[Senate Hearing 111-679, Part 3]
[From the U.S. Government Publishing Office]


                                                 S. Hrg. 111-679, Pt. 3
 
                      DEEPWATER HORIZON LIABILITY 

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   TO

RECEIVE TESTIMONY ON THE LIABILITY AND FINANCIAL RESPONSIBILITY ISSUES 
  RELATED TO OFFSHORE OIL PRODUCTION, INCLUDING THE DEEPWATER HORIZON 
 ACCIDENT IN THE GULF OF MEXICO, INCLUDING S. 3346, A BILL TO INCREASE 
  THE LIMITS ON LIABILITY UNDER THE OUTER CONTINENTAL SHELF LANDS ACT

                               __________

                              MAY 25, 2010


                       Printed for the use of the
               Committee on Energy and Natural Resources

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

BYRON L. DORGAN, North Dakota        LISA MURKOWSKI, Alaska
RON WYDEN, Oregon                    RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota            JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana          SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington           JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey          JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas         ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan            BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               McKie Campbell, Republican Staff Director
               Karen K. Billups, Republican Chief Counsel



















                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bennett, Craig, Director, National Pollution Fund Center, United 
  States Coast Guard.............................................    14
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Hayes, David J., Deputy Secretary, Department of the Interior....    10
King, Rawle O., Analyst in Financial Economics and Risk 
  Assessment,Congressional Research Service......................    47
Meltz, Robert, Legislative Attorney, Congressional Research 
  Service........................................................    55
Murkowski, Hon. Lisa, U.S. Senator From Alaska...................     2
Perrelli, Thomas J., Associate Attorney General, Department of 
  Justice........................................................     6
Ramseur, Jonathan, Specialist in Environmental Policy, 
  Congressional Research Service.................................    42
Whitehouse, Hon. Sheldon, U.S. Senator From Rhode Island.........     4

                                APPENDIX

Responses to additional questions................................    65


                      DEEPWATER HORIZON LIABILITY

                              ----------                              


                         TUESDAY, MAY 25, 2010

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.

    The committee met, pursuant to notice, at 10:08 a.m. in 
room SR-325, Russell Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW 
                             MEXICO

    The Chairman. The hearing will come to order.
    Today is the third hearing of this committee on issues 
related to the Deepwater Horizon disaster in the Gulf of 
Mexico. While today's hearing will focus on liability and 
financial issues, we continue to have foremost in our minds the 
human component of this accident, the 11 rig workers who lost 
their lives, their families, the people of the Gulf who are 
experiencing this catastrophic situation firsthand.
    Yesterday, I was fortunate to accompany our Assistant 
Majority Leader, Dick Durbin, and Senator Murkowski, Senator 
Landrieu, Senator Whitehouse, Senator Vitter--all of us spent 
the day in the Gulf observing the consequences of this accident 
and the joint response of our government agencies, NPB, and the 
many volunteers.
    It's a sobering reality to see oil begin to impact the 
shorelines and know that this well is not yet under control. 
However, I also saw many people who have been working night and 
day for weeks to fight this spill and to protect the Gulf, and 
I think we all express our gratitude to them for their 
extraordinary effort.
    Today, we examine the liability, financial, responsibility, 
and penalty provisions of the law related to this accident. 
This is--there is urgency in our effort. We need to ensure that 
those harmed by this accident are fully compensated and that a 
system is in place that properly allocates risks and losses. 
Based on what I've learned so far, I believe that we have a 
system in dire need of repair. Current law caps the responsible 
party's damages, other than the cleanup cost, at $75 million, 
which clearly is nowhere near the damages that result--have 
resulted from this disaster.
    Equally as troubling, the law requires the Secretary of 
Interior to adjust the amount of these caps at least every 3 
years to reflect significant increases in the Consumer Price 
Index. Yet, the limit on damages for offshore facilities has 
not been increased since the law was passed in 1990. Twenty 
years of inflation have been ignored.
    Victims of the disaster will certainly wonder why there 
should be any cap on damages, and why those responsible should 
not simply be required to pay the full amount of the harm they 
caused. BP has stated that it will pay all legitimate claims 
and that it will not insist on the $75-million cap currently in 
the law. But, even accepting this as true, we have a broken 
system that is in need of repair. The Oil Spill Liability Trust 
Fund financed almost--financed mostly by taxes on oil, is 
intended to cover higher levels of damages and to spread the 
risk of excess damages among the industry as a whole. Yet, it 
is limited to paying $1 billion per incident. Congress, over 
the years, has been inconsistent in acting taxes to fund this 
effort, and the taxes that support it are scheduled to expire 
in 2017. So, we obviously need to look at that, as well.
    The law also requires that operators in the offshore 
environment demonstrate certain levels of financial 
responsibility to ensure that they can cover the losses that 
they may cause. However, for facilities like the Deepwater 
Horizon, the maximum amount required is $150 million and the 
standard requirement is only $35 million. This amount has not 
been increased in decades. We obviously need to fix this.
    Finally, there are civil and criminal penalties available 
to the Secretary to punish those who violate safety and other 
requirements. These are intended to be a deterrent to playing 
fast and loose with the rules and creating safety risks. But 
the civil penalties were set in 1990, at $20,000 a day. They've 
been raised only once, to $35,000 a day. Here, too, the law 
requires the Secretary to adjust these penalties every 3 years 
to reflect increases in the Consumer Price Index, and that has 
only occurred sporadically.
    So, we have our work cut out for us. These are complex 
areas of law and policy. We have a number of experts here to 
help us think through how to fix these problems, and I look 
forward to their testimony.
    I know Senator Whitehouse is here to speak briefly about 
his legislation that he's introduced regarding civil and 
criminal penalties, but before calling on him, let me call on 
Senator Murkowski for her statement.

        STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you, Mr. Chairman. I want to thank 
you for agreeing to hold this very important hearing this 
morning.
    As you have mentioned in your statement, our visit 
yesterday to the Gulf, that Senator Whitehouse and Senator 
Landrieu and several others joined us on, I think, was a very 
important visit, a very important trip to understand the impact 
of the Deepwater Horizon spill, understand better the 
consequences as that spill unfolds as we see the impact to 
local residents, certainly to the marine environment. I can 
assure you that what I saw yesterday certainly has reinforced 
my commitment to help make things right for all those, whose 
lives and their livelihoods are being so vastly affected by 
this disaster.
    When it comes to the issue of liability associated with a 
major oil spill, I don't think that there's any State that's 
represented here on this committee that has a more direct 
experience, certainly a more immediate concern, than the State 
of Alaska.
    When the Exxon Valdez tragedy occurred, it was a horrible 
incident at that time. It was a long and very sad part of 
Alaska's history. The litigation that followed was years in 
being resolved. The litigation over punitive damages literally 
took 2 decades to resolve. That, and--in and of itself, was an 
absolute tragedy, and I am committed to ensuring that we don't 
see a similar situation unfold with this Gulf spill.
    Now, I wanted our committee to hold this hearing because 
there's been considerable discussion about the liability for 
the Deepwater Horizon spill, and what part of that liability is 
limited or not limited. I think there has been some 
mischaracterization out there that BP is only going to be 
responsible for $75 million of the spill.
    Mr. Chairman, if I really thought that the Federal 
Government was going to protect companies that have billions of 
dollars in assets, and then require that they only pay $75 
million, regardless of the ultimate costs and damages for the 
spill, with taxpayers and spill victims that could possibly 
then be hung out to dry, I would be the absolute first to 
introduce legislation to correct what would clearly be a flawed 
system. The reality is, is that this $75 million figure is 
drawn from just one provision on strict liability in OPA, the 
Oil Pollution Act, and it has nothing to do with the expressly 
unlimited--the unlimited liability provided for the cleanup 
costs. I think it's also important to recognize that it has 
nothing to do with the law's authorization for unlimited 
damages that are allowed under various State laws. We recognize 
that not every State has unlimited strict liability, so we do 
need to take that into account.
    I think, we have all stated around this table here, in this 
committee room, with the CEO of BP in front of us, that we must 
hold, and we will hold, BP accountable.
    Mr. Chairman, you have stated, and repeated again the 
affirmation that was made by BP, that they will--they will pay 
for and provide for all of those costs that are incurred as a 
result of this oil spill.
    When we were in the Gulf yesterday with Secretary 
Napolitano and Secretary Salazar, they, too, reiterated, many, 
many times throughout the course of the day, that BP will be 
responsible for the damages--for the costs associated with the 
spill.
    I think that we need to listen carefully and constructively 
on how we hold companies liable, how we incentivize stronger 
safety and environmental safeguards as it pertains to the $75-
million liability cap. My own opinion is that we need to 
increase this liability cap to reflect both the inflation, the 
changing financial and the risk portfolios that are associated 
with certain types of exploration. I hope that, as we consider 
some of the suggestions here today, and going out into the 
future here, we consider how we make changes in ways that are 
not arbitrary. Right now there's a proposal out there that the 
liability cap needs to be $10 billion. Is that the right 
figure? I don't know. Maybe it is. Maybe it needs to be higher. 
Maybe it needs to be unlimited. Maybe it needs to be somewhere 
in between. But, I think we need to make the time, take the 
time, to ensure that you're building good policy on this.
    If Congress decides to impose a strict and direct liability 
of an additional $10 billion on top of the unlimited cleanup 
and the unlimited lawsuits that can be brought about--against 
responsible parties in State courts, I think we have to 
consider what the potential consequences might be. Will there 
be jobs lost? Particularly in the Gulf Coast, our energy's--
Nation's--our energy security, perhaps, weakened. We need to be 
considering these aspects. We've got an interest in making sure 
that the victims of this tragic spill, and, God forbid, that 
any future spills, are justly compensated in a fair and an 
expeditious manner.
    I think it is important that we figure out how we deal with 
this liability cap in increasing it, but again, I'm reserving 
judgment on what that appropriate figure might be until we've 
examined this in a way that Secretary Salazar asked us to do 
just last week.
    So, I welcome the witnesses that we will have today. I 
welcome Senator Whitehouse for his perspective.
    I thank you, Mr. Chairman, for your leadership on this 
issue.
    The Chairman. Thank you very much.
    Senator Whitehouse has introduced legislation, S. 3346, to 
revise the civil and criminal penalty provisions. We welcome 
him to the committee to make a statement about that bill.
    Go right ahead.

 STATEMENT OF HON. SHELDON WHITEHOUSE, U.S. SENATOR FROM RHODE 
                             ISLAND

    Senator Whitehouse. Thank you, Chairman Bingaman.
    Thank you, Ranking Member Murkowski and members of the 
Energy and Natural Resources Committee.
    First of all, thank you for holding this hearing. I 
encourage you to review the penalty and liability framework 
governing offshore drilling and enact changes to this framework 
so we can prevent future disasters, like the one now unfolding 
in the Gulf.
    Thank you also for inviting me to make a few remarks about 
my Outer Continental Shelf Lands Act's amendments of 2010 bill, 
S. 3346. The bill seeks to enhance penalties for failing to 
meet worker safety and environmental regulations on offshore 
oil rigs. It is just one piece of the puzzle.
    My colleague Senator Menendez has introduced 2 other bills 
to raise liability caps for oil spills when they occur and to 
eliminate the per-incident cap on claims to the Oil Spill 
Liability Trust Fund. I'm a cosponsor of both of these bills 
and commend Senator Menendez's leadership on this issue. I look 
forward to working with him, and all of my colleagues in the 
Senate, to forge a strong deterrence system to discourage 
irresponsible oil drilling.
    Just yesterday, as the Chairman has indicated, we visited 
Louisiana--the Chairman, the Ranking Member, Senator Landrieu, 
Senator Durbin, and others--to inspect the disaster caused by 
the BP Deepwater Horizon oil spill. Since the tragic explosion 
on this oil rig on the night of April 20, which took the lives 
of 11 workers, oil from Mississippi Canyon Block 252 has been 
spewing uncontrollably into the deep waters of the Gulf, at a 
rate that no one seems able to accurately calculate, and that 
has very likely been underestimated.
    I knew the extent of the spill from press reports, but it 
is another thing entirely to go and see the massive oil slick 
spread across the surface of the Gulf, with black smoke 
billowing off of the waters where controlled burns are taking 
place. Oil is now also washing up on coastal beaches and 
wetlands, areas vital to the economies of Louisiana, 
Mississippi, Alabama, and Florida.
    While in the Gulf, we also heard from shrimpers and other 
Gulf fishermen about the destruction of the ecosystem and the 
potential collapse of their industries. Some of these folks are 
second-and third-generation fishermen. This is literally the 
only life they have ever known, and they worry it could be gone 
forever. Rhode Island fishermen face similar worries at home, 
more based on economic concerns than on oil spills. But, I'm 
sympathetic to the concerns of our fishing community, and this 
fishing community.
    S. 3346 would amend the Outer Continental Shelf Lands Act 
by enhancing penalties in the following 3 ways: increasing 
civil penalties from $38,000 per violation to $70,000 per 
violation, per day. Two, where the violation constitutes a 
threat of serious, irreparable, or immediate harm or damage to 
life, including fish and other aquatic life, property, any 
mineral deposit, or the marine, coastal, or human environment, 
increase civil penalties from $38,000 per violation, per day, 
to $150,000 per violation, per day. Three, increase the upper 
bound of criminal penalties from $100,000 per violation, per 
day, to $10 million per violation, per day.
    The goal of the Outer Continental Shelf Penalties Program 
is to assure safe and environmentally sound oil and gas 
operations on the Outer Continental Shelf. Enhancing these 
penalties will go a long way to deter oil companies from 
cutting corners on safety measures that can prevent disasters 
like the Gulf spill.
    We need to take a comprehensive look at the penalty and 
liability framework that governs offshore oil and gas drilling 
and the substantive requirements that exist to protect our 
workers, our coastlines, and the marine environment from 
devastating oil spills.
    We may want to consider banning drilling at certain depths 
until it's clear that we can engage in repair and recovery 
activities at those depths.
    Chairman Bingaman, I applaud your efforts to address the 
liability portion of this work in today's hearing. One thing 
I'm certain of is that the current penalty and liability system 
is inadequate. In just the first 3 months of this year, the 
five largest oil companies worldwide, including BP, made $23 
billion in profits. The current liability and penalty limits 
are inconsequential in the face of those recordbreaking 
profits.
    I want to close by anticipating an argument we will hear 
from the oil and gas industry, that enhancing penalties will 
drive companies out of the business of offshore drilling. The 
way I see it, robust safety and environmental standards, and 
tough penalties for noncompliance with those standards, help to 
avoid disasters like the BP Deepwater Horizon oil spill. Not 
only will it save workers' lives and protect our marine and 
coastal environments, but this will save money, because these 
disasters cost many times more than the cost of prevention.
    Just consider these costs. In the 1996 North Cape Scandia 
spill off the coast of Rhode Island, cleanup costs, natural 
resource damages, and penalties totaled almost $32 million. In 
the 1989 World Prodigy Spill at Brenton Reef, Rhode Island, 
cleanup costs and fines exceeded $35 million. Rough estimates 
of the cleanup costs for Deepwater Horizon's bill range from $2 
billion to $8 billion. Suddenly, $75,000 or $150,000 doesn't 
seem like such a very large number.
    Mr. Chairman, I'd like to offer into the record of these 
proceedings a list of some of BP's violations of Outer 
Continental Shelf Lands Act regulations, taken from the MMS Web 
site. These are exactly the types of safety systems that failed 
on April 20. May I ask consent to have that submitted for the 
record?
    The Chairman. We're glad to have that included.
    Senator Whitehouse. I appreciate the attention of the 
committee. I thank you and your good work.
    The Chairman. Thank you for testifying and your leadership 
in introducing the bill that you've put forward.
    We have 2 panels.
    We will excuse you at this point.
    We have 2 panels, today, of experts, first from the 
administration and then from the Congressional Research 
Service.
    The first panel is Thomas Perrelli, who is the associate 
attorney general; second, David Hayes, who is the Deputy 
Secretary of Interior; and third, is Craig Bennett, who is 
director of the Coast Guard's National Pollution Funds Center. 
If they would all come forward, please, and take their seats.
    If there is no particular preference on your part, why 
don't we start with Mr. Perrelli. If you could give us your 
views in the first 5 or 6 minutes, and then we will include all 
of the statements in full in the record, and then we'll have 
questions.
    Mr. Perrelli, go right ahead.

 STATEMENT OF THOMAS J. PERRELLI, ASSOCIATE ATTORNEY GENERAL, 
                     DEPARTMENT OF JUSTICE

    Mr. Perrelli. Thank you Chairman Bingaman and Ranking 
Member Murkowski for the opportunity to testify about issues of 
liability and financial responsibility related to offshore oil 
production.
    Before I begin, I would like to echo the Chairman's 
sentiments and take a moment to express my condolences to the 
families of those who lost their lives, and to those who were 
injured, in the explosion and sinking of the Deepwater Horizon.
    The explosion and fire that took place aboard the Deepwater 
Horizon and the spill of oil that followed have created a 
potentially unprecedented environmental disaster for the people 
and fragile ecosystems of the Gulf Coast. This disaster has 
been met with a massive and coordinated response from the 
Federal Government, led by President Obama. The agencies 
operating as a part of the unified command and numerous 
dedicated Federal officials have been on the scene from the 
beginning. The activities have been focused, as they must be, 
on stopping the oil spill and preventing and mitigating its 
effects.
    The Department of Justice, too, has been fully engaged in 
these response efforts. Our mandate is to make sure that we 
recover every dime of taxpayer funds that the United States 
spends for the removal efforts and damages caused by this 
catastrophe. We have been working tirelessly, and will continue 
to do so, to carry out this mandate and ensure that the 
American people do not pay for any of the damages for which 
others are responsible.
    At the direction of the Attorney General, we have been 
monitoring the situation on the ground, coordinating our 
efforts with the State attorneys general, and working with 
Federal partner agencies and natural resources trustees to make 
sure that we measure and track every bit of cost incurred in 
damages to the United States, the States, and the environment. 
We are looking ahead to issues of financial responsibility and 
liability, many of which arise under the Oil Pollution Act, 
which is the subject of my testimony today.
    As you know, OPA was passed in the wake of the Exxon Valdez 
disaster to provide specific legal authority for dealing with 
the consequences of oil spills. OPA gives Federal officials the 
authority to designate responsible parties who, first and 
foremost, are required to clean up oil spills and then pay 
removal costs and damages. The Coast Guard has, thus far, 
designated BP and TransOcean as responsible parties for this 
bill, under OPA.
    In its current form, OPA contains conditional caps that, in 
some instances, limit the liability of responsible parties, 
caps which are based on the size and nature of the vessel or 
facility that is the source of the spill. BP has already stated 
in several fora, however, that it will not seek to limit its 
payments to the applicable cap, and that it will not look to 
the Federal Government to reimburse it for claims that it pays 
in excess of the applicable cap. We expect BP to uphold this 
commitment.
    The U.S. Government is committed to making sure that all 
responsible parties, in any oil spill, are held fully 
accountable for the costs and the damages they have imposed on 
our people, our communities, and our natural resources.
    The liability provisions of OPA have not been updated in 
some time, and it is clear that they need to be revised to 
better reflect the principle that polluters should bear the 
risks, costs, and damages associated with the harm they caused 
to individuals, communities, and the natural environment. BP 
has recognized its obligation to fully compensate all those 
suffering damages in the current oil spill.
    For the future, we need to change the legal framework to 
ensure that there is no arbitrary cap on corporate 
responsibility for a similar major oil spill. We'll work with 
Congress to develop appropriate proposals and transitions.
    Thank you, Mr. Chairman.
    [The prepared statement of Perrelli follows:]

     Statement of Thomas J. Perrelli, Associate Attorney General, 
                         Department of Justice
    Chairman Bingaman, Ranking Member Murkowski, and members of the 
Committee, thank you for the opportunity to testify today about 
liability and financial responsibility issues related to offshore oil 
production. Before I begin, I would like to take a moment to express my 
condolences to the families of those who lost their lives and to those 
who were injured in the explosion and sinking of the Deepwater Horizon.
INTRODUCTION
    The explosion and fire that took place aboard the Deepwater Horizon 
Mobile Offshore Drilling Unit on April 20th and the spill of oil into 
the Gulf of Mexico that followed have created a potentially 
unprecedented environmental disaster for the people and fragile 
ecosystems of the Gulf Coast. President Obama, the Department of 
Justice, and the entire Administration are committed to ensuring that 
those responsible for this tragic series of events are held fully 
accountable.
    From the moment these events began to unfold, this matter has had 
the close attention of Attorney General Holder. While Administration 
efforts have focused on responding to the disaster and ensuring that 
the responsible parties stop the discharge, remove the oil, and pay for 
all costs and damages, the Department of Justice has been carefully 
monitoring events on the 2 ground and providing legal support to the 
agencies involved in the response efforts. To handle the multiple legal 
issues that a disaster of this magnitude raises, the Attorney General 
has assembled a team of attorneys from our Civil and Environment and 
Natural Resource Divisions who have experience with the legal issues 
that arise out of oil spills and other environmental disasters, as well 
as the United States Attorneys for the districts that are being, or are 
likely to be, affected by the spill. The United States Attorneys are on 
the frontline and have critically important knowledge of their 
communities and local matters. We at the Department of Justice are 
working to coordinate our efforts not only with the other federal 
agencies involved but also with the state Attorneys General for the 
affected states and with representatives from local communities.
    My testimony today will focus on the Oil Pollution Act of 1990, or 
``OPA.'' As you know, OPA was passed in the wake of the Exxon Valdez 
disaster to provide specific legal authority for dealing with the 
consequences of oil spills. OPA assigns responsibility and liability 
for cleaning up such spills. It also provides a liability scheme for 
payment of damages ranging from the immediate and ongoing economic harm 
that individuals and communities suffer to the potentially devastating 
and long-term harm done to precious natural resources.
    Although OPA is the primary federal vehicle for addressing 
liability for response costs and damages resulting from oil spills, it 
is not the only legal vehicle for seeking compensation for incidents 
such as those now unfolding in the Gulf. It is important to remember 
that OPA expressly preserves state and other federal mechanisms for 
pursuing damages for injuries caused by such incidents and for 
assessing penalties for the underlying conduct that may cause such 
disasters. There may be additional legal authorities available under 
both state and federal law, but the focus of my testimony today is OPA.
    I assure you that this Administration will explore all legal 
avenues to make sure that those responsible for this disaster pay for 
all of the devastation that they have caused. Our mandate is to make 
sure that we recover every dime that the United States Government 
spends for the removal of the oil and the damages caused by this 
catastrophe. We will work tirelessly to carry out that mandate and to 
ensure that the American people do not pay for any of the costs and 
damages for which others are responsible.
THE OIL POLLUTION ACT OF 1990
    OPA provides a strict-liability scheme for payment of removal costs 
and damages resulting from a discharge of oil from a vessel or facility 
into or upon the waters of the United States, including the area in 
which the Deepwater Horizon explosion, fire, and oil spill occurred. 
That means that those companies that are ``responsible parties'' under 
OPA are responsible for paying costs and damages under the statute, 
regardless of whether they are found to be at fault. Here, under OPA, 
the Coast Guard has designated the source of the spill and has thus far 
identified BP and Transocean as responsible parties under the statute.
    OPA establishes certain limits on liability according to a formula 
that varies based on the size and nature of the vessel or facility that 
is the source of the spill. For discharges of oil from an offshore 
facility (other than a deepwater port), a responsible party is liable 
for all removal costs: There is no cap on such a responsible party's 
liability for removal costs. OPA defines removal costs as the costs of 
removing spilled oil from water and shorelines or taking other actions 
as may be necessary to minimize or mitigate damage to the public health 
or welfare, including wildlife and public and private property. The 
responsible party must pay in full for the removal costs incurred by 
the United States, a state, or an Indian tribe, or by a private party 
acting in accordance with the National Contingency Plan.
    In addition to being responsible for all removal costs, a party 
responsible for a discharge of oil from an offshore facility is also 
liable for damages from the spill. With recognized exceptions, a 
responsible party's liability for damages for a discharge of oil from 
an offshore facility is limited to $75,000,000 per incident. The 
liability cap does not apply if the discharge was caused by the gross 
negligence or willful misconduct of the responsible party or of any of 
its agents, employees, or contractors. Similarly, no liability cap 
applies if the spill resulted from the responsible party's--or its 
agent's, employee's, or contractor's--violation of an applicable 
Federal safety, construction, or operating regulation. Under such 
circumstances, a responsible party would be strictly liable for all 
damages covered by the statute. Recoverable damages cover, among other 
things, injuries to natural resources, loss of subsistence use of such 
resources, destruction of property, loss of tax revenue, loss of 
profits or earning capacity, and net increased costs for additional 
public services, including protection from fire, safety, or health 
hazards.
    I note that BP has stated in Congressional testimony--including 
Lamar McKay's testimony before this Committee on May 11--that it will 
not use the $75 million cap to limit its payment of legitimate claims 
under OPA. We expect BP to uphold this commitment. Rest assured, 
however, that the United States Government is committed to making sure 
that all responsible parties are held fully accountable for all the 
costs and damages they have imposed on our people, our communities, and 
our precious resources.
    In addition, under OPA, the Oil Spill Liability Trust Fund is 
available to pay compensation for removal costs and damages to the 
extent that a responsible party does not do so. The Fund is financed 
primarily by an 8 cent per barrel tax on oil collected from the oil 
industry. For any one oil-pollution incident, the Fund may pay up to $1 
billion or the balance of the Fund, whichever is less. Natural resource 
damage assessments and claims in connection with a single incident are 
limited to $500 million of that $1 billion. If the Fund pays 
compensation to a claimant, it becomes subrogated to all that 
claimant's rights to recover from the responsible party under OPA or 
from any party under any other law. That is, the Fund steps into the 
shoes of claimants that the Fund pays and assumes any rights of action 
that the claimants would otherwise have.
PROPOSED AMENDMENTS TO OIL POLLUTION ACT
    As you know, the President recently sent up a legislative proposal 
designed to improve our ability to respond to oil spills. The proposal 
requested additional funding for many of the agencies that are 
responding to the present unprecedented oil spill.
    Of more direct relevance to this hearing, the proposal would do two 
things: First, it would raise the potential cap on damages for 
responsible parties beyond the current limits. Second, it would 
increase the amount in the Oil Spill Liability Trust Fund by increasing 
the tax on industry through which the Fund is financed and would 
increase the amount the Fund could pay for cleanup and damages related 
to any given incident.
    The Administration supports a significant increase in liability for 
offshore oil and gas developers whose actions pollute our oceans and 
coastlines and threaten our wildlife and other natural resources. There 
are a number of factors to consider in increasing the liability caps. 
We must determine how to ensure that the liability rules provide the 
appropriate incentive for companies working in this field to fully 
account for the damages their actions may cause and to mitigate the 
risks of a catastrophic event. We must consider how best to ensure that 
the liability rules we adopt provide confidence that an individual or 
business harmed by an oil spill will be able to seek--and receive--fair 
compensation, and that the trustees charged with protecting our 
precious natural resources can secure adequate compensation for any 
harm done to those resources. In addition, 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. We must analyze how any 
change in the caps will interact with the current liability structure 
under OPA. Under that structure, the party responsible for a spill is 
liable for associated costs and damages up to a specified cap, if the 
cap applies, with liability for additional costs and damages spread 
across the oil industry as a whole through the Oil Spill Liability 
Trust Fund.
    The Administration's proposal to increase the applicable liability 
caps would apply to any party found to be liable under OPA for any 
incident that occurred prior to enactment of the new liability caps. 
The Administration believes it is both fair and constitutional to enact 
legislation that would ensure that those who have caused environmental 
damage are held responsible for the damages they caused rather than 
imposing these costs on society more generally.
    Our experiences over the last twenty years, and with the current 
disastrous chain of events, have convinced us that the old liability 
caps are simply inadequate to deal with the potentially catastrophic 
consequences of oil spills. We look forward to working with you to fix 
these caps.
CONCLUSION
    The focus of everyone's efforts right now is--and should be--on 
ensuring that BP stops the discharge of oil and responds to the 
immediate aftermath of the spill.
    The review of the facts regarding the Deepwater Horizon explosion, 
fire, and oil spill is still in its infancy. It would be premature to 
speculate as to the level of damages here or how much any responsible 
party will be liable to pay.
    The Department strongly supports the Administration's legislative 
proposal and we look forward to working with you to see it adopted.

