Oil and Gas and Sulphur Operations on the Outer Continental Shelf – Requirements for Exploratory Drilling on the Arctic Outer Continental Shelf

Final Regulatory Impact Analysis

RIN: 1082-AA00

FINAL RULE DEPARTMENT OF THE INTERIOR Bureau of Safety and Environmental Enforcement (30 CFR Parts 250 and 254) Bureau of Ocean Energy Management (30 CFR Part 550)

July 2016

Table of Contents 1. Executive Summary .............................................................................................................................. 4 1.1 Compliance Costs ........................................................................................................................... 5 1.2 Benefits ........................................................................................................................................... 7 1.2.1 Benefit: Improving Information and Coordination among Federal Agencies ........................ 7 1.2.2 Benefit: Minimizing Natural Resource and Subsistence Impacts ........................................... 8 1.2.3 Benefit: Reducing the Risk of a Catastrophic Oil Spill ........................................................... 8 1.2.4 Benefit: Reducing the Duration or Severity of a Catastrophic Oil Spill................................. 8 1.2.5 Benefit: Regulatory Certainty to Industry............................................................................... 9 1.2.6 Benefit: Assurance to Stakeholders and Partners................................................................. 10 2. Introduction......................................................................................................................................... 11 2.1 Executive Orders and the Unfunded Mandates Reform Act......................................................... 13 2.2 Outline of RIA .............................................................................................................................. 14 3. Need for Regulation ............................................................................................................................ 15 4. Alternatives ......................................................................................................................................... 20 5. Baseline Assumptions ......................................................................................................................... 20 6. Arctic OCS Economic Analysis Assumptions.................................................................................... 23 6.1 Cost Assumptions ......................................................................................................................... 24 6.1.1 Wage Rates and Loaded Wage Factors ................................................................................ 24 6.1.2 Daily Rig Operating Costs and Drilling Season ................................................................... 26 6.1.3 Burden to Review Paperwork Submissions........................................................................... 27 6.1.4 Discounting Assumptions ...................................................................................................... 27 6.2 Scenario Assumptions................................................................................................................... 28 6.2.1 Exploration Scenario ............................................................................................................ 28 6.2.2 SCCE and Resource Sharing ................................................................................................ 31 6.3 Transfers ....................................................................................................................................... 32 7. Analysis of Costs and Benefits Assigned to the Rule ......................................................................... 32 7.1 Costs of the Rule’s Provisions ...................................................................................................... 33 7.1.1 (a) Additional Incident Reporting Requirements (§ 250.188) .............................................. 35 7.1.2 (b) Additional Pollution Prevention Requirements (§ 250.300) ........................................... 36 7.1.3 (e) Additional Information Requirements for APDs (§ 250.470) .......................................... 38 7.1.4 (f) Incorporation of API RP 2N, Third Edition (§ 250.470) ................................................ 39

7.1.5 (g) SCCE Requirements (§ 250.471)..................................................................................... 40 7.1.6 (h) Additional Relief Rig Requirements (§ 250.472)............................................................. 47 7.1.7 (i) Additional Auditing Requirements (§ 250.1920).............................................................. 51 7.1.8 (j) Real-time Location Tracking Requirements (§ 254.80) ................................................... 52 7.1.9 (k) IOP Requirements (§ 550.204) ........................................................................................ 55 7.1.10 (l) Planning Information Requirements to Accompany EPs (§ 550.220) ........................... 56 7.1.11 (m) Industry Familiarization with the New Rule ................................................................ 57 7.1.12 Summary of the Rule’s Quantitative Costs ......................................................................... 58 7.2 Benefits of the Rule’s Provisions.................................................................................................. 59 7.2.1 Benefit: Improving Information and Coordination among Federal Agencies ...................... 60 7.2.2 Benefit: Minimizing Natural Resource and Subsistence Impacts ......................................... 61 7.2.3 Benefit: Reducing the Risk of Catastrophic Oil Spill ............................................................ 62 7.2.4 Benefit: Reducing the Duration of a Catastrophic Oil Spill ................................................. 64 7.3 Summary of the Costs and Benefits of the Rule’s Provisions ...................................................... 77 8. Discussion of Non-monetized Impacts ............................................................................................... 77 9. Conclusion .......................................................................................................................................... 79 10. UMRA ................................................................................................................................................ 82 Appendix: Baseline Provisions ................................................................................................................... 85 A1. Cost of the Rule’s Baseline Provisions ................................................................................... 85 A.1.1 Additional Requirements for Securing Wells........................................................................ 85 A.1.2 Real-time Monitoring Requirements .................................................................................... 87 A2. Baseline Benefits: Reducing the Risk of a Catastrophic Oil Spill .......................................... 88 A3. Summary of the Costs and Benefits of the Baseline Provisions ............................................. 89

