UNITED STATES OIL POLLUTION LIABILITY REGIME: THE IMPLICATION

OF THE DEEPWATER HORIZON INCIDENT

By

Eric Odion Otojahi*

ABSTRACT

The Deepwater Horizon incident, which triggered the largest offshore oil spill in theUnited States (US) following the Exxon Valdez oil spill in 1989 has occasioned severalclaims against British Petroleum (BP) and other responsible parties for damagecaused by the oil spill from Macondo exploration well. The enormous oil spill and theconsequent damage resulting from the Deepwater Horizon incident have raisedvarious concerns as to the adequacy of the US oil pollution liability regime in dealingwith oil spill arising from offshore oil and gas facilities. A major concern is the extentto which responsible parties should be held liable for economic damage arising fromoil spill resulting from offshore oil and gas facilities. A critical issue that has beenraised is whether unlimited liability is the optimum approach to dealing with theinadequacy of the existing liability limit for economic damage from oil spill resultingfrom offshore oil and gas facilities under the Oil Pollution Act 1990. This thesisargues that while the Deepwater Horizon incident has revealed the need to reviewthe existing oil pollution liability regime in the US, there is need to raise the liabilitylimit to reflect the risk involved in offshore drilling rather than eliminating the limitin order to avoid disincentive to offshore drilling in the US Gulf of Mexico.

*LLM Oil and Gas Law Candidate at the University of Aberdeen, Aberdeen,Scotland. Eric Otojahi was called to the Nigerian Bar in 2009. He worked as

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an Associate in Aluko & Oyebode, legal practitioners and solicitors(www.aluko-oyebode.com) in Nigeria from December 2009 to February 2012. Healso worked as Personal Research Assistant to a High Court Judge in LagosState, Nigeria from March 2012 to December 2012. He is a student member ofthe International Bar Association (IBA), the International Chamber ofCommerce Young Arbitrators Forum and Association of International PetroleumNegotiators respectively. I acknowledge the financial contribution of theIBA Section on Energy, Environment, Natural Resources and InfrastructureLaw (SEERIL) towards the pursuit of my LLM program. E-mail:eric.odion.otojahi.12@aberdeen.ac.uk

TABLE OF CONTENTS

Page

List of Abbreviations 3

1.0 General Introduction and Background ………………… 4

2.0 Existing Liability Regime for Oil Pollution in the US Gulf

of Mexico ..... 9

2.1 Introduction …………………………. 9

2.2 Civil liability for oil spill from offshore oil and gas

facilities …………. 10

2.3 Criminal penalties for oil spill from offshore oil and gas

facilities …………. 12

2.4 The Deepwater Horizon incident: BP and other responsible

parties ………….. 14

3.0 The implication of the Deepwater Horizon incident on the

existing 2

US Oil Pollution Liability Regime ……………………………..

18

3.1 Introduction …………………………... 18

3.2 The inadequacy of the existing liability limit for

offshore facilities …….. 18

3.3 Legislative proposal for review of the existing liability

limit for offshore facilities 19

3.4 Argument against unlimited liability: Proposal for raising

the liability limit … 21

4.0 Conclusion ……………………… 30

Bibliography ………………………… 32

LIST OF ABBREVIATIONS

BOEM - Bureau of Ocean Energy Management

BP - British Petroleum

CFR - Code of Federal Regulation

3

COF - Covered Offshore Facilities

CWA - Clean Water Act

EPA - Environmental Protection Agency

GCCF - Gulf Coast Claims Facility

MBTA - Migratory Bird Treaty Act

MOEX - Mitsui Oil Exploration

NPFC - National Pollution Funds Center

OPA - Oil Pollution Act

OSLTF - Oil Spill Liability Trust Fund

USC - United States Code

DOJ - Department of Justice

GENERAL INTRODUCTION AND BACKGROUND

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The Deepwater Horizon incident, which triggered the largest

offshore oil spill in the United States (US) following the

Exxon Valdez oil spill in 1989,1 has occasioned several claims2

against British Petroleum (BP)3 and other responsible parties

for damage caused by the oil spill from Macondo exploration

well.4 The blowout at the Deepwater Horizon drilling rig on

20th April 2010 led to the destruction of the drilling rig,

loss of eleven lives and enormous oil spill of about 4.9

million barrels of crude oil in the US Gulf of Mexico.5

The enormous oil spill and the consequent damage resulting

from the Deepwater Horizon incident have raised various

concerns as to the adequacy of the US oil pollution liability

regime in dealing with oil spill arising from offshore oil and1 Kenneth P Green and Steven F Hayward, ‘The Dangers of Overreacting to theDeepwater Horizon Disaster’ American Enterprise Institute for PublicResearch (June 2010) 1.2 The law suits resulting from the oil spill involve claims for propertydamage and economic loss; claims by injured workers; wrongful death actionsfiled by families of the eleven workers that were killed and derivative andclass action shareholder claims (securities litigation). See John Clay, ‘AnExplosion of Litigation: BP and Deepwater Horizon’ (2010) 9 EnergyLitigation 1-2 <http://www.ajamie.com/files/Uploads/Documents/An%20Explosion%20of%20Litigation.pdf> accessed 20 July 20133 BP is the operator of the Macondo exploration well, block 252 MississippiCanyon, located off the coast of Venice, Louisiana. The Macondo explorationwell was drilled by Transocean’s ultra deepwater, semi-submersible mobileDeepwater Horizon rig. BP has 65% share, Anadarko Petroleum has 25% sharewhile Mitsui Oil Exploration (MOEX) has 10% share. Cameron Internationalmade the faulty blowout preventer, which, had it functioned properly, couldhave prevented the explosion. Halliburton manufactured the cement casingswhich were intended to prevent the leakage of gas from the wellhead. SeeRobert Muir-Wood, ‘The Macondo, Gulf of Mexico, Oil Spill – Insuranceimplications’ Risk Management Solutions (June 2010) 2.4 Rawle O King, ‘Deepwater Horizon Oil Spill Disaster: Risk, Recovery andInsurance Implications’ Congressional Research Service, CRS Report forCongress (12 July 2010) 3.5 ibid, 3; Ronen Perry, ‘The Deepwater Horizon Oil Spill and the Limits ofCivil Liability’ (2011) 86 Washington Law Review 3

5

gas facilities.6 The huge number of claims associated with the

Deepwater Horizon oil spill have also exposed a number of

shortcomings of the statutory liability limit for economic

damage arising from oil spill resulting from offshore oil and

gas facilities under the Oil Pollution Act 1990 (OPA).7

A major concern is the extent to which responsible parties

should be held liable for economic damage arising from oil

spill resulting from offshore oil and gas facilities.8 Under

the US oil pollution liability regime, a responsible party is

liable to bear the total clean-up costs plus $75 million

liability limit for economic damage arising from oil spill

resulting from offshore oil and gas facilities.9

In the wake of the Deepwater Horizon incident, a proposal for

unlimited liability regime for offshore oil and gas facilities

6 Jonathan L Ramseur, ‘Liability and Compensation Issues Raised by the 2010Gulf Oil Spill’ Congressional Research Service, CRS Report for Congress (11March 2011); Nicolas D Loris, Jack Spencer and James Jay Carafano, ‘OilSpill Liability: A Plan for Reform’ Backgrounder (2 August 2010) 1-8;Jonathan Simon and Jennifer Owen, ‘The Policy and Regulatory Response toDeepwater Horizon: Transforming Offshore Oil and Gas Leasing?’ (2010) 40Environmental Law Reporter 1184.7 Kenneth M Murchison, ‘Liability under the Oil Pollution Act: Current Law and Needed Revisions (2011) 71 Louisiana Law Review 936.8 Nicolas D Loris, Jack Spencer and James Jay Carafano, ‘Oil SpillLiability: A Plan for Reform’ Backgrounder (2 August 2010) 1. In wake ofthe Deepwater Horizon incident, the US President Obama requested that abill be sent to the US Congress to toughen and update the law surroundingcaps on damages. See Statement by the Press Secretary, ‘Today's BP OilSpill Response Meeting’ The White House Statement & Releases (10 May 2010)<http://www.whitehouse.gov/the-press-office/statement-press-secretary-todays-bp-oil-spill-response-meeting> accessed 21 July 2013; Lawrence IKiern, ‘Oil Pollution Act: Legislative changes, amendments set agenda fornew Congress’ [2011] Daily Environment Report, 3.9 OPA 990, s 1004 (a) (3).