    The Chairman. Mr. Hayes, we're glad to have you before the 
committee. Go right ahead.

 STATEMENT OF DAVID J. HAYES, DEPUTY SECRETARY, DEPARTMENT OF 
                          THE INTERIOR

    Mr. Hayes. Thank you, Mr. Chairman and members of the 
committee.
    I'll make a few oral remarks, my written testimony is for 
the record, thank you.
    I've been asked to focus my testimony on the enforcement 
authority under the Outer Continental Shelf Lands Act, the 
companion to what Mr. Perrelli is talking about, in terms of 
the Oil Pollution Act. I'm delighted to testify on this 
subject. Obviously, our first focus right now is on the oil 
spill disaster and the response to it. Secretary Salazar sent 
me down to the Gulf the first--the morning after. I know 
several of you visited with Secretary Salazar and Napolitano 
yesterday, and he reported this morning that it was an 
excellent trip and was delighted you were able to go.
    Now, while our primary focus is on the disaster and 
responding to it, it's appropriate, we believe, that you are, 
obviously, taking up these broad policy questions. We are also 
looking at important policy questions regarding this disaster 
and how to respond to it. It's for those reasons that Secretary 
Salazar commissioned an independent root-cause analysis, to be 
done by the National Academy of Engineering, that will be 
folded into the new Presidential commission that will examine 
all aspects of this disaster and come up with new proposals, 
potentially, on how to ensure it will not occur again.
    Also, Secretary Salazar will be delivering to the 
President, later this week, an interim-measures report to deal 
with safety issues associated with ongoing activities on the 
Outer Continental Shelf. Most notably and important to this 
committee is the fact that the Secretary has reorganized the 
Minerals Management Service, already, to take apart the 
enforcement side away from the leasing and permitting side. He 
also, in his reorganization, removed the revenue-producing side 
from those 2 organizations. So, we look forward to working with 
you on those issues.
    With regard to inspections and enforcement, this has been 
an--of very significant interest of the Secretaries. In fact, 
last fall, the Secretary commissioned a unit of the National 
Academy of Sciences to take a stem-to-stern look, if you will, 
at the inspection program of MMS. That National Academy study 
is ongoing, and we're looking forward to the results.
    On the precise issue raised by Senator Whitehouse's 
proposed testimony, we agree that it's appropriate to revisit 
whether the statutory penalties under the Outer Continental 
Shelf Lands Act are adequate or not. We note, of course, the 
additional liability scheme that Mr. Perrelli focused on under 
the Oil Pollution Act, but certainly the Outer Continental 
Shelf Lands Act is the primary enforcement mechanism for 
ongoing review and approval--and, if necessary, compliance--for 
the oil and gas industry, in terms of offshore activities that 
the Department of the Interior has purview over.
    In that regard, I note that the original penalty authority 
came from the 1978 Lands Act amendments, and the original fine 
was 10,000 per day, per violation. In the 1990 Oil Pollution 
Act, there was an amendment to the Outer Continental Shelf 
Lands Act that increased that fine for civil penalties to 
$20,000 per day, per violation. Plus, it established the 
ability to adjust that upward under the Consumer Price Index. 
In 1997, MMS revised the penalty amount up, under the CPI, to 
$25,000 a day. In 2003, it was again revised up, because of the 
CPI, to $30,000 a day. In 2007, it was again revised up to 
$35,000 per day. In August of last year, MMS did it--the latest 
CPI analysis, and the CPI had not gone over the threshold to 
raise it further. So, there has been attention on this issue, 
but we are based on a statutory structure that's been in place 
for some time.
    As the administration, we are absolutely open to 
considering amendments to the Act to increase the current $35-
per day, per violation, civil penalty and the $100,000 criminal 
penalty. We look forward to working with the committee on those 
issues.
    Thank you.
    [The prepared statement of Mr. Hayes follows:]

   Statement of David J. Hayes, Deputy Secretary, Department of the 
                                Interior
    Thank you, Chairman Bingaman, Ranking Member Murkowski, and Members 
of the Committee, for the opportunity to discuss liability, 
enforcement, and financial responsibility issues related to oil 
production on the Outer Continental Shelf, including those associated 
with the ongoing response to the Deepwater Horizon rig explosion.
    Before we begin let me express my sympathy to the families of those 
who lost their lives and the many who were injured or have lost their 
livelihood in this massive environmental disaster. This spill continues 
to command our time and resources at the Department of the Interior as 
we work to ensure that the spill is stopped; that those responsible are 
held accountable; and that the natural resources along the Gulf Coast 
are protected and restored.
Introduction
    Secretary Salazar said when he appeared before you last week that 
we at the Department have been actively and aggressively engaged in 
this spill from day one. The Secretary has been to the Gulf Coast and 
Houston many times to ensure all that can be done to stop the spill is 
being done; to monitor the effects of the spill on our lands and waters 
in the Gulf; and to direct the Department's response to this tragedy.
    I left for the Gulf the morning after the explosion to help provide 
senior, on-the-ground leadership and communication with principals in 
Washington. Working with Rear Admiral Landry, we stood up a Joint 
Command structure in those early days, and moved from a search and 
rescue effort to a spill response effort. I have continued to be 
involved in the response to this disaster each and every day from April 
20 forward. I have returned to the Gulf twice since that initial trip, 
and I am working virtually around the clock on Gulf-related response 
activities, coordinating our Department's efforts in responding to the 
spill, both in terms of capping the well, and in working to protect our 
trust resources from damage from the spill.
    The Secretary has detailed the many actions that we have taken in 
response to the explosion and spill and the major changes that we have 
been making at the Minerals Management Service--not just over the past 
5 weeks, but over the past 16 months--to address prior ethics issues, 
strengthen its independence, balance its mission, increase safety, and 
improve management, regulation, and oversight of operations on the 
Outer Continental Shelf (OCS). This kind of fundamental change does not 
always come easily or instantaneously, but we have been committed to a 
reform agenda in the Department since our arrival a little more than a 
year ago, and we are determined to see it through.
    The latest manifestation of these reforms, the reorganization of 
MMS, was announced by the Secretary last week. The Secretarial Order 
released last week creates three separate entities within the 
Department to address the three distinct and conflicting missions of 
the MMS--safety and enforcement, energy development, and revenue 
collection. We will be consulting with Congress as we work out the 
details of this reorganization. The result will be a strong and 
independent framework that will hold energy companies accountable and 
in compliance with the law of the land.
Those Responsible Will Be Accountable
    We are here today to address issues of liability and enforcement as 
it pertains to oil and gas development on the OCS. Let me begin by 
noting that the President has been very clear in this regard: we will 
not rest until this spill is contained and we will aggressively pursue 
compensation for all costs and damages from BP and other responsible 
parties. There should be no doubt that all responsible parties will be 
held accountable for paying costs associated with this spill, including 
all costs of the government in responding to the spill and compensation 
for loss and damages that arise from the spill.
    At the urging of Secretary Salazar and Secretary Napolitano, in a 
recent letter BP has confirmed that it will pay for all of these costs 
and damages regardless of whether the statutory liability cap contained 
in the Oil Pollution Act applies. The bottom line is that, while the 
investigations as to the cause are still underway, those found 
responsible will be held fully accountable for their actions.
Outer Continental Shelf Enforcement
    Specific to development on the OCS, the Outer Continental Shelf 
Lands Act (OCSLA) provides the Department with the authority to manage 
access to and development of energy and mineral resources on the OCS 
and to ensure that operations on the OCS are safe and protective of the 
environment. Under its provisions, the Department has the authority to, 
among other things, promulgate and enforce safety and environmental 
regulations; investigate and report on major fires, oil spills, death 
or serious injury; review allegations of any violation of safety 
regulations under the Act; and summon witnesses and require the 
production of information.
    In order to determine whether an operator's performance on the OCS 
is in compliance with applicable laws and regulations, the OCSLA 
provides for scheduled onsite inspections at least once a year of each 
facility on the OCS and also periodic unannounced onsite inspections 
where no advance notice is given. If those inspections find 
noncompliance with applicable requirements, a wide range of enforcement 
actions can be taken, depending on the circumstances, ranging from 
written warnings to financial penalties, to drilling and/or production 
shut-ins of platforms, wells, equipment, or pipelines.
    As a matter of policy, Minerals Management Service inspectors and 
field engineers conduct complete inspections of all safety devices and 
environmental standards for drilling activities approximately once a 
month while drilling rigs are on location. MMS also conducts 
inspections of up to 3,600 OCS production facilities every year. 
Finally, MMS conducts unannounced inspections generally targeting 
operators for whom compliance concerns exist or who are conducting 
inherently dangerous operations, such as welding, construction 
activities, and normal production activities at the same time.
    If an operator is found in violation of a safety or environmental 
requirement, MMS issues a citation requiring that the violation be 
fixed within 14 days. On average about 24,000 inspections per year are 
conducted and 2,500 Incidents of Non-Compliance (INCs) are issued. Many 
of these INCs are for minor non-compliance issues such as marking 
equipment improperly, but some are for serious non-compliance issues 
such as 5 unauthorized bypassing of safety devices. The latter triggers 
an automatic civil penalty referral, discussed in detail below, and may 
result in a component or facility shut-in.
    Issuance of a facility shut-in order is a serious and expensive 
penalty for non-compliance as it stops all production until the issue 
is fixed. In 2009, MMS issued 97 INCs that resulted in shutting-in a 
production facility and 20 that resulted in shutting-in a drilling 
facility.
    Evidence of serious non-compliance may result in the assessment of 
civil or criminal penalties for failure to comply with requirements 
under the law, a license, a permit, or any regulation or order issued 
under the Act. These provisions are found in section 24 of the Act (43 
U.S.C. Sec. 1350), and are currently set at not more than $35,000 per 
day for civil administrative penalties, or $100,000 per day for 
criminal penalties.
    Violations that cause injury, death, environmental damage, or pose 
a threat to human life or the environment will trigger a Civil Penalty 
Review. Civil penalties are reviewed and assessed by the MMS under 
three categories that reflect the severity and number of operator 
violations. From fiscal year 2000 through FY 2008 over $18 million in 
civil penalties were collected.
    In the spirit of working to improve and reform the MMS inspection 
program, and as part of our MMS reform agenda, in September 2009 the 
Secretary asked the National Marine Board, an arm of the highly 
respected National Academy of Sciences, to direct an independent review 
of MMS's inspection program for offshore facilities. The results of 
that review are due to us this fall and will help us enhance the 
effectiveness of that program as we implement our reforms.
    We are also addressing the program through changes to the budget. 
The MMS inspection program, which currently has 55 inspectors in the 
Gulf of Mexico Region and 7 in the Pacific and Alaska Regions, would 
receive under the President's fiscal year 2011 Budget funding for an 
additional 6 inspectors for offshore oil and gas facilities in the 
Gulf, an increase of more than 10 percent. In addition, the 
Administration's recently submitted legislative proposal to address the 
BP oil spill also contains, among other things, a request for an 
additional $29 million for the Department to further increase its 
inspection capability, as well as to support the development of new 
enforcement and safety regulations, and to carry out studies needed in 
light of this event.
The Outer Continental Shelf Lands Act Amendments Act
    The Outer Continental Shelf Lands Act Amendments Act, S. 3346, 
proposes to increase the amount of the civil penalties available under 
the OCSLA to $75,000 per day; provide for a mandatory civil penalty of 
not more than $150,000 per day, without regard to the allowance of a 
time period for corrective action, for continuing violations that 
constitute a threat of serious, irreparable, or immediate harm or 
damage to life, including fish and aquatic life, property, mineral 
deposits, or the environment; and increase criminal penalties for 
violations to $10 million.
    The maximum daily civil penalty was adjusted to $35,000 by 
regulation in March 2007. While the Department published a notice 
summarizing review of the amount of this maximum civil penalty in the 
Federal Register in January 2010, we recognize that the underlying 
statutory requirements have not been amended in 20 years, when the 
amount for civil penalties was changed as part of the Oil Pollution 
Control Act of 1990. Moreover, the statutory amount for criminal 
penalties has not been amended since its enactment in 1978 when the 
existing criminal penalty provisions of not more than $100,000 per day 
or imprisonment for not more than 10 years were put in place.
    The investigations into the Deepwater Horizon explosion and this 
spill have not been completed, so it is premature to speculate as to 
the extent to which the proposed increased penalty provisions would 
apply to this particular matter. Nevertheless, given the time that has 
elapsed since these provisions were last amended, we believe it is 
appropriate to consider thoughtful increases in the amount of both 
civil and criminal penalties under the Act. We welcome the opportunity 
to work with Congress on this matter as this legislation moves forward.
Conclusion
    The Department is committed to ensuring that we are doing all we 
can to assist those in the Gulf Coast region to persevere through this 
disaster and that our important places are protected and restored. We 
are working to ensure that BP and other responsible parties are doing 
all they can to stop the discharge of oil and meet their 
responsibilities--and commitments--to the region. The reforms we are 
putting in place will ensure the integrity of the OCS program into the 
future. And the joint investigation we are carrying out with the 
Department of Homeland Security and the 30 day safety review ordered by 
the President will provide us with valuable information and will help 
us identify what caused this tragedy and what safety measures should be 
immediately implemented.
    We will get to the bottom of this disaster and will hold those 
responsible fully accountable.

    The Chairman. Thank you very much.
    Mr. Bennett, go right ahead.

 STATEMENT OF CRAIG BENNETT, DIRECTOR, NATIONAL POLLUTION FUND 
               CENTER, UNITED STATES COAST GUARD

    Mr. Bennett. Good morning, Chairman Bingaman, Ranking 
Member Murkowski, and members of the committee. I am grateful 
for the opportunity to testify today about the Oil Pollution 
Act of 1990 Liability and Compensation Regime, as it relates to 
the oil spill in the Gulf.
    I have been the director of the National Pollution Fund 
Center for 2 years, and I was chief of the financial management 
division at the NPFC for 4 years, prior to assuming my current 
position.
    My role as the director of the NPFC in this response is 
threefold. First, I fund the Federal response, using amounts 
Congress has made available from the Oil Spill Liability Trust 
Fund, the so-called ``emergency fund.'' Second, I ensure the 
responsible party is advertising its availability to pay claims 
for removal costs and damages. If claimants are not fully 
compensated by a responsible party, they may present their 
claims to the NPFC for payment from the fund. Third, I recover 
Federal response costs and claims paid by the fund from any and 
all responsible parties.
    With respect to the Deepwater Horizon response, BP 
reported, yesterday, that they have spent over $760 million in 
their response to this spill. Federal response costs against 
the emergency fund have totaled $72.4 million. Fund costs 
include the direct cost of the Coast Guard and 27 other Federal 
partners, as well as over $7 million in funding that has been 
provided to 14 different State agencies for State response 
efforts.
    While we exercised our one-time advancement authority to 
move $100 million from the parent fund to the emergency fund, 
the emerging scale of this enormous response effort is burning 
through those funds. This is important because, while the 
responsible party may be reimbursing emergency fund cost, those 
reimbursements go back into the parent fund, not the emergency 
fund. We believe that we may exhaust the existing balance in 
the emergency fund as early as June 5, much earlier than 
previously forecast.
    Legislation is on the Hill to allow for additional 
advancement authority, and it is critical that we obtain that 
authority as soon as possible.
    As the responsible party, BP is advertising and paying 
claims for the removal costs and damages that result from this 
spill. To date, BP has reportedly received over 25,000 claims 
and paid over $28 million. Most of these claims have been for 
loss of income and wages to individuals, small businesses, and 
fishermen. As of yesterday, BP has reportedly opened 28 claims 
processing centers, with over 432 personnel in the field to 
assist claimants, and has established a 1-800 number as well as 
Web-based claims submission capability.
    BP currently has the capacity to accept 6,000 claims per 
day, and advises that it can surge quickly to a capacity of 
15,000 claims per day, putting over 2500 adjusters in the 
field, if necessary. My staff is in daily conversation with BP 
executives regarding any concerns that are brought to our 
attention regarding claimants' efforts to submit their claims.
    A central tenet of OPA 90 is that the polluter pays. 
Federal response costs are being accounted for, and will be 
billed to, BP and other responsible parties and guarantors, 
under OPA. We anticipate frequent, periodic billings and prompt 
payment.
    Going forward, the administration will continue response we 
have sustained since the first day of this incident. 
Individuals, communities, and businesses have suffered as a 
result of this spill. The OPA regime is working to ensure a 
robust Federal response, that those damaged from this spill are 
compensated, and the polluter pays.
    The Department supports the administration's legislative 
proposal, and we look forward to working with Congress to 
adjust the OPA regime appropriately.
    Thank you for the opportunity to testify today. I look 
forward to your questions.
    [The prepared statement of Mr. Bennett follows:]

Prepared Statement of Craig Bennett, Director, National Pollution Fund 
                   Center, United States Coast Guard
    Good morning Chairman Bingaman and distinguished members of the 
committee. I am grateful for the opportunity to testify before this 
committee on the subject of the BP Deepwater Horizon oil spill 
currently ongoing in the Gulf of Mexico.
    On the evening of April 20, 2010, the Transocean-owned, BP-
chartered, Marshall Islandsflagged Mobile Offshore Drilling Unit (MODU) 
DEEPWATER HORIZON, located approximately 72 miles Southeast of Venice, 
Louisiana, reported an explosion and fire onboard. This began as a 
Search and Rescue (SAR) mission-within the first few hours, 115 of the 
126 crewmembers were safely recovered; SAR activities continued through 
April 23rd, though the other 11 crewmembers remain missing.
    Concurrent with the SAR effort, the response to extinguishing the 
fire and mitigating the impacts of the approximate 700,000 gallons of 
diesel fuel onboard began almost immediately. In accordance with the 
operator's Minerals Management Service (MMS)-approved Response Plan, 
oil spill response resources, including Oil Spill Response Vessels 
(OSRVs), were dispatched to the scene. After two days of fighting the 
fire, the MODU sank into approximately 5,000 feet of water on April 
22nd. On April 23rd, remotely operated vehicles (ROVs) located the MODU 
on the seafloor, and, on April 24th, BP found the first two leaks in 
the riser pipe and alerted the federal government. ROVs continue to 
monitor the flow of oil.
    As the event unfolded, a robust Incident Command System (ICS) 
response organization was stood up in accordance with the National 
Response Framework (NRF) and the National Oil and Hazardous Substances 
Pollution Contingency Plan (NCP). ICS is utilized to provide a common 
method for developing and implementing tactical plans to efficiently 
and effectively manage the response to oil spills. The ICS organization 
for this response includes Incident Command Posts and Unified Commands 
at the local level, and a Unified Area Command at the regional level. 
It is comprised of representatives from the Coast Guard (Federal On-
Scene Coordinator (FOSC)), other federal, state, and local agencies, as 
well as BP as a Responsible Party.
    The federal government has addressed the Gulf Oil Spill with an 
all-hands-on deck approach from the moment the explosion occurred. 
During the night of April 20th-the date of the explosion-a command 
center was set up on the Gulf Coast to address the potential 
environmental impact of the event and to coordinate with all state and 
local governments. After the MODU sank on the 22nd, the National 
Response Team (NRT), led by the Secretary of Homeland Security and 
comprised of 16 Federal agencies including the Coast Guard, other DHS 
offices, the Environmental Protection Agency (EPA), National Oceanic 
and Atmospheric Administration (NOAA), Department of Interior (DOI), as 
well as Regional Response Teams (RRT), were activated.
    On April 29, Secretary Napolitano declared the event a Spill of 
National Significance (SONS), which enhanced operational and policy 
coordination at the national level and concurrently allowed Admiral 
Allen's appointment as the National Incident Commander (NIC) for the 
Administration's continued, coordinated response. The NIC's role is to 
coordinate strategic communications, national policy, and resource 
support, and to facilitate collaboration with key parts of the federal, 
state and local government.
    The NIC staff is comprised of subject matter experts from across 
the federal government, allowing for immediate interagency 
collaboration, approval and coordination. While the FOSC maintains 
authorities for response operations as directed in the National 
Contingency Plan, the NIC's primary focus is providing national-level 
support to the operational response. This means providing the Unified 
Command with everything that they need--from resources to policy 
decisions--to sustain their efforts to secure the source and mitigate 
the impact. This will be a sustained effort that will continue until 
the discharges are permanently stopped and the effects of the spill are 
mitigated to the greatest extent possible. Beyond securing the source 
of the spill, the Unified Command is committed to minimizing the 
economic and social impacts to the affected communities and the nation.
UNIFIED RECOVERY EFFORTS
    The Unified Command continues to attack the spill offshore. As of 
May 13, 2010, over 5 million gallons of oily water have been 
successfully recovered using mechanical surface cleaning methods. 
Further, approximately over 704,000 of surface dispersants have been 
applied to break up the slick, and controlled burns have been used as 
weather conditions have allowed. In addition to the ongoing offshore 
oil recovery operations, significant containment and exclusion booms 
have been deployed and staged strategically throughout the Gulf region. 
These booms are used to protect sensitive areas including: 
environmental and cultural resources, and critical infrastructure, as 
identified in the applicable Area Contingency Plans (ACPs). To date, 
more than a million feet of boom have been positioned to protect 
environmentally sensitive areas. Fourteen staging areas have been 
established across the Gulf Coast states and three regional command 
centers. The Secretary of Defense approved the requests of the 
Governors of Alabama (up to 3,000), Florida (up to 2,500), Louisiana 
(up to 6,000), and Mississippi (up to 6,000) to use their National 
Guard forces in Title 32, U.S. Code, status to help in the response to 
the oil spill.
VOLUNTEERISM AND COMMUNICATION WITH LOCAL COMMUNITIES
    A critical aspect of response operations is active engagement and 
communication with the local communities. Several initiatives are 
underway to ensure regular communications with the local communities.
          1. Active participation and engagement in town hall meetings 
        across the region with industry and government involvement.
          2. Daily phone calls with affected trade associations.
          3. Coordination of public involvement through a volunteer 
        registration hotline (1-866-448-5816), alternative technology, 
        products and services e-mail ([email protected]), and 
        response and safety training scheduled and conducted in 
        numerous locations.
          4. More than 7,100 inquiries received online via the response 
        website (www.deepwaterhorizonresponse.com) with more than 6,121 
        inquiries completed, with 4-hour average time of response.
          5. Over 568,000 page hits on response website.
          6. Over 110 documents created/posted to response website for 
        public consumption.
          7. News, photo/video releases, advisories to more than 5,000 
        media/governmental/private contacts.
          8. Full utilization of social media including Facebook, 
        YouTube, Twitter and Flickr.
          9. Establishment of Local Government hotlines in Houma, LA 
        (985-493-7835), Mobile, AL (251-445-8968), Robert, LA (985-902-
        5253).
MODU REGULATORY COMPLIANCE REQUIREMENTS
    43 U.S.C. Sec.  1331, et seq. mandates that MODUs documented under 
the laws of a foreign nation, such as the DEEPWATER HORIZON, be 
examined by the Coast Guard. These MODUs are required to obtain a U.S. 
Coast Guard Certificate of Compliance (COC) prior to operating on the 
U.S. Outer Continental Shelf (OCS).
    In order for the Coast Guard to issue a COC, one of three 
conditions must be met:

          1. The MODU must be constructed to meet the design and 
        equipment standards of 46 CFR part 108.
          2. The MODU must be constructed to meet the design and 
        equipment standards of the documenting nation (flag state) if 
        the standards provide a level of safety generally equivalent to 
        or greater than that provided under 46 CFR part 108.
          3. The MODU must be constructed to meet the design and 
        equipment standards for MODUs contained in the International 
        Maritime Organization Code for the Construction and Equipment 
        of MODUs.

