Senate and House committees voted out legislation last week that would remove the existing cap on a producer’s liability for economic damages from oil spills on the federal Outer Continental Shelf (OCS).

The Senate Environmental and Public Works Committee (EPW) sent its bill to the Senate floor, where it likely will be merged with other bills that have been introduced following the oil spill in the Gulf of Mexico.The House Transportation and Infrastructure Committee last Thursday reported its measure to the full House.

There has been significant pressure on Capitol Hill to eliminate the existing liability cap of $75 million, with many lawmakers saying the amount would be far from adequate to compensate those affected by the explosion aboard the Deepwater Horizon rig and the current oil spill (see NGI, May 10). Raising the liability cap could make oil and natural gas operations in the Gulf of Mexico (GOM) uninsurable by all but the largest companies. Independent producers would likely be forced out of the Gulf.

Because insurance would not be available, “more than 100 U.S. companies would be forced out of the effort to produce domestic resources, leaving only a few of the very largest multinational corporations and those companies owned by foreign governments” exploring for oil and natural gas in the OCS, the American Petroleum Institute said.

Carol Browner, special adviser to President Obama on energy and climate change, believes that removing the liability cap is the right step, even if it means small producers won’t be able to operate in the GOM. “Maybe this is a sector [oil and gas] where you really need large companies who can bring to bear the expertise and who have the wherewithal to cover the expense if something goes wrong,” she said in an interview with WSJ.com.

The $75 million cap was initially to be substituted with a $10 billion limit, but an amendment offered by EPW Committee Chairman Barbara Boxer (D-CA) would totally remove the cap on a producer’s economic liability.

Likewise, the House bill (HR 5629) would make a producer involved in an oil spill liable for all of the cleanup costs and damages to third parties. The bill also raises the minimum level of financial responsibility for an offshore facility to $1.5 billion, and requires the president to review the minimum level of responsibility for an offshore facility every three years and to revise the level upward to reflect the potential risk of a release to human health and the environment.

In other developments on Capitol Hill, Sen. Dianne Feinstein (D-CA) last Tuesday introduced legislation that would cut off the flow of federal incentives for oil and natural gas drilling in the deep waters of the OCS.

The bill would repeal mandatory and discretionary royalty-based incentives for all future leases to drill for oil and gas in federal waters at depths of 400 meters (1,312 feet) or more.

“The BP spill catastrophe in the Gulf of Mexico proves that offshore drilling in deep waters is extremely risky and that safety, prevention and response technologies are totally insufficient. Yet energy companies have long benefited from federal incentives that encourage drilling at increasingly greater and greater depths. This to me makes no sense,” Feinstein said.

Oil has been spewing in the GOM for more than two months following an explosion on board the BP plc-leased Deepwater Horizon, which sank off the coast of Louisiana.

She said the taxpayer-funded incentives should instead go towards the development of clean, renewable energy sources.

Congress over the past decades has established a number of royalty relief programs to promote domestic exploration and production in deep waters. In 1995 Congress passed the Deep Water Royalty Relief Act, which granted a royalty “holiday” to oil and gas companies drilling in deep waters for leases sold between 1996 and 2000. The measure reduced the amount of royalties that companies owed for drilling in the GOM.

And in 2005 Congress passed the Energy Policy Act, which mandated royalty relief for wells in waters deeper than 400 meters. This provided incentives for drilling for oil and natural gas in the offshore U.S. deepest waters.

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