Oil-Spill Liability To Rise in U.K.


The U.K. oil industry is to consider doubling the cap on payouts for oil spills in the North Sea, amid concerns that the current system is inadequate to deal with an incident on the scale of the Deepwater Horizon disaster in the Gulf of Mexico.

Members of the industry’s voluntary compensation scheme for oil spills in the U.K. are meeting later this month, and people familiar with the matter said the current $120 million cap was likely to be “considerably increased” and possibly doubled.

North Sea operators were generally unfazed by the proposed change. “We’d be supportive,” said Simon Lockett, chief executive of Premier Oil PLC. “I think the government needs to set its policy and the industry has to work with it.” He added that the cap was “ripe” for a review.

Currently, oil companies in the U.K. are fully liable for cleaning up spills from their installations. But if they default on payments, a backup fund kicks in that is underwritten by all U.K. North Sea operators. The fund limits payouts to $120 million per incident.

In the wake of the Gulf of Mexico oil spill, however, that figure is widely seen as too low. At one point, BP PLC was paying roughly that amount every day to deal with the leak. Its total bill for the cleanup now stands at close to $4 billion, not including a $20 billion liability fund BP has promised to raise over the next 3½ years.

Scrutiny of safety regimes for offshore drilling has intensified globally since the Deepwater Horizon rig caught fire in the Gulf last April, killing 11 people and triggering the world’s worst marine oil spill.

In the U.S., legislators have been seeking to remove a $75 million cap on liability for offshore oil spills, a move fiercely opposed by smaller oil companies that fear higher insurance costs would squeeze them out of the Gulf. That effort has lost steam in recent weeks, with the Senate declining to act on a bill that would have eliminated the cap ahead of the summer recess. Meanwhile, European Union Energy Commissioner Guenther Oettinger has urged a moratorium on new deepwater drilling until the causes of the Gulf disaster are known.

The U.K. government—which is heavily reliant on tax receipts from North Sea oil operators—has been more circumspect. In June, the U.K’s Department for Energy and Climate Change said it was increasing its inspection of drilling rigs in the light of the disaster. It also said it would be reviewing the indemnity and insurance requirements for companies operating offshore. But it stressed that the country’s existing safety provisions were “fit for purpose.”

The process of indemnifying oil spills in the U.K. is handled by the Offshore Pollution Liability Association, an industry body that administers a voluntary compensation plan known as OPOL.

Under the OPOL Agreement, a company is fully responsible for the cost of oil spills from its offshore facilities. But if it can’t meet its liabilities—for example, because of bankruptcy—other OPOL signatories step in to guarantee the payment of costs of as much as $120 million.

A U.K. government spokesperson said the Energy Department was reviewing this figure with OPOL and the industry “to ensure that the sum available actually aligns with the revised estimates that may result from a Gulf-type incident.”

The review would look at compensation costs associated with “a range of different oil-spill scenarios, from minor leaks to major incidents,” said Paul Dymond, operations director at Oil & Gas UK, the main trade association for Britain’s offshore oil and gas industry.

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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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