    The DEEPWATER HORIZON had a valid COC at the time of the incident, 
which was renewed July 29, 2009 with no deficiencies noted. The COC was 
issued based on compliance with number three, stated above. COCs are 
valid for a period of two years.
    In addition to Coast Guard safety and design standards, MMS and the 
Occupational Safety and Health Administration (OSHA) also have safety 
requirements for MODUs. MMS governs safety and health regulations in 
regard to drilling and production operations in accordance 30 CFR part 
250, and OSHA maintains responsibility for certain hazardous working 
conditions not covered by either the Coast Guard or MMS, as per 29 
U.S.C. Sec.  653 (a) and (b)(1).
COAST GUARD/MMS JOINT INVESTIGATION RESPONSIBILITIES
    On April 27th, Secretary Napolitano and Secretary of the Interior 
Ken Salazar signed the order that outlined the joint Coast Guard-MMS 
investigation into the Deepwater Horizon incident.
    Information gathering began immediately after the explosion-
investigators from both agencies launched a preliminary investigation 
that included evidence collection, interviews, witness statements from 
surviving crew members, and completion of chemical tests of the crew. 
The aim of this investigation is to gain an understanding of the causal 
factors involved in the explosion, fire, sinking and tragic loss of 11 
crewmembers.
    The joint investigation will include public hearings, which have 
already begun in Kenner, LA. The formal joint investigation team 
consists of equal representation of Coast Guard and MMS members. The 
Coast Guard has also provided subject matter experts and support staff 
to assist in the investigation.
LESSONS LEARNED FROM PAST RESPONSES
    The Coast Guard has been combating oil and hazardous materials 
spills for many years; in particular, the 1989 major oil spill from the 
EXXON VALDEZ yielded comprehensive spill preparedness and response 
responsibilities.
    In the 20 years since the EXXON VALDEZ, the Coast Guard has 
diligently addressed the Nation's mandates and needs for better spill 
response and coordination. For example, a SONS Exercise is held every 
three years. In 2002, the SONS Exercise was held in New Orleans to deal 
with the implications of a wellhead loss in the Gulf of Mexico. In that 
exercise, the SONS team created a vertically integrated organization to 
link local response requirements to a RRT. The requirements of the RRT 
are then passed to the NRT in Washington, D.C, thereby integrating the 
spill management and decision processes across the federal government. 
The response protocols used in the current response are a direct result 
of past lessons learned from real world events and exercises including 
SONS.
    Although the EXXON VALDEZ spill shaped many of the preparedness and 
response requirements and legislation followed to this day, other 
significant events since 1989 have generated additional lessons learned 
that have shaped our response strategies. For example, the M/V COSCO 
BUSAN discharged over 53,000 gallons of fuel oil into San Francisco Bay 
after colliding with the San Francisco-Oakland Bay Bridge in heavy fog. 
Through the recovery of over 40 percent of the spilled product, the 
Unified Command recognized improvements were needed in some areas. As a 
result, new guidance and policy was developed to better utilize 
volunteers in future responses. Additionally, standard operating 
procedures for emergency notifications were improved to ensure better 
vertical communications between the federal responders and local 
governments. Furthermore, steps were taken to preidentify incident 
command posts (ICPs) and improve booming strategies for environmentally 
sensitive areas.
    Most recently, the Coast Guard led a SONS exercise in March, 2010. 
Nearly 600 people from over 37 agencies participated in the exercise. 
This exercise scenario was based on a catastrophic oil spill resulting 
from a collision between a loaded oil tanker and a car carrier off the 
coast of Portland, Maine. The exercise involved response preparedness 
activities in Portland, ME; Boston, MA; Portsmouth, NH; Portsmouth, VA; 
and Washington, DC. The response to the SONS scenario involved the 
implementation of oil spill response plans, and response organizational 
elements including two Unified Commands, a Unified Area Command, and 
the NIC in accordance with the National Contingency Plan and national 
Response Framework. The exercise focused on three national-level 
strategic objectives:

          1. Implement response organizations in applicable oil spill 
        response plans
          2. Test the organization's ability to address multi-regional 
        coordination issues using planned response organizations
          3. Communicate with the public and stakeholders outside the 
        response organization using applicable organizational 
        components.
    The SONS 2010 exercise was considered a success, highlighting the 
maturity of the inter-agency and private oil spill response 
capabilities and the importance of national-level interactions to 
ensure optimal information flow and situational awareness. The timely 
planning and execution of this national-level exercise have paid huge 
dividends in the response to this potentially catastrophic oil spill in 
the Gulf of Mexico.
ROLE OF THE OIL SPILL LIABILITY TRUST FUND
    The Oil Spill Liability Trust Fund (OSLTF), established in the 
Treasury, is available to pay the expenses of federal response to oil 
pollution under the Federal Water Pollution Control Act (FWPCA)(33 
U.S.C. Sec.  1321(c)) and to compensate claims for oil removal costs 
and certain damages caused by oil pollution as authorized by the Oil 
Pollution Act of 1990 (OPA) (33 U.S.C. Sec.  2701 et seq.). These OSLTF 
uses will be recovered from responsible parties liable under OPA when 
there is a discharge of oil to navigable waters, adjoining shorelines 
or the Exclusive Economic Zone (EEZ). The OSLTF is established under 
Revenue Code section 9509 (26 USC Sec. 9509), which also describes the 
authorized revenue streams and certain broad limits on its use. The 
principal revenue stream is an 8 cent per barrel tax on oil produced or 
entered into the United States (see the tax provision at 26 U.S.C. 
Sec.  4611). The barrel tax increases to 9 cents for one year beginning 
on January 1, 2017. The tax expires at the end of 2017. Other revenue 
streams include oil pollution-related penalties under 33 U.S.C. Sec.  
1319 and Sec.  1321, interest earned through Treasury investments, and 
recoveries from liable responsible parties under OPA. The current OSLTF 
balance is approximately $1.6 billion. There is no cap on the fund 
balance but there are limits on its use per oil pollution incident. The 
maximum amount that may be paid from the OSLTF for any one incident is 
$1 billion. Of that amount, no more than $500 million may be paid for 
natural resource damages. 26 U.S.C. Sec.  9509(c)(2).
    OPA further provides that the OSLTF is available to the President 
for certain purposes (33 U.S.C. Sec.  2712(a)). These include:

          Payment of federal removal costs consistent with the NCP. 
        This use is subject to further appropriation, except the 
        President may make available up to $50 million annually to 
        carry out 33 U.S.C. Sec.  1321(c) (federal response authority) 
        and to initiate the assessment of natural resource damages. 
        This so-called ``emergency fund'' amount is available until 
        expended. If funding in the emergency fund is deemed 
        insufficient to fund federal response efforts, an additional 
        $100 million may be advanced, one time, from the OSLTF subject 
        to notification of Congress no later than 30 days after the 
        advance. See 33 U.S.C. Sec.  2752(b). Additional amounts from 
        the OSLTF for Federal removal are subject to further 
        appropriation.
          Payment of claims for uncompensated removal costs and 
        damages. Payments are not subject to further appropriation from 
        the OSLTF. 33 U.S.C. Sec.  2752(b).
          Payment of federal administrative, operating and personnel 
        costs to implement and enforce the broad range of oil pollution 
        prevention, response and compensation provisions addressed by 
        the OPA. This use is subject to further appropriation to 
        various responsible federal agencies.
            National Pollution Funds Center (NPFC) Funding and Cost 
                    Recovery
    The NPFC is a Coast Guard unit that manages use of the emergency 
fund for federal removal and trustee costs to initiate natural resource 
damage assessment. The NPFC also pays qualifying claims against the 
OSLTF that are not compensated by the responsible party. Damages 
include real and personal property damages, natural resource damages, 
loss of subsistence use of natural resources, lost profits and earnings 
of businesses and individuals, lost government revenues, and net costs 
of increased or additional public services that may be recovered by a 
State or political subdivision of a state.
    In a typical scenario, the FOSC, Coast Guard or EPA accesses the 
emergency fund to carry out 33 U.S.C. Sec.  1321(c), i.e., to remove an 
oil discharge or prevent or mitigate a substantial threat of discharge 
of oil to navigable waters, the adjoining shoreline or the EEZ. Costs 
are documented and provided to NPFC for reconciliation and eventual 
cost recovery against liable responsible parties. Federal trustees may 
request funds to initiate an assessment of natural resource damages and 
the NPFC will provide those funds from the emergency fund as well.
    OPA provides that all claims for removal costs or damages shall be 
presented first to the responsible party. Any person or government may 
be a claimant. If the responsible party denies liability for the claim, 
or the claim is not settled within 90 days after it is presented, a 
claimant may elect to commence an action in court against the 
responsible party or to present the claim to the NPFC for payment from 
the OSLTF. OPA provides an express exception to this order of 
presentment in respect to State removal cost claims. Such claims are 
not required to be presented first to the responsible party and may be 
presented direct to the NPFC for payment from the OSLTF. These and 
other general claims provisions are delineated in 33 U.S.C. Sec.  2713 
and the implementing regulations for claims against the OSLTF in 33 CFR 
Part 136. NPFC maintains information to assist claimants on its website 
at www.uscg.mil/npfc.
    NPFC pursues cost recovery for all OSLTF expenses for removal costs 
and damages against liable responsible parties pursuant to federal 
claims collection law including the Debt Collection Act, implementing 
regulations at 31 CFR parts 901-904 and DHS regulations in 6 CFR part 
11.
    Aggressive collection efforts are consistent with the ``polluter 
pays'' public policy underlying the OPA. Nevertheless, the OSLTF is 
intended to pay even when a responsible party does not pay.
            OSLTF and the Deepwater Horizon
    On May 12th, the Administration proposed a legislative package that 
will: enable the Deepwater Horizon Oil Spill response to continue 
expeditiously; speed assistance to people affected by this spill; and 
strengthen and update the oil spill liability system to better address 
catastrophic events. The bill would permit the Coast Guard to obtain 
one or more advances--up to $100 million each--from the Principal Fund 
within the Oil Spill Liability Trust Fund to underwrite federal 
response activities taken in connection with the discharge of oil that 
began in 2010 in connection with the explosion on, and sinking of, the 
mobile offshore drilling unit Deepwater Horizon. To deal more generally 
with the harms created by oil spills as well as to toughen and update 
these laws, the bill would, for any single incident, raise the 
statutory expenditure limitation for the Oil Spill Liability Trust Fund 
from $1 billion to $1.5 billion and the cap on natural resource damage 
assessments and claims from $500 million to $750 million.
    In order to help those impacted by the oil spill get claims and 
benefits quickly, the legislative package proposes Workforce Investment 
Act provisions which would assist states in providing one-stop services 
for those affected by the oil spill, including filing claims with BP, 
filing unemployment insurance/Oil Spill Unemployment assistance claims, 
accessing job placement, training and workforce services, accessing 
SNAP, child care, or other social service benefits, and applying for 
SBA Disaster Loans.
    The emergency fund has been accessed by the FOSC for $68 million as 
of May 23, 2010. BP, a responsible party, is conducting and paying for 
most response activities. The Coast Guard requested and received an 
advance of $100 million from the OSLTF Principal Fund to the emergency 
fund as authorized by 33 U.S.C. Sec.  2752(b), because the balance 
remaining in the emergency fund was not adequate to fund anticipated 
federal removal costs. BP and Transocean have been notified of their 
responsibility to advertise to the public the process by which claims 
may be presented. As of May 24th, 23,960 claims have been opened with 
BP, and nearly $28 million has been disbursed; though Transocean has 
also already been designated as a responsible party, all claims are 
being processed centrally through BP.
CONCLUSION
    Through the National Incident Command, we are ensuring all 
capabilities and resources-government, private, and commercial-are 
being leveraged to protect the environment and facilitate a rapid, 
robust cleanup effort. Every effort is being made to secure the source 
of the oil, remove the oil offshore, protect the coastline, include and 
inform the local communities in support of response operations, and 
mitigate any impacts of the discharge.
    Thank you for the opportunity to testify today. I look forward to 
your questions.