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was made.10 In support of this proposal, it was argued that the

magnitude of the oil spill resulting from the Deepwater

Horizon incident has shown that if the liability limit is not

eliminated, responsible companies would only be liable for a

fraction of the true cost of such a disaster.11 It was also

argued that the current liability limit ‘deny just and fair

recovery of legal claims’12 and antithetic to the interests of

victims of oil spill who may have legitimate claims against

responsible parties.13 It was further argued that the existing

liability limit ‘effectively subsidises drilling in the very

locations where the damage from spills would be the

greatest.’14

On the other hand, some writers have proposed that the

liability limit should be significantly raised to reflect the10 See the Majority view in the Report of the US Senate Committee onEnvironment and Public Works on the deliberation of the Committee on BigOil Bailout Prevention Liability Bill of 2010 (s 3305), a bill to amend theOil Pollution Act of 1990 (5 August 2010) (hereinafter referred to asReport on Big Oil Bailout Prevention Liability Bill 2010)<http://beta.congress.gov/111/crpt/srpt249/CRPT-111srpt249.pdf> accessed 6August 201311 ibid; Andrew F Popper, ‘Capping incentives, capping innovation, courtingdisaster: The Gulf Oil Spill and Arbitrary Limits on Civil Liability (2011)60 DePaul Law Review; Kenneth M Murchison, ‘Liability under the OilPollution Act: Current Law and Needed Revisions’ (n 7) 937.12 Kenneth M Murchison, ‘Liability under the Oil Pollution Act: Current Law and Needed Revisions’ (n 7), 985.13 ibid, 975. See also the Statement of Kate Gordon, Vice President forEnergy Policy, the Center for American Progress Action Fund on ‘Liabilityand Financial Responsibility for Oil Spills under the Oil Pollution Act1990 and Related Statutes’ made before the US House of RepresentativesCommittee on Transportation and Infrastructure on 9 June 2010, 3<http://www.americanprogressaction.org/wp-content/uploads/issues/2010/06/pdf/gordon_testimony.pdf> 8 August 201314 Michael Greenstone, ‘A Built-In Incentive for Oil Spills’ Politico (3June 2010) <http://www.politico.com/news/stories/0610/38068.html> accessed26 July 2013

7

risk involved in offshore drilling.15 In support of this

proposal, it was argued that raising the liability limit would

force oil companies engaged in offshore drilling to better

internalise the risk of an oil disaster.16 It was however

argued that eliminating the liability limit may serve as

disincentive to smaller companies in engaging in offshore oil

and gas exploration in the US Gulf of Mexico.17

Some writers have also argued that reacting to the Deepwater

Horizon incident by simply raising the liability limit or

eliminating it entirely, without other reforms, may inhibit

investment in oil and gas exploration and production in the US

Gulf of Mexico.18 It was also argued that a higher liability

limit or unlimited liability means very little if ‘crucial

safety, regulatory and liability issues continue to be

ignored.’19

A critical issue that has been raised is whether unlimited

liability is the optimum approach to dealing with the

inadequacy of the existing liability limit for economic damage

15 Statement of Kate Gordon (n 13) 3; Lindsay K Scaief, ‘Upping the ante inthe Oil Industry: Why unlimited liability for Oil Companies will dealAmerica a bad beat’ (2011) 43 Texas Tech Law Review, 1344 - 1349; Kenneth PGreen and Steven F Hayward, ‘The Dangers of Overreacting to the DeepwaterHorizon Disaster’ (n 1), 4.16 Statement of Kate Gordon (n 13) 3. 17 Lindsay K Scaief, ‘Upping the ante in the Oil Industry: Why unlimitedliability for Oil Companies will deal America a bad beat’ (2011) 43 TexasTech Law Review, 1346.18 Green and Hayward (n 1) 4; Nicolas D Loris, Jack Spencer and James JayCarafano, ‘Oil Spill Liability: A Plan for Reform’ (n 8), 1. 19 Nicolas D Loris, Jack Spencer and James Jay Carafano, ‘Oil SpillLiability: A Plan for Reform’ (n 8), 1.

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from oil spill resulting from offshore oil and gas facilities

under the Oil Pollution Act 1990.20

While the Deepwater Horizon incident has revealed the need to

review the existing oil pollution liability regime in the US,

there is need to raise the liability limit to reflect the risk

involved in offshore drilling rather than eliminating the

limit in order to avoid disincentive to offshore drilling in

the US Gulf of Mexico.

This thesis argues that, in determining the extent to which

the liability limit should be reviewed, the optimum approach

would be to significantly raise the liability limit rather

than eliminating the limit.21 This approach is necessary in

order to balance the competing interest of providing incentive

for the prevention of oil spill from offshore drilling and

promoting investment in offshore drilling in the US Gulf of

Mexico.22

This thesis is limited to oil pollution liability arising from

oil spill resulting from offshore oil and gas facilities in

the US Gulf of Mexico as against oil spill resulting from

vessels and sea-going tankers. While a mobile offshore

drilling unit (MODU) like the Deepwater Horizon is first

treated as a tank vessel for its liability limit,23 it is20 Scaief (n 17) 1340.21 Scaief (n 17) 1347.22 See Report of the National Commission on BP Deepwater Horizon Oil Spilland Offshore Drilling (January 2011) (hereinafter referred to as NationalCommission Report) 284<http://docs.lib.noaa.gov/noaa_documents/NOAA_related_docs/oil_spills/DWH_report-to-president.pdf> accessed 27 August 2013 23 OPA 1990, s 1004(b)(1).

9

deemed to be an offshore facility where the removal and damage

costs exceed the liability limit for the MODU.24 The Oil

Pollution Act 1990 defines a mobile offshore drilling unit as

a ‘vessel (other than a self-elevating lift vessel) capable of

use as an offshore facility.’25

Section two discusses the existing oil pollution liability

regime for offshore oil and gas facilities in the US Gulf of

Mexico prior to the Deepwater Horizon incident. The legal

regime for oil pollution liability in the US has evolved over

time in response to major oil spills.26 The civil liability and

criminal penalties will be considered based on the relevant

provisions of the Oil Pollution Act 1990 and the Clean Water

Act 1977 respectively. Although the Oil Pollution Act

establishes the current liability regime applicable to oil

spill arising from offshore oil and gas facilities,27 the Clean

Water Act still imposes civil and criminal penalties for

discharge of oil in federal navigable waters in the US.28 The

civil claims and criminal charges against BP and other

responsible parties will also be considered in this section.

The implication of the Deepwater Horizon incident on the

existing civil liability regime for oil spill arising from

offshore oil and gas facilities will be analysed in section

24 ibid, s 1004(b)(2).25 ibid, s 1001(18).26 Kenneth M Murchison, ‘Liability under the Oil Pollution Act: Current Lawand Needed Revisions’ (n 7) 717.27 OPA 1990, ss 1001-1020; Kenneth M Murchison, ‘Liability under the OilPollution Act: Current Law and Needed Revisions’ (n 7) 927.28 See generally CWA 1977, ss 309 and 311.

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three. A proposal for the increase of the existing civil

liability limit will be made and analysed in the light of the

need to promote investment in offshore oil and gas operations

in the US Gulf of Mexico. Policies, like unlimited liability,

that may inhibit offshore drilling could have economic29 and

energy security implications30 for US. The policy approach for

improving the existing legal regime will be considered in the

light of the ‘broad economic, environmental, safety and energy

security implications of the Deepwater Horizon incident’.31

The conclusion of this work will be made in section four. This

section will summarise the arguments made in the work and come

to the conclusion that there is need to raise the liability

limit for economic damage resulting from oil spill arising

from offshore oil and gas facilities rather than legislating

an unlimited liability regime. This is necessary in order to

avoid disincentive to offshore oil and gas exploration and

production in the US Gulf of Mexico.

29 Michael Faure and Wang Hui, ‘Economic Analysis of Compensation for OilPollution Damage’ (2006) 37 Journal of Maritime Law & Commerce, 185-190.30 Scaief (n 17) 1349. 31Jonathan Simon and Jennifer Owen, ‘The Policy and Regulatory Response toDeepwater Horizon: Transforming Offshore Oil and Gas Leasing?’ (2010) 40Environmental Law Reporter 1085

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EXISTING LIABILITY REGIME FOR OIL POLLUTION IN THE US GULF OF

MEXICO

Introduction

The legal regime for oil pollution liability in the US has

evolved over the years in response to major oil spills from

vessels/sea-going tankers and offshore oil and gas

facilities.32 The first major federal statute governing oil

32 Kenneth M Murchison, ‘Liability under the Oil Pollution Act: Current Lawand Needed Revisions’ (n 7) 717.

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pollution liability was the Federal Water Pollution Control

Act 1948 which was eventually amended and replaced by the

Federal Water Pollution Control Amendment Act, 1972 (1972

Act).33 The 1972 Act was amended in 1977 and renamed the Clean

Water Act 1977 (the CWA).34

In response to the Exxon Valdez oil spill in 1989, the US

Congress enacted the Oil Pollution Act 1990 (OPA) to provide a

more comprehensive and responsive oil pollution liability

regime.35 OPA amended the CWA,36 expanded liability for clean-up

costs, increased liability limits and imposed liability for

damages to natural resources as well as certain economic

losses which may be suffered by government and individuals.37

It also strengthens federal response authority and establishes

a fund to ensure that claims are paid up to a stated amount.38

33 Kenneth M Murchison, ‘Learning from More than Five-and-a-Half Decades ofFederal Water Pollution Control Legislation: Twenty Lessons for the Future’(2005) 33 Boston College Environmental Affairs Law Review 533.34 Robert Force, Martin Davies and Joshua S Force, ‘Deepwater Horizon:Removal Costs, Civil Damages, Crimes, Civil Penalties and States Remediesin Oil Spill Cases’ (2011) 85 Tulane Law Review 891.35 ibid, 893.36 While OPA did not repeal the CWA, it provides that the oil spillprovisions of the CWA as contained in section 311(f), (g), (h) and (i)shall not apply with respect to any incident for which liability isestablished under section 1002 of OPA. See OPA, s 2002(a).37 Kenneth M Murchison, ‘Liability under the Oil Pollution Act: Current Lawand Needed Revisions’ (n 7) 926.38 Kristina Alexander, ‘The 2010 Oil Spill: Natural Resource DamageAssessment under the Oil Pollution Act’ Congress Research Service, CRSReport for Congress (8 September 2010) 1-2; Eric A DeGroff, ‘TheApplication of Strict Criminal Liability to Maritime Oil PollutionIncidents: Is there OPA for the Accidental Spiller?’ (2004) 50 Loyola LawReview 833.

