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Gard News 205, February/April 2012

A recent report by the US Government Accountability Office makes key recommendations regarding the funding of government response to major oil spills in light of lessons learned from the DEEPWATER HORIZON incident.

The US Government Accountability Office (GAO) investigates receipt and expenditure of public funds in order to make recommendations to the President and Congress for improvements in efficiency and accountability of the federal government.   The GAO is in effect a non-partisan financial and performance auditor.  In a report published on 24th October 2011, the GAO made two key recommendations regarding the funding of government response to major oil spills in light of lessons learned from the DEEPWATER HORIZON spill.1 

The key concept behind OPA 90, the US federal legislation that governs oil spill responsibility, is "polluter pays."  However, when the responsible party is not identified, is unable to pay or the limitation of liability under the statute has been reached, the Oil Spill Liability Trust Fund (the Fund) steps in to fund clean-up and compensation.  The Fund is administered by the US Coast Guard through its National Pollution Funds Center (NPFC).  The Fund is primarily financed through an eight cent per barrel tax on petroleum products and is subject to a USD 1 billion cap on the gross amount paid per incident.  The GAO made recommended changes to both the cap and the tax. 

Federal agencies seek payment for response costs from the NPFC, which pays and then "bills" the Responsible Party for costs recoverable under OPA 90.  As of May 2011, the NPFC had billed and received payment from BP of USD 711 million.  The GAO expresses concern that the Fund cap will be exhausted and recommends that the Fund cap be restated to be net, rather than gross (i.e., expenditures less reimbursements).   That will increase the amount of funds available for agency response to spills of the magnitude of the DEEPWATER HORIZON. 

The eight cent per barrel tax that makes up over 70 per cent of the Funds revenue is currently set to expire in 2017.  The GAO recommends extending the tax to build the Fund.  While these two recommendations are important, the most interesting reading in the GAO report is the tracking of the expenditures by government agencies and BP.

OPA 90 goes beyond "polluter pays" to "polluter hires clean-up contractors, sets up claims centers, evaluates claims and pays them".   The state and federal governments have a monitoring function and can step in if the performance of the Responsible Party is inadequate in any of its responsibilities.

Notwithstanding the USD 75 million OPA 90 limitation2 applicable to rigs, BP agreed with President Obama to set up a USD 20 billion trust fund to pay claims.3 BP established the Gulf Coast Claims Facility (GCCF) administered by Ken Feinberg to receive, review and, as appropriate, pay claims made by individuals and businesses.  As of 31st May 2011, the GCCF had paid USD 4.2 billion with respect to over 320,000 individual and business compensation claims.  The GCCF will remain in place to receive claims until 23rd August 2013. 

Under OPA 90, claimants are required to submit their claims to the Responsible Party first and if unsatisfied, they can then submit the claim to the NPFC.  As of 31st May 2011, the NPFC received 901 claims totalling USD 238 million.  So far, the NPFC has denied all of the 570 claims that it has reviewed which clearly indicates the proper denial of the claims by the GCCF in the first place.   

While the dollar figures reported for claims are staggering, the process of assessing the damage to natural resources is just beginning.  The GAO report cites the National Commission on BP DEEPWATER HORIZON Oil Spill and Offshore Drilling report estimate of restoration cost at USD 15-20 billion over 30 years.    BP has already agreed to immediately fund restoration projects of USD 1 billion split between the Department of the Interior (DOI) and the National Oceanic and Atmospheric Administration (NOAA) and the states of Alabama, Florida, Louisiana, Mississippi and Texas.  In addition to immediate funding, BP has agreed to pay DOI and NOAA USD 10 million each to study the effects of the spill on the environment for purposes of assessing natural resource damages (which will then be charged against BP).

In summary, the GAO report can be seen as a factual and reliable report regarding the expenditures of the federal agencies responsible for spill management as well as the staggering amounts of money paid and to be paid by BP as Responsible Party.   Evidently we will see the financial and legislative ripple effect from this incident for years to come.

Footnotes
1 The full report is available on the GAO website at http://www.gao.gov/.
2 The limitation applies only to compensation. Clean up costs are not subject to the limitation. The limitation will not apply if the spill is a result of gross negligence, wilful misconduct or the spill is the result of a violation of a federal operation, safety or construction regulation.
3 BP has settled with two of the parties to the drilling project: MOEX agreed to pay BP USD 1.065 billion and Anadarko has agreed to pay BP USD 4 billion.

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