    The Chairman. Thank you all very much.
    I'll start with a few questions.
    Mr. Perrelli, as I understood your testimony, your 
position, the administration's position, is that we should 
eliminate the cap on liability that is currently in the law, 
and not have any cap. Is that correct?
    Mr. Perrelli. I think it's important to realize that OPA 
covers a wide range of activities--small vessels, large 
vessels. But, with respect to activities that might have the 
risk of resulting in a similar major oil spill, such as we are 
seeing currently, we don't think there should be an arbitrary 
cap on corporate responsibility.
    The Chairman. Let me ask--Mr. Hayes, do you agree with that 
position, or is that something that Interior is still 
assessing?
    Mr. Hayes. We are totally in line with the Department of 
Justice on this, Mr. Chairman.
    The Chairman. All right.
    Mr. Hayes. The administration.
    The Chairman. Mr. Hayes, let me change subjects just 
slightly here. There continue to be reports in the media about 
permits being issued for drilling in the Gulf, and waivers 
being issued with regard to environmental requirements. We have 
tried to nail this down. I believe the--Secretary Salazar 
indicated that the position that he had taken, and that the 
administration had taken, is that there would be no additional 
drilling permitted in the Gulf until some of these studies and 
investigations have been done.
    Could you clarify, in short terms, where we stand on that, 
what operations are still being permitted, which operations 
have been suspended or stopped?
    Mr. Hayes. Sure. I'd be happy to, and I appreciate the 
chance to clarify this, Mr. Chairman.
    First, let me say that, as you'll recall from last week, 
there is a requirement that the Minerals Management Service act 
on exploration plans within 30 days under the Outer Continental 
Shelf Lands Act. That's the area where the categorical 
exclusions have been used. Because of that statutory 
requirement, exploration plans continue to be approved, but 
those do not allow for drilling. The drilling decision is a 
later decision, under an APD. There has to be a special 
affirmative act to allow for drilling.
    As for the drilling, the Department put a stop on 
processing new APD permits after----
    The Chairman. Now----
    Mr. Hayes [continuing]. April 20.
    The Chairman [continuing]. Specify ``APD,'' for those of us 
who are not experts.
    Mr. Hayes. Application for Permit to Drill.
    The Chairman. All right.
    Mr. Hayes. There are basically 2 types of drilling permits, 
if you will. There is the initial APD that gives you the 
authority to put a new hole in the ground. Then, there can be 
situations where, after you have started drilling, there are 
safety issues that arise or other circumstances that arise that 
require you, as a driller, to move that ongoing drilling 
operation around. Those are called ``sidetracks,'' ``revised 
permits to drill,'' ``bypass permits.'' Those are all for 
ongoing, already-started drilling activities.
    What the Department has stopped is approving new APDs. For 
current drilling activities, where there's a need, for--often 
for safety reasons--to do a bypass or to do what's called a 
sidetrack, those have been approved, but those are not new 
APDs. That's the--I think, has risen--is the reason for the 
lack of clarity.
    But, there--in the deep water, there have not been any new 
APDs implemented since April 20. There were 2 that were 
approved between April 20 and May 6; they were both suspended. 
No APDs that have been filed since April 20 have been allowed 
to go forward and do new deepwater drilling.
    The Chairman. Thank you for clarifying that.
    Let me ask the--sort of, the other side of the coin with--
when we're talking about possible liability limits. The other 
side of the coin seems to me to be requirements for financial 
responsibility. What are we going to require, there, for 
companies that go into the deep water and drill?
    I'd ask, Mr. Hayes, if you have a position on that.
    Mr. Hayes. We agree with Senator Whitehouse, that it's 
appropriate to--and your point in your opening statement, Mr. 
Chairman--that it's appropriate to revisit that financial 
assurance requirement.
    That seems anachronistic, frankly, $150 million financial 
assurance, certainly for a situation like this for a company 
like BP. Fortunately, it does not appear to be coming into play 
here. But, we do think it's appropriate. Just as we look at 
potentially revising upwards the statutory penalties, we look 
at revising upwards the financial assurance requirements.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you very much, Mr. Chairman.
    Mr. Perrelli, Mr. Hayes, I just wanted to make sure that I 
understood, clearly, your statements to the Chairman. Is it 
correct to state, then, that both of you would agree that we 
should not have the current $75-million liability cap, that it 
should be an unlimited cap?
    Mr. Perrelli. I think--for the future, for activities such 
as deepwater drilling, where there is a risk of a similar major 
oil spill, I think we think that there should not be----
    Senator Murkowski. So, are----
    Mr. Perrelli [continuing]. That cap.
    Senator Murkowski [continuing]. Are you differentiating 
between deepwater and shallow-water exploration and----
    Mr. Perrelli. I think we'll need to work with the Congress 
and the committee on the whole range of activities that are 
subject to OPA--small vessels, large vessels, shallow-water 
drilling, deeper-water drilling. But, certainly in the context 
of any activity that could result in a similar major oil spill, 
our----
    Senator Murkowski. But----
    Mr. Perrelli [continuing]. Our view is, there should not be 
an arbitrary cap.
    Senator Murkowski. But, there should be some assessment of 
risk and some analysis, then, that plays in there.
    Mr. Perrelli. Certainly. We should look at the risks and 
look at transition rules, as well.
    Senator Murkowski. Mr. Hayes, I want to make sure that I'm 
not misinterpreting your statement.
    Mr. Hayes. I'm on all fours with Mr. Perrelli, Senator. 
It's always good to pay attention to your lawyer.
    Senator Murkowski. Let me ask you--both of you have stated 
this morning, and certainly your boss, Mr. Hayes--Secretary 
Salazar--has made very, very clear that BP, as the responsible 
party, will be paying, and that BP doesn't expect to be held to 
the cap. So, if, in fact, it is correct, here, that there's no 
doubt that the responsible party is going to be held fully 
accountable for this particular spill, does the administration 
think, then, that we need any specific legislation to make this 
true, to ensure that this is, in fact, the case?
    Mr. Perrelli. I think we are going continue to work to 
ensure that BP lives up to its commitments. So, they have made 
that commitment; we take it seriously, and we will work with 
them to ensure that they do so. I think our focus on the 
legislative proposal is transition into a new liability regime.
    Senator Murkowski. So, basically, going forward.
    Mr. Perrelli. Yes. We're focused on going forward.
    Senator Murkowski. Let me ask about that, because as the 
$75-million strict liability cap is in place now, it only 
applies in cases where there's been no gross negligence, 
willful misconduct, or regulatory noncompliance. So, I'm 
assuming that there is a possibility, or a likelihood, that any 
of these 3 faults can be alleged, in which case the liability 
capped is removed altogether.
    Mr. Perrelli. That's correct, Senator.
    Senator Murkowski. OK. So, in fact, what we're talking 
about here, with a cap, may or may not--and the ``may not'' is, 
perhaps, quite likely--may not be in place for this 
particular--for the Deepwater Horizon incident.
    Mr. Perrelli. I certainly don't want to speculate as to 
where the facts may lead, but, under OPA, if there's gross 
negligence or violation of any safety, operational, or 
construction regulation that may have caused this spill, the 
caps would be removed.
    Senator Murkowski. I won't ask you to speculate, but I will 
ask you if the Department of Justice is aware, at this point in 
time, of any incident, instance, either proven or alleged, of 
the responsible parties engaging in gross negligence, willful 
misconduct, or regulatory noncompliance.
    Mr. Perrelli. Senator, I don't want to comment on any 
pending or contemplated investigation. There are many facts yet 
to be developed. So, I can't give you any insight on that, 
currently.
    Senator Murkowski. Let me ask you, Mr. Bennett, because 
when we were in Louisiana yesterday, had an opportunity to hear 
from representatives from the fishing industry, the small 
charter boat industry, as well as the oyster fishermen, and 
there was a discussion about what is happening with the 
processing of claims, and there was concern that, in fact, 
claims were being expedited, that there was a process that was 
transparent and that worked for those that had been affected, 
whether within their businesses, in being able to go out and 
fish, or charter bookings that had been canceled. The question 
to you is, In your office's role of overseeing this claims 
process, are we sure that we've got the--a sufficient number of 
claims offices, that we have staffing that is sufficient, that 
we have a staff that can deal with--for instance, we've got a 
big Vietnamese community within the shrimping industry, do we 
have translators there? Are we fully set up?
    The Secretary of the Interior was pretty adamant yesterday 
that there would be followup meetings with Admiral Landry. He 
volunteered, himself, to go down there as a part of a followup 
meeting because--what we heard was that, in fact, the process 
that is being set up is not meeting the needs of the local 
people. Can you comment on that?
    Mr. Bennett. Yes, Senator, I'll be glad to. By OPA, our--
the law requires us to require the responsible party to 
advertise and collect claims. BP's been very responsive, beyond 
the law, in our questions or our direction, to--as we oversee 
and make sure that they're complying with taking claims. 
They've--we welcome any complaints or any concerns about the 
claimant process. We are not getting a lot of concerns sent to 
my office, so if you're hearing that, I do want to know about 
it. My executives talk to BP's daily about their claim 
processes. As I said, they've opened 28 offices. They've been 
opening capacity at a rate of about 28 percent, and the claims 
growth has grown at a rate of about 12 percent, and it's 
leveling off. Now, it'll probably pick up once oil comes ashore 
and we start getting more damage claims. But, it--but, the 
capacity to take 6,000 claims a day--they're currently getting 
about 2,000 claims a day, they can surge to a capacity of 
15,000 claims a day. So, again, this is industries--what 
they're telling us; but, it appears, from what we know, the 
data that we have, that they're meeting the requirement. As 
soon as we got word about Vietnamese and Spanish and Croatian 
communities, we approached BP and said, ``We expect you to 
handle that.'' They immediately got translator services, and 
they immediately started advertising, the next day, in local 
community newspapers and media. So, BP has been responsive to 
any of our requests or direction from any concerns that we 
become aware of.
    Senator Murkowski. You're probably going to be hearing 
about this meeting.
    Thank you, Mr. Chairman.
    Senator Dorgan [presiding]. Let me ask--the comment that 
was just made, that BP has indicated that it intends to pay all 
legitimate claims--obviously, the question ism ``What's 
legitimate?'' But, aside from that, is BP's representation 
legally binding in any way? Legally binding on them? They've 
simply indicated that they would intend to pay legitimate 
claims. So, 6 months or, a year from now, is that a legally 
binding commitment?
    Mr. Perrelli. I don't want to make a judgment as to how 
that commitment might be viewed in a court of law down the 
road. They've certainly made that commitment very publically, 
as well as publically committed not simply to pay claims beyond 
the 75 million, but not to seek recourse against the fund, 
which is also a significant commitment. So, we intend--whether 
it's in a court of law or elsewhere--we certainly intend to 
have them uphold that commitment.
    Senator Dorgan. So, you intend to represent that commitment 
as something that's binding.
    Mr. Perrelli. As I said, I can't speak to whether or not it 
would be binding in a court of law if we were to litigate this 
down the road.
    Senator Dorgan. That's the reason I asked the question is, 
obviously that's pretty important. In the middle of this 
crisis, while the gusher is still flowing on the ocean floor, 
the representation today might be very different than the 
actions 6 months or a year from now. So, I appreciate the fact 
that BP has made these representations. I'd feel more 
comfortable if there were some binding requirements here, or 
they were legally binding.
    Let me ask about another topic. It is about a letter that 
you've received at the Justice Department from about 18 of us 
recently and it asks you to take a look at an announcement by 
TransOcean Limited, the owner of the Deepwater Horizon oil rig. 
TransOcean is headquartered in Switzerland, by the way, where 
it has a dozen employees, and it has 1300 employees in Houston. 
But they moved to Switzerland, most likely, to reduce its tax 
obligation to the United States. So, in Switzerland, it 
announces that it's--intends to distribute $1 billion to its 
shareholders at this point in time. Is that troublesome to you? 
We've written a letter asking whether it's troublesome, because 
there may be substantial liability here for TransOcean because 
of this spill, as well. If they go ahead and distribute that $1 
billion, in the face of potential liability, wouldn't that be a 
pretty difficult circumstance for a lot of people, whose lives 
have been dramatically affected, to see?
    Mr. Perrelli. Senator, I don't think I've actually seen a 
copy of the letter, although I've been told that it was sent. I 
think our focus is--from all of the responsible parties, or 
anybody who's potentially liable, to recover every dime for the 
taxpayer. So, regardless of whether TransOcean or another 
responsible party has spent funds, our goal is going to be to 
get back every dime for the American taxpayer.
    Senator Dorgan. Yes, well, you will just have received 
this, then. Would you take a hard look at this letter. It does 
raise real questions. At a previous hearing, we had, at this 
table, 3 parties, each of which were pointing in the other 
direction, saying ``Well, it wasn't our fault, it was somebody 
else's fault,'' one of which was TransOcean. I notice, in their 
location in Switzerland, they want to give a billion dollars 
back to their shareholders, at a time when I think there might 
be very substantial liability questions that would suggest we'd 
want them to have that money available.
    You talk, also, about the issue of liability for offshore 
oil and gas development, and I think you talked about that, Mr. 
Hayes, you talked about significant increases in liability, as 
well, Mr. Perrelli. The significant increases obviously will 
affect different companies in different ways. I think you 
alluded, just a moment ago, it may well have decision points 
with respect to whether it's a shallow or a deep well, the size 
of the project, size of the company, and so on. Describe for 
us, if you will, what your thinking is, going forward, with 
respect to liability. ``Significant increases,'' does that 
suggest that you believe there ought to be a cap on liability 
requirements for companies? If so, what would the conditions be 
that attach to a cap?
    Mr. Perrelli. The legislative proposal that the 
administration sent up was structured, requiring entities of 
all sizes to pay all removal costs plus some amount of damages 
yet to be determined. We want to very much work with the 
committee and look at the different factors, look at, for 
different types of oil exploration or transport, the factors 
needed to ensure that companies invest sufficiently in safety, 
the factors needed to ensure that the funds, at the end of the 
day, are sufficient to make sure that all claims are all paid 
out. I think we also want to look at the market impacts that 
may affect different kinds of entities that may be involved in, 
you know, transport of small amounts of oil on a coastline, 
versus drilling in very deep water. We think those are 
different activities, each one requires a little bit different 
look.
    Senator Dorgan. Let me go back to this other point. Are 
there ways that you could take steps to make legally binding 
the statement by BP, or at least ask them to make this legally 
binding at this point, No. 1?
    No. 2, that's the one side of potential liability. The 
other side is a billion dollars being disbursed to shareholders 
at a time when you may want to see that it is available for 
liability on TransOcean.
    Are you interested in working on both of those to see that 
the folks who are affected by this oil spill are protected?
    Mr. Perrelli. I will. I'll take that back and we'll give 
that further consideration, Senator.
    Senator Dorgan. All right.
    Senator Sessions.
    Senator Sessions. Thank you.
    Mr. Perrelli, to walk through this--the statue that 
provides liability coverage, it has some good things in it. I 
believe that it can be improved, and I've offered legislation 
to do that. With regard to the damages of cleanup, the cost of 
all the cleanup, is there any question that the responsible 
party--this case, BP--is responsible for all the cleanup costs, 
the marshes, the beaches, and that kind of thing?
    Mr. Perrelli. Senator, there's no question that they're 
responsible for all the removal costs.
    Senator Sessions. With regard to the $75-million category, 
is this a loss of profits that shrimpers or fishermen may have, 
potential beaches--rentals that get canceled, and those kind of 
things? Is that what is capped under this bill?
    Mr. Perrelli. What the $75-million cap applies to, if it 
applies, as we talked before--there are many situations in 
which it would not--it applies to a wide range of damages; and 
that includes the kinds of economic damages that you were 
discussing, the cost of public services that may be required in 
response to a disaster such as this, as well as damage to 
natural resources, the impact, once the oil is removed, of 
trying to revive that habitat. That's an area where, in prior 
oil spills, there have been very significant--in the hundreds 
of millions of dollars of impact on natural resources.
    Senator Sessions. But, on classical State law, that has not 
be abrogated. This is the kind of lawsuits one might file under 
Federal Law in Federal court, I presume that we're talking 
about, the 700 million in the total cleanup costs. But, there 
are possibilities that under classical State, pollution, or 
nuisance, or trespass-type actions, you could file those 
lawsuits, also.
    Mr. Perrelli. OPA expressly allows States to impose greater 
liability or requirements. That's correct, Senator.
    Senator Sessions. Legislation--I've worked with Senator 
Vitter, and we--the legislation that I signed onto does have 
retroactive liability alterations in the Act. I know Senator 
Dorgan just said, ``Should we do this?'' I have heard some 
complaints, or concerns really, that this raises constitutional 
questions about the ability of Congress to retroactively alter 
this situation. Does the Department of Justice have an opinion 
about that?
    Mr. Perrelli. I'll start, first, by noting that there would 
be many situations in which--for example, if the cap didn't 
apply--there wouldn't be a concern about retroactivity. But, 
Congress legislates retroactively all the time. I think--while 
we think that there would be arguments that might be made under 
the Takings Clause and other provisions, we think we would have 
pretty strong arguments in response, that Congress, in 
legitimately legislating in order to ensure cleanup and 
compensation, would not run afoul of constitutional 
protections.
    Senator Sessions. Do you--what would expect that to be 
contested?
    Mr. Perrelli. One could envision it could be contested 
either as a constitutional matter or in a breach of contract 
action, which might actually be more likely.
    Senator Sessions. Mr. Perrelli, with regard to the 
investigations that are ongoing--I know MMS and, I believe, 
Coast Guard maybe has people on that team--to what extent is 
the FBI involved in that?
    Mr. Perrelli. Senator, I cannot comment on any contemplated 
or pending investigation.
    Senator Sessions. I would just suggest, if there is a 
possibility of a criminal investigation, and everyone is 
presumed innocent, but if there is, the FBI should be involved 
in that. My observation is that their expertise in those kind 
of matters exceed agency investigators, although they have 
great skills in many ways.
    With regard to the shallow-water drilling, Mr. Bennett, is 
that within your jurisdiction? We do have thousands of jobs 
that I understand will soon end if all shallow-water drilling 
is stopped, because it doesn't take long to get one of those 
wells completed and the ones already ongoing are soon wrapping 
up. What is your expectation with how long it will take to make 
a decision about that?
    Mr. Hayes. Senator, I'll take that one for--on behalf of 
the Secretary of the Interior.
    The policy statement that I described to, and clarified 
with, the Chairman is in place only until the 30-day report is 
delivered to the President later this week. So, this was 
essential a timeout on the drilling of new deepwater wells, in 
particular. After May 6, though, we are also--stopped approving 
shallow-water--drilling APDs, as well. But, that's just until 
the end of the week. So, the issue has been raised, 
appropriately, as to what should happen after this safety 
report gets delivered to the President. We're looking at that 
issue and are cognizant of the fact that there are important 
distinctions between shallow-water and deepwater risks.
    Senator Sessions. Thank you.
    The Chairman [presiding]. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Perrelli, at our hearing 2 weeks ago, I laid out a 
pattern of horrific safety problems at BP. Today, I want to 
talk about the recent pattern of actions taken by the 
TransOcean company since the accident in the Gulf. Let me walk 
you very specifically through the timetable.
    At our hearing 2 weeks ago, the top management of 
TransOcean said that they had nothing to do with the accident. 
They said it was BP's fault; they, in effect, were just 
following BP's orders.
    Two days after our hearing, in the committee, after they 
absolved themselves of responsibility, TransOcean went off to 
Federal court in Houston. There, they filed a claim, under 
American Admiralty Law that governs maritime accidents, and 
they said again they aren't liable, but if they are, their 
liability ought to be capped at $26.7 million.
    On the day after that, on May 14, TransOcean announced, at 
the shareholders meeting in Switzerland, that they are going to 
distribute $1 billion in profits to shareholders.
    Given that pattern of activity--and I had followed it since 
our hearing--I went out and put together this letter, with 17 
of our colleagues as cosigners, asking you all to investigate. 
By the way, we told the administration--not only did we send it 
to you all, we told you that I was going ask about ask about it 
this morning. So, the Department's been on notice.
    Here's my question--is, Would you agree that TransOcean 
shifting a billion dollars in funds from the company to its 
shareholders and its Federal court filing under the Admiralty 
Laws could possibly be a way for TransOcean to either evade or 
limit its liability?
    Mr. Perrelli. Let me respond by focusing particularly on 
the Limitation of Liability Action, in which, although we are 
not a party to that action, we have already responded to 
TransOcean, and I imagine that we will also make a filing in 
that case, explaining in the strongest possible terms that what 
TransOcean is attempting to do there is inappropriate. The 
1851----
    Senator Wyden. But, you believe what TransOcean is doing is 
inappropriate.
    Mr. Perrelli. The filing of the Limitation of Liability 
Action----
    Senator Wyden. All right.
    Mr. Perrelli [continuing]. Seeking to limit their liability 
to $26 million, the statute that they are seeking to use is a 
statute perhaps best known as being the statute used by the 
owners of the Titanic to attempt to limit their liability. 
Congress, when it enacted OPA, expressly said that the 
Limitation of Liability Act does not limit liabilities under 
OPA, and further said it expressly doesn't limit the 
liabilities that States may impose for oil pollution 
activities.
    Senator Wyden. What does the Department intend to do in 
response to the recent pattern of activity by TransOcean? Seems 
to me that what's going on here is pretty clear. For a company 
that said it did nothing wrong, this company is working pretty 
hard to insulate itself from being held responsible for an 
accident involving its own drill rig and crew. It seems to me 
this is an area where the Department really needs to dig in and 
do a thorough investigation. Are you all prepared to do that?
    Mr. Perrelli. As I indicated, I can't comment on any 
pending or contemplated investigation. But, I will say that, on 
this question of whether they can limit their liability through 
this action that they have filed, we believe, in the strongest 
possible terms, and we'll make that clear, that they cannot.
    Senator Wyden. I certainly hope that you will look into 
this thoroughly, because, given what they said before the 
committee, given the fact that, just in a matter of days, they 
went out and took this action, then went forward and delivered, 
in effect, you know, the dividend--I mean, it seems to me this 
is a pattern of activity that requires that the Department look 
into this thoroughly, because the decision to transfer this 
enormous amount of money out of its own count--account, as a 
profit, given all the events that had taken place in recent 
weeks, suggests to me that, if the Government doesn't look into 
this, the Government is simply not following through in an area 
that I think is central for the Government to have credibility, 
in terms of its response to the tragedy in the Gulf.
    So, I appreciate you're saying that their conduct is 
inappropriate. I hope you'll look into this, you know, 
thoroughly, because this pattern of activity--and I consider it 
a pattern, literally from the weeks since they came here--
strikes me as unacceptable. I can't say that it is illegal, at 
this point, but it certainly ought to be unacceptable, given 
the tragedy that we've seen in the Gulf.
    Thank you, Mr. Chairman.
    The Chairman. Senator Barrasso.
    Senator Barrasso. Thank you very much, Mr. Chairman. Mr. 
Chairman, thank you for holding this hearing.
    You know, I think the headline from yesterday's Wall Street 
Journal tells it all. It says, ``U.S. Was Not Ready For Major 
Oil Spill: Despite mature offshore operations, Gulf crews are 
improvising with chemicals, protective boom, and outdated 
maps''--outdated maps.
    Today is day 36. Oil continues gushing into the Gulf. No 
one is really sure how much oil is leaking. We were first told 
it was 1,000 barrels a day. Then it looked like 5,000 barrels a 
day. But, now scientists say that the number may be much 
higher. The cloud of confusion over how much oil is spilling 
into the Gulf is very concerning, and it's also very unclear 
who is in charge. I mean, here is today's Washington Post, 
front page, ``Administration Torn on Getting Tough with BP.'' 
Administration torn on getting tough with BP.
    Secretary Salazar says BP has missed deadline after 
deadline. Secretary Salazar says that if BP is not doing what 
they're supposed to be doing, we'll push them out of the way.
    But, just yesterday, the Coast Guard Commandant, Thad 
Allen, said, ``To push BP out of the way, it would raise the 
question 'To replace them with what?''' That's why it is hard 
to tell who is in charge.
    The response seems to be delayed. We've tried many 
different things, from the ``top hat'' to the ``junk shot'' to 
the ``undersea straw.'' During testimony just last week to this 
committee, Secretary Salazar promised that, last Saturday or 
Sunday, triggers would be pulled to try the ``dynamic kill.'' 
Saturday passed. Sunday passed. No sign of a dynamic kill. So, 
36 days, still no solution.
    The American people want to know if the administration is 
dithering while U.S. coastal communities are engulfed in oil. 
Public anger, truly, is growing. The American people are angry; 
angry at BP and angry at the administration. The 
administration's confused response stands in contrast to public 
anger. The administration likes to say that it will, quote, 
``keep the boot on the throat of BP.'' It's time to use the 
other boot to actually stop the spill.
    BP clearly bears the brunt of the responsibility for this 
spill. BP is responsible for paying for all of the cleanup, 
regardless of cost. But, the White House and the administration 
has some responsibility. There are lapses in regulatory 
enforcement.
    The second story in The Washington Post today, ``U.S. Oil 
Drilling Agency Ignored Risk Warnings: Officials Bypass Laws 
Protecting Environment, Documents Show.''
    So, the spill occurred in Federal waters, the Federal 
Government owns the underground oil, so my question, Mr. Hayes, 
At what point does the administration take complete control to 
protect our communities and our coastline?
    Mr. Hayes. Mr. Senator, Commandant Thad Allen is the 
national incident commander, operating on behalf of the 
administration and the government, under the laws that this 
Congress passed, the Oil Pollution Act of 1990, to supervise 
all cleanup activities. He is the national incident commander. 
He is in charge. BP is paying for and implementing, under his 
charge, the cleanup responsibilities.
    Senator Barrasso. Can you, then, talk to us about the 
upcoming plan, if there is one, for this dynamic kill?
    Mr. Hayes. I can. Secretary Chu is in Houston, as we speak. 
Today, the final preparations are being implemented for a 
dynamic kill attempt that--if today's procedures go well and 
the pressure testing proves sound, a decision will be made, 
late tonight or early tomorrow morning, to attempt the dynamic 
kill tomorrow.
    Senator Barrasso. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Sanders.
    Senator Sanders. Thank you, Mr. Chairman.
    I think we all understand that we are looking at one of the 
most significant ecological disasters in the modern history of 
our country. We understand that nobody can fully estimate what 
either the economic or ecological damages will be.
    All of this takes place, I must say, at a time when the 
American people are having significant doubts about BP and 
TransOcean. We are looking at a multinational corporation--BP--
which earned $5.6 billion in the first quarter of this year. 
We're looking at a company which many Americans are now 
believing ignored many safety factors as they proceeded rapidly 
in order to move that project along. We're looking at a company 
which denied, refused to put information out there. We still do 
not know, today, how much oil is leaking. We were told 1,000 
barrels a day, there are estimates, now, that it may be 100 
times that. We still don't know. We see a company which many 
Americans think is--been not been aggressive in attempting to 
stop the flow--or effective, for sure--or in proceeding 
forward--going forward with the cleanup.
    Now, I want to get back to Mr. Perrelli and ask you a very, 
very simple question. I think you've dodged it a little bit. 
Should we eliminate the cap completely and hold BP 100 percent 
responsible so that they pick up all of the economic damages as 
well as the environmental damages? Very simple question. Yes or 
no.
    Mr. Perrelli. Senator, BP has said they're committed to 
doing that----
    Senator Sanders. Oh, oh, let me--I'm sorry.
    Mr. Perrelli [continuing]. I think, as I indicated, our 
proposal to lift the cap is focused on the future. As I 
indicated to Senator Sessions, however, we also think that we 
would have strong arguments if Congress ultimately decided to--
--
    Senator Sanders. No. But, what is your--that's not a good 
answer, to be honest with you, in the sense that what BP said 
doesn't mean much. You may be the last person in America who 
trusts or believe what BP says. It doesn't matter. A year from 
now, the TV cameras will not be there. Some fisherman is going 
to have to go to court to try to get damages from BP, a 
multibillion-dollar corporation. This guy doesn't stand a 
chance. Now is the moment. Do we lift the cap, or do we not? 
What's the answer?
    Mr. Perrelli. As I indicated, our proposal to lift the cap 
is focused on the future.
    Senator Sanders. So, it is not dealing with BP. It is, as I 
hear it--correct me if I'm wrong--your position is that we 
should not lift the cap on BP for this oil spill.
    Mr. Perrelli. As I indicated, we are focused on the 
proposals for the future. That's our----
    Senator Sanders. Mr. Chairman, I would hope that this 
committee and the Senate will move aggressively to move in a 
very different direction that the administration is indicating.
    The taxpayers--it is beyond comprehension that you have a 
oil company making over 5 billion in profits in the first 
quarter of this year at the same time as you have a Nation 
running a recordbreaking deficit, that the taxpayers of this 
country should be asked to pay one nickel--one nickel in costs, 
just because BP says something--I'm glad you believe them, but 
you may be one of the few people in America who trusts them.
    Mr. Perrelli. Senator, I don't think it's a question of 
belief, here. We are committed to recovering every single dime 
from BP. As we talked about before, there are many 
circumstances in which the cap will not apply. We also 
recognize that there are many other statutes that may be 
available to pursue either penalties or damages from BP, as 
well as State law. So, we think that we will be able to 
recover, regardless of BP's commitment, every single dime that 
has been expended by the taxpayers.
    Senator Sanders. I think you are ignoring, and making it 
more--you're ignoring the best way to go forward, by simply 
lifting the cap.
    That's it.
    Thank you very much, Mr. Chairman.
    The Chairman. Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    Thank you, to the witnesses.
    Lets look ahead. Mr. Perrelli, I appreciate your comment 
about that. I'll leave it at--leave it to the experts to try to 
get this spill stopped and get everything under control. But, 
there are 2 views that I see with respect to the future; one 
that says, ``OK, this happened because people were lax.'' 
That's the headline that Senator Barrasso quoted. Either the 
company was lax, or the regulators were lax, or both were lax, 
and that--therefore, if we tighten up all of the procedures, 
nothing of this sort will ever happen again. The other view is, 
``Hey, accidents happen. We've drilled thousands and thousands 
of these wells without any incident, and, statistically, this 
is a very small percentage and--of difficulty.'' Accidents 
happen with automobiles. Accidents happen with airplanes. 
Accidents are going to happen anytime you have a large number 
of activities of this kind.
    I'd like reaction to that. Is this, indeed, just a very 
small percentage that ``accidents happen,'' and so, we can go 
statistically, as far into the future as we have in the past, 
and--before we get another one of these? Or is this, indeed, a 
circumstance where there lax practices, either on behalf of the 
company or the regulator--I don't want to have to determine who 
was lax--but, was there something, here, that could be 
prevented in the future?
    Then the second side of that, if we do move in a direction 
that, by virtue of the cap, drives the nonmajors out of this 
business so that only the majors survive, because only the 
majors will be big enough to deal with a cap, what are the 
chances that they will be able to get sufficient insurance, if 
the cap is set so high or if the cap is lifted altogether, so 
that a business decision will be made by the board, or boards, 
of these companies, ``The risk is too great, and we will drop 
all activities as far as drilling is concerned''? Look into the 
future, in these 2 areas, and give me your responses.
    Mr. Hayes, you're probably the one who's thought about 
these issues the most. So, I'll let you come first. But, 
anybody else who has a view about these 2 areas, I'd like to 
get your response.
    Mr. Hayes. Thank you, Senator. I would say that, with 
regard to the first point, this is an unusual accident. That's 
clearly the case. There were 2 independent, serious things that 
went wrong: the blowout, on the one hand; and the failure of 
the blowout preventer, on the other. Each of those, 
independently, is extraordinarily rare. To have them both 
happen at the same time is even more extraordinarily rare.
    However, it's unacceptable for it to occur. That is why we 
are committed to doing a thorough investigation and a top-to-
bottom evaluation of whether we have the right regulatory 
system, the--whether we are state-of-the-art, whether there is 
enough oversight of industry. You will see, later this week, in 
the report that the Secretary will be delivering to the 
President, some ideas, in terms of additional interim safety 
measures that we might consider--that the President might 
consider imposing. Because this type of accident, rare though 
it is, is unacceptable, and must not be allowed to ever happen 
again.
    That is our commitment, to work with you and the Congress 
to make sure we have a system in place so that we never have to 
deal with this again.
    I'll defer to Mr. Perrelli on the second part of your 
question, Senator, on the cap issue.
    Mr. Perrelli. Senator, I think we learn, unfortunately, 
every day, more information about the risks of offshore 
drilling. I think that rethinking the liability provisions is 
appropriate as we learn more and more about the risks.
    You raise a number of questions about insurance. I would 
say that today, the major players in this industry already are 
involved in a mix of insurance and self-insurance. They are--
today--facing the prospect potentially of unlimited liability, 
both because there are many circumstances in which the caps 
wouldn't apply, but also because of State law and other law 
that is out there.
    So, I think that our fundamental starting point is that the 
polluter should pay. Where you have a risky activity that is 
highly lucrative in a place where the entity that is most able 
to ensure safety is going to be the company engaged in the 
activity--we think that it's appropriate, where there's the 
prospect of a similar major oil spill, to not have a cap on 
liability.
    Senator Bennett. But, you're going to drive toward 
concentration in the industry, perhaps.
    Mr. Perrelli. As I think we've talked about, we think there 
are a lot of activities covered under OPA and different 
liability regimes, as under the current law, may be 
appropriate. I think our focus here is on where there's a 
prospect of a similar major oil spill. I think most of that 
activity--and Mr. Hayes can talk--most of the deepwater 
activity is a much smaller set of players.
    Senator Bennett. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Let me just advise folks--the order that folks have arrived 
in, here, is Stabenow next, then Shaheen, then Menendez, and 
Landrieu, then Cantwell. Of course, if some of our Republican 
colleagues arrive, they'll be inserted in that.
    Senator Stabenow. Then we do have a second panel. So, let 
me just advise everybody that we would like to do all of that 
before lunch.
    Senator Stabenow. Thank you, Mr. Chairman, and I appreciate 
this hearing as an important part of the series of hearings 
we've been having.
    I do feel compelled, before asking a question, to make an 
editorial comment, because one of the things that I can see 
happening, in terms of where we focus accountability, is the 
fact that we're not looking at, more broadly, the consequences 
of a philosophy of deregulation that has gone on now for many, 
many years. We see that on Wall Street, we see that now with 
Minerals Management Services. We see that across the board. 
There's an inspector general report out, documenting the fact 
that there were--unscrupulous use of government funding from 
2005 to 2007, too close to industries that they regulate.
    I raise this only because this White House is dealing with 
holdovers from the former administration that believed in that 
deregulation, backing up, not having the accountability, 
letting the industries basically make the decisions. Even, 
the--the Minerals Management Services chief who just stepped 
down was from the Bush administration. I mention that only 
because I can hear where this is going, in terms of pressing--
that somehow this is all about the Obama administration.
    Mr. Chairman, we have 107 nominees pending right now that--
the President doesn't even have his own team in place. So, I'm 
happy to hold them accountable. But, let's give them their team 
first. They don't even have their team in place. I think that 
directly relates to what is going on here. So, I would say--I 
don't want to deal with the old team that was in place, right 
now, the holdovers from a philosophy, frankly, that has caused 
us a lot of trouble. It causes a lot of problems, that 
philosophy of deregulation and not protecting the public 
interest. Let's put the new team in place and let the President 
have his team, and--I mean, I'm willing to be as tough as 
ever--as anyone on them.
    Let me talk about BP and ask your comments, because when we 
look at the efforts--at the history of BP, it is very 
disturbing, beyond this horrendous situation that we have right 
now.
    In March 2005, an explosion at a BP facility in Texas 
resulted in 15 deaths, 170 injuries. After an investigation, it 
was determined that BP cut maintenance and safety controls in 
an effort to reduce costs.
    The oil spill right now doesn't appear to be an isolated 
accident--or incident. It's part of a track record of cutting 
corners on safety, that is, frankly, very concerning, that has 
cost workers their lives.
    Last October, OSHA again fined BP because they failed to 
correct safety hazards they found after that 2005 explosion, as 
well as 439 new safety hazards found since then. They were 
fined $20 million for a huge oil spill in Alaska in 2006 
because of a corroded pipeline. According to a recent study, BP 
refineries are responsible for 97 percent of all flagrant 
violations found by government inspectors in the refinery 
industry. Most of these citations from inspectors found that 
they were--their behavior was egregious and willful.
    So, my question is, Given the track record, at this point, 
is there any reason, or evidence to date, that BP may have been 
grossly negligent or in violation of an applicable Federal 
safety construction or operating regulation, for any of the 
actions right now, that would put them in a position to waive 
the current $75-million cap?
    Mr. Perrelli. Senator, you correctly state that those are 
circumstances in which the cap would not apply. Our focus to 
date has really been on cleanup, and I don't want to comment on 
any contemplated or pending investigation on this matter, from 
the Justice Department.
    Senator Stabenow. Does anyone else want to comment? I mean, 
clearly this is a record of serious concerns about cutting 
costs. Raises a lot of questions about how we got into this 
situation without safety provisions put in place, in case 
something like this happened, even though we've been told this 
could never happen, and that's why that we don't have the 
answer. This has gone on for over a month, because somehow it 
never was going to happen. But, it does raise serious questions 
about a number of different things. I hope we're going to focus 
on this in a much more direct way in the future.
    Yes.
    Mr. Hayes. I'd be happy to just reinforce the notion, 
Senator, that we intend to absolutely look at the entire BP 
record, as part of the overall investigation that is now 
underway. I fully expect the commission, that the President 
announced last Saturday, will also look at whether there's a 
pattern here for this company, and do a stem-to-stern 
evaluation of the adequacy of the regulatory program. In that 
regard, I appreciate your comment, that the inspector general 
report that came out today reinforced the notion that, prior to 
the time this administration took office, there were serious 
problems at the Minerals Management Service.
    Secretary Salazar, in the very first month of coming into 
the office, established a new ethics procedure for MMS. The 
focus at that time was on the revenue side. We stop--we ended 
the royalty-in-kind program. We required special ethics 
training. The Secretary today has asked the inspector general, 
as a follow-up to that report, to see if any ethical violations 
have continued in connection with the New Orleans activities of 
the Minerals Management Service. The report the inspector 
general has does not indicate that they have continued. But, we 
want to make sure they have not continued. This is definitely a 
work in progress as we deal with what has been too cozy a 
relationship, as the President has said, between industry and 
regulators.
    Senator Stabenow. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Shaheen.
    Senator Shaheen. Thank you, Mr. Chairman, for holding for 
this hearing.
    Thank you, gentlemen, for being here.
    There's been a lot of talk this morning about the Oil 
Pollution Act of 1990 and about what the responsible party is 
required to pay under that Act. I think there's been general 
agreement, from everybody who's spoken, that BP would be liable 
to pay the costs of cleanup in the spill. One of the big 
questions has been about the $75-million liability cap.
    I made some charts this morning because I thought it might 
be instructive to look at how that liability cap of $75 million 
compares to some of the costs involved in this spill.
    So, if we look at this first poster, you can see, at the 
bottom, if you have a magnifying glass, the $75 million in 
liability. Above that is the estimated damage to Louisiana's 
fishing industry, which is, right now, estimated at $2.4 
billion. Above that, you can see the estimated damage to 
Florida's tourism industry, which is estimated at $3 billion. 
Above that is the dot that shows BP's profits for the first 
quarter of this year, $6.2 billion. Finally, the large dot at 
the top are BP's profits for 2009, which are $16-$18.8 billion.
    I also thought it would be helpful to show how that $75 
million fits into the total profits from BP for 2009, and I 
misspoke; the profits were $16.6 billion. But, you can see, 
that $75 million is a very tiny sliver of what BP's profits 
were. I think that's why you're hearing, we're all hearing, so 
much concern this morning about that $75-million liability cap.
    So, the question that I really have--and I'm proud to be on 
Senator Menendez's legislation to raise that liability cap to 
$10 billion--but, the question that's been raised this morning 
is, Should we have a cap at all on liability? Does a cap 
encourage riskier behavior on the part of the industry? I don't 
know, Mr. Perrelli, if you would like to take first shot at 
that.
    Mr. Perrelli. I think in a situation where you have the 
risk of a similar major oil spill, you have activity that is 
risky itself, but highly lucrative. You have the companies that 
are engaged in it in the best position to invest in new 
technology to ensure it's safer, to ensure that they have 
sufficient staff, ensure that they are complying with all of 
the Federal regulations. That is the situation where not having 
any cap, I think, we think, makes a lot of sense, and is 
consistent with the basic principle that polluters should pay 
for all of the damage that they cause.
    Senator Shaheen. Thank you.
    There's been a lot of talk about BP, and BP has said they 
will pay the total cost of the cleanup. I think most of us, 
looking at the scenes on television, would say that that cost 
of cleanup includes the cost of the booms, the cost of, you 
know, people raking in the oil. But, what else is included in 
that cost of cleanup? Are all of the legal costs that the 
Department--the Attorney General is incurring right now 
included in that cost of cleanup? Is the time that the 
Department of the Interior is spending on this included in that 
cost of cleanup?
    Mr. Perrelli. I'll speak first and then maybe Mr. Bennett 
can add to it. But, certainly the costs that are covered 
include public services, expenditures by public services, all 
of the damages to our natural resources, all of the efforts of 
agencies to minimize or mitigate the impact of the oil, the 
impact on subsistence uses of fish, and the economic impact. 
So, it is a broad range of categories.
    I will say that this is certainly unprecedented in its 
scope, and there may be issues that arise that haven't been 
dealt with before. But, certainly OPA was intended to cover a 
broad range of costs and damages.
    Mr. Hayes. I'll just add, as Mr. Perrelli said, damages 
include unreimbursed removal costs, personal or property 
damages, lost profits or earnings, loss of government revenues, 
cost of increased public services, natural resource damages. 
That's the damage side.
    On the response side, the Federal on-scene coordinator, 
Admiral Landry, is the authority for driving the response, 
under the leadership of the national incident commander, 
Admiral Allen.
    So, clearly, under OPA, those response costs are determined 
by her, so she needs something--for instance, the National 
Guard rollout, we're paying for out of the fund to support her 
and covering that cost.
    The surge of government that you're seeing, that we're all 
part of, is new ground, as Mr. Perrelli said. We really haven't 
ever done this before, on that scale. We're still working 
through some of the public policy questions of if it's clearly 
needed by the FOSC and the NIC, a lot of--you know, getting 
teams of scientists together to evaluate dispersants or to 
evaluate flow rates--that's clearly something they need and 
want--it's paid for. If I were to go down and do a tour of the 
site, I would pay out of Coast Guard operating costs, because I 
don't consider myself part of the response.
    Senator Shaheen. Thank you.
    The Chairman. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Let me commend the administration for embracing an 
unlimited liability for economic damages flowing from an 
offshore rig spill, at least for deepwater development. I have 
been advocating we need to lift the cap, and I'm going to amend 
my legislation to pursue unlimited liability, certainly in this 
regard.
    But, I think we disagree about the question of 
retroactivity. I want to ask Mr. Perrelli--under the law, not 
what BP has said--just so I get this straight--under the law, 
BP has, beyond all of the natural resources cleanup and the 
cleanup and all of those efforts, which I understand they will 
pay for--but, after that, when there is liability, under the 
law right now, they only have a $75-million liability cap, is 
that correct? Yes or no?
    Mr. Perrelli. I wouldn't characterize it that way, Senator. 
There is a cap, but it is conditioned on a number of things, 
including that there has to be no gross negligence and no 
violation of any safety, operational, or construction 
regulations. So, there are many circumstances in which the cap 
would not apply at all. But, in addition, there are certainly 
other Federal statutes at issue, as well as State law, that 
could be brought into play.
    Senator Menendez. Then why would we have put aside a $75-
million liability cap if all of these other elements could 
expose you, unlimitedly?
    Mr. Perrelli. OPA, when it was enacted, among other things, 
for example, increased penalties under the Clean Water Act, as 
well as expressly left State law remedies of----
    Senator Menendez. In the absence of those exemptions that 
you describe, they would have a $75-million liability cap.
    Mr. Perrelli. If--under OPA, if those exceptions didn't 
occur, there would be a $75-million liability cap, as I 
indicated----
    Senator Menendez. Now----
    Mr. Perrelli [continuing]. State law would still be 
available.
    Senator Menendez [continuing]. Has BP entered into a 
consent agreement with the Department of Justice to agree to--
as they have verbalized, and as the administration has said 
that they have verbalized--has BP entered into consent 
agreement to be liable for above the $75-million cap?
    Mr. Perrelli. Not as----
    Senator Menendez. Have they--give you any written 
assurances that, in fact, they will be liable for above the 
$75-million cap?
    Mr. Perrelli. I believe they've provided written assurances 
to the Cabinet Secretaries, Secretary Napolitano and Secretary 
Salazar and--as you know--at least the Chairman, I know, made 
such statements to some congressional committees.
    Senator Menendez. I'd like to see if the Department has a 
copy, or, if not, Mr. Hayes, I'd like to see what was written, 
what's the nature of the language of BP's commitment.
    Senator Menendez. Because Exxon said all of these--many of 
these same things during the Exxon Valdez. Then they litigated 
all the way to the Supreme Court for--it took 20 years, and 
individuals fell off along the way, who were damaged, simply 
because they could not sustain it.
    Let me ask you, Mr. Perrelli--Senator Murkowski suggested--
Is unlimited liability available under State law for this bill? 
Section 1018 of OPA seems to allow State liability, beyond 
Federal caps, for oil discharges, but it says, quote, ``within 
such State.'' Would a spill like this, in Federal waters, be 
considered a discharge within a State, allowing increased State 
liability?
    Mr. Perrelli. I think certainly a significant amount of 
damage to State coastlines, and within a certain distance of 
the coastline, would be damage to that State. I think that out 
on the Outer Continental Shelf, the rules may be different. 
But, certainly there will be significant damages that a State 
might be able to pursue to its coastline----
    Senator Menendez. But, there is no question that this is a 
discharge, not within a State, but in the territorial waters of 
the United States and Federal waters, is that correct?
    Mr. Perrelli. That's where the initial discharge occurs, 
but there's no question, I think, as we see every day, that 
there's tremendous damage being done to the coastline----
    Senator Menendez. I have no disagreement with that, but my 
point is that, when we go to State liability, it is a litigious 
process, assuming that BP wants to be litigious along the way. 
Ultimately, there are no guarantees.
    So, if we, in fact, believe that, either between the 
exceptions that you stated may exist--we don't know whether 
they're pertinent to this particular incident--or BP's 
statements that they are going to accept unlimited liability, I 
don't see what the reticence is to lift--to the unlimited 
liability, certainly in deepwater drilling.
    Let me ask you one other question. The inspector general of 
the Department of the Interior is soon releasing a report that 
describes regulators allowing--at MMS--to allowing company 
officials to fill out inspection forms in pencil--company 
officials--which inspectors would, quote, ``write on top of the 
pencil in ink and turn in complete forms.'' This is just the 
latest in a series of allegations leveled at MMS. Some of these 
have been referred to U.S. attorneys, and they have passed on 
it. Is the Justice Department going to look at these incidents 
and determine whether there is prosecutions that should be 
leveled?
    Mr. Perrelli. Senator, I can't speak about this particular 
instance, but if we get a referral from the Inspector General 
of the Department Interior, we will take a serious look.
    Senator Menendez. Mr. Hayes, do you intend to make a 
referral of the inspector general's report to the Department of 
Justice?
    Mr. Hayes. We have just received this draft report from the 
IG last night, and I expect the Secretary will do exactly what 
he did when he came into office, in January 2009, on the heels 
of the IG investigations in Lakewood, Colorado. He specifically 
referred everything to the U.S. Attorney, even though that 
particular investigation had already been processed by the 
previous administration. In this case, the Secretary issued a 
press release, this morning, making it clear that he intends to 
aggressively evaluate these activities, all of which occurred 
under the prior administration. But, he intends to aggressively 
look into the individuals involved and to consider prosecution, 
termination, whatever is appropriate.
    Senator Menendez. I respect what the Secretary has done in 
the ethics reforms that he has instituted. I do hope that there 
is appropriate referrals to the Justice Department, because 
only when we act seriously will the regulators understand that 
you can't, ultimately, be cozying up to the industry and doing 
what they want and putting us all at risk.
    Thank you, Mr. Chairman.
    The Chairman. Senator Landrieu.
    Senator Landrieu. Yes, I want to go back to this liability 
question, because Senator Menendez and others have recommended 
a cap, I think, for the whole offshore, but he clarified, just 
a moment ago, for deepwater, so I'm not sure, but a cap of 10 
billion.
    Mr. Perrelli, you testified--and Mr. Hayes--that the 
administration's position is unlimited cap for deepwater. Is 
that correct?
    Mr. Perrelli. Senator, for deepwater, where there's a 
threat of a similar major oil----
    Senator Landrieu. So, you're deepwater, unlimited; he may 
be deepwater, 10 billion. If that was in effect today, can 
you--can this law, this new law that we will consider--whether 
it's unlimited, as you have recommended--and the 
administration--or 10 billion, as Senator Menendez--does that 
go into effect for BP? Can we be retroactive in our laws?
    Mr. Perrelli. We think that there would be strong arguments 
to say that Congress could, indeed, impose it retroactively.
    Senator Landrieu. OK, so you believe that there's 
constitutional grounds to be retroactive.
    Mr. Perrelli. We think it would not violate the 
Constitution. We recognize that there would be litigation risk, 
breach of contract actions could be brought, but we think we 
would have strong arguments. Among other things, OPA, itself, 
has an express provision saying that Congress may increase 
liability or requirements on oil companies.
    Senator Landrieu. So, whether the Congress moves to a$10-
billion cap, as suggested by Senator Menendez and others, or 
the unlimited cap, as suggested by the administration, do you 
think, in the administration's view, that you should have a 
different cap for deep water, shallow water, and then near 
shore? Because, as you know, this drilling can occur in 10 feet 
of water, 1,000 feet of water, which is considered shallow, and 
then deep, which is 1,000 to 5,000 and then ultra deep, over 
5,000. The risk, of course, are expediential, in terms of--that 
those--that factor of depth, distance, darkness, as Thad Allen 
has said so accurately.
    So, how is the administration thinking about this? Because 
it's very important, to thousands of people in the industry 
that don't drill in deepwater, but have been drilling fairly 
safely in shallow wells, what--have you--are you thinking about 
the effect of your proposal on the industry as a whole?
    Mr. Perrelli. I think we recognize, as you indicated, that 
OPA covers a wide range of different activities that may have 
different risks. We recognize that it's complicated and there 
are many factors that have to be considered, including what 
will create the best incentives for safety, what will ensure 
that claims will be paid, but the impact on the market, as 
well.
    So, I think we would like to work with the Congress on what 
are the appropriate liability provisions for different types of 
drilling or different types of transport. I think--overall, 
however, I think that a primary point is, ``the polluter pays'' 
should be at the core of this. These liability provisions 
haven't been changed in 20 years, and I think we have learned 
that they are not sufficient for the risks we face today.
    Senator Landrieu. I agree with you on that, that they're 
not sufficient. But, I would call your attention to The Wall 
Street Journal article today, that insurance premiums for 
offshore drilling have soared between 15 and 50 percent. Now, 
for companies like BP, who are generally self-insured with 
reinsurance, and Shell and Chevron that are big enough to 
handle these increases and, I think, big enough to pay the 
billions of dollars of claims that potentially can come, I'm 
not too concerned. But, I am concerned about actions that this 
Congress would take that would make it virtually impossible, or 
very difficult, for other independents and small operators. 
There are thousands that seem to be invisible to some members, 
but they're not invisible to me. So, I think we've got to be 
very careful about that.
    I couldn't agree with you more, the polluter should pay. BP 
should be--pay everything, as I've said; and if anyone else was 
at fault, they should, as well.
    But, Mr. Bennett--I've got a minute left--I want to ask you 
this question. I need to be very clear with you, as we met in 
my office for some time; and I appreciate you coming--What does 
the law require you to do, now, to make BP pay these claims in 
full and on time? Do you have the authority to make them do 
that? If not, do you need some additional authority?
    Mr. Bennett. The current law requires me to notify them 
that their obligation to advertise and to receive claims, and 
to make sure they're doing that. They're doing that.
    Beyond that, what the law allows--that if BP does--either 
denies a claim or does not respond to a claimant within 90 
days, the claimant may bring their claim directly to me, and 
then I can adjudicate it, and, if I chose to pay it, I will pay 
BP. The idea behind that is that small claimants, especially, 
don't have to go through costly litigation. If they don't get 
the right answer from BP, they can bring it to us, as a second 
look. If we pay it, it's NPFC and Justice talking to BP about--
--
    Senator Landrieu. That's good's to know, that not everybody 
in Louisiana is going to have hire an attorney. Some of them 
are, and they're going to want to, and should. But, we don't 
want everybody having to hire attorneys and accountants and 
spend thousands of dollars to get a legitimate claim paid.
    For the record, Mr. President--Mr. President--Mr. Chairman, 
I want to say--because TransOcean isn't here, and I just 
learned this in a meeting with them, but in fairness, I'd like 
to say this on the record--70 to 80 percent of their revenues 
come from outside of the United States. So, when someone asked 
why they may be headquartered outside of the United States, 
it's because 70 percent of their revenues come from outside of 
the United States. I'll get the accurate information.
    Now, I'm not going to comment at all about their 
distribution, et cetera, but what people have to understand 
about this offshore oil and gas industry, which I'm glad 
everybody's now paying a lot of attention, is that a lot of 
these companies get a majority of their revenues from other 
places in the world, not just in the Gulf of Mexico.
    Thank you.
    The Chairman. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman. I know we're 
going to--I think we're--are you going to have a second panel 
at some point in time?
    The Chairman. We do have a second panel, right after your 
questions are finished.
    Senator Cantwell. OK. I almost wish Mr. Meltz could join us 
now, from the CRS. I'll wait.
    But--because Mr. Perrelli--his testimony seems to be a 
little different than yours on this issue of retroactivity. The 
reason why I'm interested in this, I think, as like millions of 
Americans, we want to know who is going to clean this up and 
how we're going to pay for it, and to make sure that they 
taxpayer doesn't become the deep pocket on this, and that we 
also don't wait 20 years, as we did with the Exxon Valdez case. 
But, in his testimony on retroactivity, he basically says the 
Constitution disfavors retroactivity. At least 5 constitutional 
provisions, noted above, basically make it very hard to go back 
and do retroactivity. So, you seem much more confident.
    Mr. Perrelli. I read Mr. Meltz's testimony, and I actually 
think it is more consistent. While he starts from the 
proposition, and I quote, that ``the Constitution disfavors 
retroactivity,'' as I indicated, Congress legislates 
retroactively all the time. Particularly in a context where 
there's an important public policy purpose at issue, Congress 
is legislating in a rational way to try to address the 
potential compensation and cleanup for victims in a statute 
that is not penal in any way, and covers a broad range of--you 
know, whether it's past and future activities. I think, we 
think, we have strong arguments that, if Congress decided to 
legislate retroactively, that it would be upheld as--
constitutional.
    Senator Cantwell. In the Oil Spill Liability Trust Fund, or 
someplace else?
    Mr. Perrelli. I'm not sure I--if----
    Senator Cantwell. How would you legislate--the discussions 
have been changing the Oil Spill Liability Trust Fund and 
raising--taking off the cap, thinking about----
    Mr. Perrelli. Right, removal of the cap.
    Senator Cantwell [continuing]. Things of that nature to 
make it retroactive. Again, I'm all for them paying. What I 
don't want is to hear, today, ``Oh there's this simple 
answer.'' I don't want to hear--just like when they were here a 
few weeks ago, and they were saying, ``We're going to pay all 
legitimate claims.'' Then I read a list, and they start going, 
``Oh well, I don't know about that one,'' or ``Yes,'' or 
``No.'' So, I don't want to hear, today, ``Oh, we have great 
hope and promise in retroactivity,'' only to find out it takes 
us 25 years to get anywhere on that case. In the meantime, 
there's significant damage that's not dealt with.
    So, he basically says that, on these 5 different issues 
here, that 3 of them--basically, he say, have--appear to have 
modest chance of success, and 2 of them seem to have almost no 
chance of success. Those are those constitutional issues.
    So, you're thinking of something different?
    Mr. Perrelli. Senator, I think that our view is that we 
would have a strong chance to defeat any constitutional claims, 
if Congress were to lift the caps. So, I may ballpark the 
chances a little bit differently. But, I think, fundamentally, 
as I indicated, Congress legislates retroactively quite 
frequently. As so, we don't think that that would be an issue.
    As Mr. Meltz noted, and as I noted before, I do think there 
certainly is the potential for a breach of contract action. 
But, OPA itself expressly says, and puts everyone on notice, 
that Congress has reserved the right to increase penalties, or 
increase removal costs or damages and increase the liability or 
impose additional requirements. So, I think that's clear to 
everyone in the industry.
    Senator Cantwell. But, it doesn't say ``retroactively.''
    Mr. Perrelli. It doesn't say ``retroactively,'' but, as I 
indicated, we believe that we have strong arguments to defeat 
any retroactivity argument that would be made.
    Senator Cantwell. Thank you for your clarity. Do you think 
that we should also look at--you know, since BP has had 
something like $373 millions in fines and restitution for 
environmental violations--a Texas refinery in an explosion in 
2005, a leak from a crude oil pipe in Alaska, fraud for 
conspiring to corner the market and manipulation of propane--do 
you think that there should be some sort ``three strikes, 
you're out'' kind of clause, as it relates to companies doing 
business, that maybe you wouldn't allow them to continue to bid 
on new leases?
    Mr. Hayes. Senator, we're--we'd be open to that, certainly. 
I mean, there are other examples, in other environmental laws, 
of situations where companies are--because of a pattern of 
behavior, are, for example, not allowed to be--to have Federal 
contracts, that sort of thing. So, we are--we're absolutely 
open to that.
    I think we're very interested in seeing these 
investigations run to ground and not prematurely drawing 
conclusions. But, we do intend to look at those issues.
    Senator Cantwell. Thank you, Mr. Chairman.
    The Chairman. Senator Shaheen, did you wish make another 
comment?
    Senator Shaheen. No, I just would like to request that, 
when Mr. Hayes provides the BP responsibility document to 
Senator Menendez, that you make it available to the entire 
committee.
    Thank you.
    The Chairman. Let me thank this panel very much for your 
testimony. You've been very generous with your time. We 
appreciate it.
    Let me call the second panel forward. That's Mr. Jonathan 
Ramseur, who is specialist in environmental policy with 
Congressional Research Service; Mr. Rawle King, who is an 
analyst in financial economics and risk assessment with 
Congressional Research Service; and Mr. Robert Meltz, who's 
legislative attorney with the Congressional Research Service.
    I would just advise the witnesses that our Republican 
colleagues are--have been invited to a lunch with the 
President, beginning here at noon; that's why they are not in 
attendance. So, that explains some of the absences.
    Let me ask each of you to take about 5 minutes and make the 
main points that you think we need to understand. Then, of 
course, we will include your full statements in the record.
    Mr. Ramseur, go right ahead.