13

This section discusses the existing oil pollution liability

regime for offshore oil and gas facilities prior to the

Deepwater Horizon incident. The civil liability and criminal

penalties will be considered based on the relevant provisions

of the Oil Pollution Act 1990 and the Clean Water Act 1977

respectively.

2.2 Civil liability for oil spill from offshore oil and gas

facilities

Under the Oil Pollution Act 1990, a responsible party39 is

liable for the total clean-up costs40 of an oil spill plus $75

million liability limit to cover economic damages41 resulting

from oil spill from offshore oil and gas facilities.42 However,39 The definition of a responsible party for liability purposes under thelaw depends on the source of the discharge. For a spill arising from anoffshore facility (other than a pipeline or deepwater port), responsibleparty is the lessee or permittee of the area in which the facility islocated or holder of a right of use and easement granted under applicablestate law or the Outer Continental Shelf Lands Act, for the area in whichthe facility is located (if the holder is a different person than thelessee or permittee. See OPA 1990, s 1001(32)(C). See also sections1001(16) and 1001(28) for definition of lessee and permittee respectively. 40 Clean-up costs/Removal costs include the costs to prevent, minimise ormitigate oil pollution. See OPA, s 1001(31).41 Economic damages include injury to natural resources, injury to real orpersonal property, loss of profit or impairment of earning resulting fromthe oil spill and the costs of providing additional public services duringor after removal activities. See OPA 1990, s 1002(b)(2). For discussion oneconomic damage, see David W Robertson, ‘The Oil Pollution Act’s Provisionson Damages for Economic Loss’ (2011) 30 Mississippi College Law Review 157;Andrew B Davis, ‘Pure Economic Loss claims under the Oil Pollution Act:Combining Policy and Congressional Intent’ (2011) 45 Columbia Journal ofLaw and Social Problems 1; David W Robertson, ‘Criteria for recovery ofeconomic loss under the Oil Pollution Act of 1990’ (2012) 7 Texas Journalof Oil, Gas and Energy Law 241.42 OPA 1990, s 1004(a)(3).

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where it is established that the oil spill was as a result of

a responsible party’s gross negligence or wilful misconduct or

violation of applicable federal safety or operating

regulations, the responsible party may incur unlimited

liability.43

Liability under OPA is strict and where the incident involves

more than one party, the liability is joint and several.44

However, there are limited defences available to a responsible

party for oil spill from offshore facility which include

situations where the oil spill results from an act of God45, an

act of war or oil spill resulting from a third party’s gross

negligence or wilful misconduct (sole cause third party

situation).46

43 ibid, s 1004(c) (1). Liability is still unlimited whether the grossnegligence or wilful misconduct or violation of relevant regulation isoccasioned by the responsible party’s agents, employees or a person actingpursuant to a contractual relationship with the responsible party. Statemay also legislate unlimited liability for oil spill. See OPA 1990, s1018(c).44 Robert Force, Martin Davies and Joshua S Force, ‘Deepwater Horizon:Removal Costs, Civil Damages, Crimes, Civil Penalties and State Remedies inOil Spill Cases’ (n 34) 899. 45 OPA defines “act of God” as “an unanticipated grave natural disaster orother natural phenomenon of an exceptional, inevitable, and irresistiblecharacter the effects of which could not have been prevented or avoided bythe exercise of due care or foresight.” See OPA 1990, s 1001(1).46 OPA 1990, s 1003(a) and (b). However, OPA does not provide a completedefence to a responsible party whenever any third party is the sole causeof a spill. The defence only applies to a third party other than anemployee or agent of a responsible party or persons in contractualrelationship with the responsible party. In addition, the responsible partywould have to show by evidence that he exercised due care and tookappropriate precaution with regards to the sole third party spill. See OPA,ss 1003(a) (3) and 1003(a)(3)(A)-(B).

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An oil exploration and production company is required to

establish financial responsibility for liability under the

Act.47 Financial responsibility of $35,000,000 is required for

an offshore facility located seaward of the seaward boundary

of a State48 or $10,000,000 for an offshore facility located

landward of the seaward boundary of a State.49 However,

financial responsibility up to $150 million may be required

where a greater amount is justified depending on the relative

operational, environmental, human health, and other risks

posed by the quantity of oil that is explored for, drilled or

produced by the responsible party from an offshore facility

located seaward of the boundary of a state.50 The financial

responsibility requirement under the law is to ensure that

compensation funds are immediately available from the

responsible party to pay claims for damages and removal

costs.51

Financial responsibility requirement may be satisfied by

evidence of insurance, surety bond, guarantee, letter of

credit and/or qualification as a self-insurer.52 Where

financial responsibility is established by way of guarantee,

the guarantor is required to execute a statement indicating

agreement to be subject to direct action claims from the

47 OPA 1990, s 1016 (c)(1)(A)48 ibid.49 ibid, s 1016(c)(1)(B).50 ibid, s 1016(c)(1)(C).51 Vincent J Foley, ‘Post-Deepwater Horizon: The Challenging Landscape ofLiability for Oil Pollution in the United States (2010/2011) 74 Albany LawReview 516.52 OPA 1990, s 1016(e).

16

government or injured claimants who have been denied payment

by the responsible party.53 A guarantor is entitled to the

defenses which would be available to the responsible party and

the defense that the incident was caused by the willful

misconduct of the responsible party.54

The Bureau of Ocean Energy Management (BOEM) is charged with

the responsibility of certifying oil spill financial

responsibility provided by oil exploration and production

companies.55 Consequently, BOEM has developed the requirement

for demonstrating oil spill financial responsibility for

covered offshore facilities (COF).56

OPA allows compensation for injured parties, for removal costs

and damages resulting from an oil spill through the Oil Spill

Liability Trust Fund (OSLTF).57 Where liability exceeds the OPA

limits, payment is made to claimants from the OSLTF,

subrogating the claimants’ right to recover from the

responsible party or third party who may be responsible for

the oil spill.58 The OSLTF is partly funded by tax on imported

53 ibid, s 1016(f).54 However, the guarantor may not invoke any other defense that might beavailable in proceedings brought by the responsible party against theguarantor. OPA 1990, s 1016(f)(1)(A)(B)(C)55 See BOEM Governing Statutes <http://www.boem.gov/Regulations/BOEM-Governing-Statutes.aspx > accessed 20 July 201356Oil Spill Financial Responsibility for Covered Offshore Facilities, 30 CFR553.57 The OSLTF was created by the Internal Revenue Code, 26 USC, s 9509; Foley(n 51) 521.58 Foley (n 51) 530; Lawrence I Kiern, ‘The Oil Pollution Act of 1990 andthe National Pollution Funds Center’ (1994) 25 Journal of Maritime Law andCommerce 489-491.

17

oil59 and partly funded by penalties imposed on oil polluters.60

In 1991, the US Coast Guard created the National Pollution

Funds Center (NPFC) to administer programs critical to the US

oil pollution response and compensation regime with the aim of

ensuring that funds are readily available for immediate

federal removal action and to initiate the assessment of

natural resource damages.61

The maximum payout available from the OSLTF for any single

incident is $1billion or the balance of the Fund, whichever is

less.62 In respect of natural resource damage assessments and

claims in connection with any single incident, the maximum

amount payable is not more than $500 million.63 The objective

of the scheme is to ensure that the polluter pays for damages

resulting from the spill, to reduce the need for litigation of

removal costs and economic damage claims and to deter risky

behaviour.64

Criminal penalties for oil spill from offshore oil and gas

facilities

Although the Oil Pollution Act 1990 provides for certain civil

penalties for violating the provisions of the Act,65 criminal59 Eight cent per barrel is paid by oil companies to part finance the OSLTF.Internal Revenue Code, 26 USC, s 4611(c) (2)(B) (i).60 Lawrence I Kiern, ‘Liability, Compensation and Financial Responsibilityunder the Oil Pollution Act of 1990: A Review of the Second Decade’ (2011)36 Tulane Maritime Journal, 11.61 Lawrence I Kiern, ‘The Oil Pollution Act of 1990 and the NationalPollution Funds Center’ (n 58) 487, 489.62 Internal Revenue Code, 26 USC, s 9509(c)(2)(A)(i).63 ibid, s 9509(c)(2)(A)(ii). 64 Foley (n 51) 530.65 Section 4303 of OPA penalises breach of certain provisions of the Act.

