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BP, Big Oil: Meet Sarbanes-Oxley Section 302

It's time to bring the accountability weight of Sarbanes-Oxley to bear on the offshore drilling industry.

NEW YORK (

TheStreet

) -- It may still be a long road to new offshore-drilling regulation, but we learned enough last week from the big oil execs to add at least one speed bump ahead of future oil-spill disasters. Without one conclusive finding about blowout preventers, long-string well casings or cement bond logs that have made petroleum engineers of us all, we can firmly conclude that applying Section 302 of the Sarbanes-Oxley Act to the oil industry deep-water well operations can't hurt as a starting place to add some responsibility in the Big Oil corner office.

What, you ask, is Section 302 of Sarbanes-Oxley? That is the section on corporate responsibility -- and, specifically, senior executives taking individual responsibility for the accuracy and completeness of corporate financial reports. There is no reason that Section 302 of the, let's say, Markey-Burgess rewrite of oil drilling legislation could not mandate that senior executives in the oil industry take individual responsibility for the thoroughness and completeness of well design and drilling operations.

Section 302 describes specific forfeitures of benefits and civil penalties for non-compliance (e.g., if a BP deepwater well were to fail, CEO Tony Hayward might be required to put his yacht up as collateral in civil court). Section 302 of Sarbanes-Oxley also mandates that "the company's 'principal officers' (typically the Chief Executive Officer and Chief Financial Officer) certify and approve the integrity of the company's financial reports quarterly." There is no reason that couldn't be revised to read that "the company's principal officers (typically the Chief Executive Officer and head of production and exploration) certify and approve the integrity of the company's deep-water wells."

Sarbanes-Oxley Section 302 also requires corporate officers to sign off as being responsible for internal controls and having evaluated these internal controls, listing deficiencies in the internal controls, and any significant changes in internal controls or related factors that could have a negative impact on the internal controls. There is no reason why these internal controls could not apply to the exact types of decisions made at the BP Macondo well with which BP CEO Hayward said he couldn't possibly be expected to be "in the know."

It's far from enough of a fix, but the offshore drilling version of Sarbanes-Oxley would provide an extra layer of corporate responsibility for deep-sea well design and operation. If nothing more, it might keep the CEOs of oil companies just a little more honest, and make them be a little more proactive in overseeing far flung operations -- operations that operate in the middle of the ocean and to depths of 35,000 feet below human vision.

Indeed, the CEOs of all the big oil companies told us last week that applying Sarbanes-Oxley to deep-water wells is a change that shouldn't cause them any worry, or in the case of Hayward, showed us that it is a change they are asking us to force on the sector: Last week's testimony from the big oil CEOS started with a cadre of heavyweights from

Exxon Mobil

(XOM) - Get Report

,

Chevron

(CVX) - Get Report

and

ConocoPhillips

(COP) - Get Report

. The message from the Big Three in the oil industry was much the same: BP screwed up, we do things differently, don't worry about our wells, all is under the watchful eye of companies unlike that reckless British operator.

Yet the oil CEOs gave those on Capitol Hill plenty to worry about in regards to potential for future oil spills when it became clear that their oil-spill response plans were cut-and-paste jobs that matched the BP approach word for word -- and often inaccurate word for word. In fact, the oil CEOs admitted that the oil spill response plans were embarrassments.

The Minerals Management Service of the Interior Department has already taken a step in this direction at its level of oil drilling enforcement by adding an oil company CEO certification requirement as a pre-cursor to allowing the resumed operations in the shallow-water Gulf of Mexico drilling, but critics have contended that the certification requirement still allows the oil industry to more or less serve as its own compliance regime without enough checks in place.

Of course, some will argue that adding a layer of senior corporate officer responsibility is just the type of alarmist response that is typical of socialist takeovers, and on top of the Pennsylvania Avenue "shakedown" of BP uncovered by moonlighting investigative reporter Rep. Joe Barton (R-Texas), a Sarbanes-Oxley Section 302 for the oil industry would bring America one step closer to becoming a Hugo Chavez state-run oil monopoly. Anyway, why should all oil companies be punished for the actions of one reckless company with a history of accidents and penalties?

And, of course, the government obviously needs it own regulatory oversight overhaul. For starters, we could use a Regulation FD for members of the House Energy and Commerce Committee, so somewhere within their often-meandering opening statements they are required to disclose how much money they do or do not receive from oil and gas lobbies, so when they accuse the President of being a mafia boss we have some idea from where the seed of the outlandish comments germinated.

Personally, I can't imagine the CEOs of Exxon Mobil, Chevron, or ConocoPhillips would complain about a Section 302 for deep-water drilling, anyway. Given the oil executives' confidence in their operations when comparing themselves favorably to BP, they should be first in line to sign up and claim individual responsibility of their deep-water wells. And given the Congressional concern over the "carbon copy" oil spill response plans, it might not be a bad idea for the government to call the oil executives on their confidence by saying, "OK, then, sign on the dotted line, offshore well by offshore well, and then maybe we will believe you."