  STATEMENT OF JONATHAN RAMSEUR, SPECIALIST IN ENVIRONMENTAL 
             POLICY, CONGRESSIONAL RESEARCH SERVICE

    Mr. Ramseur. Good afternoon, Mr. Chairman, ranking member, 
and members of the committee.
    My name is Jonathan Ramseur, and I am a specialist in 
environmental policy in the Congressional Research Service. I 
have been asked by the committee to discuss aspects of the oil 
spill liability policy and allocation of costs associated with 
a major oil spill. My testimony will provide background on the 
Oil Pollution Act's liability structure and its interaction 
with the Oil Spill Liability Trust Fund.
    I should note that CRS does not advocate policy or take a 
position on specific legislation.
    OPA liability provisions apply to any discharge of oil from 
a vessel or facility to navigable waters, adjoining shorelines, 
or the exclusive economic zone of the United States. 
Responsible parties include owners and operators of vessels or 
facilities, or lessees of offshore facilities. Responsible 
parties are liable for oil spill removal costs, natural 
resource damages, and a range of economic costs.
    However, a party's liability may be limited. Liability 
limits differ by oil spill source. For example, tank vessel 
liability is generally based on a vessel's gross tonnage. 
Offshore facilities, like the Gulf well leased to British 
Petroleum, have their liability caps at all removal costs plus 
$75 million.
    Under some circumstances, a party's OPA liability may be 
unlimited. Liability limits do not apply if an oil spill was 
proximately caused by gross negligence or willful misconduct or 
the violation of an applicable Federal safety construction or 
operating regulation. In addition, the responsible party must 
report the spill and cooperate with response officials. It is 
currently undetermined whether liability limits would apply to 
the Gulf oil spill. Regardless, individual liability is only 
one component of the framework established by OPA.
    The second significant element is the Oil Spill Liability 
Trust Fund. Primary purposes of the fund include immediate 
access to funds for prompt Federal oil spill response, and 
payment for claims in excess of a responsible party's liability 
cap. The fund is supported by a per-barrel tax on domestic and 
imported oil. At present, the tax is 8 cents. A recent 
estimate, made before the Gulf spill--from OMB--indicated a 
fund balance of approximately $1.6 billion. However, the fund 
has a per-incident expenditure cap of $1 billion. When OPA was 
drafted, Congress intended that this cap would be able to cover 
catastrophic spills. The National Pollution Fund Center, which 
manages the fund, would only be able to award claims up to this 
threshold. It is my understanding that such a scenario has not 
occurred in the fund's history.
    Costs beyond the OPA trust fund's per-incident limit could 
be addressed in several ways. Existing Federal authorities 
could be used to provide assistance in some circumstances. 
Another route of recourse would be the parties to State loss. 
OPA specifically does not preempt States from imposing 
additional liability or requirements relating to oil spills; 
however, it is uncertain how State laws would interact in this 
situation, and compensation via State laws may involve 
considerable litigation.
    These issues raise a central policy question: How should 
Congress allocate the costs associated with a major accidental 
oil spill? Congress may consider modifying OPA's liability and 
compensation framework. Potential options for Congress include, 
but are limited to, increasing the liability limits so the 
responsible party would be required to pay a greater portion of 
the spill cost, to increasing the per-barrel oil tax to more 
quickly raise the fund's balance. Concurrently, Congress could 
remove or raise the per-incident cap on the trust fund. It 
might be noted that the $1-billion cap established in 1990 is 
approximately equivalent to $600 million, in today's dollars.
    Three, authorizing repayable advances, to be made via the 
appropriations process, to the trust fund so that the fund 
would have resources to carry out its functions.
    Recent legislative proposals have included these 
approaches.
    Thank you again for the invitation to appear today. I will 
be pleased to address any questions you may have.
    [The prepared statement of Mr. Ramseur follows:]