18

prosecutions of responsible parties are conducted by the US

Department of Justice (DOJ) under the CWA66 among other

relevant statutes.67 The CWA criminalises both negligent and

knowing violations of specified CWA relating to discharge of

oil in navigable waters in the US.68 It is a misdemeanour for

an operator of an offshore facility to discharge oil

negligently into navigable waters and a felony to do so

knowingly.69

A person70 who violates the relevant provisions of the CWA

negligently may be fined up to $2,50071 per day of violation or

may be imprisoned up to one year, or both.72 Where a person66 Eric A DeGroff, ‘The Application of Strict Criminal Liability to MaritimeOil Pollution Incidents: Is there OPA for the Accidental Spiller?’ (2004)50 Loyola Law Review 866.67 Such as the Endangered Species Act 1973 and the Migratory Bird Treaty Act(MBTA) 1918. See Robert Meltz, ‘Federal Civil and Criminal PenaltiesPossibly Applicable to Parties Responsible for the Gulf of Mexico OilSpill’ Congressional Research Service, CRS Report for Congress (16 December2010) 1-11.68 CWA 1977, s 309(c). Brigid Harrington, ‘A Proposed Narrowing of the CleanWater Act's Criminal Negligence Provisions: It's Only Human?’ (2005) 32Boston College Environmental Affairs Review, 645. 69 William H Rodgers, Jason DeRosa and Sarah Reyneyeld, ‘Stranger thanfiction: “Inside” Look at Environmental Liability and Defense Strategy inthe Deepwater Horizon Aftermath’ (2011) 1 Washington Journal ofEnvironmental Law and Policy 230.70 ‘Person’ under the CWA means an individual, corporation, partnership,association, State, municipality, commission, or political subdivision of aState, or any interstate body. See CWA 1977, s 502(5).71 It should be noted that in imposing the fines, the Court may rely on theCriminal Fine Improvements Act 1984 (as amended) enacted by the US Congressto reflect changes in criminal fines except for those statutes specificallyexempted under the Act. Robert Meltz, ‘Federal Civil and Criminal PenaltiesPossibly Applicable to Parties Responsible for the Gulf of Mexico OilSpill’ (n 67) 2. 72 CWA 1977, s 309(c)(1)(A). However, where the conviction of a person isfor a violation committed after a first conviction, he shall be liable to afine up to $50,000 per day of violation, or by imprisonment of not morethan 2 years, or by both

19

violates the relevant CWA provisions knowingly, he may be

liable to pay a fine up to $5,000 per day of violation, or

imprisonment up to 3 years, or both.73 A person who knows at

the time of the violation that he thereby places another

person in imminent danger of death or serious bodily injury

may upon conviction be liable to a fine up to $250,000 or

imprisonment up to 15 years, or both.74 Where such a person is

an organisation, it may upon conviction be liable to a fine up

to $1,000,000.75

In addition, responsible corporate officers could also be

charged under the CWA for felony of criminal endangerment.76

The CWA defines ‘person’ for the purpose of criminal liability

under the CWA to include, among other entities, ‘any

responsible corporate officers’.77 This provision raises the

possibility that high-level corporate officers may face

criminal prosecution for violations of the CWA, regardless of

actual knowledge of the violation.78 It has been argued that

the responsible corporate officer doctrine permits juries to

infer the knowledge element of environmental crimes through an73 CWA, s 309(c)(2)(A). However, where a conviction of a person is for aviolation committed after a first conviction of such person, he shall beliable to a fine up to $100,000 per day of violation, or imprisonment ofnot more than 6 years, or by both.74 CWA, s 309(c)(3)(A).75 ibid. In a situation where the conviction of the person is for aviolation committed after a first conviction, the maximum punishment willbe doubled with respect to both fine and imprisonment. CWA, s 309(c)(3)(A)76 Kirk F Marty, ‘Criminal Prosecution of Responsible Corporate Officers andNegligent Conduct under Environmental Law’ (2009) 23 Natural Resources andEnvironment 1. 77 CWA 1977, s 309(c)(6).78 Marty (n 76) 1; Faisal A Shuja, ‘Federal Criminal Issues Presented bythe British Petroleum Oil Spill’ (2011) 9 Loyola Maritime Law Journal 132.

20

individual’s corporate position, knowledge of other

violations, and authority to control activity, even if that

authority is not exercised.79

The CWA also makes provision for civil administrative

penalties and civil judicial penalties.80 An operator or person

in charge of an offshore facility from which oil is discharged

may be liable to an administrative penalty up to $25,000

(adjusted to $37,500)81 per day82 or civil judicial penalty up

to $25,000 (adjusted to $37,500) per day of violation83 or

$1,000 (adjusted to $1,100) per barrel of oil discharged.84

Where it is established that the violation by the operator or

person in charge of the offshore facility was as a result of

gross negligence or wilful misconduct, he may be liable for an

amount up to $100,000 (adjusted to $140,000) for the violation

or $3,000 (adjusted to $4,300) per barrel of oil discharged.85

However, a person is not liable for a civil judicial penalty

79 Marty (n 76) 5.80 CWA 1977, s 311(b)(6) and (7).81 For the adjustments made to penalties under the CWA, see US EnvironmentalProtection Agency (EPA) Adjustment of Civil Monetary Penalties forInflation 213-214<http://www.gpo.gov/fdsys/pkg/CFR-2009-title40-vol1/pdf/CFR-2009-title40-vol1.pdf> accessed 24 July 2013. The adjustments were made by EPA pursuantto the Federal Civil Penalties Inflation Adjustment Act 1990. See Meltz (n67) 2. 82 CWA 1977, s 311(b)(6).83 ibid, s 311(b) (7)(A).84 CWA 1977, s 311(b) (7) (A). Similarly, an operator or person in charge ofan offshore facility who fails to carry out a removal order by thePresident without sufficient cause may be liable to an amount up to $25,000per day (adjusted to $37,500) or up to three times the costs incurred bythe Oil Spill Trust Fund established OPA; or an amount up to $25,000(adjusted to 37,500) per day of violation for failure to comply with theNational Contingency Plan.85 CWA 1977, s 311(b) (7) (A).

21

for an oil spill if the person has been assessed a civil

administrative penalty for the oil spill.86

2.4 The Deepwater Horizon incident: BP and other responsible

parties

The enormous oil spill and the consequent huge economic

damages resulting from the Deepwater Horizon incident led BP

to establish the Gulf Coast Claims Facility (GCCF) to

administer claims by individuals and businesses for damages

arising from the incident.87 BP agreed to create a $20 billion

escrow account to pay claims submitted to, and approved by the

GCCF.88 BP also waived its right to the liability limit

established under the Oil Pollution Act 1990.89 The GCCF is a

unique mechanism, drawing on previous compensation schemes,

like the 9/11 Victim Compensation Fund, to address the adverse

economic impact of the Deepwater Horizon spill on individuals

and businesses affected by the oil spill.90

86 ibid, s 311(b) (7) (F).87 Robert Force, Martin Davies and Joshua S Force, ‘Deepwater Horizon:Removal Costs, Civil Damages, Crimes, Civil Penalties and State Remedies inOil Spill Cases’ (n 34) 935.88 Press Release, BP Forms Gulf of Mexico Oil Spill Escrow Trust<http://www.bp.com/en/global/corporate/press/press-releases/bp-forms-gulf-of-mexico-oil-spill-escrow-trust.html> accessed 23 July 201389 Statement of BP, Exploration & Production Inc. Re Applicability of Limitof Liability Under Oil Pollution Act of 1990<http://www.laed.uscourts.gov/OilSpill/Orders/BPStatement.pdf> accessed 5August 201390 Shannon L Sole, ‘BP’s Compensation Fund: A Buoy for Both Claimants andBP’ (2011) 37 Journal of Corporation Law 246; John C P Goldberg Report toKenneth Feinberg on ‘Liability for Economic Loss in connection with theDeepwater Horizon Spill’ (22 November 2010) 4-5<http://www.afj.org/connect-with-the-issues/the-corporate-court/crude_justice/goldberg-memorandum-of-law-re-opa-for-feinberg-2010.pdf> accessed 26August 2013

