‘Laughably Low’ Spill Liability Cap Spurs U.S. Debate After BP

More than nine months after BP Plc’s Gulf of Mexico oil spill, the company says it has paid $3.2 billion in damages. U.S. law required it to pay $75 million.

Members of Congress are reviving efforts that failed last year to increase the 20-year-old liability limit, which BP waived after the April blowout of its Macondo well resulted in the biggest U.S. offshore spill.

Oil companies from Exxon Mobil Corp., the world’s biggest, to the smallest independent drillers have a stake in the debate. So do insurers such as Munich Re and Warren Buffett’s Berkshire Hathaway Inc., which may benefit from increased demand for coverage from oil producers exposed to greater liability.

“We have a laughably low liability level,” Representative Rush Holt, a New Jersey Democrat, said in a press conference last month. He proposes eliminating the limit in a bill called the Big Oil Bailout Prevention Act.

The starting point for the renewed debate may be a proposal last year by Senator Mary Landrieu, a Louisiana Democrat, to combine a ceiling of $250 million with a shared-risk pool for costlier spills to which all companies operating in the Gulf would contribute.

The pool would cover added costs of as much as $15 billion, according to Senator Mark Begich, an Alaska Democrat who is working with Landrieu on a compromise bill.

“We’re going to be aggressive about it,” Begich said in an interview.

Small Drillers

One concern is the threat to small companies from higher liability caps. “The goal here is to make sure we’re not squeezing the small independents out,” Begich said. “We have to get this issue resolved, for the stability of the industry.”

Spreading responsibility across all operators may help save about 185 smaller drillers that operate in the Gulf, according to William Reilly, co-chairman of a panel President Barack Obama appointed to probe the BP disaster.

While the commission’s report recommended increasing the liability limit “significantly,” getting lawmakers to agree on details “is going to be a heavy lift,” according to Mike Olsen, an attorney at Bracewell & Giuliani LLP in Washington.

Landrieu wants the industry pool to cover damages from $250 million to $10 billion, according to Taylor Henry, her spokesman. Begich said the pool could go as high as $15 billion.

Damages exceeding such limits would fall to the oil company that owned the well under Landrieu’s proposal, according to Henry. Begich called for an escrow account “similar to what BP did.”

‘Fully Accountable’

BP’s Macondo well exploded on April 20, killing 11 workers, injuring 17, and destroying Transocean Ltd.’s $365 million Deepwater Horizon rig. Crude oil spewed into the Gulf for 87 days. BP is paying into a $20 billion escrow account to handle claims.

Legislation to remove all liability limits passed the House last year, when Democrats were in control, and wasn’t taken up in the Senate.

Senate Majority Leader Harry Reid, a Nevada Democrat, supports removing the cap and implementing the Reilly panel’s recommendations, according to Jon Summers, a spokesman.

Senator Robert Menendez, a New Jersey Democrat, said he would oppose any limits on spill liability.

“When oil companies cause a problem, be it an oil spill or other environmental disasters, they should be held fully accountable,” Menendez said in an e-mailed statement.

In the House, Representative Doc Hastings of Washington, who heads the Natural Resources Committee now that Republicans control the chamber, said in an interview that he’s “open to discussion” about a compromise that wouldn’t endanger jobs in the Gulf.

Viable Industry

Alan Jeffers, a spokesman for Irving, Texas-based Exxon, referred questions on the liability caps to the American Petroleum Institute.

“We support a liability system that ensures there are sufficient resources” to clean up a spill and pay for damages, Carlton Carroll, a spokesman for the Washington-based industry group, said in an e-mail. “However, any limits must be set in a manner that allows continued development in the outer continental shelf by a variety of participants large and small.”

Landrieu said last year that her proposal was designed to “get the taxpayers off the hook and keep the industry viable, particularly the independents.”

Her proposal may be too costly for some companies operating in shallow waters, according to Don Briggs, president of the Louisiana Oil & Gas Association in Baton Rouge.

Shelling out “$250 million can be a crasher for many of the smaller producers in the Gulf of Mexico,” he said. “A $250 million cap on a guy producing a well that has a 100 barrels of oil a day, versus one in deep water that may have 2,000 barrels a day, there’s a big difference.”

Insurers Winners

Bad news for drillers may be good news for insurance companies.

“An insurer is a winner if it can bring the additional capacity to market” profitably, Robert Hartwig, president and chief economist at the Insurance Information Institute, a New York-based trade group, said in an interview.

Offshore operators pay $3 billion to $4 billion in annual premiums to private commercial insurers, according to Hartwig.

Even with no change in legal liability limits, prices may climb 20 percent to 40 percent this year for deepwater property coverage and so-called control-of-well policies, which reimburse clients when wells must be capped, according to Marsh Inc., the insurance brokerage arm of Marsh & McLennan Cos. Those policies may supplement self insurance and coverage from an industry mutual insurer called Oil Insurance Ltd., Marsh said.

Deepwater Horizon “will have repercussions for that portion of the insurance industry for years to come,” Jim Pierce, chairman of Marsh’s global energy practice, said in a statement on Jan. 27.

Added Coverage

Munich Re said in September that it was planning to develop coverage for oil-drilling operators in the Gulf of Mexico by offering $10 billion to $20 billion of individual liability coverage. The company would commit as much as $2 billion. Munich Re said in December it plans to work with brokers at Marsh & McLennan, Willis Group Holdings Plc and Aon Corp.

Berkshire will provide additional industry coverage of as much as $250 million on policies of as much as $2.5 billion underwritten by other insurers, Willis said last month.

American International Group Inc.’s Chartis division boosted capacity at its Oil Rig unit to $200 million from $150 million in August. The decision was a response to the rising value of offshore production equipment and energy industry requests for higher loss-limits on their insurance after Deepwater Horizon, said Dorian Grey, president of Oil Rig, in an e-mailed statement.

To contact the reporter on this story: Katarzyna Klimasinska in Washington at kklimasinska@bloomberg.net. Noah Buhayar in New York at nbuhayar@bloomberg.net

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Stuart H. Smith is an attorney based in New Orleans fighting major oil companies and other polluters.
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