  Statement of Jonathan Ramseur, Specialist in Environmental Policy, 
                     Congressional Research Service
    Good afternoon Mr. Chairman, Ranking Member, and Members of the 
Committee. My name is Jonathan Ramseur. I am a Specialist in 
Environmental Policy in the Congressional Research Service (CRS). On 
behalf of CRS, I would like to thank the Committee for inviting me to 
testify here today. I have been asked by the Committee to discuss 
aspects of oil spill liability policy and allocation of costs 
associated with a major oil spill. My testimony will provide background 
on the Oil Pollution Act's liability structure and its interaction with 
the Oil Spill Liability Trust Fund. I should note that CRS does not 
advocate policy or take a position on specific legislation.
Oil Spill Liability before the 1989 Exxon Valdez Spill
    When the Exxon Valdez ran aground in March 1989, multiple federal 
statutes, state statutes, and international conventions dealt with oil 
discharges. Many observers\1\ described this legal collection as an 
ineffective patchwork. Arguably, each law had perceived shortcomings, 
and none provided comprehensive oil spill coverage. For more than 15 
years prior to the Valdez, Congress had made attempts to enact a 
unified oil pollution law. Several contentious issues hindered the 
passage of legislation. A central point of debate dealt with state 
preemption: whether a federal oil spill law should limit a state's 
ability to impose stricter requirements, particularly unlimited 
liability.
---------------------------------------------------------------------------
    \1\ See, for example, U.S. Congress, House Committee on Merchant 
Marine and Fisheries, Report accompanying H.R. 1465, Oil Pollution 
Prevention, Removal, Liability, and Compensation Act of 1989, 1989, 
H.Rept. 101-242, Part 2, 101st Cong., 1st sess., p. 32.
---------------------------------------------------------------------------
    In the aftermath of Valdez--which was followed by a handful of 
other large oil spills in 1989 and 1990-Members faced great pressure to 
overcome these disputed issues.\2\ The spill highlighted the 
inadequacies of the existing coverage and generated public outrage. The 
end result was the Oil Pollution Act of 1990 (OPA)\3\--signed August 
18, 1990--the first comprehensive law to specifically address oil 
pollution to waterways and coastlines of the United States.
---------------------------------------------------------------------------
    \2\ For further discussion, see CRS Report RL33705, Oil Spills in 
U.S. Coastal Waters: Background, Governance, and Issues for Congress, 
by Jonathan L. Ramseur (and cited references contained therein).
    \3\ P.L. 101-380, primarily codified at 33 U.S.C. 2701, et seq.
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Oil Spill Liability under the Oil Pollution Act of 1990
    OPA liability provisions apply to any discharge of oil (or threat 
of discharge) from a vessel (e.g., oil tanker) or facility (e.g., 
offshore oil rig)\4\ to navigable waters, adjoining shorelines, or the 
exclusive economic zone of the United States (i.e., 200 nautical miles 
beyond the shore). Responsible parties, including owners/operators of 
vessels/facilities and/or lessees of offshore facilities\5\--are 
liable\6\ for (1) oil spill removal costs and (2) a range of other 
costs including:
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    \4\ The definition of ``facility'' is broadly worded and includes 
pipelines and motor vehicles. 33 U.S.C. 2701(9).
    \5\ See 33 U.S.C. 2701(32).
    \6\ Responsible parties have several defenses from liability (33 
U.S.C. 2703): act of God, act of war, and act or omission of certain 
third parties. These defenses are analogous to those of the Superfund 
statute (the Comprehensive Environmental Response, Compensation, and 
Liability Act (CERCLA, commonly known as Superfund), P.L. 96-510) 
enacted in 1980 for releases of hazardous substances. See 42 U.S.C. 
9607(b).

   injuries to natural resources (e.g., fish, animals, plants, 
        and their habitats);
   loss of real personal property (and resultant economic 
        losses);
   loss of subsistence use of natural resources;
   lost government revenues resulting from destruction of 
        property or natural resource injury;
   lost profits and earnings resulting from property loss or 
        natural resource injury; and
   costs of providing extra public services during or after 
        spill response.\7\
---------------------------------------------------------------------------
    \7\ OPA Section 1002(b)(2).

    Compared to the pre-OPA liability framework, OPA significantly 
increased the range of covered damages.\8\ Moreover, a responsible 
party is now liable (subject to the limits discussed below) for all 
cleanup costs incurred, not only by a government entity, but also by a 
private party.\9\ Limits (or Caps) to Liability Barring exceptions 
identified below, responsible party liability is limited or capped for 
each ``incident.''\10\ The liability limits differ based on the source 
of the oil spill: some limits are simple dollar amounts; others have 
unlimited liability for cleanup costs with limits on other damages. For 
example (and relevant to the Gulf spill):
---------------------------------------------------------------------------
    \8\ Congress recognized that ``there is no comprehensive 
legislation in place that promptly and adequately compensates those who 
suffer other types of economic loss as a result of an oil pollution 
incident.'' U.S. Congress, House Committee on Merchant Marine and 
Fisheries, Report accompanying H.R. 1465, Oil Pollution Prevention, 
Removal, Liability, and Compensation Act of 1989, 1989, H.Rept. 101-
242, Part 2, 101st Cong., 1st sess., p. 31.
    \9\ OPA Section 1002(b)(1).
    \10\ ``Incident'' means any occurrence or series of occurrences 
having the same origin, involving one or more vessels, facilities, or 
any combination thereof, resulting in the discharge or substantial 
threat of discharge of oil. 33 U.S.C. 2701(14).

   Mobile offshore drilling units (MODUs), like the Deepwater 
        Horizon unit (owned by Transocean), are first treated as a tank 
        vessel for their liability caps. Based on this unit's gross 
        tonnage, its liability cap would be approximately $65 million 
        (per the National Pollution Funds Center).\11\ If removal and 
        damage costs exceed this liability cap, a MODU is deemed to be 
        an offshore facility for the excess amount.\12\
---------------------------------------------------------------------------
    \11\ See National Pollution Funds Center, ``Oil Pollution Act 
Liabilities for Oil Removal Costs and Damages as They May Apply to the 
Deepwater Horizon Incident'' (undated).
    \12\ USC 2704(b).
---------------------------------------------------------------------------
   Offshore facilities, like the Gulf well leased to British 
        Petroleum, have their liability capped at ``all removal costs 
        plus $75 million.''

    The National Pollution Funds Center (NPFC) described the liability 
for this incident as follows:

          Liability for the New Horizon Incident: The lessee of the 
        area in which the offshore facility is located is clearly a 
        responsible party for the reported discharge below the surface 
        from the well, an offshore facility. The OPA liability limit, 
        if it applies, is all removal costs plus $75 million. The owner 
        of the MODU would also be a tank vessel responsible party for 
        any oil discharge on or above the surface of the water. The 
        MODU liability limit, if it applies, as a tank vessel, is 
        approximately $65 million. If the OPA oil removal costs and 
        damages resulting from the discharge on or above the water 
        exceed this liability amount the MODU is treated as an offshore 
        facility for the excess amount. In that case the lessee of the 
        area in which the offshore facility is located would be a 
        liableresponsible party up to the offshore liability limit 
        amount of all removal costs plus $75 million. (emphasis added 
        by CRS)\13\
---------------------------------------------------------------------------
    \13\ See National Pollution Funds Center, ``Oil Pollution Act 
Liabilities for Oil Removal Costs and Damages as They May Apply to the 
Deepwater Horizon Incident'' (undated).
---------------------------------------------------------------------------
Loss of Liability Limit
    Liability limits do not apply if the incident was ``proximately 
caused'' by ``gross negligence or willful misconduct'' or ``the 
violation of an applicable Federal safety, construction, or operating 
regulation . . . '' If one of these circumstances is determined to have 
occurred, the liability would be unlimited. In addition, the 
responsible party must report the incident and cooperate with response 
officials to take advantage of the liability caps. According to the 
National Pollution Funds Center, liability limits are ``not usually 
well defined until long after response,'' and litigation may be 
required to resolve the issue.\14\
---------------------------------------------------------------------------
    \14\ National Pollution Funds Center, FOSC Funding Information for 
Oil Spills and Hazardous Materials Releases, April 2003, p. 4.
---------------------------------------------------------------------------
Increasing Liability Caps
    OPA requires the President to issue regulations to adjust the 
liability limits at least every three years to take into account 
changes in the consumer price index (CPI).\15\ Despite this 
requirement, adjustments to liability limits were not made until 
Congress amended OPA in July 2006. The Coast Guard and Maritime 
Transportation Act of 2006 (P.L. 109-241) increased limits to doubleand 
single-hulled vessels.\16\ Subsequently, the Coast Guard made its first 
CPI adjustment to the liability limits in 2009.\17\ The offshore 
facility limit has remained at the same level since 1990. According to 
the Federal Register preamble (July 1, 2009), the Coast Guard will join 
efforts with the other relevant agencies-Environmental Protection 
Agency, Department of the Interior, and Department of Transportation-to 
submit CPI adjustments together in 2012.
---------------------------------------------------------------------------
    \15\ 33 USC 2704(d)(4).
    \16\ This act increased limits to $1,900/gross ton for double-
hulled vessels and $3,000/gross ton for single-hulled vessels.
    \17\ This rulemaking increased the limits to $2,000 for double-
hulls and $3,200 for single-hulls. U.S. Coast Guard, ``Consumer Price 
Index Adjustments of Oil Pollution Act of 1990 Limits of Liability-
Vessels and Deepwater Ports,'' Federal Register Volume 74, No. 125 
(July 1, 2009), pp. 31357-31369.
---------------------------------------------------------------------------
Oil Spill Liability Trust Fund
    Before the passage of OPA, federal funding for oil spill response 
was widely considered inadequate,\18\ and damage recovery was difficult 
for private parties.\19\ To help address these issues, Congress 
established the Oil Spill Liability Trust Fund (OSLTF). Although 
Congress created the OSLTF in 1986,\20\ Congress did not authorize its 
use or provide its funding until after the Exxon Valdez incident.
---------------------------------------------------------------------------
    \18\ Wilkinson, Cynthia et al., ``Slick Work: An Analysis of the 
Oil Pollution Act of 1990,'' Journal of Energy, Natural Resources, and 
Environmental Law, 12 (1992), p. 188.
    \19\ Congress, House Committee on Merchant Marine and Fisheries, 
Report accompanying H.R. 1465, Oil Pollution Prevention, Removal, 
Liability, and Compensation Act of 1989, 1989, H.Rept. 101-242, Part 2, 
101st Cong., 1st sess., p. 35.
    \20\ Omnibus Budget Reconciliation Act of 1986 (P.L. 99-509).
---------------------------------------------------------------------------
    Pursuant to Executive Order (EO) 12777, the U.S. Coast Guard 
created the National Pollution Funds Center (NPFC) to manage the trust 
fund in 1991. The fund may be used for several purposes, including:

   prompt payment of costs for responding to and removing oil 
        spills;
   payment of the costs incurred by the federal and state 
        trustees of natural resources for assessing the injuries to 
        natural resources caused by an oil spill, and developing and 
        implementing the plans to restore or replace the injured 
        natural resources; and
   payment for the range of claims described above (e.g., 
        financial losses; government revenue losses; property damages; 
        etc).

Projected Level of the Fund
    OPA provided the statutory authorization necessary to put the fund 
in motion. Through OPA, Congress transferred other federal liability 
funds\21\ into the OSLTF. In complementary legislation, Congress 
imposed a 5-cent-per-barrel tax on the oil industry to support the 
fund.\22\ Collection of this fee\23\ ceased on December 31, 1994, due 
to a sunset provision in the law. However, in April 2006, the tax was 
reinstated by the Energy Policy Act of 2005 (P.L. 109-58). In addition, 
the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) 
increased the tax rate to 8 cents through 2016. In 2017, the rate 
increases to 9 cents. The tax is scheduled to terminate at the end of 
2017.\24\
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    \21\ The Clean Water Act Section 311(k) revolving fund; the 
Deepwater Port Liability Fund; the Trans-Alaska Pipeline Liability 
Fund; and the Offshore Oil Pollution Compensation Fund.
    \22\ Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239). 
Other revenue sources for the fund include interest on the fund, cost 
recovery from the parties responsible for the spills, and any fines or 
civil penalties collected.
    \23\ The tax is imposed on (1) crude oil received at U.S. 
refineries, paid by the operator of the refinery; and (2) imported 
crude oil and petroleum products, paid by the person entering the 
product for consumption, use, or warehousing. See 26 USC 4611.
    \24\ Section 405 of P.L. 110-343.
---------------------------------------------------------------------------
    Under the original tax legislation (the Omnibus Budget 
Reconciliation Act of 1989 (P.L. 101-239)), the per-barrel tax would be 
suspended in any calendar quarter if the fund balance reached $1 
billion, restarting again if it dipped below that number. With the 
Energy Policy Act of 2005 (P.L. 109-58), Congress raised this threshold 
from $1 billion to $2.7 billion. The Emergency Economic Stabilization 
Act of 2008 repealed the requirement that the tax be suspended if the 
unobligated balance of the fund exceeded $2.7 billion.
    As illustrated in Figure 1*, the fund was projected (in May 2009) 
to reach approximately $3.5 billion in FY2016. Earlier this year, the 
Office of Management and Budget (OMB) estimated an (unobligated) 
balance of $1.575 billion in the trust fund by the end of FY2010.\25\
---------------------------------------------------------------------------
    * Figure has been retained in committee files.
    \25\ Office of Management and Budget, Budget of the U.S. Government 
for Fiscal Year 2011, Appendix, p. 548.
---------------------------------------------------------------------------
Trust Fund Vulnerability and Liability Limits: Considerations for 
        Congress
    A primary purpose of the Trust Fund is to reimburse persons for 
removal costs and/or damages that exceed the responsible parties' 
liability limits. For example, if a spiller's liability limit is 
determined to be $100 million, and the total costs of the incident 
equal $500 million, the trust fund could reimburse parties for the 
difference (in this case $400 million). However, OPA established a per-
incident expenditure cap. The maximum total amount available for each 
incident is $1 billion. Within this $1 billion limit, natural resource 
damage awards cannot exceed $500 million. Such a scenario has not 
occurred under the OPA framework.
    A significant spill, particularly one that impacts sensitive 
environments and/or areas of substantial human populations, could 
threaten the viability of the fund. As one reference point, the Exxon 
Valdez spill tallied approximately $2 billion in cleanup costs and $1 
billion in natural resource damages (not including third-party claims)-
in 1990 dollars. Punitive damage claims were litigated for more than 12 
years, eventually reaching the U.S. Supreme Court in 2008 (Exxon 
Shipping v. Baker). Plaintiffs were eventually awarded approximately 
$500 million in punitive damages.\26\ An additional $500 million in 
interest on those damages was subsequently awarded.
---------------------------------------------------------------------------
    \26\ Note that the original (1994) district court award was for $5 
billion.
---------------------------------------------------------------------------
    These issues raise a central policy question: how should Congress 
allocate the costs associated with a major, accidental oil spill? Under 
the existing framework, responsible parties (i.e., owners/operators of 
vessels and facilities) are liable up to their liability caps (if 
applicable); the trust fund, which is funded primarily through the tax 
on the oil industry, covers costs above liability limits up to the per-
incident cap ($1 billion). Statements from OPA's legislative history 
suggest that drafters intended the fund to cover ``catastrophic 
spills.''\27\
---------------------------------------------------------------------------
    \27\ U.S. Congress, House Committee on Merchant Marine and 
Fisheries, Report accompanying H.R. 1465, Oil Pollution Prevention, 
Removal, Liability, and Compensation Act of 1989, 1989, H.Rept. 101-
242, Part 2, 101st Cong., 1st sess., p. 36.
---------------------------------------------------------------------------
    Costs (including, for example, natural resource damages, economic 
losses, etc.)\28\ beyond this perincident limit could be addressed in 
several ways. One mechanism would be for parties to use state laws. OPA 
does not preempt states from imposing additional liability or 
requirements relating to oil spills, or establishing analogous state 
oil spill funds (33 U.S.C. 2718). OPA legislative history and 
statements from OPA drafters\29\ indicate that state laws and funds 
would supplement (if necessary) the federal liability framework under 
OPA. Alternatively, existing federal authorities could be used to 
provide assistance in some circumstances. For example, an emergency 
declaration under the Stafford Act would appear a potential approach 
for the current situation, because it is intended to lessen the impact 
of an imminent disaster. A declaration in the context of a manmade 
disaster is unprecedented: during the Exxon Valdez spill, the President 
turned down the governor of Alaska's two requests for an emergency 
declaration.\30\ Regardless, other federal authorities may provide 
mechanisms for assistance.\31\
---------------------------------------------------------------------------
    \28\ Although offshore facilities are liable for all removal costs, 
liability for removal costs for other responsible party categories 
(e.g., tank vessels, onshore facilities) is limited. Thus, a 
significant oil spill from a tank vessel could potentially encounter 
the per-incident trust fund cap, based solely on its response costs.
    \29\ See George Mitchell, ``Preservation of State and Federal 
Authority under the Oil Pollution Act of 1990,'' Environmental Law, 
Vol. 21, no. 2 (1991).
    \30\ The rationale for the turndowns was that a declaration by the 
President would hinder the government's litigation against Exxon that 
promised substantial compensation for the incident. See CRS Report 
R41234, Potential Stafford Act Declarations for the Gulf Coast Oil 
Spill: Issues for Congress, by Francis X. McCarthy.
    \31\ For example, see the amendment in the nature of a substitute 
to H.R. 4899 (Supplemental Appropriations Act, 2010) reported from the 
Senate Committee on Appropriations May 14, 2010 (S. Rept. 111-188).
---------------------------------------------------------------------------
    In addition, Congress may consider modifying this liability 
framework. Potential options for Congress include (but are not limited 
to):

          1. Increase the liability limits, so that the responsible 
        party would be required to pay a greater portion of the total 
        spill cost before accessing trust fund dollars (e.g., S. 3305, 
        introduced May 4, 2010, by Senator Menendez).
          2. Increase the per-barrel oil tax to more quickly raise the 
        fund's balance. Concurrently, Congress could remove or raise 
        the per-incident cap on the trust fund.
          3. Authorize ``repayable advances'' to be made (via the 
        appropriations process) to the trust fund, so that the fund 
        would have the resources to carry out its functions (cleanup 
        efforts, claim awards). Up until 1995, the fund had this 
        authority, in order to ensure it could respond to a major spill 
        before the fund had an opportunity to grow (via the per-barrel 
        tax). S. 3036 (introduced May 4, 2010, by Senator Menendez) 
        would take this approach. This proposal would allow unlimited 
        advances.

    Thank you again for invitation to appear today. I will be pleased 
to address any questions you may have.

    The Chairman. Thank you very much, Mr. King.

