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Impacts of Increased Liability Limits on Deepwater OperationsBriefing Paper
 –
8.26.10
1220 L Street, NW | Washington, DC 20005-4070 www.api.org
The Oil Pollution Act of 1990 (OPA ’90) established the Oil Spill Liability Trust Fund (OSLTF)as an “insurance policy” for payment of potential damages from oil releases from
exploration, production or transportation accidents
. The OSLTF is funded exclusively by a per barrel tax on the oil industry
 –
not by taxpayers. The industry has contributed 100% of the $1.6billion currently in the Fund.
OPA ‟90 requires that responsible parties
pay
ALL cleanup costs
related to a spill from an offshoreplatform. Only then can responsible parties use the OSLTF to cover up to $1 billion for consequentialdamages if those claims exceed the OPA
‟s
$75 million liability cap. Further, the liability cap for consequential damages does not apply in instances of gross negligence, willful misconduct, or violation of applicable federal regulations. Injured parties may also file claims in state courts, whichare not subject to the liability limits.In response to the Deepwater Horizon incident,
BP has made it clear in writing that it will pay100% of the environmental cleanup and all legitimate claims for economic damages withoutseeking reimbursement from the Fund
(see attached letter from Tony Hayward to SecretariesSalazar and Napolitano). Nevertheless, some in Congress have proposed eliminating liability limitsentirely. This would threaten the viability of offshore operations and could significantly reduce USdomestic oil production, cost jobs and harm U.S. energy security.Some of the leading insurance companies in the oil and gas market have told Congress that theywould be unable to offer adequate insurance protection for offshore operations under thisproposal (letters attached). Further, bec
ause the OPA „90 considers any lending or insuring party
to be a guarantor, insurers are reluctant to provide third party liability coverage for fear of liabilityto the federal government.
1
 If the financial responsibility requirement is raised significantly, then only two independent oilcompanies have the shareholder equity to meet a significantly higher (e.g., $10 billion) financialassurance test by self insurance. As the insurance industry has indicated that it cannot provide sufficient coverage to meetfinancial assurance requirements at this level, this provision would, in effect, push all small,medium and even most of the major integrated companies out of the Gulf. An estimated 170,000 direct and indirect jobs are supported by the oil and natural gas industry inthe Gulf of Mexico. As the companies that could meet the self insurance threshold account for about 15 percent of the total Gulf production on a barrel of oil equivalent basis, raising thefinancial responsibility threshold would place about 145,000 jobs at risk.If small and even mid-sized U.S. companies are forced out of the offshore exploration market byliability limit increases, huge national oil companies owned by foreign governments could taketheir place. Such companies comprise 15 of the largest 16 global oil and gas companies, andwould likely have the financial strength to meet increased financial responsibility requirements.
1
 
However,
 
some institutions will provide insurance coverage or surety bonds in amounts much less than $10 billion if theresponsible party provides them with a separate waiver of financial responsibility for damages greater than the amount of thepolicy/bond
.
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