Energy Probe

Lawrence Solomon
Financial Post
May 8, 2010

Washington laid the groundwork for the Gulf oil spill by letting the offshore oil industry dodge its liabilities.

BP deserves to be excoriated for contaminating the Gulf of Mexico. Preoccupied with phony multi-million-dollar PR campaigns to cast itself as green and “Beyond Petroleum,” it failed to focus on the actual multi-billion-dollar environmental catastrophe that could come of a worst-case blow-out.

But BP’s bad conduct is as nothing compared to that of the real villain in this piece: the U.S. federal government.

I blame the U.S. government not because, as the owner of the Outer Continent Shelf where the accident occurred, it bears ultimate responsibility for activities that occur on its property. Neither do I blame the U.S. because it actively solicited bids from oil firms for drilling in the Outer Continental Shelf. Accidents happen, despite best efforts. Spacecraft can explode. Olympic lugers can crash. Nuclear plants can melt down. Coal mines can collapse. Elevators can plummet. Hydro dams can fail.

I blame the U.S. government not because an accident happened but because it failed to ensure that BP — along with every other firm drilling off the U.S. coast — had every incentive to avoid an accident. To the contrary, the federal government told the firms drilling in submerged lands under federal jurisdiction that they needn’t be unduly troubled about the consequences of a worst-case scenario on their bottom line.

“Do your best to avoid an accident,” the U.S. in effect said, “but don’t worry about going the extra mile. If the worst occurs, we’ll backstop you. You’ll never have to be fully accountable for the damage an accident does, your shareholders will never need to worry that an accident will bankrupt you.”

The U.S. provides this backstop through its Oil Pollution Act 1990, which limits the liability of offshore oil firms to US$75-million plus cleanup costs, and then even absolves the oil firms of responsibility if the accident occurs as a result of an act of God, an act of war or the negligence of a third party. In the case of the Gulf of Mexico disaster, the third party could turn out to be the company whose rig BP leased: Transocean Ltd.

BP is already on record disavowing responsibility, since it was Transocean’s Deepwater Horizon rig that exploded and sank last month. As BP’s chief executive, Tony Hayward, told NBC, “We are responsible not for the accident but we are responsible for the oil and for dealing with it and cleaning the situation up.”

While BP has publicly agreed to pay “all necessary and appropriate cleanup costs” as well as “legitimate and objectively verifiable claims for other loss and damage caused by the spill,” it will ultimately be up to the courts to determine what is “necessary,” “appropriate” and “legitimate.” If Transocean was indeed solely responsible for the accident, and if BP decides to use the U.S.-government-created loopholes designed to entice offshore oil exploration, BP could be off the hook for the lion’s share of damages associated with its drilling.

I do not blame BP, or any firm, for obeying both the letter and the spirit of the law. But I do blame the U.S. government for creating a bad law that dilutes the strict liability needed to focus the mind of any company operating in a vulnerable environment. Had BP faced unlimited liability, putting its entire market capitalization of $150-billion at risk, financial prudence would have required it to consider robust prevention and contingencies in the event of a catastrophic blowout.

BP would have examined the potential liability of destroying the area’s fisheries and shrimperies, of destroying its tourism and other industries, and then weighed the cost of having backup safety systems in place to avert a worst-case disaster. Because an immense liability was at play, any insurers brought in to protect BP would have done their own assessment of liabilities, and based their premiums on their judgment of the robustness of BP’s preparedness. The experimental measures that BP is now desperately employing — such as the cofferdam containment dome it yesterday dropped over the wellhead — would have been tested and retested well in advance.

As a result of a sober assessment of the full risks and benefits, BP and the insurers might have determined that the risks of drilling in the Outer Continental Shelf were too high, and abandoned the project. Or, more likely because of the extraordinarily high value of the oil in the Gulf, BP would have demanded redundancy in fail-safe measures in a rig, and BP would have devised reliable emergency containment systems to rapidly deploy in the event the fail-safe systems failed.

As it was, BP didn’t need to go through any of these precautionary exercises. The consequences to BP of presiding over what could potentially have become the greatest oil spill in human history, one with untold potential to wreak economic and environmental harm, was so trifling a matter to BP’s bottom line that BP didn’t even need to get insurance — it decided to self-insure, to save itself the cost of the insurance premium. The mismatch between the consequences of a catastrophe to BP and the consequences to society at large was entirely a function of U.S. law.

The U.S. law has other untoward consequences still. Beyond the U.S. portion of the Outer Continental Shelf lie oilfields owned by other nations and leased to foreign companies. If an accident occurs there, the ecology, people and industries of the Gulf could become every bit as much at risk. The best protection for the Gulf is a safety culture, and a safety infrastructure, that a regime of strict liability would have inculcated. As it is, thanks to an unprincipled U.S. federal law, there is no safety infrastructure and no safety culture and no reason to think an even worse catastrophe couldn’t occur in the future.

LawrenceSolomon@nextcity.com

Lawrence Solomon is executive director of Energy Probe and Urban Renaissance Institute and author of The Deniers: The world-renowned scientists who stood up against global warming hysteria, political persecution, and fraud.