22

While BP and other responsible parties have settled some of

the claims against them,91 several other law suits are being

pursued against the responsible parties in the Eastern

District Court of Louisiana.92 It is unlikely in the light of

the circumstances surrounding the Deepwater Horizon incident

that any responsible party will successfully rely on the

limited defenses under OPA.93 Evidence has been led and

concluded and the judgment of the court is being awaited.94 The

extent of liability of the responsible parties in the

91 Press Release, BP Announces Resolution of All Criminal and SecuritiesClaims by U.S. Government Against Company Relating to Deepwater HorizonAccident 14 November 2012<http://www.bp.com/en/global/corporate/press/press-releases/bp-announces-resolution-of-all-criminal-and-securities-claims-by-u.s.-government-against-company-relating-to-deepwater-horizon-accident.html> accessed 5August 2013. BP and the Securities and Exchange Commission (SEC) enteredinto settlement of the claim involving civil securities fraud charges, inwhich BP agreed to pay $525 million. Transocean also entered into civilsettlement with US Department of Justice in which it agreed to pay $1billion while MOEX agreed to a $70 million civil penalty settlement, withan additional $20 million in supplemental environmental projects. SeeJonathan L Ramseur and Curry L Hagerty, ‘Deepwater Horizon Oil Spill:Recent activities and ongoing developments’ Congressional Research Service,CRS Report for Congress (31 January 2013) 5-6; Margaret Cronin Fisk,‘Transocean $1 Billion Gulf Oil-Spill Settlement Approved’ Bloomberg(Washington, 19 February 2013)<http://www.bloomberg.com/news/2013-02-19/transocean-1-billion-gulf-oil-spill-settlement-approved.html> accessed 26 August 201392 See update and current development on BP civil trial<http://www.laed.uscourts.gov/OilSpill/OilSpill.htm> accessed 5 August2013; public access to the trial documents<http://www.mdl2179trialdocs.com/> accessed 30 August 201393Robert Force, Martin Davies and Joshua S Force, ‘Deepwater Horizon:Removal Costs, Civil Damages, Crimes, Civil Penalties and State Remedies inOil Spill Cases’ (n 34) 901. 94 Tom Fowler, ‘Testimony Ends in BP Trial - Judge to Assess CivilCulpability for Energy Firms in Deepwater Horizon Disaster’ The Wall StreetJournal, 17 April 2013<http://online.wsj.com/article/SB10001424127887324493704578429070675918086.html> accessed 5 August 2013

23

Deepwater Horizon oil spill will depend on whether they are

found grossly negligent for their various actions.95

The US Department of Justice (DOJ) initiated criminal charges

against BP,96 Transocean97 and Halliburton.98 The case for the

criminal prosecution was predicated on the fact that the

unprecedented damage caused by the incident and the loss of

eleven lives could have been avoided if BP and other

responsible parties had maintained a higher safety standards.99

BP pleaded guilty to the charges and entered a plea agreement

with DOJ in November 2012.100 BP will pay $4 billion over a95 Laurel Brubaker Calkins, ‘BP Battles US, Transocean Over Gulf Spill RateClaims’ Bloomberg (Washington, 2 March 2013)<http://www.bloomberg.com/news/2013-03-01/transocean-claims-bp-prolonged-spill-by-hiding-flow-rate.html> accessed 26 August 201396 BP was charged for manslaughter, obstruction of Congress and breach ofthe Clean Water Act. See United States of America v BP, Exploration andProduction Inc., Criminal Informationhttp://www.justice.gov/criminal/vns/docs/2012/11/2012-11-15-BP-Exploration-Information.pdf accessed 5 August 201397Transocean was charged for negligently discharging oil in the US Gulf ofMexico. See United States of America v Transocean Deepwater Inc., CriminalInformation<http://www.justice.gov/iso/opa/resources/492201313123040440822.pdf>accessed 26 August 2013 98 Halliburton was charged for criminal destruction of the oil spillrecords. See Jef Feeley and Margaret Cronin Fisk, ‘Halliburton PleadingGuilty to Destroying Oil Spill Files’ Bloomberg (Washington, 26 July 2013)<http://www.bloomberg.com/news/2013-07-25/halliburton-pleading-guilty-to-destroying-oil-spill-files.html> accessed 26 August 201399William H Rodgers, Jason DeRosa and Sarah Reyneyeld, ‘Stranger thanfiction: “Inside” Look at Environmental Liability and Defense Strategy inthe Deepwater Horizon Aftermath’ (n 69) 221. 100 US Department of Justice, ‘BP Exploration and Production Inc. Agrees toPlead Guilty to Felony Manslaughter, Environmental Crimes and Obstructionof Congress Surrounding Deepwater Horizon Incident’<http://www.justice.gov/opa/pr/2012/November/12-ag-1369.html> accessed 5August 2013; Press Release, BP Announces US District Court’s Acceptance ofPlea Resolving All Criminal Claims Against Company Relating to DeepwaterHorizon Accident 29 January 2013<http://www.bp.com/en/global/corporate/press/press-releases/bp-announces-

24

period of five years and will serve a term of five years’

probation.101 Transocean also entered into a guilty plea

agreement with DOJ in which it agreed to pay $400 million.102

It is reported that Halliburton has agreed to plead guilty to

the one-count misdemeanour charge of criminal destruction of

relevant records relating to the oil spill.103 Consequently, it

may be liable to a fine up to $200,000 and a three-year

probation term.104

The damage claims that have been asserted against BP and other

responsible parties as well as the $20 billion fund created by

BP to settle claims from individuals and businesses suggest

that the existing liability limit for offshore facilities is

insufficient.105 While efforts are being made by BP106 and other

responsible parties107 to settle the various claims, it

us-district-court-s-acceptance-of-plea-resolving-all-criminal-claims-against-company-relating-to-deepwater-horizon-accident.html> accessed 5August 2013101 ibid.102US Department of Justice, ‘Transocean Agrees to Plead Guilty toEnvironmental Crime and Enter Civil Settlement to Resolve US Clean WaterAct Penalty Claims from Deepwater Horizon Incident’ 3 January 2013<http://www.justice.gov/opa/pr/2013/January/13-ag-004.html> accessed 26August 2013 103 Feeley and Fisk (n 98). 104 ibid.105 Robert Force, Martin Davies and Joshua S Force, ‘Deepwater Horizon:Removal Costs, Civil Damages, Crimes, Civil Penalties and State Remedies inOil Spill Cases’ (n 34) 945.106 As at 31st July 2013, BP has paid over $12 billion to settle claims fromindividuals, businesses and governments for damages resulting from theDeepwater Horizon oil spill. See Gulf of Mexico Gulf Spill Claims and OtherPayments Public Report <http://www.bp.com/content/dam/bp/pdf/gulf-of-mexico/Public_Report_July_2013_v2.pdf> accessed 26 August 2013107 For instance, see Transocean Settlement Fact Sheet: BP Oil Disaster –Restoration and Recovery <http://eli-ocean.org/gulf/files/Transocean-Settlement.pdf> accessed 26 August 2013

25

suggested that the US Congress should develop policies and

enact laws that would address this limitation. This will be

considered in detail in the next chapter.

26

THE IMPLICATION OF THE DEEPWATER HORIZON INCIDENT ON THE

EXISTING US OIL POLLUTION LIABILITY REGIME

Introduction

On 8 August 1990, President George W Bush while signing the

Oil Pollution Act 1990 (OPA) into law remarked that ‘… the

prevention, response, liability and compensation components

fit together into a compatible and workable system that

strengthens the protection of the environment’.108 However,

these laudable components of OPA has played less significant

role in the compensation of victims and response to the

Deepwater Horizon oil spill.109 This is an indication that the

existing liability regime under OPA needs to be reviewed to

reflect the risk involved in offshore drilling.110

This section argues that there is need to raise the liability

limit for economic damage arising from oil spill resulting

from offshore oil and gas facilities as opposed to eliminating

the limit. The argument will be hinged on the need to avoid

disincentive to offshore exploration and drilling in the US108 George W Bush, Statement on Signing the Oil Pollution Act of 1990 August18, 1990, The American Presidency Project, available at<http://www.presidency.ucsb.edu/ws/?pid=18772> accessed 25 July 2013109 Robert Force, Martin Davies and Joshua S Force, ‘Deepwater Horizon:Removal Costs, Civil Damages, Crimes, Civil Penalties and State Remedies inOil Spill Cases’ (n 34) 948.110 Statement of Senator Jeff Bingaman at the Hearing before US SenateCommittee on Energy and Natural Resources, 111th Congress, 2nd Session onthe Liability and Financial Responsibility issues related to offshore oilproduction, including the Deepwater Horizon accident in the Gulf of Mexico,25 May 2010 (hereinafter referred to as Senate Hearing on Liability andFinancial Responsibility)<http://docs.lib.noaa.gov/noaa_documents/NOAA_related_docs/oil_spills/DWH_liability_hrg_111-679_pt3.pdf> accessed 25 July 2013; NationalCommission Report (n 22) 284.

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Gulf of Mexico. The analysis will be made in the light of the

economic and energy security implications of unlimited

liability regime.

