UPDATE 2-US oil spill panel urges increased safety steps

* Panel says BP spill indicates industry-wide problem

* Panel weighing self-regulating oil industry group

* Govt oversight of offshore drilling has been inadequate
(Adds background, comments about liability caps)

By Ayesha Rascoe

WASHINGTON, Dec 2 (Reuters) - The White House oil spill
commission on Thursday challenged offshore drillers to boost
safety standards, detailing proposals for the creation of an
independent, self-regulating industry group and reform of
government oversight.

Created in the aftermath of the BP (BP.L) drilling accident
in the Gulf of Mexico, the commission said the entire offshore
oil industry needed to increase its focus on safety and such an
industry group could hold firms accountable.

"The oil and gas industry needs to embrace a new safety
culture," commission co-chair Bill Reilly said at the start of
a two-day meeting to help prepare the panel's final report.

Reilly said a lack of resources had plagued the
government's offshore drilling regulator for years, which he
said justified the Obama administration's decision to delay
expansion of offshore drilling to areas off the Atlantic coast
and in the eastern Gulf. [ID:nLDE6B10VL]

"The industry is upset about it, but one has to ask how a
decision could ever have been made otherwise, given the poor
state of the agency itself," Reilly said.

The presidential commission tackled possible solutions for
the government and the oil industry at Thursday's meeting, as
it worked to lay out a path for offshore drilling after the
nation's largest offshore oil spill in history.

It will be ultimately up to Congress, regulators and
companies to decide whether and how to implement whatever
policy changes the commission recommends.

The panel is considering pushing for the creation of a
self-regulating safety organization for offshore drilling akin
to the U.S. nuclear sector's Institute of Nuclear Power
Operations to help enforce industry standards. [ID:nN18227167]

At Thursday's meeting, commission staff said an independent
safety group would be able to perform independent auditing and
should be empowered to dole out rewards and sanctions.

Any safety institute set up by the industry should not be
operated by a lobbying group, such as the American Petroleum
Institute, the panel's staff said.

To encourage participation in a safety institute, some
commissioners said it may be necessary to require membership
before firms can drill in areas deemed risky by regulators.

REFORMING GOVERNMENT OVERSIGHT

To be effective, the institute would have to be
complemented by a strong federal regulator, the staff said.

"There are fundamental weaknesses in the U.S. regulatory
approach" to offshore drilling, commission co-chair Bob Graham
said at the meeting.

The panel's staff said the Interior Department's offshore
drilling agency had been severely underfunded for years, and
too many overlapping duties among federal agencies had caused
lapses in oversight.

Ultimately, the panel said the government would need to
adopt a system that combined prescriptive rules with a
risk-based performance approach.

The panel is also considering recommending a more drastic
reorganization of Interior's offshore drilling agency than the
department has already proposed. [ID:nN19223644]

Under the commission staff's plan, safety regulations would
be enforced by a separate entity within the department that
would not have to answer to the interior secretary or other
political appointees.

In addition, commissioners said there may be a need to
increase fees to fund additional government oversight and to
require companies to prove they can respond to a major spill
before acquiring leases for high-risk areas.

Congress should phase in increases to the cap on the amount
companies may pay in economic damages from oil spills, as well
as raise financial responsibility requirements for drilling,
panel staff said.

WEIGHING COSTS VS SAFETY

At a meeting last month, the panel's investigative team
blamed bad decisions by BP and its contractors, Halliburton
(HAL.N) and Transocean (RIG.N), for the massive Gulf spill.
[ID:nN09295607]

The panel's staff on Thursday said most of those mistakes
had resulted from management failures at all three companies.

The panel also officially released a chart detailing
decisions made by BP and its contractors prior to the spill
that saved time but increased risks. The chart was leaked by
the media last week. [ID:nN24213109]

Companies need policies to make sure financial pressures do
not bias decisions in favor of cost savings over safety, the
panel said.

This is the panel's final public deliberation before the
scheduled release of its official policy recommendations in
January.
(Editing by Alden Bentley and Dale Hudson)