TANKER OWNERS COPY WITH OPA, BUT . . .

The Petroleum industry Research Foundation Inc. (Pirinc), New York, reports the world tanker industry is learning to live with tough provisions of the U.S.'s Oil Pollution Act (OPA) of 1990.

But serious problems lie over the horizon.

In a report prepared under contract for the Department of Energy, Pirinc noted U.S. waterborne oil imports totaled 6.5 million b/d in 1991, three fourths of which was crude oil, and are expected to rise by almost 3 million b/d by 2000.

"Tanker demand will grow even faster," Pirinc predicted. "Most of the U.S. imports and the increased traffic to other world consuming regions will be on long haul trades. The number of U.S. port calls by tankers and the volume of offshore lightering will grow."

LIVING WITH OPA

Pirinc noted OPA and a variety of state pollution laws affect every aspect of the tanker industry.

It said, "OPA imposed strict, joint, and several liability against vessel owners, operators, and bareboat charterers in the event of an oil spill. It established limits to liability but severely restricted the limits' applicability. It strips traditional defenses down to three: an act of war, an act of God, or the act of an unrelated third party.

"In addition, liability limits do not apply if the spill results from a violation of a federal regulation or safety standard. The combination of provisions means that most spills will breach OPA's defenses."

Pirinc pointed out that OPA allowed states to enact oil spill legislation, including prevention and cleanup measures. Nineteen states have imposed strict unlimited liability, and, unlike OPA, many impose liability on cargo owners and charterers.

"Some state regulations are draconian, and compliance with conflicting, overlapping state regulations has become so burdensome that to date they have caused more shifts in companies' ship deployment patterns than OPA."

NO BUSINESS AS USUAL

Pirinc said most tankers owners have continued trading to the U.S. but "this is not to say 'business as usual' rules the day.

"Some refuse to carry 'persistent' oils (effectively, crude oil and residual fuel oil) to mainland ports, and restrict themselves to discharging via Louisiana Offshore Oil Port or lightering or transshipping in the Caribbean.

"Companies have restructured and have pulled out of marginal trades. Most large oil companies have recommitted themselves to the U.S. trade and focus their efforts on control of the tonnage they use either by ownership or by extensive inspection programs for chartered vessels and establishment of much closet links with independent shipowners.

"The most visible effect of OPA, so far, is the sea change in operational procedures, safety provisions, and inspection routines now being implemented in the oil trades. The trend is pervasive, across all company types and all company sizes.

"Some owners are citing their radically improved operational and safety systems in marketing their vessels. There are signs of a marked improvement in the quality of tonnage employed in the U.S. trades.

"Corporate restructuring to limit the assets at risk continues, but the early signs of a flight to quality provides a stark contrast to the fears of many OPA critics who forecast that U.S. oil imports would be carried in inferior ships by uncaring owners for unscrupulous charterers. The exact opposite is occurring."

Pirinc said OPA's once controversial double hull requirements have been accepted. Half of the tanker tonnage now being built is double hulled, and the proportion will increase with time.

"It is possible that an alternative, equally environmentally sound, mid-deck tanker might be permitted to enter U.S. trades in the future, but this is a long way off."

The International Maritime Organization accepted such a design early this year but no such tankers have been built and congressional approval for the design will not come until its safety record has been established.

FINANCIAL RESPONSIBILITY

Pirinc's study observed OPA requires certificates of financial responsibility for vessels trading to the U.S. at higher levels of coverage than before.

"Also much higher is the risk that shipowners and providers of financial responsibility will possibly face unlimited liability in the event of a spill. Cargo owners and charterers also may be at risk.

"The Coast Guard's proposed rules have caused a storm of controversy because OPA requires that the guarantor (under pre-OPA rules, the protection and indemnity clubs that provide insurance) be directly liable for any damages. The clubs have refused to submit to OPA's higher requirements and defense waivers.

"If the Coast Guard were to implement the rules as proposed, no ship would likely qualify for a certificate. A complete stop to U.S. waterborne commerce is unthinkable, however. A solution will be reached."

Pirinc said natural resource damage assessment proposals, based on an evaluation technique known as contingent valuation, threaten to make extraordinarily high claims commonplace, even after lost incomes have been compensated and resources restored.

A National Oceanic and Atmospheric Administration panel is studying whether to use the technique in forthcoming rules.

"The potential for operational disruption posed by OPA mandated contingency plans has been a cause for concern. The Coast Guard has convened a second round of meetings of an advisory panel of industry representatives, state officials, and environmentalists in an attempt to assure its rules are workable. The August 1992 deadline for adoption of final rules is thus unlikely to be met."

RISING COSTS

The study said satisfactory levels of pollution liability insurance are hard to come by and very expensive. "The capacity of the reinsurance market is currently inadequate for the unlimited liability post-OPA world, and the cost of cover for shipowners has easily trebled in the last 2 years. It is now one of a shipowner's largest costs.

"OPA and associated state laws have on average added roughly 6 cents/bbl to the shipowners's cost of importing oil to the U.S. over the last 2 years. This is not the same as the cost of imported oil to the consumer. That depends on freight rates, which have been well below levels required to cover full economic cost for years.

"A double hulled very large crude carrier currently under construction will require rates equivalent to about $2/bbl to earn a return on its investment to carry crude from the Middle East to the U.S. This is about 80 cents/bbl above last year's relatively strong time charter rates. Of that difference, about 35 cents/bbl will be OPA induced."

It said over time, fundamental shipping market forces are likely to raise oil transportation costs more than OPA. And the OPA induced cost increases are further dwarfed by other increases facing the oil industry and consumers such as "green" product specifications and facilities requirements.

EVERYONE AT RISK

"The apparently smooth transition by tanker owners and the oil industry reflects an act of faith rather than rational acceptance," Pirinc said. "The U.S. is the preeminent source of tanker demand, and it is set to be the biggest growing in volume terms during the 1990s. It is rational to expect that tankers will continue to carry oil to the U.S. because there is no conceivable alternative.

"It is equally rational to expect that at some future point there will be a major, polluting spill in U.S. waters despite every precaution being taken. When that happens, under the laws as they currently stand, it is quite possible that shipowners--and probably the charterer and cargo owner--will be wiped out.

"Here is the act of faith: The laws are so vague and ambiguous in many areas that even when regulations for their implementation are agreed, no one will have a clear idea of the consequences until individual cases land in court. Judges may have so much leeway in interpretation--of damage awards in particular--that the future structure of the tanker industry could be in their hands."

Copyright 1992 Oil & Gas Journal. All Rights Reserved.