The inadequacy of the existing liability limit for offshore

facilities

While a responsible party is liable for the total clean-up

costs of oil spill and $75 million liability limit for

economic damage,111 the Deepwater Horizon incident has revealed

the inadequacy of the liability limit and provides evidence of

areas ripe for improvement.112 As highlighted in chapter two,

the catastrophic nature of the spill and the insignificance of

the $75 million liability limit in the light of the oil spill

led BP to waive its right to the limit under OPA113 and create

a $20 billion escrow account to pay claims submitted to and

approved by the Gulf Coast Claim Facility (GCCF).114

The enormous oil spill superseded the annual cap for emergency

response fund available to the US Coast Guard and other

federal agencies through the Oil Spill Liability Trust Fund

(OSLTF).115 This presents a situation in which the scope of111 Oil Pollution Act 1990, s 1004(a)(3).112 Lawrence I Kiern, ‘Liability, Compensation and Financial Responsibilityunder the Oil Pollution Act of 1990: A Review of the Second Decade’ (n 60)10.113 See (n 89) 114 Alfred R Light, ‘The Deepwater Horizon Oil Spill Trust and the GulfCoast Claims Facility: The “Superfund” Myth and the law of unintendedconsequences’ (2011) 5 Golden Gate University Environmental Law Journal,87-88; Byron G Stier, ‘The Gulf Coast Claims Facility as quasi-public fund:Transparency and Independence in claim administrator compensation’ (2011)30 Mississippi College Review, 255.115 Lawrence I Kiern, ‘Liability, Compensation and Financial Responsibilityunder the Oil Pollution Act of 1990: A Review of the Second Decade’ (n 60)

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claim recovery under OPA may need to be expanded.116 In

response, the US Congress took measures to increase the

emergency funding available from the (OSLTF) for oil spill

response.117 The measure taken was to ensure uninterrupted

funding for the unprecedented government response to the

Deepwater Horizon oil spill.118 An additional emergency advance

to the US Coast Guard and other federal agencies was allowed

in order to ensure effective response to the Deepwater Horizon

incident.119 However, the measure taken does not address the

inadequacies of OPA in response to similar future oil spill.120

Legislative proposal for review of the existing liability

limit for offshore facilities

While it became apparent that the magnitude of the Deepwater

Horizon oil spill would surpass the existing liability limit,

several bills were proposed in the US Congress to either

increase or eliminate the liability limit for economic damage

arising from oil spill resulting from offshore facilities.121

11.116 Robert Force, Martin Davies and Joshua S Force, ‘Deepwater Horizon:Removal Costs, Civil Damages, Crimes, Civil Penalties and State Remedies inOil Spill Cases’ (n 34) 940.117 Lawrence I Kiern, ‘Liability, Compensation and Financial Responsibilityunder the Oil Pollution Act of 1990: A Review of the Second Decade’ (n 60)10. 118 ibid, 11.119 ibid.120 Lawrence I Kiern, ‘Oil Pollution Act: Legislative changes, amendmentsset agenda for new Congress’ [2011] Daily Environment Report, 2.121 One of the bills introduced was the Big Oil Bailout Prevention Bill 2010(3305).

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However, the US Congress was divided as to the extent to which

such review should be made.122

Some of the Congress members proposed that the liability limit

for damage resulting from offshore oil and gas facilities

should be eliminated while others proposed a significant

increase in the liability limit.123 While deliberating on the

Big Oil Bailout Prevention Liability Bill of 2010, some

Congress members moved that the liability limit be

eliminated.124 It was argued that the current $75 million

liability limit, without amendment, would mean that the

American tax payers would be required to pay for damages

beyond the amount available from the OSLTF in the event of

future major oil spill.125 It was also argued that eliminating

the liability limit will ensure that oil companies have the

maximum incentive to adopt higher safety measures to avoid oil

spill.126

Although it was agreed that there is need to review the

liability limit,127 some Congress members are of the view that

the repercussion of eliminating the liability limit in its

entirety should be considered in order to adopt an optimum

122 Report of the US Senate Committee on Environment and Public Works on thedeliberation of the Committee on Big Oil Bailout Prevention Liability Billof 2010 (3305) (hereinafter referred to as Report on Big Oil BailoutPrevention Liability Bill 2010)<http://beta.congress.gov/111/crpt/srpt249/CRPT-111srpt249.pdf> accessed 6August 2013123 ibid.124 Report on Big Oil Bailout Prevention Liability Bill 2010 (n 122) 2125 ibid, 2.126 ibid, 3.127 ibid, 16.

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approach.128 Consequently, it was argued that eliminating the

liability limit could lead to disincentive to small and

medium-sized independent operators in the US Gulf of Mexico.129

It was further argued that eliminating the liability limit may

pose difficulty to independent oil companies in securing

insurance in order to establish evidence of financial

responsibility.130 It was noted that this may lead to

restriction in domestic production of oil and gas in the US

Gulf of Mexico.131 Further, it was noted that an effective

legislation to address major oil spill should ensure that as

much as victims are to be fully compensated, maintaining

access to America’s domestic offshore energy resources should

be considered.132

Although the proposed amendments were not passed into law,133

it set the stage for legislative action in the 112th Congress

to amend the Oil Pollution Act 1990.134

Argument against unlimited liability: Proposal for raising

the liability limit

In considering a review of the existing liability limit for

offshore facilities, it is paramount to balance the public

128 ibid.129 ibid.130 ibid.131 ibid, 17.132 ibid, 16.133 Lawrence I Kiern, ‘Oil Pollution Act: Legislative changes, amendmentsset agenda for new Congress’ (n 120) 2.134 ibid.

31

policy concern for adequate compensation of oil spill victims

and the need to avoid disincentive to competent independent

oil companies.135 Eliminating the liability limit could have

anti-competitive impact on small and medium-sized independent

oil exploration and production companies.136 A substantial

portion of the offshore industry in the US Gulf of Mexico is

made up of smaller independent operators.137 The independent

companies play significant role in developing many small and

end-of-life oil fields that larger companies like BP would

find uneconomical.138 Consequently, eliminating the liability

limit for economic damage may jeopardise the interest and

continued existence of these independent operators as they may

be put out of drilling activities in the US Gulf of Mexico.139

An unlimited liability regime may lead to bankruptcy of

smaller companies who may be involved in a major oil spill

like the BP Deepwater Horizon spill.140 The enormous oil spill

from the Deepwater Horizon led BP to create a $20 billion fund

to cater for claims from individuals and businesses affected

by the catastrophic oil spill.141 If small independent oil

companies had caused the catastrophic oil spill in Macondo,

such small companies might have disposed of its assets to be

able to raise $20 billion to settle the several claims brought

135 National Commission Report (n 22) 284.136 ibid, 246.137 ibid.138 ibid.139 ibid.140 ibid, 568.141 Light (n 114) 87, 88.

32

against BP, which may leading to bankruptcy.142 In such a

situation, suing the small independent companies would mean

obtaining judgment that may not be satisfied143 thereby

rendering any potential claim against the company

irrelevant.144 In the event that there is any amount left after

the sale of such company’s assets, victims of oil spill may

find themselves queuing up in line with a long list of secured

creditors having priority of claim, with no likelihood of

obtaining payment.145

Unlimited liability may put the US offshore oil and gas

industry at a comparative disadvantage146 in a global economy

governed by international limitation regimes, which impose

lower limits and provides less compensation compared to the US

liability regime.147 In fact, oil exploration and production

activities in the Gulf of Mexico are not only limited to US

jurisdiction because other countries like Mexico and Cuba have

expressed interest in deep water drilling in the Gulf of

Mexico.148 Curtailing offshore drilling activities in the US

Gulf of Mexico by imposing an unlimited liability may not

address the risk of potential major oil spill like the

Deepwater Horizon incident.149 This is because other countries142 Inho Kim, ‘Financial Responsibility Rules under the Oil Pollution Act of1990’ (2002) 42 Natural Resources Journal, p 568.143 Lynn M LoPucki, ‘Death of Liability’ (1996) 106 Yale Law Journal, p 14.144 Kim (n 142) 568.145 LoPucki (n 143) 14.146 Foley (n 51) 516, 517.147 Thomas J Schoenbaum, ‘Liability for Damages in Oil Spill Accidents:Evaluating the USA and International Law Regimes in the light of DeepwaterHorizon’ (2012) 24 Journal of Environmental Law 398.148 National Commission Report (n 22) 300.149 Green and Hayward (n 1) 4.

