Senate panel raises questions in call for higher liability cap

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, May 26 -- Federal offshore oil spill liability limits clearly need to be raised, US Senate Energy and Natural Resources Committee members agreed on May 25 at the panel’s third hearing on the Gulf of Mexico rig accident and oil spill. But they disagreed by how much and whether existing laws provide unlimited opportunities to recover damages from parties who are responsible.

“Based on what I’ve learned so far, I believe that we have a system in dire need of repair,” said Jeff Bingaman (D-NM), the committee’s chairman, in his opening statement. “Current law caps the responsible parties’ damages, other than cleanup costs, at $75 million, nowhere near the damages which will result from this accident.”

Bingaman said it also found it troubling that while federal law requires the US Interior secretary to adjust these limits at least every 3 years to reflect changes in the Consumer Price Index, they have not been changed since 1990, when the Oil Pollution Act was passed following the oil spill into Alaska’s Prince William Sound when the Exxon Valdez tanker ran aground.

Bingaman said victims of the current spill from BP’s Macondo well in the gulf may wonder why there is any cap on damages, and why those responsible should not simply be required to pay the full amount of the harm they cause. “BP has stated that it will pay all legitimate claims, and that it will not insist on the $75 million cap currently in the law,” he said. “Even accepting that as true, we still have a broken system in need of repair.”

Bingaman said the Oil Spill Liability Trust Fund (OSLTF), which is intended to cover additional damages and is financed largely by a tax on oil, is limited to paying $1 billion per incident; that a requirement for offshore operators to demonstrate certain financial responsibility levels has only $35 million as its standard requirement; and that civil and criminal penalties which were set at $20,000/day in 1990 have increased only to $35,000/day.

‘Arbitrary’ proposals
“My own opinion is that we need to increase the $75 million liability cap to reflect inflation and the portfolios of the companies which are involved,” said Lisa Murkowski (R-Alas.), the committee’s ranking minority member. “But we need to safeguard against adopting proposals which are arbitrary. There’s one which would raise the cap to $10 billion on top of the unlimited cleanup costs and unlimited lawsuits which can be brought in state courts, but which could affect future activity.”

Murkowski said an increase is clearly needed, but added that it be enacted carefully. “We must and we will hold BP fully accountable for this tragedy,” she said. “We also must consider the cumulative effect of the different levels of liability, which could be economically devastating. Thousands of jobs, particularly along the Gulf Coast, could be lost, and our nation’s energy security could be weakened without providing any additional protection.”

But two US senators who have sponsored bills to increase the federal spill liability limit said it needs to reach a level that deters irresponsible behavior by unusually well capitalized companies operating offshore. “Enhancing these penalties will go a long way toward deterring oil companies from cutting corners,” said Sheldon Whitehouse (D-RI), the hearing’s first witness. “We also may want to consider banning drilling at certain depths until we determine that we can engage in repair and recovery activities at those depths.”

Whitehouse noted that his bill, S. 3446, would amend the Outer Continental Shelf Lands Act by raising the daily civil penalty maximum from $20,000/day to $75,000/day or $150,000/day if the spill poses serious or irreparable harm. It also would raise the maximum criminal penalties from $100,000 and imprisonment of up to 10 years to $10 million.

Committee member Robert Menendez (D-NJ), who is a cosponsor of Whitehouse’s bill and has introduced two of his own, said he might amend one of his measures so it would eliminate liability caps since the Obama administration apparently thinks liability should be unlimited. Two Obama administration witnesses quickly disagreed with that characterization.

‘Thoughtful increases’
“The investigations into the Deepwater Horizon explosion and this spill have not been completed, so it is premature to speculate as to the extent to which proposed increased penalty provisions would apply in this particular matter,” said Deputy US Interior Secretary David J. Hayes. “Nevertheless, given the time that has elapsed since these provisions were last amended, we believe it is appropriate to consider thoughtful increases in the amount of both civil and criminal penalties under the [OCS Lands Act].”

Associate US Atty. Gen. Thomas J. Perrelli said many factors need to be considered. “We must determine how to ensure that the liability rules provide the appropriate incentive for companies working in this field to fully account for the damages their actions may cause and to mitigate the risks of a catastrophic event,” he explained. “We must consider how best to ensure that the liability rules we adopt provide confidence that an individual or business harmed by an oil spill will be able to seek—and receive—fair compensation, and that the trustees charged with protecting our natural resources can secure adequate compensation for any harm done to those resources.”

Lawmakers also should analyze how any change in liability caps would interact with the current liability structure under OPA, he continued. “Under that structure, the party responsible for a spill is liable for associated costs and damages up to a specific cap, if the cap applies, with liability for additional costs and damages spread across the oil industry as a whole through the [OSLTF],” Perrelli told the committee. The caps don’t apply if it is demonstrated that the party responsible for a spill flagrantly violated regulations, he added.

Several committee members said that ExxonMobil Corp. offered to pay all damages resulting from the 1989 spill into Prince William Sound before appealing a damage award to the US Supreme Court for the next 20 years. “In the middle of this crisis, while the gusher is flowing from the ocean floor, the representation now might be different from what BP feels down the road,” said Byron L. Dorgan (D-ND).

Perrelli responded that the Obama administration’s legislative proposal which it sent to Congress on May 12 would require responsible parties to pay all costs. “We want to work with the committee to make sure companies invest sufficiently in safety and have funds to pay any claims,” he said. “We also want to investigate money that is required for drilling in deep water compared to shallower depths.

‘Every single dime’
“We are committed to recovering every single dime from BP,” he added. “There are many other statutes available as well as state laws. We are confident we can recover every single dime that has been expended by the taxpayers.”

Another witness, Craig Bennett, who directs the US Coast Guard’s National Pollution Fund Center, said that BP has gone beyond OPA requirements in its response to this spill. “To date, it has received over 25,000 claims and paid more than $28 million. It currently has the capacity to accept 6,000 claims/day and can go up to 15,000 claims/day,” he said. “It appears from the data we’re acquiring is that they are meeting the need. As soon as we heard about claims from Vietnamese, Spanish, and Croatian fisherman, we notified BP and it immediately hired translators.”

Dorgan and another Democrat on the committee, Ronald A. Wyden (Ore.), meanwhile, criticized Transocean Ltd., which owned the Deepwater Horizon rig, for filing a legal motion on May 13 under the federal Limitation of Shipowner’s Liability law to control its exposure and its plans to distribute $1 billion to shareholders as a dividend. “For a company that said it did nothing wrong, this company is working pretty hard to insulate itself from liability for an accident involving its own drill rig and crew,” Wyden observed, adding that he, Dorgan, and 16 other Senate Democrats wrote US Attorney General Eric H. Holder Jr. on May 24 requesting an investigation.

Perrelli said the US Department of Justice already has notified Transocean that its effort to seek a $26 million liability limit in federal court is not justified. “It is using a provision that dates back to the Titanic,” he added.

In a statement issued following the hearing, Transocean said that the dividend proposal was announced on Feb. 6, described in a preliminary proxy statement filed with the US Securities and Exchange Commission on Mar. 1, and approved by shareholders at the offshore drilling contractor’s annual meeting on May 14. “The payment of this dividend will not impact the company’s ability to meet its legal obligations relating to the Deepwater Horizon accident,” it continued. “In addition to its ongoing operating revenues, the company has insurance coverage applicable to the Deepwater Horizon, including insurance for the fair market value of the rig at the time of the accident. Other insurance is in place for claims asserted following the Apr. 20 accident.”

Contact Nick Snow at nicks@pennwell.com.

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