Financial requirements spawned by insurance provisions under the 1990 Oil Pollution Act (OPA) threaten to cripple the U.S. offshore oil industry, the National Petroleum Council warns.
NPC has delivered an interim report on the issue to Energy Sec. Hazel O'Leary. She planned to forward it to Interior Sec. Bruce Babbitt because Interior's Minerals Management Service drafted the controversial proposed rule.
Authors of the NPC study estimated the burden of the new rule would fall most heavily on small to midsize offshore operators and cost the nation as much as 2 million b/d of production.
The National Ocean Industries Association urged the federal government to give the report careful consideration.
Robert Stewart, NOIA president, said, "The potential impacts to the domestic industry, offshore and onshore, are serious. Broad interpretation of the statute could force hundreds of companies out of business, placing thousands more of our industry workers in the unemployment lines."
OPA contains provisions for double hulls on oil tankers and requires offshore operators to show evidence of financial responsibility of as much as $150 million in case of spills, compared with $35 million under previous law.
MMS has interpreted the law tightly in its proposed rule, and industry has objected loudly (OGJ, Nov. 15, p. 26).
TOUGHER RULES
NPC said, "The new financial responsibility requirements, as contained in the MMS's preliminary interpretation, could have serious and substantial impacts on all segments of the oil and gas industry and disrupt commerce in many other areas. Even under a narrower interpretation of OPA's requirements, offshore operators may face significant cost burdens."
NPC said if MMS cannot inject enough administrative flexibility into the rule, Congress may want to consider a legislative amendment.
It noted the proposed rule would extend financial responsibility, requirements to not only offshore but also onshore operations, including production, pipelines, refineries, and terminals."
It said MMS's preliminary, interpretation of the definitions and interaction of the terms "offshore facility,""onshore facility," and "responsible party" would have the effect of imposing a financial responsibility requirement on all types of petroleum production, refining, transportation, and distribution facilities, whether located in traditional offshore areas or onshore.
"As a result," NPC said, "the responsible party for any of these operations would be required to show evidence of up to $150 million of financial responsibility." Only some of the largest oil companies would be able to self insure, leaving hundreds of firms to seek alternative methods of showing the required financial responsibility.
"Even if conventional insurance were available to meet such a requirement - and it is not clear that it would be many companies would not be able to tolerate such an added cost in their operations," NPC said.
"Since self insurers may incur no incremental cost, any firm unable to self insure would be at a competitive disadvantage in the best of circumstances and unable to operate in the worst."
NPC said MMS erred in its rule, ignoring OPA's distinctions between "onshore facility" and "offshore facility."
"The law treats the two differently for liability, spill response, contingency planning, and a number of other issues. The law imposes no financial responsibility requirement on onshore facilities. Furthermore, the law specifies the 'responsible party' separately for onshore facilities and onshore facilities.
"For an offshore facility, the responsible party is the 'lessee,' 'permittee,' or 'holder of easement,' just as it was under the law that preceded OPA, the Outer Continental Shelf Lands Act. These terms apply solely to the traditional offshore arena and have no meaning when applied to refineries, terminals, and other facilities located on land."
NPC said the $150 million requirement will result in the loss of offshore oil and gas production and reserves due to early abandonment, and will make only the largest offshore fields economic to develop.
It said service industries, federal and state royalties, and regional economies and jobs also will feel the effect of a decline in offshore operations.
INSURANCE QUESTION
NPC said Congress' setting of a $150 million financial responsibility level seems to be arbitrary, and no offshore operations spill has even approached the lower level of $35 million.
"Low pressure reservoirs, blowout and spill prevention equipment, automatic shutdown systems, safety training, all have contributed to this exemplary record," NPC said.
Conventional insurers are unwilling to operate under the new rules.
"The insurance industry has indicated that, while it will continue to provide pollution cover for offshore operations, it will not allow those policies to be used as guarantees of financial responsibility.
"Of particular concern is the combination of the OPA's provisions that guarantors of financial responsibility are directly liable for costs and damages, that the guarantor cannot assert standard defenses to that liability, and the fact that OPA does not preempt state laws, which may expose underwriters to liabilities above OPA's financial responsibility level of $150 million. In the absence of insurance cover, evidence of financial responsibility may be unavailable to any company unable to self insure."
The report said the regulations would create potential open ended liabilities for banks and other financial institutions that have been the industry's main source of capital.
"These institutions will be reluctant to dedicate new capital to the petroleum industry since the costs associated with a spill could bankrupt the borrower. Furthermore, the assets of a current operator unable to demonstrate evidence of responsibility will suddenly be devalued, forcing lenders to reevaluate their use as collateral."
NPC said the National Oceanic and Atmospheric Administration is considering rules requiring damages for loss of use of offshore waters after spills, which also "may expose operating companies to unpredictable, large, and potentially bankrupting liability regimes."
SOLUTIONS
NPC said federal agencies can draft rules that both conform OPA requirements with commercial realities and safeguard the public interest.
It recommended that MMS narrow the scope of its definition of "offshore facility" to vessels, offshore facilities, and deepwater ports and the definition of "responsible party" to operators and not lenders and insurance companies.
NPC said, "The MMS should explore the statutory authority to calibrate the levels of financial responsibility required of various responsible parties to the extent of risk posted by oil pollution from their facilities, including but not limited to the extent to which these operators have taken steps to mitigate risk."
And it said alternative commercial mechanisms should be recognized as viable methods of demonstrating financial responsibility.
"These include arrangements where a number of parties may aggregate the same funds of revenue or insurance coverages and state and federal funds available to covered parties for compensation of damages and cleanup costs. Similar funds are used to demonstrate financial responsibility under the Environmental Protection Agency program applicable to underground storage tanks."
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