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August 1, 2010

CLEAR Act clears House

The acronym CLEAR could become as familiar in the offshore drilling market as OPA 90 is in marine oil transportation. Unless, of course, it falters in the Senate

H.R. 3534, the Consolidated Land, Energy, and Aquatic Resources Act of 2010 -- the CLEAR Act -- passed the House on July 30 by a vote of 209-193, with one voting present.

Among other things, the CLEAR Act eliminates the current $75 million cap on liabilities related to oil spills. While that provision has received much attention, it is just part of a hefty and far reaching legislative response to the Deepwater Horizon disaster.

H.R. 3534 incorporates H.R. 5629, the Oil Spill Accountability and Environmental Protection Act of 2010, which the Transportation & Infrastructure Committee reported on a bipartisan basis on July 1, 2010. It also incorporates key elements of H.R. 5626, the Blowout Prevention Act of 2010 reported by the Committee on Energy and Commerce by a bipartisan vote of 48 to 0, with one abstention, on July 15, 2010.

Section 212 of H.R. 3534 requires oil company CEOs to certify that their well designs are safe, that their blowout preventers have redundant systems for all foreseeable blowout scenarios and failure modes, and that the company can promptly control and stop a blowout if the blowout preventer and other well control measures fail.

Section 205 includes the requirement that blowout preventers have two sets of blind shear rams and redundant emergency backup control systems that can activate when communications from the rig are severed. Section 205 also requires the installation of at least three barriers across each hydrocarbon flow path, the installation and pressure testing of lockdown devices, adequate centralization of casing, the circulation of drilling fluids prior to cementing, and cement bond logs for all cementing programs intended to provide a barrier to hydrocarbon flow. Section 205 further requires that blowout preventers, well designs, and cementing programs and procedures be certified as safe by independent, third-party inspectors selected by the federal regulator, not the oil company. The costs of these independent certifications will be paid for by the oil companies.

Under Section 205, states have the responsibility to enforce the federal safety require.ments or comparable state provisions for high-risk wells drilled in near-shore waters. If the state lacks an adequate regulatory regime, the Department of the Interior can enforce the federal requirements.

Section 108 of H.R. 3534 establishes an independent advisory board to provide the Secretary of the Interior with independent scientific and technical advice. Subsection (e) specifies the advisory board's ongoing role in periodically assessing well control technologies and practices, evaluating the Department of the Interior's regulations, and recommending modifications to those regulations.

H.R. 3534 requires that all vessels engaged in oil drilling activities in the U.S. Exclusive Economic Zone (200-mile zone) be U.S.-flag vessels that are owned and crewed by American citizens.

The Act as passed also includes an amendment by Congressman Charlie Melancon (D.La.) to lift the current moratorium on deepwater drilling the Gulf of Mexico. But the Melancon provision scarcely is a full scale slap down of the drilling ban.It would lift the moratorium for companies that meet the new safety requirements set by the Department of the Interior in the wake of the Deepwater Horizon explosion. Specifically, if an application for a permit to drill complies with the "Notice to Lessees" 5 and 6, complies with any further safety measures recommended by the Secretary, and has completed all required safety inspections, the moratorium will not apply to the drilling application.

Under the Melancon amendment, the Secretary of the Interior will be required to report by October 31st to the House Committee on Natural Resources and the Senate Committee on Energy and Natural Resources on the status of:

1) the collection and analysis of evidence regarding the potential causes of the explosion on the Deepwater Horizon offshore drilling rig, including information collected by the Presidential Commission and other investigations,

2) implementation of safety reforms announced by the Department of the Interior on May 27th,

3) the ability of operators in the Gulf of Mexico to respond effectively to an oil spill in light of the Deepwater Horizon incident; and

4) industry and government efforts to engineer, design, construct and assemble wild well intervention and blowout containment resources necessary to contain an uncontrolled release of hydrocarbons in deep water, should another blowout occur.

CRITICISM

The CLEAR Act has attracted some sharp criticism.

Rep. John L. Mica (R-FL), Transportation and Infrastructure Committee Republican leader,said "this bill, which will raise taxes by $22 billion, misses the mark. In typical Democrat fashion, this bill overtaxes, over-regulates, and costs American jobs."

