U.S. OIL SPILL LAW TO CAUSE GROWING TANKER PROBLEM

Sept. 30, 1991
Robin Buckner Price Staff Writer Tanker owners face a growing dilemma on the issue of oil spill liability. The U.S. Oil Pollution Act, passed last year in the wake of the March 1989 Exxon Valdez oil spill, was intended to reduce risk of and damage from such accidents. However, in addition to phasing in double hulls on most tankers operating in U.S. waters, the law substantially increases shipowner's liability for spills. And the federal law does not preempt state liability laws, which in
Robin Buckner Price
Staff Writer

Tanker owners face a growing dilemma on the issue of oil spill liability.

The U.S. Oil Pollution Act, passed last year in the wake of the March 1989 Exxon Valdez oil spill, was intended to reduce risk of and damage from such accidents.

However, in addition to phasing in double hulls on most tankers operating in U.S. waters, the law substantially increases shipowner's liability for spills. And the federal law does not preempt state liability laws, which in most cases amount to unlimited liability for spill cleanup.

Rather than face potentially unlimited liability in the event of a spill, tanker owners worldwide are exercising a number of options to shield themselves. Some of those options could increase the potential for oil spills, industry officials warn.

The act also threatens to shatter the international alliance among shippers. A report by Drewry Shipping Consultants Ltd., London, says the law could have a devastating effect on operating practices. Tanker owners and operators have voiced the most opposition to the new spill law and the shackles it places on them. Now the industry that insures tankers has spoken up about its increased liability, and it too may launch a boycott.

NOT A DONE DEAL

Meantime, the issue of what constitutes adequate liability coverage has not been decided.

The International Association of Independent Tanker Owners (Intertanko), Oslo, reported draft regulations regarding certificates of financial responsibility are held up for the time being.

The U.S. Coast Guard prepared the document months ago and sent it to the Department of Transportation for review and approval. It then went to the Off ice of Management and Budget (OMB) for final approval before publication as a notice of proposed rulemaking.

However, OMB returned the rules to the Coast Guard with a request for a cost/benefit analysis. Intertanko said the President's Committee on Competitiveness asked OMB to consider the economic effect of the proposed rulemaking,

The Coast Guard probably will hire consultants to prepare a draft cost/benefit analysis, Intertanko predicted. Intertanko suggested hearings could be held in Washington on the subject, giving all sides an opportunity to discuss some of the problems connected with the law.

OIL SPILL LAW

The oil spill act increases shipowners' liability in the event of a spill, requires phasing in of double hulled tankers, and facilitates improved spill response and preparedness (OGJ, Aug. 6, 1990, p. 27).

Under the act, shipowners' liability in the event of spill increased to $1,200/vessel ton from $150/vessel ton, with a minimum liability of $10 million for vessels larger than 3,000 gross tons and $2 million for smaller tankers. Previously there was a $14 million cap on liability.

Offshore facilities have a liability of $75 million plus unlimited cleanup costs, and onshore facilities or deepwater ports could be liable for $350 million.

A $1 billion oil spill cleanup fund was established under the law, which uses an existing 5 cents/bbl fee on oil. Half of the fund can be used for a single spill, and spill victims can use the fund when a spiller's liability limit has been reached, the spiller is unknown, or settlement is delayed.

Double hulls will be required on most tankers plying U.S. waters, to be phased in under a timetable based on the tanker's age and tonnage.

The act also facilitated formation of the Marine Spill Response Corp., which was launched by a group of U.S. oil companies.

It is funded by the Marine Preservation Association and headed by the U.S. Coast Guard (OGJ, Sept. 10, 1990, p. 40).

Double hulls, spill liability, and liability insurance will take on growing importance, given the Lower 48's hefty share of oil supply from Alaska, all water borne, and the rising trend in U.S. oil imports, mostly water borne.

Meantime, figures reported by Overseas Shipholding Group (OSG), New York, show a steady increase in the world tanker fleet of very large crude carriers for the past 5 years and a bulging tanker orderbook among shipbuilders.

The world tanker orderbook at the end of 1990 had swelled to 38 million dwt, to be delivered in the following 3 years, from 25 million dwt a year earlier. The 1990 orderbook was the fattest since 1976.

But the growth in fleet capacity is likely to be gradually constrained later in the 1990s by the combined effects of vessel aging and tighter safety and environmental restrictions, especially for tankers entering U.S. waters, OSG said.