33

exploring in the Gulf of Mexico may unlikely curtail their own

exploration in the Gulf of Mexico from which major oil spill

that may impact adversely on US waters could occur.150 For

instance, it was reported that in 1979 oil from Ixtoc I spill

in the Mexican region reached Texas beaches.151

Further, inhibitive environmental regulations152 such as

unlimited liability regime could adversely affect the US

energy sector.153 This may lead to movement of oil companies

from the US Gulf of Mexico to other countries exploring oil

and gas in the Gulf of Mexico with less stringent liability

limit and environmental standards.154 A good example of this

situation was the impact of the moratorium imposed on offshore

drilling in the US Gulf of Mexico following the Deepwater

Horizon disaster.155 It was reported that some oil service

companies had to move their drilling rigs and equipment to a

less stringent environment156 due to the economic impact of the

150 ibid, 4.151 ibid.152 Adam B Jaffe, ‘Environmental Regulation and the Competitiveness of USManufacturing: What does the evidence tell us?’ (1995) 33 Journal ofEconomic Literature 133.153 ibid.154 ibid, 136. 155 Rob Bluey, ‘Fiscal Impact of the Offshore Drilling Moratorium’ NationalCenter for Policy Analysis, Brief Analysis No 743 (27 April 2011) 2.156 Sue Sturgis, ‘Company challenging offshore drilling moratorium movedoverseas to avoid U.S. taxes’ Institute for Southern Studies (14 July 2010)<http://www.southernstudies.org/2010/07/company-challenging-offshore-drilling-moratorium-moved-overseas-to-avoid-us-taxes.html> accessed 27August 2013; Kenneth Rapoza, ‘Why U.S. Oil Rigs Left Gulf of Mexico forBrazil’ Forbes (23 March 2011)<http://www.forbes.com/sites/kenrapoza/2011/03/23/as-us-oil-rigs-leave-for-brazil-permits-and-prices-only-factor/> accessed 27 August 2013

34

moratorium.157 Even some major oil companies may consider an

unlimited liability in litigious American society as a reason

not to engage or continue to drill in US Gulf of Mexico.158

Where unlimited liability is imposed, the US may lose world

market share159 when independent oil companies who play key

role in offshore exploration move to countries with less

stringent environmental standards.160 This may lead to a

decrease in the attractiveness of US as a ‘locus’ for

investment161 in offshore drilling. Similarly, where offshore

exploration and drilling is impeded, it may increase US

importation rate of crude oil from other countries leading to

a surge of oil transportation that may pose more risk of oil

spill.162 While this work is limited to liability for oil spill

arising from offshore facilities, it is worth noting that oil

spill from sea going vessels/tankers contribute a large

proportion of oil spill US has ever had.163 A close example is

the Exxon Valdez oil spill in 1989.164 Although oil pollution157 Steven Shavell, ‘Should BP be liable for economic losses due to themoratorium on oil drilling imposed after the Deepwater Horizon accident?’[2011] Discussion Paper No. 708 Series of Harvard JM Olin Center for Law,Economics and Business 1, 6 158 Patrice Hill, ‘Heavy liability could sink small oil drillers’ TheWashington Times, 25 July 2010http://www.washingtontimes.com/news/2010/jul/25/heavy-liability-could-sink-small-oil-drillers/?page=all (accessed 26 July 2013)159 Jaffe (n 152) 137.160 ibid; Green and Hayward (n 1) 4161 Jaffe (n 152) 137162 Scaief (n 17) 1346. 163 Green and Hayward (n 1) 2.164 Robert K Perrons, ‘Assessing the damage caused by Deepwater Horizon: Notjust another Exxon Valdez’ (2013) 71 Marine Pollution Bulletin, 20 – 22;Stephen Rauche, ‘Raising the Stakes for Environmental Polluters: The ExxonValdez Criminal Prosecution’ (1992) 19 Ecology Law Quarterly; Richard TSylves and Louise K Comfort, ‘The Exxon Valdez and BP Deepwater Horizon Oil

35

arising from offshore oil and gas facilities has occurred in

the past, they have generally had a lower profile than those

involving sea-going tankers.165

When stringent environmental policies, such as unlimited

liability, scares oil companies away from the US Gulf of

Mexico, the implication is that there may be less bid for

leases and consequently less rent and royalties for the US

Government.166 The recent lease sale conducted by BOEM in the

Central Gulf of Mexico puts the lease sale at $1.7 billion167

Promoting policies, such as unlimited liability regime, that

would inhibit offshore exploration would mean that the lease

sale figure would be drastically cut down.168 This may lead to

less revenue for the US government in the form of rent and

royalties.169

The US Gulf of Mexico is a vital source of oil and gas for the

United States.170 Loss of small independent companies may also

mean loss of jobs for the American populace.171 A recent study

conducted on energy jobs in the US puts the total potential

Spills: Reducing Risk in Socio-Technical Systems’ (2012) 56 AmericanBehavioural Scientist, 83.165 Andrew Rees and David Sharp, ‘Drilling in Extreme Environments:Challenges and implications for the energy insurance industry’ Lloyd’sEnergy Report [2011] 29.166 Bluey (n 155) 2.167 Report of BOEM on Consolidated Central Gulf Lease Sale 216/222 Reportconducted on 20 June 2012<http://www.boem.gov/Oil-and-Gas-Energy-Program/Leasing/Regional-Leasing/Gulf-of-Mexico-Region/Lease-Sales/216-222/222AHB. aspx > accessed 16 August2013 168 Bluey (n 155) 1.169 ibid.170 National Commission Report (n 22) 22.171 Scaief (n 17) 1345.

36

jobs impact of promoting offshore exploration and production

at approximately 1.0 million jobs by 2018 and over 1.4 million

by 2030.172 Promoting policy that would inhibit offshore

exploration like unlimited liability for economic damage from

oil spill from offshore facilities may imply curtailing the

benefit of offshore exploration and production in this

regard173. This may consequently impact adversely on the US

labour market which is significantly supported by offshore

exploration and production activities.174

The US may also run the risk of losing a huge source of energy

domestically, thereby increasing the country’s dependence on

foreign sources for its energy security.175 It is reported that

by 2025, the US importation of oil may be as high as two-third

of its oil needs.176 This concern is heightened by the fact

that oil price is set in the world market, based, to a large

extent, on production levels determined by the Organisation of

Petroleum Exporting Countries (OPEC)177 of which key member

states are from the Middle East.178 The unstable political

climate of this region (the Middle East) may have huge172 Wood Mackenzie, ‘US Supply Forecast and Potential Jobs and EconomicImpacts (2012 – 2030)’ 7 September 2011, 3<http://www.api.org/Newsroom/upload/API-US_Supply_Economic_Forecast.pdf>accessed 15 August 2013173 Joseph R Mason, ‘The Economic Contribution of increased Offshore OilExploration and Production to Regional and National Economies’ AmericanEnergy Alliance (February 2009), 25.174 National Commission Report (n 22) 295.175 Patrice Hill, ‘Heavy liability could sink small oil drillers’ (n 158).176 Nasser Momayezi and R B Tosenburg, ‘Oil, the Middle East and US NationalSecurity’ (2011) 1 International Journal of Humanities and Social Sciences,1.177ibid.178ibid.

37

implications for US energy security as its dependence on

imported oil continues to rise.179 While offshore drilling may

not be regarded as a complete solution to US energy

challenges,180 it plays a significant role in promoting

domestic oil production towards the reduction of reliance on

oil importation in the US.181 It is therefore suggested that

the US Federal Government should develop policies that would

not impede offshore drilling just as the proposal for

unlimited liability may likely do.

In addition, eliminating the liability limit may impact on the

ability of small and medium-sized independent companies to

secure insurance for unlimited liability coverage.182 This may

in turn impact on the independent companies’ ability to meet

the financial responsibility requirement under the law due to

a possible ‘sky rocket’ insurance premium that may result from

unlimited liability regime.183 It has been argued that the

success of financial responsibility regulations may depend on

the willingness of the insurance industry to insure high risk

activities with unlimited liability.184 Eliminating the

liability limit may pose challenge to insurers in evaluating

the financial risk exposure and defining reasonable limits as

179 ibid, 4.180 ibid, 6.181 National Commission Report 294. 182 Foley (n 51) 516.183 National Commission Report (n 22) 246.184 Kim (n 142) 565. For discussion on the challenges of insurance coverageof oil pollution, see Kenneth S Abraham, ‘Catastrophic Oil Spills and theProblem of Insurance’ (2011) 64 Vanderbilt Law Review 1769; Joanna MRoberto, ‘Gulf Coast Oil Spill Coverage Impact on the Insurance Industry’(2011) 40 Torts, Insurance & Compensation Law Section Journal 9.

38

well as calculating premium.185 This may have adverse effect on

offshore drilling as investment in offshore exploration may be

considered too risky to be insured, especially with unlimited

liability for economic damage from offshore facilities in deep

waters like the US Gulf of Mexico.186 It has been argued that

unlimited liability may not serve as incentive to small

independent companies when there is likelihood of bankruptcy

which may eventually shift the cost of any damage from oil

spill on the society and ultimately the victims.187 Liability

insurance requirement is justified when it creates incentive

to take care and safety measure while dealing with risky

activities.188 Although eliminating the liability limit may not

pose a great threat to major companies like BP, it may be

prohibitively expensive for small and medium-sized independent

companies to secure liability insurance.189 This may force many

of the small companies out of business.190 Consequently, the US

may run the risk of losing huge source of energy

domestically.191

While the elimination of all risk is impossible in offshore

drilling,192 the adoption of a significantly increased185 Statement of Rawle O King (Senate Hearing on Liability and FinancialResponsibility) (n 110) 54.186 ibid.187 Michael Faure and Wang Hui, ‘Economic Analysis of Compensation for OilPollution Damage’ (2006) Journal of Maritime Law & Commerce 189.188 Steven Shavell, ‘Minimum Assets Requirements and Compulsory LiabilityInsurance as a solution to judgment-proof problem’ (2005) 36 Rand Journalof Economics 75.189 Patrice Hill, ‘Heavy liability could sink small oil drillers’ (n 158).190 ibid.191 ibid.192 Kenneth M Murchison, ‘Beyond Compensation for Offshore DrillingAccidents: Lowering Risks, Improving Response’ (2011) 30 Mississippi

39

liability limit may provide incentive to lower risk of oil

spill and damage that oil spill may cause.193 Liability should

be commensurate with the potential for disaster.194 Since the

Deepwater Horizon incident had shown the inadequacy of the

existing liability regime for offshore facilities, the

liability limit should be increased to reflect the risk

involved in offshore drilling rather than legislating an

unlimited liability regime.195 While there should be a limit on

liability, it should not be arbitrarily lower than the

expected damage and risk involved so as not to violate the

victim’s right to full compensation.196 Although offshore

drilling in the US Gulf of Mexico is inherently risky,197

offshore drilling provides the US with huge supplies of oil

and gas.198

The proponents of unlimited liability for economic damage from

oil spill resulting from offshore facilities have argued that

arbitrary cap and artificial liability limits undermine the

deterrence of risky behaviour.199 It was argued that ‘a capped

damages market is less safe market - and that means

significant long-term costs’.200 It was also argued that the

existing liability limits shifts the loss from the party

College Law Review, 304.193 ibid.194 Scaief (n 17) 1347.195 ibid.196 Faure and Hui (n 187) 185.197 National Commission Report (n 22) 127.198 ibid.199 Andrew F Popper, ‘Capping Incentives, Capping Innovation, CourtingDisaster: The Gulf Oil Spill and Arbitrary Limits on Civil Liability’(2011) 60 DePaul Law Review, 996.200 ibid, 1003.

