Industry's Gamble is Capped by Liability Limits

 

On June 15, BP set aside $20 billion in an escrow account to pay economic damage claims to people and businesses that have been affected by the oil spill. This account is neither a floor nor a ceiling on liability; experts are estimating damage cost estimates range from $8 and $50 Billion. As of 20 September, clean up expenses were ~$9.5 Billion.

The risky decision faced by oil exploration companies is very different. The responsible party(ies) in a spill is liable for: (1) certain specified damages resulting from the discharged oil; and (2) removal costs incurred in a manner consistent with the National Contingency Plan (NCP). Oil Pollution Act limits the liability of responsible parties for offshore facilities, such as the Deepwater Horizon facility, to all removal costs (i.e., direct cleanup cost) plus $75 Million and other language places a limit of $3200-$4300 per gross ton [see the Committee on Transportation and Infrastructure hearing document and the Oil Pollution Act, CFR33(40)(Section §2704(a)(3)]. In other words, we offer a basic risky decision to industry that is much more favorable even than the public gamble - the public agrees through regulatory limits to cover most consequences of a lost gamble.

Who would turn down a chance to enter this gamble? See "solved" decision tree reflecting liability limits currently in place.

The argument is that the public gamble is worthwhile enough to cover the bet by industry so that they cannot lose - or else industry may not want to take the risk (see the explanation by MIT Professor Greenstone in a recent article). In effect, our laws underwrite industry's risk for energy exploration to encourage high-risk exploration where the public gamble is considered "acceptable." And we must recognize that environmental impact statements assess a suite of risks other than well blowout that may also be underestimated or part of this rigged gamble favoring industry exploration for energy. NOTE: This illustration oversimplifies the actual business decision to explore for energy, and BP set aside $20 billion in an escrow account to pay economic damage claims to people and businesses that have been affected by the oil spill.

A short video on America's Spill may illustrate some of the consequences, in terms of the energy pay off.

Review the Public Gamble

Review the Basic Risky Decision

 

Professor James J. Corbett works on energy and environmental solutions for transportation in the College of Earth, Ocean, and Environment at the University of Delaware.

Sources:

Sources: Comparisons assume 50,000 barrels per day is released from the Deepwater Horizon drill site. 

Houston Chronicle article report early expert damage estimates: $10 Billion

Price of Crude Oil from U.S. DOE: $75 per barrel as of 6 June 2010

Site Updated 16 June 2010