It estimated double hulls add about 20% to the cost of building a tanker.

STATE ACTION

One of the most controversial aspects of the law is the potential for unlimited liability.

Intertanko said only six of 24 U.S. coastal states place a limit on damage liability, and vague, general terms in some of those states' spill laws could add up to unlimited liability. As a result, some say responsible transporters will be scared out of the industry, with the vacuum filled by less responsible transporters, thus increasing risk of spills.

Because the federal act allows preemption by state laws, individual states and ports are introducing antipollution regulations that support and sometimes surpass the federal law's provisions.

Drewry said the most significant are:

  • California's new oil spill law, which includes setting up a $100 million cleanup fund by implementing a 24 cents/bbl tariff on all oil entering state waters. New measures being imposed also call for surprise tanker inspections and a requirement that any oil tanker in California waters provide evidence of $500 million of liability against a spill, to increase to $1 billion by 2000. And, unlike the federal legislation which holds ship owners and operators liable for spills, California's legislation places shared liability between cargo and shipowners, following international principles.

  • Louisiana legislation, which will follow California's lead with its new regulations.

  • Texas legislation, which establishes more coordinated spill response teams and holds polluters liable for civil penalties of as much as $500,000.

INDUSTRY FALLOUT

The fallout from the new law began early, but most recent is Chevron International's decision to scale down its activates related to U.S. resid deliveries.

"Due to concern about the environmental risks associated with deliveries in U.S. waters, shipping into the U.S. and complementary activities by Chevron International at Freeport, Bahamas, will be reduced significantly," Chevron said.

Chevron noted the decision does not affect its resid business in the Caribbean/Gulf Coast, its marine bunkering operations, or its product/feedstock activities.

Meantime, Royal Dutch/Shell Group disclosed plans to slash the size of its fleet to 50 vessels from 90, phasing out its third party transportation business (OGJ, July 1, p. 32).

Even prior to the legislation's passage, several international shipping concerns announced plans to boycott the U.S. Royal Dutch/Shell, Teekay Shipping Co. Inc., Long Beach, Calif., Ste. Nationale Elf Aquitaine, A.P. Moller of Denmark, and Petrofina SA of Brussels, barred their vessels from calling at U.S. ports with the exception of the Louisiana Offshore Oil Port (OGJ, July 9, 1990, p. 30).

Refusing to do business in U.S. ports will not be a feasible course of action for many, noted Frank Paine, independent consultant, in an article for Geopolitics of Energy. He suggested U.S. companies providing crude for their own refineries are not likely to participate in such a boycott.

But non-U.S. companies and independent tanker operators can make the boycott threat credible by avoiding U.S. ports until rates for trade to the states exceed the rates in other areas by amounts equal to the difference in insurance premiums. If other countries follow the U.S. lead, enough ports will be off limits to again make the threat credible, Paine said.

Many believe companies with the most to lose are likely to leave the market, leaving companies with the least to lose to fill the gap.

Drewry noted about 50% of the world tanker fleet is owned or operated by oil companies, governments, or large independents. The rest is left to smaller independents.

And while smaller companies may hold the tonnage required to meet U.S. demands, the quality of the vessels often is in question.

Drewry said, "The threat of unlimited liability ... may see the U.S. market itself develop a two tier structure as top rates are paid for the best quality ships on U.S. trades while lower--but still high--rates are paid for poor quality ships on U.S. trades."

Douglas C. Wolcott, president of Chevron Shipping Corp., told the Connecticut Maritime Association Chevron wants the greatest possible control over fleets carrying its cargoes.

Other techniques companies are using to manage the increased risk include dividing fleets into one ship corporations to shield assets. Others are passing title on oil cargoes to foreign entities, who in theory are further removed from U.S. laws.

EXXON'S PROGRAM

Other companies are focusing on operational safety to reduce their exposure to liability.

Exxon Shipping Co. has placed increased emphasis on safety operations as one way of reducing exposure to liability.

"We recognized some time ago that the extensive federal and state legislation, together with erosion of the federal preemption principle with respect to control and regulation of marine operations, would result in a new scale of regulatory requirements," Exxon said.

"Much of the legislation enacted erodes the liability defenses while at the same time imposing severe civil and criminal penalties.