40

benefitting from highly profitable economic activities to

innocent individuals who receive no direct benefit from the

economic activities.201 It was further argued that the existing

liability limit constitute a contingent tax on innocent

victims of oil spill, to the benefit of offshore oil companies

who profit from the activity that caused the damage.202

While it is true that arbitrary liability limit may undermine

risky behaviour,203 it may be argued that deterrence can be

achieved not only through unlimited liability but also through

raising the liability limit to reflect the risk involved in

offshore drilling. Increasing the liability limit may result

in a strong incentive for oil companies to adopt adequate

safety measures in the course of offshore drilling.204 The

argument that liability limit should be eliminated fails to

take cognisance of the fact that even under OPA, responsible

parties may incur unlimited liability where the oil spill

results from gross negligence or wilful misconduct or

violation of applicable federal safety regulations.205 It may

be argued that the unlimited liability provision acknowledges

the fact that accidental oil spill may occur since it will be

unrealistic to expect a ‘no-spill’ situation in offshore

drilling.206 Advocating for a significant increase in the

201 Kenneth M Murchison, ‘Liability under the Oil Pollution Act: Current Lawand Needed Revisions’ (n 7) 937. 202ibid. 203 Popper (n 199) 996.204 National Commission Report (n 22) 286.205 Oil Pollution Act 1990, s 1004(c)(1).206 Kenneth M Murchison, ‘Beyond Compensation for Offshore DrillingAccidents: Lowering Risk, Improving Response’ (n 192) 304.

41

liability limit does not suggest that the liability limit

should be arbitrarily capped as this may distort the

incentives of industry participants from adopting adequate

safety precautions in drilling operations.207

In addition to increasing the liability limit, it is proposed

that the per-barrel tax on domestic and imported oil to fund

the OSLTF be increased. While this may not provide incentive

to offshore facilities to mitigate risk,208 it would to a large

extent enable victims of oil pollution to have access to

adequate compensation for any damage suffered.209 Also, the

emergency fund available to US Coast Guard and other federal

agencies to respond effectively to oil pollution should be

extended beyond the Deepwater Horizon disaster to major oil

spill which may occur in future.210 The US government should

also promote policies that would encourage new innovative

financial instruments to serve as alternatives to traditional

insurance policies in order to address any significant

increase in the liability limit that may be imposed.211 While

resolving the insurance issue in a way acceptable to oil

companies may be challenging, the insurance industry should

partner with the oil and gas industry in order to develop

insurance policies at risk-based prices that will enable

207 National Commission Report (n 22) 284.208 ibid, 286.209 ibid.210 Statement of Jonathan Ramseur (Senate Hearing on Liability and FinancialResponsibility) (n 110) 47.211 Statement of Rawle O King (n 185) 55.

42

offshore oil companies to continue to explore for oil that the

US society demands.212

Policymakers should look critically into the impact of

whatever action is to be taken in the aftermath of the

Deepwater Horizon incident. This is important as developing an

appropriate policy in this regard would require an

understanding of the complex economic impact that could result

from an unlimited liability regime for economic damage from

oil spill resulting from offshore oil and gas facilities in

the US Gulf of Mexico.213 In this regard, Thomas Perrelli,

Associate Attorney General, US Department of Justice has

advised that ‘… we must consider the ways in which new

liability rules may affect the structure of the offshore oil

industry and the number of market participants.’214

An effective legislative reform in the aftermath of the

Deepwater Horizon incident should not only concern the

liability limit but also regulating drilling activities and

safety of operations in the US Gulf of Mexico.215 This is

necessary in order to have a balanced environmental and safety

policy towards curtailing the occurrence of oil spill. The US

oil and gas industry should adopt a culture of maximising

safety and environmental protection rather than considering

environmental damage as a mere cost of business which may lead

212 Rees and Sharp (n 165) 39.213ibid, 284. 214 Statement of Thomas Perrelli (Senate Hearing on Liability and FinancialResponsibility) (n 110) 9.215 Foley (n 51) 530; Kenneth M Murchison, ‘Beyond Compensation for OffshoreDrilling Accident: Lowering Risks, Improving Response’ (n 192) 289.

43

to profit maximisation culture rather than safety culture.216

Raising or eliminating liability limit would play less

significant role if crucial safety and regulatory issues are

ignored.217

It is therefore proposed that the issues analysed above should

be properly considered by the US Congress in deciding the

extent to which the existing liability limit for offshore oil

and gas facilities should be raised. While it is reported that

the Big Oil Bailout Prevention Bill seeking to amend OPA has

been reintroduced in the US House of Representatives,218 it is

hoped that the liability regime for offshore facilities would

be considered in the light of the economic and energy security

implications of legislating an unlimited liability regime for

oil spill arising from offshore facilities. This is necessary

in order to avoid a liability regime that would create

disincentive to investment in offshore oil and gas exploration

in the US Gulf of Mexico.

216 ibid.217 Nicolas D Loris, Jack Spencer and James J Carafano, ‘Oil SpillLiability: A Plan for Reform’ (n 8) 1.218 Holt Reintroduces Big Oil Bailout Prevention Act, 26 January 2011<http://holt.house.gov/index.php?option=com_content&task=view&id=741&Itemid=18> accessed 27 August 2013

44

CONCLUSION

The enactment of the Oil Pollution Act 1990 was hailed as a

regime that would ensure adequate compensation for victims of

oil spill and response to major oil spill. However, the

Deepwater Horizon incident has exposed the limitations of the

45

existing liability regime under the Act. Given the economic

and environmental impact of the Deepwater Horizon oil spill,

it has become imperative to increase the existing liability

limit for offshore facilities in order to reflect the risk

involved in offshore drilling in the Gulf of Mexico.

While there have been proposals to eliminate the liability

limit for economic damage arising from oil spill resulting

from offshore oil and gas facilities, there is need to

consider the economic and energy security implication of

legislating unlimited liability regime. Given the significance

of the US offshore oil and gas industry to the US economy,

there is need to legislate a liability regime that will avoid

disincentive to investment in offshore drilling in the US Gulf

of Mexico. This is necessary in order to enhance US domestic

energy supply; ensure continuous sustenance of the US offshore

labour market and harnessing the fiscal benefit of promoting

investment in offshore oil and gas exploration in the US Gulf

of Mexico. These economic goals can be achieved by increasing

the liability limit rather than legislating unlimited

liability regime.

The impact of unlimited liability regime on investment in

offshore drilling and the US economy as a whole should be

painstakingly considered and analysed. The US Government may

call for a reconsideration of the liability and financial

responsibility issues raised by the Deepwater Horizon incident

in order to have a true picture of the economic implication of

legislating unlimited liability regime. Likewise, there is

46

need for the US Congress to consider any proposed amendment to

the existing liability limit for offshore facilities in the

light of avoiding disincentive to investment in offshore

drilling in the US Gulf of Mexico.

It is also imperative to develop environmental and safety

policy towards curtailing the occurrence of oil spill. An

effective legislative reform should not only consider the

liability regime for oil spill but also address safety issues

in order to as much as possible prevent or reduce the

occurrence of oil spill. While the proposed legislative reform

may be regarded as challenging, it is hoped that the US

Congress will ‘take the bull by the horn’ and legislate a

liability regime that will not only ensure adequate

compensation for victims of oil spill but also avoid

disincentive to investment in offshore drilling in the US Gulf

of Mexico. Based on the arguments made in this thesis, the

optimum approach would be to increase the existing liability

limit for offshore oil and gas facilities rather than

legislating unlimited liability regime. Given the

reintroduction of the Big Oil Bailout Prevention Bill, the

Congress should sieze the opportunity to raise the existing

liability limit rather than eliminating the limit taking into

consideration the need to avoid disincentive in offshore

drilling in the US Gulf of Mexico.

47

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