Abbreviations

APD Application for Permit to Drill

API American Petroleum Institute

API RP American Petroleum Institute Recommended Practice

BBLs Barrels

BLS Bureau of Labor Statistics

BOEM Bureau of Ocean Energy Management

BOP Blowout preventer

BSEE Bureau of Safety and Environmental Enforcement

DOI Department of the Interior

EO Executive Order

EP Exploration Plan

GOM Gulf of Mexico

IOP Integrated Operations Plan

MODU Mobile Offshore Drilling Unit

NTL Notice to Lessees

OCS Outer Continental Shelf

OMB Office of Management and Budget

OSRP Oil Spill Response Plan

PPCS Pre-positioned capping stack

RIA Regulatory Impact Analysis

SCCE Source Control and Containment Equipment

SEMS Safety and Environmental Management Systems

UMRA Unfunded Mandates Reform Act of 1995

1. Executive Summary

Before authorizing exploration drilling for Arctic OCS hydrocarbon resources, BOEM and BSEE must

ensure that exploration can occur safely and with minimal environmental risk. This regulation provides a

regulatory framework specifically designed for Arctic OCS exploration and outlines the specific

requirements for exploratory drilling activities. Its purpose is to provide the requirements and standards

to which all individual exploration plans, permits and operations will be held.

A catastrophic oil spill resulting from exploratory drilling on the Arctic OCS is highly unlikely due to the

nature of the geology, the shallow water depth, and the relative simplicity of well construction for wells

likely to be drilled in the Arctic OCS. 1 However, because the potential adverse effects of a catastrophic

oil spill are so large, steps must be taken to reduce the spill risk, duration, and severity should one occur.

BOEM and BSEE have determined that the benefits of this rule exceed the costs when both quantitative

and qualitative factors are considered.

1.1 Compliance Costs

The new provisions of the rule are estimated to result in compliance costs of $2,047.6 million under 3-

percent discounting and $1,739.0 million under 7-percent discounting over 10 years. 2 Exhibit 1 shows

the provisions of the rule and the primary benefits. As the exhibit emphasizes, many of the provisions of

this rule are specifically intended to minimize the risks of catastrophic oil spills and minimize the damage

of a spill should one occur.

1 “Catastrophic event” is defined in our analysis consistent with the Draft Economic Analysis Methodology for the 2017-2022 Outer Continental Shelf Oil and Gas Leasing Program, as “any high-volume, long-duration oil spill from a well blow-out, regardless of its cause (e.g., a hurricane, human error, terrorism).” 2 For the final rule, based on the recent relinquishment and termination of many Chukchi and Beaufort Sea planning areas leases, BOEM and BSEE use a 10 numbered year scenario with active exploratory drilling running 9 years (year 2 to year 10). This is a conservative approach, as BOEM and BSEE do not anticipate any active open water exploratory drilling in the next several years. The use of a numbered year scenario rather than calendar year scenario reflects the significant uncertainty regarding when additional future Arctic exploration will commence.