"In order to fulfill our commitment to strict compliance with all regulatory requirements, Exxon Shipping has started the formalization of its compliance system by compiling a database of all federal and state regulations, defining compliance responsibilities, and ensuring strict compliance."

UNILATERALISM

During the last 30 years the international shipping community has built an allegiance to rules adopted by the International Maritime Organisation (IMO). And to date, rules adopted at the state and port level have mainly been measures to ensure that international standards were met.

Passage of the Oil Pollution Act was a rebuff of the international shipping alliance and has many crying foul, fearing not only higher costs but also a threatened two tiered international market where one set of standards applies everywhere but the U.S., creating a maze of regulations.

Despite negative opinions, Drewry said, reports suggest other nations, including Canada and Germany, are considering similar legislation in an attempt to "emulate the U.S. model."

Drewry sees two viewpoints developing about the best way to fight oil pollution. One school of thought points to global enforcement of IMO regulations to reduce tanker accidents. The other view, spearheaded by the U.S., is disenchanted with continued accidents in spite of IMO rules.

Drewry said, "Although slammed internationally by many shipowners as a hastily concocted set of rules designed to appease public pressure in the aftermath of the Valdez incident, there is little doubt among experts that the act, which attempts to deal with all issues from prevention to compensation, will affect the future structure of the tanker market more than any other single piece of legislation."

INSURANCE EFFECTS

Not only are tanker operators facing increased liability, the insurance industry that ultimately writes the check in the event of a spill also faces added exposure, evinced by the drastic increases in premiums during the last year.

Protection and indemnity (P&I) clubs contend that when the Coast Guard finally issues the financial responsibility rules, the clubs probably will not consider certificates of insurance, or "blue cards," sufficient as proof of financial responsibility, said Gerard McAloon, vice-president and deputy chairman of the energy group for insurance broker Johnson & Higgins, New York.

If a tanker owner or operator attempts to prove responsibility with a blue card, its insurance policy will become void under a warranty provision in the policy.

McAloon said that's largely because the law broadens the group of potential claimants from people who had direct damage from the spill to include anybody who had experienced a financial loss.

"If the fisherman can sue, why not the bait and tackle shop?" McAloon asked.

Also under the new law, McAloon said, tanker operators can be sued on the federal level and on the state level for the same spill, placing the operators and insurance companies under a double financial threat.

What's more, the guarantor is liable for the federally required amount of damages regardless of the terms of the insurance policy.

McAloon said if a tanker is insured only for specific ports and is traveling in an uncovered states' port when a spill occurs, the insurance company may be forced to make payment.

McAloon sees the trend heading toward large tanker owners and operators using their balance sheets to certify financial responsibility.

Another option, he said, would be a pool with mutual contributions from tankers operating off the U.S. that could be used in the event of a spill. However, he noted the Coast Guard would have to set the amount required in the fund.

Phasing in double hulls or bottoms on tankers will not necessarily reduce premiums, McAloon noted, because insurance underwriters are not convinced double hull tankers offer any less risk.

AVAILABLE COVERAGE

Meantime, most P&I clubs offer coverage of as much as $1 billion, but that offering tripled premiums on most renewals last February, due in large part to the new legislation, Drewry said. Cost of a basic $500 million policy jumped 20-60% among the clubs.

Drewry said the greatest increase was in the excess pollution contract, which is a $200 million supplement to the basic policy. For each voyage, the contract cost 13 cents/gross registered ton of the vessel in 1990. This year the cost shot up to 55.50/ton. The equivalent certificate for non-U.S. tanker travel increased to 20-350/ton.

Further coverage of as much as $1 billion is available, but that could increase the cost of oil imports by about 35-55 cents/ton, Drewry said.

In addition, the International Group of P&I clubs introduced a surcharge last February to pay for a $25 million pool levy and a $25 million increase in reinsurance costs, both related to U.S. pollution liability. The levy calls for all oil tankers to pay an added 32 cents/ton for the first 10 U.S. trips. The surcharge drops to 16 cents/ton/trip for ships discharging only at Louisiana Offshore Oil Port or other Coast Guard approved areas.

Chevron's Wolcott said the added insurance premium is more a commercial than a liability issue. Shipowners will pass along the extra insurance costs to cargo owners, who will in turn pass it on to consumers, with the end result of higher transportation costs.

Intertanko reported Chevron has taken out insurance coverage of $1.9 billion.

Copyright 1990 Oil & Gas Journal. All Rights Reserved.