Legislation seeking to increase producers’ liability for economic damages from oil spills would make oil and natural gas operations in the Gulf of Mexico (GOM) uninsurable by all but the largest companies, two producer groups said.
“Initial economic analysis shows raising the liability cap to $10 billion per incident would limit Gulf operations to only the largest companies, forcing mid-size and smaller firms who cannot self-insure from the market,” said Jack Gerard, CEO of the American Petroleum Institute (API), which represents major producers.
“Insurance industry equity is insufficient to provide such coverage, but even if insurance were available, the hypothetic premium increases would raise the total unit costs of exploration and production in the Gulf of Mexico by 25%, making many fields uneconomical to produce, which would threaten our nation’s energy security, reduce government revenues and cost thousands of American jobs,” he said.
“Raising it [the liability cap] to a $10 billion level would put out virtually all of our members that operate in the Gulf of Mexico,” said Dan Naatz, vice president of federal resources for the Independent Petroleum Association of America (IPAA), which represents independent producers, in an article in CQ Today.
“Make no mistake, independent producers that operate in the offshore are not ‘mom-and-pop’ operations; they are well-funded organizations that have been responsible operators in the offshore for more than four decades. However, these liability legislative proposals will empower multinational and foreign oil companies while creating an impossible financial challenge to other American companies who compete with these corporations in the offshore,” said IPAA Chairman Bruce Vincent, who is also president of Swift Energy.
He noted that insurance is not available to independents at the $10 billion level. And without it, independent production could be shut down and new drilling would come to a virtual halt, according to Vincent.
In the wake of the explosion aboard the Deepwater Horizon rig and the growing oil slick off the coast of Louisiana, legislation has been introduced in both the House and Senate to increase a producer’s liability for economic damages from an oil spill to $10 billion from its current level of $75 million under the Oil Spill Liability Trust Fund (see Daily GPI, May 11; May 5).
President Obama also has forwarded to Congress legislation to raise a producer’s liability for economic damages from an oil spill. The measure calls for the higher cap to take effect retroactively to include damages from the blowout of the BP-leased rig and oil spill in the GOM (see Daily GPI, May 13).
“Existing law holds companies accountable for all the costs associated with cleaning up oil spills and up to $75 million in economic damages, though even that liability limit does not apply in instances of gross negligence, willful misconduct or violation of applicable federal regulations. Injured parties can also pursue damages in state courts, which are not limited by the federal liability cap,” Gerard said.
“Any necessary changes in the trust fund should be determined after there is a clear sense of the resource needs arising from this incident and should be thoughtfully considered with an opportunity for all stakeholders to be heard,” he noted.
Gerard called on Congress to “endeavor to preserve the trust fund’s viability without undermining the oil and natural gas industry’s ability to insure capital investments.”
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