Exhibit 1. Regulatory Provisions, Costs, and Benefits 3 Final RIA Rule Cost Discounted at 3% over 10 years Provision Primary Benefit $ millions (a) Additional Incident Reporting Improves information to Federal Requirements $0.56 agencies (b) Additional Pollution Prevention Minimizes natural resource impacts $141.09 Requirements (c) Additional Requirements for Securing Reduces risk of a spill * Wells (d) Real-time Monitoring Requirements Reduces risk of a spill ** (e) Additional Information Requirements Improves information to Federal $0.23 for APDs agencies (f) Incorporation of API RP 2N Reduces risk of a spill $0.08 (g) Additional SCCE Requirements Improves spill control and $681.92 containment (h) Relief Rig Requirements Improves control of a spill $1,206.55 (i) Additional Auditing Requirements Improves information to Federal $5.58 agencies (j) Real-time Location Tracking Improves information to Federal $0.96 Requirements agencies (k) IOP Requirements Improves coordination among $7.67 Federal agencies (l) Planning Information Requirements to Improves information to Federal $2.57 Accompany EPs agencies (m) Industry Familiarization with Rule General $0.37 Total: $2,047.60 * The drilling of mudline cellars has been a longstanding practice in the Chukchi and Beaufort Seas extending back to the 1980’s, thus this provision is assigned to the regulatory baseline. ** The BSEE Well Control rule at § 250.724 requires real-time monitoring for all operations with a subsea BOP or surface BOP on a floating facility, thus the cost for this provision is assigned to the regulatory baseline.

3 Note that former provision (d) from the NPRM: Stipulating the frequency of blowout preventer pressure tests, was removed from this rule. These requirements were addressed in the BSEE Blowout Preventer Systems and Well Control, 1014–AA11 rulemaking.

1.2 Benefits

BOEM and BSEE recognize that the Arctic OCS contains substantial oil and natural gas resources, and

this rule provides the guidance and requirements that operators must follow to minimize the risks of

catastrophic oil spills when exploring for these valuable resources. Although this RIA focuses its

discussion on the benefits of reducing the probability, duration, or severity of a catastrophic oil spill,

BOEM and BSEE recognize that similar benefits relate, perhaps to a lesser extent, to any significant but

non-catastrophic oil spills as well. The unique nature of the Arctic, its ecological resources, and the

Alaska Natives’ subsistence needs make the rule even more necessary to avoid the devastating effects of a

catastrophic oil spill. Although the probability of a catastrophic spill is very small, the Deepwater

Horizon oil spill demonstrated that such low probability events can have devastating human, economic,

and environmental consequences.

Due to both the uncertainty and difficulty of measuring benefits, we do not offer an aggregate quantitative

assessment of all of the rulemaking provisions. Instead, we present a combination of quantitative and

qualitative discussions based on the benefits of the different provisions of this rule. In general, the

individual provisions of this rule serve four main beneficial purposes: (1) improving information to and

coordination among Federal agencies, (2) minimizing natural resource impacts, (3) reducing the risk of a

catastrophic oil spill, and (4) improving containment and reducing the severity of a catastrophic oil spill.

Each of these benefits is discussed in more detail in Section 7.2 of this final RIA. In addition to these

four main benefits of the rule’s individual provisions, in aggregate the rule has additional benefits

including the provision of regulatory certainty to industry and the assurance to stakeholders and partners

that the Department of the Interior (DOI) is committed to safe Arctic OCS operations.

1.2.1 Benefit: Improving Information and Coordination among Federal Agencies

A portion of the rule’s new provisions are designed to improve Federal interagency coordination of Arctic

exploratory activities. Improved information provided to Federal agencies will facilitate coordination

within the federal family and enable agencies to better identify risk mitigations early in the planning

process. These benefits are discussed qualitatively in Section 7.2.1.