STATEMENT OF RAWLE O. KING, ANALYST IN FINANCIAL ECONOMICS AND 
        RISK ASSESSMENT, CONGRESSIONAL RESEARCH SERVICE

    Mr. King. My name is Rawle King. I'm in analyst in 
financial economics and risk assessment at the Congressional 
Research Service.
    CRS has been asked by the committee to provide testimony on 
financing recovery from large-scale natural disasters and to 
review the amount of insurance that is likely to become 
available from the global commercial insurance market for 
third-party pollution liability damages facing operators of 
offshore energy facilities in the aftermath of the Deepwater 
Horizon accident.
    In the aftermath of this event, one major issue that 
Congress may wish to deliberate upon is the willingness of the 
commercial insurance industry to participate in the Oil Spill 
Financial Requirement Program. Given the proposed increase in 
the limit of liability required under OPA to $10 billion and 
also the required evidence of financial responsibility to some 
level that is yet to be determined.
    Some insurance market experts have asserted that the 
potential capacity for third-party liability commercial 
insurance that is available to meet the oil spill financial 
requirements is approximately in the range of $1.5 billion. 
This amount is likely to be far below the oil spill financial 
responsibility requirement for the proposed $10-billion 
liability limit.
    Companies that engage in oil spill and gas exploration, 
drilling, and production face many risks. In general, the 
offshore energy business in the Gulf of Mexico involves risks 
that can be classified in 5 broad categories, whether it's 
weather perils, marine perils, drilling perils, production 
perils, political-risk perils. The Deepwater Horizon incident 
appears, to some, to have resulted from the drilling peril, a 
drilling peril involving a blowout preventer.
    The insurance underwriting of offshore energy facilities is 
among the most difficult and complex commercial property and 
liability risk to insure, especially in the Gulf of Mexico, 
where hurricanes often damage platform and overseas--undersea 
pipeline. The offshore oil and gas insurance market, a 
specialty insurance market, with about $3.5 billion in annual 
premiums, offers insurance coverage for blowout--control of 
blowouts, the cost of drilling in deep water, and, in the event 
of a blowout, the cost of redrilling.
    Given the time that has been allotted to me, I would like 
to delve quickly into the insurance requirements. Under Section 
1016 of OPA, parties responsible for the offshore facilities 
must establish and maintain financial responsibility capability 
to meet their liabilities for removal costs and damages caused 
by oil discharge from an offshore facility and associated 
pipelines. This financial responsibility is demonstrated in 
various ways, including surety bonds, guarantees, letters of 
credit, and self-insurance, but the most common method by means 
to achieve this requirement is through insurance certificates. 
The problem has been that--going forward, is that--by the way, 
the market, thus far, has been in the soft market, so insurance 
was readily available. The problem now is the limited capacity 
in the global commercial insurance market to meet the demands, 
going forward. This is the fundamental problem. How will the 
offshore energy companies meet their insurance requirement, 
going forward, given the limited capacity that stands behind 
the insurance that is sold in the commercial marketplace?
    So, it becomes an availability issue. To some extent, it 
becomes an insurability issue, given the strict liability 
provisions in the OPA statute.
    I'd like to deal with 2 distinct points, in terms of the 
insurance availability issue. Some insurance--just based on 
economics of supply and-demand principles, and the fallout from 
possibly the worst damaging oil spill in the Nation's history, 
one would expect that the supply of insurance coverage for new 
financial responsibility requirements to only be available at a 
higher price. We've heard, today, and quite naturally, the cost 
of insurance has gone up dramatically. Given a limited supply 
of insurance, increased demand for the coverage, you would 
expect prices to go up. It may go up, and also the insurance 
may not be available at all.
    So, if the past is an indication of the future, private 
commercial insurers concerned about the potential for future 
massive environmental-related damages may be reluctant to 
commit financial capital to underwrite unknown new risk in the 
post-Deepwater Horizon environment until there's greater 
clarity on the legislative and the legal climate. Insurers 
simply need to collect the necessary data for evaluation of 
this risk associated with the severity of the losses that are 
unknown at this time.
    So, in conclusion, given the magnitude of losses and 
uncertainty about future profitability in the energy insurance 
business, a hard insurance--energy insurance market, where 
there's scarcity of coverage and high prices, may emerge 
following this incident.
    Many insurance market experts would support a more 
efficient, I believe--and based--this is based on my research, 
looking at the catastrophe risk and how to finance this risk. 
Given the limited capacity that's available currently in the 
energy insurance market, that is a specialty market, that 
generates roughly $3.5 billion in premium, that is a small 
market, relative to the whole global insurance marketplace.
    Most experts would believe that what is needed is a more 
efficient predisaster risk-financing approach to managing and 
financing large-scale oil spill disasters.
    So, what I'm saying is, the current way of insuring the 
risk and transferring it to the reinsurance market, it's 
limited. So, the ability now to expand the liability coverage 
and expect the oil companies to go into the small--relatively 
small insurance market, the capacity is not there.
    So, what--and it may be out of the--outside of the 
jurisdiction of this committee, how do you expand the market 
for this risk? A prefinancing mechanism would involve 
alternative risk-financing strategies that, again, is beyond 
this committee, but that is how the catastrophe insurance 
market is moving to provide coverage through the insurance 
mechanism.
    Thank you again for this invitation to appear today. I will 
be pleased to address any questions you may have.
    [The prepared statement of Mr. King follows:]

  Statement of Rawle O. King, Analyst in Financial Economics and Risk 
               Assessment, Congressional Research Service
    Good afternoon Chairman Bingaman, Ranking Member Murkowski, and 
Members of the Committee. My name is Rawle King. I am an analyst in 
financial economics and risk assessment in the Congressional Research 
Service (CRS). On behalf of CRS, I would like to thank the Committee 
for inviting me to testify here today. CRS has been asked by the 
committee to provide testimony on financing recovery from large-scale 
disasters, and to review the amount of insurance that is likely to 
become available from the commercial insurance market for third-party 
pollution liability damages facing operators of offshore energy 
facilities in the aftermath of the Deepwater Horizon accident. I should 
note that CRS does not advocate policy or take a position on specific 
legislation.
Introduction
    Companies that engage in oil and gas exploration, drilling, and 
production on federal lands on the Outer Continental Shelf (OCS) face a 
wide range of risks, including marine environmental uncertainty, 
adverse exposures in drilling and construction of offshore oil wells, 
performance of equipment, and defects in plans and specifications. 
Numerous parties are involved in the U.S. offshore oil and gas 
exploration and development business, including lease or permit 
holders, drilling contractors, cementing engineers and their various 
sub-contractors, such as the manufacturers of the blowout preventer. In 
the early 1960s, a specialty energy insurance market emerged to offer 
pollution liability coverage for third-party property claims and 
cleanup and contamination risks, oil well blowouts, and redrilling.
    In 1990, Congress passed the Oil Pollution Act (OPA)\1\ to 
strengthen the safety and environmental practices in the oil and gas 
exploration, drilling, and production business. Under OPA, operators of 
offshore energy facilities must demonstrate oil spill financial 
responsibility (OSFR) for removal costs and damages caused by oil 
discharges from offshore facilities and associated pipelines. 
Commercial insurance is usually purchased by the facility operator to 
not only meet the OSFR requirements pertaining to pollution liability 
coverage for third-party property claims and cleanup and contamination 
risks, but also to protect the company itself from the financial 
consequences of an oil well blowout and the expenditures following the 
loss of well control, the cost to redrill after a blowout, and the 
pollution liability coverage for third-party property claims and 
cleanup and contamination risks and the direct physical loss or damage 
to platforms, rigs, and equipment.
---------------------------------------------------------------------------
    \1\ P.L. 101-380; 104 Stat. 484.
---------------------------------------------------------------------------
The Gulf Coast Oil Spill
    On April 20, 2010, the ultra-deepwater, semi-submersible mobile 
offshore oil rig Deepwater Horizon burned and sunk in the Gulf of 
Mexico off the shores of Louisiana. The rig was owned and operated by 
Transocean, a Swiss offshore drilling contractor, and leased to British 
Petroleum (BP). The explosion and fire killed 11 workers and injured 17 
others.
    According to the American Petroleum Institute, there have been 17 
marine well blowouts in the United States since 1964 for a total of 
248,963 barrels spilled.\2\ Two blowouts have occurred in state waters 
and account for 5% of the total spillage. The largest of these 
incidents occurred in January 1969 from Alpha Well 21 off Santa 
Barbara, California, which spilled 100,000 barrels. The 2009 API report 
said the volume of U.S. well blowouts tends to be small, that is, 50% 
of the well blowouts involved 400 barrels of oil or less.
---------------------------------------------------------------------------
    \2\ American Petroleum Institute, ``Analysis of U.S. Oil 
Spillage'', p. 25, Aug. 2009, located at: [http://www.api.org/Newsroom/
safetyresponse/upload/Analysis_us_oil_spillage.pdf].
---------------------------------------------------------------------------
    Table 1 places the Deepwater Horizon oil spill currently as the 
eighth worst offshore platform oil spill worldwide as of May 5, behind 
the Alpha Well 21, but its impact may be unlike any other, in terms of 
offshore oil pollution damages. The final cost of the Deepwater Horizon 
incident will likely depend on many factors, including the distance 
between the oil spill location and the potential impact sites along the 
Gulf Coast, the sea conditions, the sensitivity of affected locations 
to damage from oil and cleanup techniques, the availability and cost of 
cleanup labor, the ecosystem value attributed to the location, and 
socioeconomic factors such as the economic value of activities affected 
by the spill, and the acceptability of residual level oil 
contamination.\3\
---------------------------------------------------------------------------
    \3\ For more information on estimating the cost of offshore oil 
spills see, Franklin E. Giles, ``Factors in Estimating Potential 
Response Costs of Spills and Releases,'' Environmental Claims Journal, 
22(1): 27-37, 2010 p. 29.
---------------------------------------------------------------------------
      
      

                           Table 1. Largest International Oil Well Blowouts by Volume
                                               (As of May 5, 2010)
----------------------------------------------------------------------------------------------------------------
                                                                                               Volume of Oil
                                                                                                  Released
                 Date                      Name of Platform              Location         ----------------------
                                                                                                 (Barrels)
----------------------------------------------------------------------------------------------------------------
June 1979--April 1980                  Ixtoc I                   Bay of Campeche, Mexico              3,500,000
October 1986                           Abkatun 91                Bay of Campeche, Mexico                247,000
April 1977                             Ekofisk Bravo             North Sea, Norway                      202,381
January 1980                           Funiwa 5                  Forcados, Nigeria                      200,000
October 1980                           Hasbah 6                  Persian Gulf, Saudi                    105,000
                                                                  Arabia
December 1971                          Iran Marine intl.         Persian Gulf, Iran                     100,000
January 1969                           Alpha Well 21             Pacific, California,                   100,000
                                                                  U.S.
April 2010                             DeepWater Horizon         Gulf of Mexico, U.S.               est. 70,000
March 1970                             Main Pass Block 41        Gulf of Mexico                          65,000
October 1987                           Yum II/Zapoteca           Bay of Campeche, Mexico                 58,643
----------------------------------------------------------------------------------------------------------------


          Source: American Petroleum Institute, ``Analysis of U.S. Oil 
        Spillage'', p. 26, August 2009, located at: [http://
        www.api.org/Newsroom/safetyresponse/upload/
        Analysis_us_oil_spillage.pdf].

    The federal government has become involved in the oil recovery 
efforts. The Secretary of the Department of Homeland Security 
Secretary, Janet Napolitano, designated the spill as a problem ``of 
national significance'' and the Minerals Management Services (MMS), the 
agency within the Interior Department that regulates offshore oil 
drilling, is actively working with the U.S. Coast Guard, in partnership 
with British Petroleum, community volunteers, and other federal 
agencies, to prevent the spread of oil and protect the environment.
    Pursuant to the Oil Pollution Act of 1990,\4\ the U.S. Coast Guard 
has named BP and Transocean as ``responsible parties'' for all cleanup 
costs including those incurred by the U.S. Coast Guard and other 
government employees.\5\ Much of BP's losses will likely be paid 
through selfinsurance because BP does not purchase insurance. BP's two 
non-operating partners of the Deepwater Horizon project have reportedly 
purchased private insurance and these insurers and their reinsurers 
have pollution liability cleanup exposures totaling about $1.4 billion.
---------------------------------------------------------------------------
    \4\ P.L. 101-380, 104 Stat. 484 (33 U.S.C. 27001 et al).
    \5\ Potential parties to this incident include; British Petroleum 
PLC, BP Products North America Inc, BP America Inc. Transocean Ltd., 
Transocean Offshore Deepwater Inc., Halliburton Energy Services Inc., 
and Cameron International Corporation.
---------------------------------------------------------------------------
Hazards Facing Offshore Operating Facilities
    As background, the oil and gas business has three major segments: 
exploration and production of oil and natural gas (the upstream); the 
transportation, storage, and trading of crude oil, refined products, 
and natural gas (the midstream); and refining and marketing of crude 
oil (the downstream). The U.S. Minerals Management Services (MMS) uses 
auctions to allocate exploration and drilling rights (leases) for oil 
and gas on federal lands on the Outer Continental Shelf (OCS). The 
federal offshore leasing program began in 1954. Companies could 
individually, or through a joint offer, submit a bid on areas or tracts 
within the federal offshore lands that are available for drilling. The 
winning bidder has the right, but not the obligation, to conduct 
exploratory drilling of the area. There is a fixed lease term during 
which exploration must begin to avoid having the lease revert to the 
government. Leases are automatically renewed if it is productive, 
provided the operator pays the appropriate royalty to the government. 
The insurance underwriting of offshore oil and gas exploration, 
drilling, and production facilities is among the most difficult and 
complex commercial property and liability risk to insure, especially in 
the Gulf of Mexico where hurricanes often damage platforms and undersea 
pipelines, and drilling and construction projects are major 
undertakings that require the use of large and expensive marine 
vessels.\6\
---------------------------------------------------------------------------
    \6\ For more information see, The International Oil Pollution 
Compensation Fund, located at: [http://www.iopcfund.org/].
---------------------------------------------------------------------------
    The offshore energy business in the Gulf of Mexico involves risks 
that could be classified in five broad categories:

   Weather perils that include environmental factors such as 
        storms, wind, hurricanes, lightning, and ice/snow/freezing;
   Marine perils that include fatigue and corrosion arising 
        from environmental conditions, collision with attendant or 
        passing vessels, foundation failure, subsidence, and mudslides;
   Drilling perils that include surface and subsurface 
        blowouts;
   Production perils that include fire, explosion, and 
        equipment failure, but also construction defects and 
        maintenance and construction activities, such as pipelaying, 
        piling operation, and construction defects; and
   Political risks that include war risk, asset confiscation, 
        expropriation or nationalization, and damage caused by labor 
        dispute or by terrorists.\7\
---------------------------------------------------------------------------
    \7\ Mark J. Kaiser and Allan G. Pulsipher, ``Loss Categories, 
Hazard Types in Marine Operations,'' Oil & Gas Journal, May 7, 2007, p. 
39.
---------------------------------------------------------------------------
    The Deepwater Horizon incident appears to some to have resulted 
from a drilling peril involving a blowout preventor.
Offshore Energy Insurance Market
    Insuring the liabilities of vessels was not made compulsory until 
the advent of the 1969 International Convention on Civil Liability for 
Oil Pollution Damage (CLC).\8\ At about the same time, the offshore oil 
and gas insurance market began offering insurance coverage for control 
of blowouts. Insurers would later expand to cover the costs of drilling 
in deeper water and, in the event of a blowout, the cost of redrilling. 
The main types of property and liability insurance coverage relevant to 
the actual causes and definitive repercussions of the Deepwater Horizon 
incident include:
---------------------------------------------------------------------------
    \8\ See, International Convention on Civil Liability for Pollution 
Damage, 1969, located at: [http://www.imo.org/conventions/
contents.asp?doc_id=660&topic_id=256].

   Offshore Physical Damage Coverage--indemnifies the insured 
        for ``all risks'' physical loss or damage to fixed offshore 
        drilling, production and accommodation facilities, including: 
        (1) fixed offshore drilling, production and accommodation 
        facilities; (2) pipelines; (3) subsea equipment; and (4) 
        offshore loading.\9\
---------------------------------------------------------------------------
    \9\ Offshore drilling rigs are classified into two categories: 
mobile offshore drilling units (MODUs) and fixed units. MODUs are 
classified in terms of bottom-supported (shallow water) rigs and 
floating (deepwater) rigs. In bottomsupported units, the rig is in 
contact with the sea floor during drilling, while a floating rig floats 
over the site while it drills, held in position by anchors or equipped 
with thrusters to be dynamically positioned. Both units float when 
moved from one site to another. Bottom-supported units include jack 
ups, tenders, submersibles, and barges. Floating units include semi-
submersibles and drillships. Fixed units (or platform rigs) are 
drilling units that are placed upon a platform or other structures. 
Subsea floating production systems are employed in deeper water. The 
Deepwater Horizon was a floating production system (FPS) or vessel that 
was connected to a subsea pipeline, while a floating, production, 
storage, and offloading vessel (FPSO) processed and stored oil on board 
a vessel prior to being offloaded into shuttle tankers.
---------------------------------------------------------------------------
   Operator's Extra Expense (Control of Well)--The Operator's 
        Extra Expense (OEE) insurance covers the costs of regaining 
        control of an oil well after an underground blowout. OEE covers 
        evacuation expenses and the property of others in the insured's 
        care custody and control. In addition, coverage may include the 
        redrilling of a well after a blowout to the original depth and 
        comparable condition prior to the loss, as well as the legal 
        expenses emanating from an incident such as the sinking of a 
        rig, or an oil spill. With respect to sudden and accidental 
        pollution, the offshore facility operator is also indemnified 
        for third-party bodily injury claims, damage to and loss of 
        third party property, and the cost of clean up and defense 
        expenses as a result of a blowout.
   Excess Liability Insurance coverage--Excess liability 
        insurance covers all legal liabilities that an offshore energy 
        facility operator might encounter. It is purchased as an 
        additional layer of coverage in excess of the OEE policy.
   Business Interruption--Covers damage to platforms, 
        pipelines, tankers, etc. owned by the insured, and contingent 
        business interruption, associated with damage to upstream 
        facilities such as processing plants, trunklines, and 
        refineries owned by third parties. This coverage is usually 
        written in conjunction with offshore physical damage coverage 
        on standardized forms published by Insurance Services Office 
        (ISO) or those that resemble the ISO form.\10\ Because of the 
        standardization in contract language there tends to be more 
        predictability in claim payments and, therefore, reduced 
        potential litigation over contract interpretation. Companies 
        filing a business interruption insurance claim must show that 
        their business operation sustained actual direct physical loss 
        of or damage to the insured property. Without this proof the 
        business interruption claim could be denied. This, in turn, 
        could result in extensive litigation because, as many experts 
        agree, the consequences of an oil spill can be far reaching 
        without any need for the oil itself to actually reach those 
        affected.
---------------------------------------------------------------------------
    \10\ ISO Form CP 0030.
---------------------------------------------------------------------------
   Workers' Compensation/Employers' Liability--Provides 
        coverage for claims arising out of employee injuries.
Oil Spill Financial Responsibility for Offshore Facilities
    As a matter of U.S. environmental policy, Congress has enacted 
numerous environmental laws designed to control oil pollution in the 
U.S. waters. Policy is implemented by federal agencies through 
regulations, rules, administrative orders, memoranda, and programs.\11\ 
Acts of oil pollution are regulated (controlled) by a wide range of 
enforcement methods undertaken by the U.S. Environmental Protection 
Agency (EPA), as well as the U.S. Coast Guard that protects and 
enforces regulations pertaining to U.S. waters. In addition, many 
federal environmental regulations (standards) are delegated to the 
states for their implementation.
---------------------------------------------------------------------------
    \11\ Some of the other water programs that are not addressed in 
this report include the regulation of the containment of wastes, 
covered by the Solid Waster Disposal and CERCLA Act; the Federal Land 
Policy and Management Act; the Surface Mining Control and Reclamation 
Act; the Forest and Rangeland Renewable Resources Planning Act; the 
Coastal Zone Management Act; or the Marine Mammal Protection Act.
---------------------------------------------------------------------------
    The Oil Pollution Act of 1990 (OPA) features a financial 
responsibility requirement and compulsory liability insurance combined 
with strict liability rules that strive to accomplish several things:

   Prevent oil pollution damages from offshore energy 
        facilities;\12\
---------------------------------------------------------------------------
    \12\ It is important to distinguish between a mobile offshore 
drilling unit (MODU), such as the Deepwater Horizon, and a well drilled 
from a MODU. A mobile offshore drilling unit (MODU) is classified as a 
vessel and well drilling from a MODU is classified as a covered 
offshore facility (COF) under the OPA. The Secretary of Transportation 
has authority for vessel oil pollution financial responsibility and the 
U.S. Coast Guard regulates the oil-spill financial responsibility 
program for vessels.
---------------------------------------------------------------------------
   Establish oil spill financial responsibility (OSFR) for 
        lease holders of offshore facilities to demonstrate the 
        capability to meet liability for possible removal costs and 
        damages;
   Establish a standard for measuring natural resource damages 
        (worst case oil spill for an offshore energy facility);
   Establish penalties for not complying with the Act.

    Specifically, the OPA features a compulsory liability insurance 
structure as part of the oil spill financial responsibility (OSFR) 
requirement combined with strict liability rules for oil pollution 
damages associated with offshore energy facilities. The financial 
responsibility and compulsory insurance requirements provide the funds 
to pay for damages, and the strict liability rules allow third-party 
claims to be made directly against the insurer, irrespective of 
negligence. This regulatory structure serves to avoid time-consuming 
and costly litigation and the need for oil spill victims to prove 
negligence as the primary test of liability for oil pollution damage. 
The rational basis for the compulsory insurance/strict liability 
structure is threefold: (1) the loss, however caused, is more than the 
victim can be expected to bear without hardship; (2) the compensatory 
system is not a liability system, as such, but, instead, a means to 
speedily compensate oil pollution victims; and (3) the regulatory 
scheme needs resources from which to pay unlimited compensation.
Insurance Requirements
    Under Section 1016 of the OPA, parties responsible for offshore 
facilities must establish and maintain oil spill financial 
responsibility (OSFR) capability to meet their liabilities for removal 
costs and damages caused by oil discharges from an offshore facility 
and associated pipelines. The OSFR is demonstrated in various ways 
including surety bonds, guarantees, letters of credit and self 
insurance, but the most common method is by means of an insurance 
certificate. The insurance certificate spells out the limit required 
under Section 1016 of OPA. Lease holders of a covered offshore facility 
(COF) must demonstrate a minimum amount of OSFR of $35 million per 
35,000 barrels of ``worst case oil-spill discharge'' up to a maximum of 
$150 for COF located in the OCS and $10 million in state waters. As an 
illustration, a worst case oil-spill discharge volume of 35,000 barrels 
(bbls) requires $35 million in OSFR while a volume of 35,001 bbls 
requires $70 million. The MMS calculates the worst case oil-spill 
discharge volume for a facility. An exemption to the OSFR is provided 
for persons responsible for facilities having a potential worst case 
oil-spill discharge of 1,000 bbls or less.
Policy Issues and Analysis
    In the aftermath of the Deepwater Horizon incident, one major issue 
that Congress may wish to deliberate is the willingness of the 
commercial energy insurance industry to participate in the OSFR program 
given the proposed increase in the limit of liability required under 
OPA to $10 billion and also the required evidence of OSFR to some level 
that is yet to be determined. If insurers were willing to participate, 
another question is whether the new limit of liability is supported by 
the availability of insurance coverage on adequate terms and conditions 
in the global commercial insurance market for offshore energy 
facilities given the insurability of future offshore oil spill hazards; 
and the insurance market's capacity for underwriting ``catastrophe'' or 
``peak'' risks, including oil spill damages.
Future Insurability of Offshore Oil Spill Perils
    With respect to the insurability of future oil spill hazards, it is 
beneficial to point out that in recent decades the frequency and 
magnitude of large-scale natural disasters have been increasing along 
with federal spending to mitigate future losses and compensate disaster 
victims. As a major source of post-disaster recovery financing, 
commercial insurance companies have also been called upon to pay for 
catastrophe-related losses, in some cases beyond their contractual 
policy limitations. For example, after the September 11, 2001 terrorist 
attacks at the World Trade Center, insurers faced pressure to interpret 
policy language liberally with respect to war risk coverage and the 
number of occurrences. After some negotiation between private insurers 
and reinsurers, legislators, and other industry participants, which led 
to the passage of the Terrorism Risk Insurance Act, (a pre-disaster 
risk financing scheme), insurers agreed to pay claims related to the 9/
11 incident. Insurers did not charge a premium to cover the risk. Other 
notable examples include asbestos and Superfund environmental claims 
(continuum triggers) and Hurricane Katrina with the water exclusion 
provision in homeowners' insurance policies where some policies were 
reinterpreted by the courts to expand coverage for water damage where 
coverage was explicitly excluded. Consideration of coverage expansion 
through the reinterpretation of insurance contract language by the 
courts could affect the availability of insurance for offshore energy 
facilities going forward.
Available Liability Insurance Capacity
    The proposed increase in the limit of liability required under OPA 
to $10 billion and also the required evidence of OSFR to something 
similar could have at least three consequences in the energy insurance 
market. First, some insurance market experts have asserted that the 
global commercial insurance capacity for third party liability 
insurance--Operators' Extra Expense (OEE) and Excess Liabilities 
coverage--that is available to meet OSFR requirements is approximately 
in the range of $1.5 billion. Insurers make the point that the strict 
liability with direct access to the insurer serves to further limit 
overall industry capacity. The reason is that the insurer cannot 
control claims payment with contract terms and conditions.
    The point is that the estimated $1.5 billion is likely to be far 
below the OSFR for the new $10 billion liability limits. Moreover, the 
OEE coverage provides a combined single limit for well control, well 
redrilling after the blowout, and sudden and accidental seepage and 
pollution cleanup. Thus, pollution liability and clean-up is subject to 
the apportionment of the combined single limit over respective risks. 
What this means is that operators of COF would have to prioritize the 
single limit: use the insurance proceeds to first hire a well control 
expert to retake control of the well and, if necessary, drill a new 
well, with the balance of the OEE insurance limits used for pollution 
clean-up.
    Second, given basic economic supply-demand principles and the 
fallout from possibly the most damaging oil spill in the nation's 
history, one would expect the supply of insurance coverage for the new 
OSFR to only be available at a high price or premium, if at all. The 
imposition of higher strict liability limits for large-scale oil 
pollution could have the effect of greatly increasing the demand for 
liability insurance protection. This could multiply the challenges 
insurers would have in evaluating the risk exposure, defining 
reasonable limits for the coverage and calculating prices.
    This means the operators may find themselves assuming or retaining 
higher levels of self insurance, which might affect the MMS's offshore 
oil and gas lease bidding and ultimately the royalties earned for the 
U.S. Treasury. The availability of alternative sources of capital for 
spreading financial risk, perhaps through catastrophe bonds or energy 
insurance financial futures and options (i.e., derivative financial 
instruments that securitizes insurance risk, turning an insurance 
policy or reinsurance contract into a security) could provide the added 
capital needed in the insurance industry to cover the higher liability 
and associated OSFR limits.
    Third, if the past is an indication of the future, private 
commercial insurers may be reluctant to commit financial capital in 
underwriting unknown new risks in the post-Deepwater Horizon 
environment until there is greater clarity on the legislative and legal 
climate. Insurers would need to collect the necessary data for 
evaluation of risks associated with certain severity of loss and 
insurability, calculate rate, policy terms and conditions, and set 
appropriate limitations. Conduct of these normal activities, at least 
in the short term, will be affected by the uncertainty of the losses 
associated with the recent Gulf of Mexico oil spill.
    From an insurer's perspective, one issue that may arise is the 
potential for future massive environmental-related (strict liability) 
damages which leads to the question as to whether offshore oil 
pollution will be insurable or insurable only with government support. 
Given the magnitude of losses and uncertainty about future 
profitability in the energy insurance business, a ``hard'' energy 
insurance market -scarcity of coverage and high prices--may emerge 
following the Deepwater Horizon incident. Prior to this event, the 
third party pollution liability market was thought to be in a ``soft'' 
phase where rates were low as a result of oversupply of capacity.\13\
---------------------------------------------------------------------------
    \13\ Willis Limited, ``Energy Market Review: On the Edge of an 
Abyss?'', March 2010, located at: [http://www.willis.com/Media_Room/
Press_Releases_(Browse_All)/2010/
20100324_Willis_Energy_Market_Review_24_March_2010/]
---------------------------------------------------------------------------
    Finally, many insurance market experts would support a more 
efficient pre-disaster risk financing approach to managing and 
financing large-scale oil spill disasters. The OPA's oil financial 
responsibility rule is a pre-disaster risk financing strategy that, in 
the wake of the Deepwater Horizon incident, could come under intense 
pressure because of capital shortages in the insurance industry.
    Again, new insurance and reinsurance companies (additional 
capacity) would be needed. A number of approaches could emerge to 
enhance access to the capital markets through new innovative financial 
instruments that serve as alternatives to traditional reinsurance 
treaties, grouped under the term alternative risk transfer or non-
traditional reinsurance.
    Thank you again for invitation to appear today. I will be pleased 
to address any questions you may have.

