution
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Legislative Actions – 111th Congress (cont’d.)

S 3763 – Restoring Ecosystem Sustainability and Protection of the Delta Act
(RESPOND Act) (introduced by Senator Landrieu – no Senate action taken)
 Amended OPA 90 to remove $75 million “limit”
 Amended OCSLA to establish Offshore Facilities Oil Spill Mutual Insurance
Fund
 Mandated mutual insurance pool requiring operators to pay $250
million per occurrence deductible with pool covering up to $10 billion
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Legislative Actions - 112th Congress




-
S 512 and HR 993 – LEASE Act – extended leases impacted by express and
de facto moratorium by one year
HR 1229 – Putting Gulf Back to Work Act – ended de facto moratorium by
imposing deadlines on permit review process
HR 1230 – Restoring American Offshore Leasing Now Act – requires
Administration to hold Gulf of Mexico and Virginia lease sales
HR 1231 – Reversing President Obama’s Offshore Moratorium Act – lifted the
Administration’s ban on new offshore drilling by requiring movement on the
2012 – 2017 Lease Plan
No Senate action on bills.
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Policy Actions

National Commission recommendations:1
 Establish a mutual liability pool, including risk-based premiums
 Phasing in higher liability limits for pollution
 Promoting joint ventures between smaller and larger operators
 Increase size and per occurrence limit of Oil Spill Liability Trust Fund
 Currently $1 billion single incident limit and $500,000 limit for natural
resource damage
 Report Regarding the Causes of the April 20, 2010 Macondo Well Blowout
released September 14, 2011 – expected to generate additional regulatory
changes2
1.
Deep Water, The Gulf Oil Disaster and the Future of Offshore Drilling, Recommendations, the National Commission on the BP Deepwater Horizon Oil Spill and
Offshore Drilling, January 2011.
2.
http://www.BOEMR.gov/pdfs/maps/DWHFINAL.pdf
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Legislative and Regulatory Actions – Looking Ahead




Amending/increasing liability limits – less likely
Creating mutual insurance pools – less likely
Additional taxes/removing “subsidies” and tax benefits – more likely
Additional technical/operational regulations regarding well design and
construction, BOP, temporary abandonment, cementing and spill response and
containment possible
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Contract Risk
Management in the
Post-Macondo World
–
The tug-of-war and
the growing
importance of “gross
negligence”
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Traditional Allocation of Offshore Drilling Risks –
“Knock-for-Knock”
Responsibility of Contractor
Responsibility of Operator
Own people - bodily injury,
illness and death
Own people – bodily injury,
illness and death
Own property
Own property
Rig pollution
Loss or damage to hole and
downhole tools
All other pollution/down-hole
pollution
Damage to reservoir
Costs of controlling wild well
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Traditional Allocation of Offshore Drilling Risks –
“Knock-for-Knock” (cont’d.)


Risk allocation and indemnities apply regardless of fault
Typically intended to include gross negligence of party seeking indemnity
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Gross Negligence Defined




Ordinary negligence is a failure to exercise the degree of care that a person
with ordinary prudence would exercise under the same or similar
circumstances
What lifts ordinary negligence into gross negligence is the mental attitude of
the defendant
The plaintiff must show that the defendant was consciously, i.e., knowingly,
indifferent to his rights, welfare and safety
In other words, the plaintiff must show that the defendant knew about the peril,
but his acts or omissions demonstrated that he didn’t care
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BP - Transocean


BP: May seek ruling that Transocean and other contractors were “grossly
negligent” in order to make indemnity obligations unenforceable
Pollution indemnity clause – neither expressly includes or excludes “gross
negligence”:
Company shall assume full responsibility for and shall protect,
release, defend, indemnify and hold contractor harmless from
and against any loss, damage, expense, claim, fine, penalty,
demand, or liability for pollution or contamination, including
control and removal thereof, arising out of or connected with
operations under this contract . . . Without regard for
negligence of any party or parties and specifically without
regard for whether the pollution or contamination is caused in
whole or in part by the negligence or fault of contractor.
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Enforceability of Indemnities for Gross Negligence



Maritime law: appears federal courts applying general maritime law feel that it is
against public policy to be indemnified for gross negligence.
 Energy XXI v. New Tech Engineering C.P., 2011 WL 1458638 (S.D. Tex. 2011);
see also Todd Shipyards v. Turbine Services, Inc., 674 F.2d 401, 411 (5th Cir.
1982) (noting, in dicta, that gross negligence would “invalidate an exemption
from liability”)
Texas Law
 Unsettled whether contractual indemnity agreements releasing a party from
liability for its gross negligence will be upheld. See Atlantic Richfield v.
Petroleum Personnel, Inc., 768 SW2d 724 (Tex. 1989)
 Seems trend in recent cases is to uphold enforcing contractual provisions
negotiated at arm’s length
 “any negligence . . .” likely broad enough to include “gross negligence” RLI
Insurance Company v. Union Pacific Rail Road Company, 463 F.Supp 2d 646
(S.D. Tex. 2006)
Louisiana Law
 Enforceable. See Urban v. Acadian Contractors, Inc., 627 F.Supp. 2d 699
(W.D La. 2007)
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Contractor – Operator Tug-of-War




Operators increasingly pushing to exclude gross negligence from
pollution/blowout indemnities
Operators pushing to increase use of contractor limits for “feel the pain”
provisions in indemnities
Contractors responding by offering “gross negligence” as trigger for any
pollution/blowout liability
Operators requesting access to contractors insurance for pollution/blowout
OEE
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