1.2.2 Benefit: Minimizing Natural Resource and Subsistence Impacts

One provision of the rule is designed specifically to minimize natural resource and subsistence impacts of

exploratory activities, outside the context of a catastrophic spill. The benefits of this provision are

discussed in Section 7.2.2. Of course, the provisions to reduce the risk and duration of a catastrophic oil

spill also minimize natural resource impacts, but these benefits are discussed in sections specifically on

catastrophic oil spills.

1.2.3 Benefit: Reducing the Risk of a Catastrophic Oil Spill

As shown in Exhibit 1, the two baseline compliance provisions ((c) Additional Requirements for Securing

Wells and (d) Real-time Monitoring Requirements) are designed to reduce the risk of a catastrophic oil

spill. The benefits of the rule’s new provision which is designed to reduce the risk of a spill ((f)

Incorporation of API RP 2N) are discussed in Section 7.2.3 and the benefits of relevant baseline

provisions are discussed in the Appendix. As discussed, this RIA focuses its discussion on the benefits of

reducing the probability, duration, or severity of a catastrophic oil spill; however, it is possible that some

of the rule’s provisions can also reduce the risk, perhaps to a lesser extent, of any significant but non-

catastrophic oil spills as well.

1.2.4 Benefit: Reducing the Duration or Severity of a Catastrophic Oil Spill

Provisions of this rule are designed to ensure that equipment and personnel are readily available to

respond to a loss of well control event. To compare the benefit of reducing the duration or severity of a

catastrophic oil spill with the costs incurred, this RIA considers the benefits of the rule as potential

avoided costs from the reduced duration or severity of an oil spill.

1.2.5 Benefit: Regulatory Certainty to Industry

This rule provides a holistic regulatory structure for OCS exploration activities in the Arctic. The

provisions in this rule codify existing requirements in the Arctic designed to reduce the probability of a

catastrophic spill or to reduce the impacts of a spill should one occur, improve the information to and

coordination among Federal agencies, and minimize natural resource and ecosystem impacts of offshore

operations in the Arctic. A benefit of this rule is to provide specific Arctic regulations clearly identifying

the requirements for operators to safely explore for hydrocarbons on the Arctic OCS.

One of the key findings of the National Petroleum Council’s Arctic Report was the necessity of such

clarity. The report stated that the “economic viability of U.S. Arctic development is challenged by

operating conditions and the need for updated regulations that reflect Arctic conditions” (p. 10). 4 This

rule provides those Arctic-specific regulatory requirements.

The oil and gas industry requires regulatory stability to undertake timely and efficient exploration. With

this rule, the oil and gas industry can more effectively plan and conduct exploratory drilling on the Arctic

OCS with lower risk and improved regulatory efficiency. The certainty from the requirements in this rule

could facilitate exploration of the Beaufort and Chukchi Sea Planning Areas. According to BOEM’s

2016 Assessment of Undiscovered Technically Recoverable Oil and Gas Resources of the Nation’s Outer

Continental Shelf, there are approximately 23.6 billion barrels of technically recoverable oil and about

104.4 trillion cubic feet of technically recoverable natural gas in the Beaufort Sea and Chukchi Sea

Planning Areas combined. 5

4 2015 National Petroleum Council Report to the Secretary of Energy; Arctic Potential, Realizing the Promise of U.S. Arctic Oil and Gas Resources; http://www.npcarcticpotentialreport.org/. Available at http://www.boem.gov/2016-National-Assessment-Fact-Sheet/

1.2.6 Benefit: Assurance to Stakeholders and Partners

The American public greatly values the Arctic as a pristine, unspoiled environment worthy of protection.

Of the approximately one million public comments BOEM received on the 2017-2022 Draft Proposed

Program, slightly less than half of the commenters opposed leasing in the Arctic, citing several concerns

including, but not limited to, oil spills, disruption to subsistence activities, and habitat destruction. In

addition to providing regulatory certainty to industry, another benefit of this rule is to provide assurance

to other stakeholders and partners, such as tribes, citizens, and other countries, that the United States will

explore the Arctic safely and with the tenets of environmental stewardship at the forefront of the decision

making process. This rule builds on one of the themes from the National Petroleum Council’s Arctic

Report that steps be taken to “secure public confidence” that activities can be conducted safely. In

addition, this rule helps achieve the National Arctic Strategy goals of protecting the unique and sensitive

Arctic ecosystems and the subsistence needs, culture, and traditions of the Alaska Native communities.

