The U.S. is currently the largest producer of oil and gas in the world, with annual crude oil production reaching a record level at 12.23 million barrels per day in 2019. A significant amount of this oil and gas comes from the federal government’s onshore subsurface mineral estate and increasingly from its lands on the offshore continental shelf.
In order for a company to acquire a permit for offshore drilling on the federally-owned continental shelf, they must obtain a lease from the Department of Interior (DOI). The application process is overseen by three DOI agencies – the Bureau of Ocean Energy Management (BOEM), the Bureau of Safety and Environmental Enforcement (BSEE), and Office of Natural Resources Revenue (ONRR).
Companies first must undergo a bidding process for the lease through BOEM. After acquiring a lease, the lease holder must submit an Exploration Plan, which includes timing of project, location of operations, methods and the potential environmental impact for all activities, in order to explore the leased areas for oil & gas deposits. Once the lease is accepted companies must then pay rent to ONRR, as well as submit a Development or Production Plan to be approved by BOEM and apply to BSEE for drilling and operations permits before extraction begins. BSEE then conducts initial inspections to ensure that structures are installed properly and equipment functions properly.
Throughout the many steps of this process, there is significant opportunity for the companies applying to knowingly make false statements in order to improve their chance of obtaining permission to drill. However, these misrepresentations are illegal under the False Claims Act (FCA), which regulates fraud in connection with those receiving compensation or other benefits from the government.
In what is known as the “reverse False Claims” provision, wrongdoers prevents the government from collecting what it is owed by making false statements to keep the government from receiving proper compensation. By making false statements on a lease application, a company is often underestimating risk or misrepresenting obligation, thus depriving the federal government of full compensation.
In one of the most famous reverse False Claims Act applications, false claims made by oil company BP in its lease applications led up to the disastrous explosion of the Deepwater Horizon oil rig in the Gulf of Mexico and the massive environmental settlement that followed.
The BP Deepwater Horizon Disaster
2020 marks ten years since the Deepwater Horizon tragedy, the largest marine oil spill in U.S. history. On April 20, 2010, BP’s offshore oil rig in the Gulf of Mexico exploded, killing 11 workers and resulting in massive damage to wildlife populations and the marine ecosystem.
The explosion at Deepwater Horizon came as a shock – but not to everyone. Nearly three months earlier, BP Well manager, Ronald Sepulvado, had reported to his superiors that key safety tests were not conducted at the Deepwater Horizon site, which had been plagued with mechanical problems and lax safety practices. However, leadership failed to take action, and the rig exploded. At the time, the project had already run 43 days over and $20 million over budget.
William Reilly, the head of the presidential investigation into the oil spill, characterized the problem as a “culture of complacency” in the company when skirting past safety regulations. Mark Bly, the head of safety at BP, also noted that BP managers at the Deepwater Horizon rig could have prevented the disaster if they had heeded warning signs.
Before a House subcommittee hearing on the investigation into BP’s negligence regarding Deepwater Horizon, it was revealed that the blowout preventer had failed a pressure test hours before the explosion, and BP did not report this before receiving the final approval to drill from a government official.
The Deepwater Horizon oil rig was seemingly primed for an accident, with problems dating to before drilling was even approved. In 2009, BP crafted a regional spill plan and a site-specific disaster contingency plan, 582 pages and 52 pages respectively, in order to be approved by the U.S. government for a lease to commence drilling operations in the Gulf of Mexico. However, after the explosion, an investigation by the Associated Press found that BP’s submitted response plans were severely flawed.
BP vastly overstated its preparedness to deal with a major leak while understating and misstating the dangers that a spill would pose to local environmental and public health. The formula they used to calculate spill volume was significantly off: had they used the internationally accepted formula, they would have produced estimates 100 times higher. They also failed to take into account the Gulf’s loop current or the wildlife specific to the gulf, instead citing cold water mammals and other inaccuracies. Additionally, a professor listed by BP as their national wildlife expert to research potential damages to local wildlife was found to have died in 2005, four years prior.
As part of their larger settlement, the Department of Justice (DOJ) found that BP had purposefully misrepresented its emergency response preparedness in order to operate under leases from the United States and profit from offshore drilling. Due to these misrepresentations, the U.S. Justice Department ordered BP to pay a settlement of US$82.6 million to resolve violations of the False Claims Act and the Federal Oil and Gas Royalty Management Act in relation to the disaster. The total settlement for the spill was over US$20.8 billion, the largest pollution penalty in U.S. history.
Key Takeaways from the Case
Had a whistleblower reported these incorrect statements on the lease applications to external authorities under the powerful qui tam provision in the False Claims Act, the problems with the rig may have been discovered by the government earlier. The FCA has proved tremendously successful: in 2019 alone, whistleblowers helped to recover $2.2 billion in monetary sanctions for U.S. taxpayers under the False Claims Act, with whistleblowers receiving $271 million for their contributions to these successes. In this case, the false statements in this case were only uncovered in investigations following the explosion.
The BP Deepwater Horizon case stands out as a particularly notable example of what can happen when companies make fraudulent statements on applications for a lease. Despite awareness of internal issues plaguing the Deepwater Horizon rig, BP attempted to show that established contingency plans were airtight and the well had no glaring issues, while reporting conditions as such to obtain permission to drill. As the number of ultra-deep drilling rigs seeking leases from the U.S. government grows, so does the risk for similar false statements. The BP case demonstrates the potential risk this poses and sets a precedent for future prosecution of this type of fraud.