Lessons From the Gulf Disaster

After 87 days, BP apparently capped its ruptured oil well, but not before it had spewed more than 200 million gallonsof crude into the Gulf of Mexico. Some analysts estimated the price tag just to clean up the mess at more than $6.1 billion.

BP has agreed to put up $20 billion to cover the cleanup and damage claims. As the company amasses that sum, the government pushed for an escrow fund in case BP goes "belly up" during the cleanup. The British oil giant agreed to set up an escrow fund that will be administered by Kenneth Feinberg, the special administrator of 9/11 claims.

Public Citizen has announced, though, that the $20 billion will need to cover Feinberg-ordered payments as well as reimbursements for state and local response, natural resource harms and payments pursuant to civil damage claims. Moreover, according to Public Citizen, the party responsible for paying into that trust fund is BP Exploration & Production Inc., the entity that controls BP's leases in the Gulf, which appears to have no other assets.

BP's stock has plummeted as the company stopped paying dividends, and the Wall Street Journal reported that the company has lost about $100 billion in market value.

The escrow fund is also intended to avoid a repeat of the 1989 Exxon Valdez oil disaster, which involved two decades of fighting in courts over the money due.

The Valdez incident involved an oil tanker that struck a reef off the coast of Alaska and spilled 260,000 to 700,000 barrels of crude oil in Prince William Sound. It covered about 1,300 miles of coastline and 11,000 square miles of ocean. After that incident, Section 2004 of the Oil Pollution Act (OPA) was passed into law in 1990, which capped the liability of holders of leases or permits for offshore facilities at $75 million per spill, plus removal costs.

When companies engage in dangerous activities, they should be held fully accountable. Most executives, however, try to figure ways to short-change the injured. In the case of BP, it has waived the OPA cap and has expressed a willingness to pay "any legitimate claim." As generous an offer as that may sound, it may have been destined anyway as the law provides for a lifting of the cap if the incident was caused by "the gross negligence or willful misconduct" of any party or its failure to comply with any "applicable federal safety, construction or operating regulations." The reported facts leading up to the spill suggest it is likely that that standard will be met.

Companies dealing with dangerous operations need to either have sufficient assets or purchase appropriate insurance to cover the consequences of their wrongful actions or they simply shouldn't be allowed to engage in the dangerous activity. Caps on liability promote negligent and even worse behavior.

Although the OPA attempted to address these problems after the Valdez incident, the law provides an insufficient remedy for the environmental disaster that occurred in the Gulf this year. What did become clear is that the government has no apparatus to handle a problem of this magnitude.

The National Transportation Safety Board handles oil pipeline disasters but not platform disasters. The Senate Energy and Natural Resources Committee has congressional oversight over the Department of Interior's Bureau of Ocean Management. But because those are the agencies that represent the government in negotiating the lease contracts with the oil companies, they don't have authority to handle it. President Obama set up a bipartisan commission in May to investigate the leak. The U.S. Justice Department is looking into civil and criminal wrongdoing.

There are lots of agencies and entities simultaneously looking into the BP disaster. Shouldn't this be coordinated, so work is not repeated and a single agency with the proper authority can get the questions answered to prevent this from happening again? At this writing, a second explosion of an offshore production platform in the Gulf owned by Mariner Energy Inc. occurred about 200 miles west of the BP tragedy.

Congress has weighed in with H.R. 3534, the Consolidated Land, Energy, Air and Aquatic Resources Act. Its goal is to "provide greater efficiencies, transparency, returns, and accountability in the Administration of Federal mineral and energy resources by consolidating administration of various Federal energy minerals management and leasing programs into one entity to be known as the Office of Federal Energy and Minerals Leasing of the Department of Interior." It passed the House on July 30 and awaits Senate approval.

Eleven people were killed in the April 20 explosion and, despite BP's apologies and promise to "restore the shoreline to its original state," thousands of businesses have been ruined and the lives of the people who live there have been forever changed.

And what about those caps? In the end, the laws allowed BP to avoid paying for the economic damage it caused - the ruined ecosystem, the businesses derailed by the loss in revenue and loss of jobs, the massive cleanup, the research on toxic materials, safe offshore drilling and countless other problems. It points out, in yet another arena, just how unfair and unjust caps on damages can be.