If the oil industry wants the offshore moratorium to be lifted sooner rather than later, why not give the industry the biggest boost it can by having its CEOs stand behind their wells in writing, since no human, CEO or otherwise, can actually reach the wells that now drill as deep as 35,000 feet below the ocean's surface?

Really, the strongest case to be made for a Section 302 post-Macondo is the testimony of BP CEO Tony Hayward.

At one point during Hayward's testimony, the BP CEO was asked how many deep-water wells BP had globally. Hayward didn't know the exact number, and answered by saying "hundreds."

Detractors of regulation will say this Hayward statement proves how unmanageable such a regulation would be: how can the CEO of a global operation be expected to know the exact number of wells located all over the world? After all, he has a global corporation to run -- or, in this case, run into the ground when he isn't on top of what is going on at one well.

And that's the important point. Given that any one deep-water well has the power to bring a formerly $180 billion market cap company to its knees, force a President of the U.S. fixate on an oil company as the No. 1 Public Enemy, and wreak havoc on the U.S. economy and ecosystem, threatening decades-old businesses and billions-of-years-old species, the better question is: how can an oil company CEO

not

be able to answer this question, and how can we as a society

not

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do all we can to make sure they know what's going on thousands of feet below the ocean's surface?

The quickly dished judgment on the testimony last week of BP CEO Tony Hayward was that he provided the Big No-Answer, a legal equivalent of the BP containment dome. Congress gushed with internal BP documents citing problems and problematic decisions with the "nightmare well" and in its design and operation, and Hayward placed the massive containment dome of his legal non-answers over the entire seven-hour interrogation. It was notable only for being the first BP containment dome to work.

"I'm afraid I can't answer that question;" or "I'm not involved in the decision-making process;" and "It's too early to draw conclusions," were the responses from the BP CEO to any question about what went wrong with the Macondo well.

"I'm not a drilling engineer;" "I'm not a cement engineer;" "I'm not a technically qualified engineer in these matters" were among the positions that we learned Tony Hayward was not qualified for in being CEO of a major oil company, and all his professional deficiencies conveniently made it impossible, and legally logical, for Hayward to be evasive, and nothing but evasive, in his answers.

In the least, the creation of a Sarbanes-Oxley section 302 for deepwater drilling would save us all from the embarrassment of having to endure another seven hours of Congressional testimony during which absolutely nothing is learned. Strike that last comment. We did learn one thing.

While Hayward's testimony has already been filed away by the cynics as the typical outcome of pointless Capitol Hill political theater, Hayward provided us with the most important answer of all: his non-answers show us the glaring need for oil company CEOs to be on the deepwater rig and peering down into its well legally, even if they can't be there physically.

We're going to be debating the ultimate fail-safe of the blowout preventer for some time to come -- the latest report in today's

New York Times

shows that the blowout preventer is less than the "ultimate" fail-safe that the oil industry would believe protects us from oil spill disasters. This point came up at the closing of Hayward's testimony last week also, when he was challenged over his assertion that the blowout preventer needs to be overhauled, but remains the best option as a fail-safe for the offshore drilling.

The

Times

report also made clear in painful detail the lapses in regulatory oversight provided by the Minerals Management Service of the Interior Department, which failed to enforce its own recommendations related to some of the risks associated with blowout preventers.

A

Wall Street Journal

report from the weekend indicated that one-third of BP wells around the globe use a well-casing design that BP says is an accepted practice, yet which Congress believes may contribute to the risk of a blowout and be used to save time and money.

In an ironic note to start week 9 of the BP oil spill, BP CEO Tony Hayward was scheduled to deliver the 2010 keynote speech at the World National Oil Companies Congress in London on Tuesday, focusing on the global responsibilities of oil companies. Hayward has canceled, citing his commitment to the Gulf of Mexico oil spill. It's ironic that when Hayward tries to send the right message to the public, global responsibility of oil companies is what ends up being sacrificed.

Philosophers and writers have always known the truth. Nietzsche said if you stare into the abyss for long enough, the abyss stares into you, and staring at the BP live oil spill came for more than 60 days now, there seem to be more questions as far as how to overhaul oil industry regulation than potential solutions. We've got to keep staring into the abyss of the deep waters of the Gulf of Mexico; that's part of the process of getting to a safer deep-water industry.

Still, that long process involving a myriad of technical issues and deep-water devices doesn't take away from the importance of some basic logic of human motivations that has existed since Shakespeare wrote

The Winter's Tale

and had a character say, "Tis safer to avoid what's grown than question how 'tis born."

-- Reported by Eric Rosenbaum in New York.

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