Canadian requirements for industry coverage of potential offshore well blowout costs are likely obsolete and “woefully inadequate,” says a report to Parliament that urges a thorough review of damage liability rules.

Ottawa’s Senate Natural Resource Committee recommends against any moratorium on offshore drilling, saying Canadian safety policing with regulatory inspections and certification appears to be stricter than the regime in the United States. But the all-party group urges all concerned to recognize the steep costs of accidents highlighted by the blowout of BP plc’s Macondo well in the Gulf of Mexico.

While Ottawa’s Senate is appointed rather than elected and far less powerful than Washington’s upper legislative chamber, the Canadian version often plays an influential advisory role in articulating consensus on technical issues. The offshore drilling report follows hearings that included National Energy Board Chairman Gaetan Caron and senior executives of offshore natural gas and oil developers such as Encana Corp. and Chevron Canada.

The Canadian pattern of accidents is different from the American record. There have been no modern Canadian counterparts to the Exxon Valdez oil spill on Alaska’s coastline and BP’s Gulf disaster this year.

The last big oil accident was on land in Alberta during 1948, when an exploration well blew out and turned a farm field into a burning black lake only 25 miles from the provincial capital of Edmonton. The province’s Energy Resources Conservation Board, using authority dating back to the 1930s, took over the well, stopped the blowout, snuffed out the fire, cleaned up the spill and made the company involved cover all the costs out of ensuing production revenues.

Canada’s biggest offshore oil spill, on the Grand Banks of Newfoundland in 2004, was trivial compared to the recent Gulf of Mexico blowout and attracted almost no attention outside its immediate vicinity. The total spill, an accidental discharge from the Terra Nova production vessel anchored about 180 miles east of St. John’s, was only 1,000 bbl.

But there have been a string of spectacular natural gas drilling accidents. In 1970-1971 an Arctic gas discovery well on King Christian Island blew out and burned for 91 days, with a 250-foot vertical column of flame that was visible at least 300 miles away in the northern winter of around-the-clock darkness.

Offshore Nova Scotia a 1974 exploration well blowout vented an estimated daily leak of 70 MMcf of gas plus smaller flows of gasoline-like condensates for two weeks. In 1985 a second gas exploration well blew out of control, but the leak stayed underground by being trapped in a shallow geological formation above the broken well bore.

Gas accidents, while sometimes spectacular as a result of explosions and fires, attract less public attention and fade from memory faster than oil disasters. “Accidents at these operations do not cause a slick similar to that of the Deepwater Horizon incident and other crude oil spills,” the Canadian Senate observed. “Gas escapes into the atmosphere, while condensate forms a thin layer on the ocean surface, the thickness of which can be measured in microns. Condensates quickly dissolve or evaporate.”

When it comes to covering financial results of offshore drilling and tanker accidents, “nations have wrestled with the establishment of appropriate liability regimes to provide for compensation of economic loss and the cost of remediating environmental damages,” says the Canadian Senate report. “There is little uniformity at the present time and Canada’s own regime appears to be confused and likely out of date.”

The Canadian rules, which date back to 1986, specify that gas and oil companies are responsible for all spill cleanup cost and damage compensation.

Companies are required to post an “absolute liability fund” covering costs whether or not a blowout is caused by negligence. But the fund is only C$30 million (US$28 million) for drilling offshore of the east coast and C$40 million (US$38 million) for Arctic operations. “As the disaster in the Gulf of Mexico demonstrates, this $30 million figure may be woefully inadequate,” the report said.

A second “civil liability fund” has to be posted to cover damages due to fault or negligence by the companies involved in Canadian offshore drilling. But the mandatory amount is only C$70 million (US$66 million).

Canada’s Senate warns, “This limit on liability could permit offshore operators to avoid paying the full cost of spills occurring as a result of their operations, perhaps paying only a small fraction of the overall third-party claims for economic loss. Governments may then have to step in to fill this financial void.”

After collecting testimony from senior regulatory and industry officials, the Canadian Senate committee observed that “significant reviews of the liability and responsibility issues are under way” and pledged to “strongly support such reviews.”

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