DOI Confirms Authority over Service Contractors on the Outer Continental Shelf

U.S. Department of Interior Board of Land Appeals Affirms BSEE’s Assertion of Authority over Contractors on the OCS

10/23/2015

FROM: Haynes and Boone

The Interior Board of Land Appeals (“IBLA”) has issued its long awaited decision on an appeal by an offshore service contractor challenging the authority of the Bureau of Safety and Environmental Enforcement (“BSEE”) to issue a citation directly to the service company for a violation of federal offshore regulations. As the first formal opinion issued by any appellate body on the issue, the IBLA decision has widespread implications for the offshore services industry. The IBLA, not surprisingly, upheld BSEE’s notice of violation (“INC”) under its assertion of regulatory authority over service contractors working on oil and gas leases on the Outer Continental Shelf (“OCS”). The contractor, Island Operating Co., Inc. (“Island Operating”), along with a number of industry groups who jointly filed an amicus brief, may appeal the IBLA’s decision to the District Court.

The significance of this decision arises from its upholding a profound change in the long-standing practices of BSEE and its predecessor agencies. Prior to May 2011, neither BSEE nor its predecessor agencies had ever before, in the 60 years since the Outer Continental Shelf Lands Act (“OCSLA”) was enacted in 1953 or the 35 years since it was amended in 1977, attempted to hold contractors responsible for their actions on the OCS. Instead, BSEE had limited its authority to lessees and operators of oil leases on the OCS and relied on contractual relations between those lessees/operators and their contractors to govern the compliance of contractors. However, in May 2011, as a direct response to the Macondo accident, the director of BSEE’s predecessor agency announced publicly the intention to exert direct jurisdiction over service companies, and in October 2011, BSEE issued INCs to two of the service companies involved in the Macondo incident. Notably, when issuing these two INCs, BSEE openly admitted that it had never before cited service companies. Equally notably, although both cited serivce companies appealed the INCs issued to each of them, they and BSEE reached settlements that eliminated any appellate review, thus leaving untested the issue of BSEE’s jurisdiction over service companies.

Against this background, the facts of the Island Operating INC take on their actual significance. In brief, the matter arose from a work project performed in March 2012 by two Island Operating employees on a platform on an OCS lease, during which the workers caused a spill of flammable chemicals and a resultant fire and discharge into the Gulf of Mexico. After an investigation, BSEE issued an INC to Island Operating in October 2012 for violating the regulation that requires that all work performed on and under an OCS lease must be done in a “safe and workmanlike manner.” (30 C.F.R. § 250.107(a)) Island Operating duly appealed the issuance of the INC.

In justifying its issuance of the INC, BSEE expressly relied on an application of the standards set forth in its then-recently issued Interim Policy Document (IPD No. 12-07, Issuance of an Incident of Non Compliance (INC) to Contractors (Aug. 15, 2012)). The IPD, a self-described internal policy document that purportedly was “not intended to create any rights in or impose any duties on any persons performing an activity under” OCSLA, gave BSEE investigators four standards or principles under which they would determine to issue enforcement actions and INCs against contractors working on leases on the OCS when such contractors had committed “serious violations of BSEE’s regulations.”

On September 25, 2015, the IBLA issued its decision and lengthy opinion affirming BSEE’s issuance of the INC to Island Operating. The IBLA based its decision on several major grounds:

• Upon an in-depth analysis of the text and legislative history of OCSLA, it held that the Act granted broad powers to the Secretary to manage the OCS, under several different sections, including Sections 3 and 5, which included authorizing BSEE’s assertion of jurisdiction over service companies, and that these broad powers were not circumscribed by sections of OCSLA, such as Section 22, that specifically empower the Secretary to more closely regulate lessees.
• Similarly, it held that, especially in light of the recent U.S. Supreme Court decision in Perez v. the Mortgage Bankers’ Association, BSEE did not violate the Administrative Procedure Act (“APA”) by not following public notice and comment or other formal rulemaking requirements when it changed its policy of not directly regulating contractors.
• It held that BSEE properly held that Island Operating had violated Section 107(a) mandates to perform in a safe and workmanlike manner and was directly liable under 250 C.F.R. § 250.146(c), and that BSEE’s issuance of the INC was consistent with the four standards in the August 15, 2012 IPD.
• It also turned aside challenges based on employment law concepts of lessee control and “borrowed employee” under state law.

It will be noteworthy to see if Island Operating appeals the decision and what further appellate opinions emerge. For the time being, though, the offshore service industry, from the large to the small, will continue to be under BSEE jurisdiction that may become more confident, if not more expansive and rigorous in light this formal IBLA approval. Also, industry players should now consider whether and to what extent their interests justify active participation in any next appellate step for what may well be a case that, like the proverbial horse, has left the barn, for good or ill.

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