The Post-Macondo World

1. The Post-Macondo World Executive DirectorShallow Water Energy Security Coalitionwww.shallowwaterenergy.orgtwitter: @shallowwaternrg Senior Vice President, General Counsel and Chief Compliance Officerww.herculesoffshore.com James W. Noe 40388

2. Topics • The Regulatory and Legislative Aftermath in the Post-Macondo World • Contract Risk Management in the Post-Macondo World

3. Regulatory and Legislative Aftermath in the Post-Macondo World

4. Regulatory and Legislative Aftermath in the Post-Macondo World • In the aftermath of Macondo, both the Obama Administration and the then-Democratic 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 factomoratorium replaced the express moratorium • “Dynamic regulatory environment” imposed • All resulting in a dramatic slowing of pace of permitting

5. Shallow Water Permitting Activity U.S. GOM Shallow Water Total Permits Approval History(1) • 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) • 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

6. 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 Time Delays in Permit Review Approval Time for Permits to Drill New Wells (Average Days) Source: Bureau of Ocean Energy Management, Regulation and Enforcement 5

7. 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

8. 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

9. 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

10. 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)

11. “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

12. 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

13. 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

14. 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.

15. 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 • 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. • http://www.BOEMR.gov/pdfs/maps/DWHFINAL.pdf

16. 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

17. Contract Risk Management in the Post-Macondo World – The tug-of-war and the growing importance of “gross negligence”

18. Traditional Allocation of Offshore Drilling Risks – “Knock-for-Knock”

19. 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

20. 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

21. 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.

22. 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 Richfieldv. 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)

23. 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