"This bill makes some necessary improvements to the existing oil spill prevention, liability and response regime. It lifts the outdated offshore facility liability limits and gives the Coast Guard a stronger role in inspecting offshore facilities and the equipment used at those facilities," said Rep. Mica. "However, the measure is going to disadvantage and close down many small businesses because it fails to base liability limits on risk and instead completely repeals the cap, no matter the circumstances. Shallow water wells will be subject to the same liability requirements as wells drilled in waters of 5,000 feet or more. Smaller American drilling companies will subsequently find it difficult, if not impossible, to afford liability insurance and compete with BP and the other large multi-national companies."

"I wish I could support this bill," said Rep. Mica," but it simply misses the mark and will kill jobs in this country. If this legislation moves forward, I hope we can work to ensure that we strengthen protections for the environment without threatening U.S. jobs."

Jim Noe, Executive Director of the Shallow Water Energy Security Coalition, commented:

"The CLEAR Act passed by the House today will make it nearly impossible for the vast majority of the shallow water oil and gas industry to operate on the Outer Continental Shelf. As a result, American jobs will be lost, the economy of the Gulf Coast will take another preventable hit, and our energy security will be at even greater risk.

"The bill's ill-conceived liability provision is particularly damaging. Insurance underwriters have highlighted the near impossibility of writing policies that can account for this onerous standard. Independent operators, who will be unable to meet this requirement, will be forced to exit the shallow water Gulf of Mexico. This will deal another blow to shallow water drillers and operators, who are currently struggling to remain in business due to bureaucratic delay and uncertainty in the federal permitting process for shallow water drilling operations.

"The CLEAR Act also imposes "one size fits all" requirements for blow out preventers that are not only nearly impossible for shallow water drillers to meet, but that add no safety value to current operations. The required equipment, which does not account for water depth, well pressure, or whether the well employs a surface or subsea BOP, does not exist and would compel drillers to redesign and retrofit their rigs in order to install the unnecessary new equipment.

"The CLEAR Act fails to recognize the accepted and known differences between shallow water and deep water operations. We have been drilling shallow water wells in the Gulf of Mexico safely for over 50 years. The wells drilled in the shallow waters of the Gulf are in well-known, predicable formations in mature reservoirs using traditional equipment and techniques. The blow out preventers on shallow water rigs are installed above the surface of the water on the deck of the rigs, making them accessible for constant inspection, maintenance, and repair, and in emergencies, can be controlled either remotely or by human hands."

On the Melancon amendment, Mr. Noe said that shallow water drillers were encouraged by comments made during the House debate but that "even if the moratorium is ultimately lifted, it does not guarantee that drilling will be allowed. Because of bureaucratic delay and ambiguity in new standards, over one-third of the shallow water fleet sits idle. Unless the Department of the Interior changes course and returns to processing applications in an efficient manner, the vast majority of the 49 marketable jack-up rigs will be idled within the next month."

"We remain opposed to this bill becoming law," said Burt Adams, Chairman of the National Ocean Industries Association. "Fortunately, House Members now head home where they will get an earful from those whose jobs and lives will be adversely affected."

"The House has christened a ship that -- should it reach its destination -- will drive up the costs of producing home-grown oil and gas and make it more difficult for independent energy producers to compete in the domestic market," said Mr. Adams. He called the legislation "truly death by a thousand cuts," citing unlimited liability, unsubstantiated standards of financial responsibility, a $2 per barrel tax on oil to fund unrelated programs, mandating a technical fix for blow out preventers before knowing the cause of the accident, and the addition of myriads of reviews and clearances.

He said the language adopted by the House to lift the deepwater drilling moratorium not only misses the mark, but the entire target. "The House has lost a golden opportunity to pass a clean lifting of the job killing moratorium," said Adams.

"We fully support increased awareness and safety in the wake of the Gulf of Mexico accident. There are many safety and procedural safeguards that could, and should, be put in to immediate effect, and some are already underway," said Adams. "Unfortunately the passage of CLEAR does little to increase actual safety and is a job killer."

The CLEAR Act's future in the Senate is uncertain. A number of Democrats representatives from oil states crossed party lines to vote against it in the House, raising questions on whether Democrats can pull together enough votes to advance the legislation in the Senate.

Download the text of the act HERE


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