The U.S. Arctic Policy recognizes the interconnectedness of Arctic nations and commits to coordinating

with other Arctic nations to develop operationally safe and environmentally sustainable development.

The United States is entering into the Agreement on Cooperation on Marine Oil Pollution Preparedness

and Response in the Arctic and must follow certain provisions outlined in Article 4: Systems for Oil

Pollution Preparedness and Response. 6 These regulations help provide assurances to the international

community that our operators in the Arctic will follow the required preparedness procedures and do

everything possible to prevent an oil spill or to minimize the effects, should one occur. Further, the

National Petroleum Council’s report on the Arctic cites the importance of the U.S. National Arctic

strategy in promoting Arctic activities because of their interaction with national security, foreign policy,

and energy policy. The goal of the Arctic strategy is to “seek an Arctic region that is stable and free of

conflict, where nations act responsibly in a spirit of trust and cooperation, and where economic and

http://www.state.gov/r/pa/prs/ps/2013/05/209406.htm.

energy resources are developed in a sustainable manner that respects the fragile environment and the

interests and cultures of indigenous peoples.” 7

2. Introduction

The U.S. Arctic region, as recognized by the United States and defined in the U.S. Arctic Research and

Policy Act of 1984, encompasses an extensive marine and terrestrial area, but this rule focuses solely on

the OCS within the Beaufort Sea and Chukchi Sea Planning Areas. BOEM and BSEE have undertaken

extensive environmental and safety reviews of potential oil and gas operations on the Arctic OCS. These

reviews, along with concerns expressed by environmental organizations and Alaska Natives, reinforce the

need to codify measures already occurring in practice for Arctic OCS oil and gas exploratory operations.

After considering the input provided by various partners and stakeholders and DOI’s direct experience

from Shell’s 2012 and 2015 Arctic OCS operations, BOEM and BSEE have concluded that these

exploratory drilling regulations will provide regulatory clarity and certainty, resulting in a more

comprehensive Arctic OCS oil and gas regulatory framework.

The U.S. Arctic OCS is a unique area, and utmost care should be taken when operating in it. Sea ice is a

dominant feature in the Arctic that affects the physical, biological, and cultural aspects of life in the area.

Given the presence and movement of sea ice, the Arctic OCS is well known for its ice-associated animals

(e.g., seals, Pacific walrus, and polar bears). Other Federally protected marine mammals are also present

in the area (e.g., bowhead, gray, and beluga whales). The area also serves as a habitat for migrating birds,

and the waters provide habitat for 40 species of fish and deep-water coral, which forms the seafloor

habitat. Some of the animals in the region are listed or proposed for listing as threatened or endangered

under the Endangered Species Act. These species include marine mammals such as the bowhead,

humpback, and fin whales, which are endangered, and polar bears, which are threatened. Other endemic

7 2015 National Petroleum Council Report to the Secretary of Energy; Arctic Potential, Realizing the Promise of U.S. Arctic Oil and Gas Resources; http://www.npcarcticpotentialreport.org/, executive summary p. 9 (March 2015).

species include three bird species (the spectacled eider and Steller’s eider are threatened, and the yellow-

billed loon is a candidate for the endangered species list). 8

In addition to the unique biological and ecological resources, the region also has unique cultural features.

The sparsely populated areas adjacent to the Beaufort and Chukchi Seas primarily include traditional

Alaska Native community residents who depend on the natural environment for food and materials,

especially the marine environment. A central cultural tradition of these communities is participation in

bowhead whale hunts. A recent survey by the Alaska Department of Administration