    The Chairman. Thank you very much.
    Mr. Meltz.

STATEMENT OF ROBERT MELTZ, LEGISLATIVE ATTORNEY, CONGRESSIONAL 
                        RESEARCH SERVICE

    Mr. Meltz. Thank you, Mr. Chairman and members of the 
committee.
    CRS is pleased to assist the committee today with its 
deliberations on the Gulf oil spill.
    I'll just proceed to the constitutionality of S. 3305 and 
3346, and try to keep the nonlawyers from glazing over.
    I do want to say that my estimation of the 
constitutionality question is pretty close to that of the 
Justice Department's, although I don't know, in detail, what 
their arguments are.
    S. 3305 would raise, from $75 million to $10 billion, in 
the version--last version I saw, the liability limit in OPA for 
damages caused by oil spills from offshore facilities, assuming 
no exceptions are triggered--in which case, the liability caps 
don't apply. The bill sets an effective date of April 15, 2010, 
presumably to cover the Gulf spill. This retroactivity has 
generated a constitutionality debate.
    It is true that the Constitution disfavors retroactivity. 
No less than 5 constitutional provisions, which I'll get to, 
embody the notion that people should be able to know the law 
and to conform their actions accordingly. Nonetheless, each of 
these 5 provisions has its special purposes and its bounds, 
recognizing that the retroactive application of statutes can be 
a desirable and unavoidable means of achieving a legitimate 
public purpose.
    CRS analysis indicates that challenges to S. 3305's 
retroactivity, based on 3 of the 5 retroactivity-oriented 
provisions in the Constitution--the Takings Clause, Substantive 
Due Process, and the Bill of Attainder Clause--have, at best, a 
modest chance of success. Claims based on the other 2--the 
Impairment of Contracts Clause and Ex Post Facto--have, we 
believe, almost no chance of success. But, the legislative 
history of the bill yet to be generated may affect the 
analysis.
    Looking at the 3 provisions with at least a minimal chance 
of success, the taking claim, might be--could be based on 
various things, but likely it would be based on the extra money 
that a responsible party in the Gulf would have to pay out 
under a retroactively raised liability cap. It's--but as is 
often said by the Supreme Court, those who do business in a 
heavily regulated field cannot claim surprise when the 
legislative body fortifies the regulatory scheme. Most 
problematic for a taking claim, is that--what the courts call 
``generalized monetary liability'' cannot be the basis of a 
taking claim. OPA liability for damages, is generalized 
monetary liability.
    Second, substantive due process, as applied to economic 
legislation like S. 3305, imposes only a minimum rational-basis 
test. Making S. 3305 retroactive seems rational enough without 
bringing in the Gulf spill. The bill's increased liability 
would forego perhaps the most important application of that 
increased liability in a long time.
    Third, to violate the Bill of Attainder Clause, a law must 
be punitive, meaning that the law is not rationally describable 
as furthering a nonpunitive purpose. But, Congress might easily 
assert a nonpunitive purpose for S. 3305, say, more fairly 
distributing the costs imposed by an oil spill between spiller 
and injured persons. Statements of those Members of Congress 
who support the bill may be reviewed carefully by a court, in 
this regard, for their intent.
    The other 2 constitutional provisions need not detain us. 
The Impairment of Contracts Clause doesn't apply to the Federal 
Government. The Ex Post Facto Clause only applies to criminal 
punishment.
    All in all, CRS believes that making certain assumptions as 
to S. 3305's legislative history, it is likely to survive 
constitutional challenge. Thus, BP may choose, as Associate 
Attorney General Perrelli said, to litigate S. 3305 under a 
breach of contract theory based on the lease terms.
    S. 3346 increases both the civil and criminal penalty caps 
in the Outer Continental Shelf Lands Act, but--and like S. 
3305, the bill sets a pre-enactment effective date of April 15 
for the increase in the civil penalty cap. CRS is unable to see 
any significant reason why the constitutionality analysis of 
this retroactivity should be any different than for S. 3305, 
nor the result any different.
    As for the increase by S. 3346 in the Outer Continental 
Shelf Lands Act criminal penalty cap, the bill states no 
effective cap. I understand there may have been an earlier 
version of the bill which stated a pre-enactment effective 
date. But, the current version, I understand, states no 
effective date for the criminal--increase in the criminal 
penalty cap. Hence, a court would almost certainly assume that 
the effective date is the date of enactment. A date-of-
enactment effective date also avoids any ex post facto 
infirmity.
    Thank you very much, and I'll be glad to take questions.
    [The prepared statement of Mr. Meltz follows:]

    Statement of Robert Meltz, Legislative Attorney, Congressional 
                            Research Service
    Mr. Chairman and Members of the Committee: the Congressional 
Research Service is pleased to assist the Committee with its 
deliberations as to the appropriate congressional response to the 
Deepwater Horizon oil spill in the Gulf of Mexico. I am an attorney 
with the American Law Division of CRS, where I specialize in 
environmental and Fifth Amendment takings law. This statement (1) gives 
a brief overview of the liability scheme in the Oil Pollution Act of 
1990 (OPA); (2) discusses the constitutionality of S. 3305, which would 
retroactively raise the OPA liability cap for damages caused by oil 
spills from offshore facilities; and (3) discusses the 
constitutionality of S. 3346, which would raise the civil penalty cap 
under the Outer Continental Shelf Lands Act (OCSLA) retroactively and 
raise the criminal penalty cap therein apparently as of bill enactment.
Brief Overview of OPA Liability
    OPA Title I serves to consolidate existing federal laws governing 
oil spill liability, expand their coverage, increase liability, 
strengthen federal response authority, and establish a fund to ensure 
that claims are paid up to a stated amount. 33 U.S.C. Sec. Sec.  2701-
2720. In its central provision, Title I states that each ``responsible 
party'' for a vessel or facility from which oil is discharged into or 
upon U.S. navigable waters, adjoining shorelines, or the exclusive 
economic zone is liable for the resulting ``removal costs'' and 
``damages.'' OPA Sec.  1002(a). Removal costs are covered regardless of 
whether incurred by the United States, a State, an Indian tribe, or a 
private person. OPA Sec.  1002(b)(1). Damages include those for natural 
resource injury (recoverable only by governments); real or personal 
property injury and resulting economic losses (recoverable only by the 
owner or lessee thereof); loss of subsistence use; governmental loss of 
revenues, as from net loss of taxes and royalties; loss of profits or 
impairment of earnings capacity (recoverable by any claimant, not just 
those who own oil-contaminated property); and the net costs of 
providing increased or additional public services during or after 
removal activities. OPA Sec.  1002(b)(2).
    The OPA liability scheme is a stringent one, modeled as it is after 
Clean Water Act section 311 and Comprehensive Environmental Response, 
Compensation, and Liability Act (Superfund Act) section 107. As with 
those statutes, OPA liability is strict, and joint and several, OPA 
Sec.  1001(17) (incorporating the Clean Water Act liability standard), 
and is subject to but a handful of defenses. OPA Sec.  1003(a)-(c). On 
the other hand, softening the liability scheme, the Act preserves the 
Clean Water Act liability caps in most cases (though raising them) and 
has been held to preclude punitive damages imposed under federal law. 
OPA Sec.  1004(a); South Port Marine, LLC v. Gulf Oil Limited 
Partnership, 234 F.3d 58 (1st Cir. 2000). Of special interest in 
connection with the recent Gulf spill, the responsible party at an 
offshore facility (such as the British Petroleum wellhead) is subject 
to unlimited liability for removal costs, but is granted a cap of $75 
million on 2 the above-listed categories of ``damages.'' OPA Sec.  
1004(a)(3). This cap has remained unchanged since OPA's enactment 
twenty years ago.
    Two other things should be said about this $75 million cap (and 
others in OPA). First, it applies per incident and per responsible 
party. It is not certain at this point that the Deepwater Horizon spill 
involves only one responsible party and only one incident, so there is 
a possibility the $75 million will be multiplied. Second, the liability 
cap (and others in OPA) is easily eliminated; if any of five exceptions 
apply, the cap is forfeited and liability for damages is without limit. 
This would be the case, for example, if the Gulf spill was found to be 
proximately caused by a responsible party's violation of an applicable 
federal safety, construction, or operating regulation. OPA Sec.  
1004(c)(1)(B).
    Because oil from the Gulf spill may result in removal costs and 
damages in foreign nations, it should be mentioned as well that OPA 
contains many provisions providing for foreign claimants. For example, 
OPA allows claims against responsible parties by foreign governments 
for natural resource damages, at least where the Secretary of State has 
certified that the foreign government provides a comparable remedy for 
U.S. claimants. OPA Sec. Sec.  1006(a)(4), 1007(a)(1)(B).
    Finally, OPA liabilities for removal costs and damages should be 
kept in context, as they do not exhaust the potential liabilities of 
parties connected to the Deepwater Horizon spill. For example, Clean 
Water Act section 311, 33 U.S.C. Sec.  1251, imposes civil and criminal 
penalties for oil spills, and the Outer Continental Shelf Lands Act 
(OCSLA), 43 U.S.C. Sec.  1350(b)-(c), contains civil and criminal 
penalties for, among other things, violation of OCS lease terms or the 
Act and its regulations. In addition, the OCSLA extends the laws of the 
United States, and the law of the ``adjacent state'' where not 
inconsistent with federal law, to the OCS. 43 U.S.C. Sec.  1333(a). 
Thus, for example, there could conceivably be civil or criminal 
violations of the Endangered Species Act, Marine Mammal Protection Act, 
or Migratory Bird Treaty Act in connection with the Gulf spill. The 
Solid Waste Disposal Act, 42 U.S.C. Sec.  6901 et seq., also may apply. 
See OPA Sec.  1018(a)(2). Finally, OPA specifies that state law 
``imposing any additional liability or requirements with respect to the 
discharge of oil or other pollution by oil within such State'' is not 
preempted. OPA Sec.  1018(a)(1); see also Sec.  1018(c).
Constitutionality of S. 3305's Retroactive Increase in the Offshore-
        Facility Liability Cap for Damages
    S. 3305, titled the Big Oil Bailout Prevention Liability Act of 
2010, would raise the liability limit in OPA section 1004(a)(3) for 
damages caused by oil spills from offshore facilities. It does so by 
simply striking the $75 million figure in that provision and replacing 
it with $10 billion, thus preserving the exceptions that, if 
applicable, eliminate the cap. More to the point, S. 3305 states that 
it would take effect April 15, 2010, so it is plainly retroactive. It 
may be noted, however, that even in the absence of a pre-enactment 
effective date, S. 3305 could be said to have some degree of 
retroactivity. Even if a responsible party's payments over the current 
$75 million cap all go toward damages occurring after the bill is 
enacted, those damages stem from a pre-enactment incident and thus 
satisfy a common definition of retroactivity. And even were it limited 
to postenactment spills, S. 3305 could be said to be retroactive in 
some measure if those spills occur at locations under pre-enactment 
leases.
    The retroactive nature of the cap increase invites examination of 
five constitutional provisions. As discussed below, claims based on 
three of these--the Takings Clause, Substantive Due Process, and Bill 
of Attainder Clause--appear to have at best a modest chance of success, 
while claims under two others--the Impairment of Contracts Clause and 
Ex Post Facto Clause--seem to have almost no chance of success. It must 
be stressed, however, that how the legislative history of an enacted 
law characterizes the predecessor bill--especially whether a broad and 
legitimate public purpose for the bill is convincingly set forth--may 
affect the analysis, especially with regard to the Bill of Attainder 
Clause. That legislative history, of course, does not yet exist. 
Further, prediction of how courts will rule when applying the broadly 
worded tests of constitutional law is always uncertain. Finally, based 
on the limited prospects of constitutional claims, the retroactive 
increase is more likely to be litigated, if at all, as a possible 
breach of British Petroleum's lease contract, an issue this testimony 
does not reach.
    Introduction--The Constitution disfavors retroactivity. At least 
five constitutional provisions, noted above, embody the notion that 
``individuals should have an opportunity to know what the law is and to 
conform their conduct accordingly; settled expectations should not 
lightly be disrupted.'' Landgraf v. USI Film Products, 511 U.S. 244, 
265 (1994). Nonetheless, each of these five provisions has its special 
concerns and is of ``limited scope,'' id. at 267, recognizing that 
within reasonable bounds, the retroactive application of statutes can 
be an acceptable and unavoidable means of achieving a legitimate public 
purpose. As the Supreme Court has said----

    Retroactivity provisions often serve entirely benign and legitimate 
purposes, whether to respond to emergencies, to correct mistakes, to 
prevent circumvention of a new statute in the interval immediately 
preceding its passage, or simply to give comprehensive effect to a new 
law Congress considers salutary.

    Id. at 267-268 (emphases added). Accordingly, several Supreme Court 
decisions in the past halfcentury to address retroactive federal 
statutes have found them constitutionally inoffensive.

          1. Takings Clause.--A taking claim, to succeed, requires that 
        the interest alleged to be taken is recognized as ``property'' 
        by the Takings Clause. Moreover, how the analysis proceeds may 
        depend on the type of property. Based on a limited 
        understanding of the facts surrounding the Deepwater Horizon 
        situation, CRS supposes that at least three interests may be 
        implicated.

    First, there is an interest in the law remaining unchanged. In the 
substantive due process context, this interest has long been held not 
to constitute a vested property interest: ``No person has a vested 
interest in any rule of law, entitling him to insist that it shall 
remain unchanged for his benefit.'' New York Central RR Co. v. White, 
243 U.S. 188, 198 (1917). More recently, takings decisions have adopted 
the same proposition. See, e.g., Branch v. United States, 69 F.3d 1571, 
1577-1578 (Fed. Cir. 1995). Thus, the bare fact that S. 3305 would 
change the law existing when an offshore lease was entered into is not, 
of itself, a basis for a taking claim.
    Second, OPA responsible parties have an interest in any money paid 
for damages in excess of the current OPA liability cap. Money is held 
to be property under the Takings Clause. Philips v. Washington Legal 
Found., 524 U.S. 156 (1998). Thus, an OPA responsible party would be 
able to argue, under the canonical Penn Central test for regulatory 
takings, 438 U.S. 104, 124 (1978), that S. 3305 effects a taking of its 
disbursements to cover damages beyond the existing liability cap. Under 
the Penn Central test, used by the Supreme Court for takings challenges 
to retroactive monetary liability, a court must examine (1) the 
economic impact of the government action, (2) the degree to which it 
interferes with reasonable, distinct investment-backed expectations, 
and (3) the ``character'' of the government action.
    Each of these Penn Central factors may pose an obstacle for a 
taking claim based on the retroactively increased monetary liability in 
S. 3305. As for the economic impact factor, the Penn Central test 
requires that the impact be very substantial, if not severe, before 
this factor weighs in favor of a taking. In one case, the Supreme Court 
held that a retroactively imposed monetary liability amounting to 46% 
of shareholder equity, combined with the ``proportionality'' of that 
impact with plaintiff's conduct, was insufficient to count the economic 
impact factor as favoring a taking. Concrete Pipe & Products, Inc. v. 
Construction Laborers Pension Trust, 508 U.S. 602, 645 (1993). Thus, 
based on reports as to the net worth or market capitalization of 
British Petroleum, the potential additional liability under S. 3305--
that is, the difference between $75 million and $10 billion--is likely 
to fall short of the Penn Central threshold, though it may not fall 
short as to other, smaller responsible parties (in this or future oil 
spills from offshore facilities).
    The interference with reasonable investment-backed expectations 
factor often involves courts in a review of the legal landscape at the 
time the property interest alleged to be taken was acquired, with a 
view toward gauging the reasonableness of the buyer's expectations of 
economically exploiting that property interest. Oil and gas operations 
on the Outer Continental Shelf have been heavily regulated under OCSLA 
since the 1950s. Moreover, by 2008 when British Petroleum entered into 
the lease at issue here, federal oil spill liability limits had been 
increased, some twice and some by multiples approaching the 133-fold 
increase (from $75 million to $10 billion) S. 3305 would effect. As the 
Supreme Court said in addressing a taking challenge to retroactive 
monetary liability, ``[t]hose who do business in the regulated field 
cannot object if the regulatory scheme is buttressed by subsequent 
amendments to achieve the legislative end.'' Concrete Pipe, 508 U.S. at 
645, quoting FHA v. The Darlington, Inc., 358 U.S. 84, 91 (1958). The 
Court noted further--

          Because legislation readjusting rights and burdens is not 
        unlawful solely because it upsets otherwise settled 
        expectations ... even though the effect of the legislation is 
        to impose a new duty or liability based on past acts, Concrete 
        Pipe's reliance on [the statute in question's] original 
        limitation of contingent liability to 30% of net worth is 
        misplaced, there being no reasonable basis to expect that the 
        legislative ceiling would never be lifted.

    508 U.S. at 646 (emphasis added; footnotes and quotation marks 
deleted). Thus, a company entering into an OCS lease in recent decades 
faces an uphill climb in arguing that S. 3305's increase in the 
liability cap interferes with its reasonable expectations.
    As much a barrier as the first two Penn Central factors may be to a 
taking challenge to S. 3305, it is the third factor, the character of 
the government action, that most likely will prove fatal. Broadly 
speaking, courts are less inclined to find a taking when the challenged 
government conduct merely adjusts the benefits and burdens of economic 
life, as does S. 3305, than when it physically invades property. More 
pointedly here, courts have adopted the ``generalized monetary 
liability'' principle, which demands that to be a taking, the 
government conduct must target specific property. The principle was 
first put forward by the concurring justice and four dissenters in 
Eastern Enterprises v. Apfel, 524 U.S. 498 (1998)--that is, by a 
majority of the Supreme Court. Thus, a taking claim may arise when 
government appropriates money from a specifically identified fund of 
money (such as interest on an interpleader fund). But a statute 
imposing a generalized monetary liability--e.g., that A pay B out of 
unspecified funds--is not a taking. All lower courts that have 
addressed this point since Eastern Enterprises have endorsed the 
generalized monetary liability rule. Commonwealth Edison Co. v. United 
States, 271 F.3d 1327, 1338-40 (Fed. Cir. 2001) (en banc); Swisher 
International, Inc. v. Schafer, 550 F.3d 1046 (11th Cir. 2008), cert. 
denied, 130 S. Ct. 71 (2009); Empress Casino Joliet Corp. v. 
Giannoulias, 896 N.E.2d 277 (Ill. 2008), cert. denied, 129 S. Ct. 2764 
(2009). In light of the principle, it is unlikely that S. 3305's 
increase in the OPA liability cap for offshore facilities--an increase 
in generalized monetary liability--would be regarded as a taking.
    Eastern Enterprises should be factually distinguished, however. 
There, a four-justice plurality of the Supreme Court did indeed hold a 
federal statute's retroactivity to effect a taking, explaining that the 
statute imposed severe retroactive liability (attaching new liabilities 
to events that occurred decades earlier) on a limited class of parties 
that could not have anticipated the liability, and that the extent of 
liability was substantially disproportionate to the company's 
experience in the affected field. These factual elements found by the 
plurality to be constitutionally offensive, at least in the aggregate, 
seem a far cry from the retroactivity of S. 3305. As applied to the 
Deepwater Horizon spill, S. 3305 needs to reach back only a short time 
(to April 20, 2010). Moreover, an increase in the liability limit could 
have been anticipated given Congress' already noted history of 
liability cap increases in the oil spill area. Finally, the extent of 
liability imposed by S. 3305 is ``proportionate to the company's 
experience,'' since the added liability would be only for damages 
stemming from a company's own oil spills. Of course, the precedent 
value of Eastern Enterprises is further undercut by the fact that only 
a minority of the justices supported the takings analysis of the 
statute's retroactivity.
    Note that both before and after Eastern Enterprises, every court to 
address the matter has rejected takings (and substantive due process) 
challenges to the Superfund Act, whose heightening of preexisting 
liability standards, extending to pre-enactment releases of hazardous 
substances, offers some parallel to that of S. 3305. See, e.g., United 
States v. Alcan Aluminum Corp., 315 F.3d 179, 189-190 (2d Cir. 2003) 
(collecting cases).
    As a third interest that could be asserted in a taking claim, 
British Petroleum might allege a right under its OCS lease not to be 
subject to laws enacted after the lease was signed. Leases are in the 
nature of contracts, and contract rights generally are held to be 
property under the Takings Clause. See, e.g., Lynch v. United States, 
292 U.S. 571, 579 (1934). That being so, British Petroleum might argue 
that S. 3305 is essentially an abrogation--a taking--by Congress of a 
contract/lease term to which the United States had agreed. Such an 
argument would focus on the clause in the company's lease stating that 
``The lease is issued subject to [the Outer Continental Shelf Lands 
Act, existing regulations thereunder, and certain future regulations 
thereunder] and all other applicable statutes and regulations.'' The 
company might contend that ``all other applicable statutes'' refers 
solely to statutes existing when the company entered into its lease--
not those, such as S. 3305, enacted later on. There is solid Supreme 
Court support for this interpretation: in 2000, the Court interpreted 
the same ``catchall'' language in another Outer Continental Shelf lease 
to ``include only statutes and regulations already existing at the time 
of the contract ..'' Mobil Oil Exploration & Producing Southeast, Inc. 
v. United States, 530 U.S. 604, 616 (2000). The argument would conclude 
that ``all other applicable statutes'' embraces the current $75 million 
cap in OPA, which S. 3305 abrogates.
    Important here, however, is the consistent preference of the U.S. 
Court of Federal Claims and its appellate court, the Federal Circuit, 
for addressing disputes revolving around written contracts with the 
United States under a breach of contract, rather than a takings, 
theory. See, e.g., Hughes Communications Galaxy, Inc. v. United States, 
271 F.3d 1060, 1070 (Fed. Cir. 2001) (``[t]akings claims rarely arise 
under government contracts, because the government acts in its 
commercial or proprietary capacity . . . ''); Castle v. United States, 
301 F.3d 1328, 1342 (Fed. Cir. 2002) (nothing is taken in the 
constitutional sense when the plaintiff, as is typical, retains the 
full range of breach of contract remedies). At least two challenges to 
congressional enactments as anticipatory breaches of pre-enactment 
OCSLA leases are in the reported case law. Mobil Oil, supra; Amber 
Resources Co. v. United States, 538 F.3d 1358 (Fed. Cir. 2008). As 
noted at the outset, this testimony does not reach any breach of 
contract issues raised by S. 3305.

          2. Substantive due process.--The Due Process Clause of the 
        Fifth Amendment has long been read to demand not only 
        procedural due process, but substantive due process as well. 
        Substantive due process in the realm of economic legislation--
        the realm of S. 3305--imposes only a very lax, highly 
        deferential standard: that there exists a plausible rational 
        basis which the legislative body could have had in mind linking 
        the means chosen and the legitimate public purpose sought to be 
        achieved. In a leading retroactivity/substantive due process 
        decision, the Court explained----

          To be sure, insofar as the [Act being challenged] requires 
        compensation for disabilities bred during employment terminated 
        before the date of enactment, the Act has some retrospective 
        effect.  . . .  But our cases are clear that legislation 
        readjusting rights and burdens is not unlawful solely because 
        it upsets otherwise settled expectations . . .  This is true 
        even though the effect of the legislation is to impose a new 
        duty or liability based on past acts.

    Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15-16 (1976) 
(emphasis added). The Court did caution that ``[t]he retrospective 
aspects of legislation, as well as the prospective aspects, must meet 
the test of due process, and the justifications for the latter may not 
suffice for the former.'' Id. at 17. But that burden, said the Court in 
a later decision, ``is met simply by showing that the retroactive 
application of the legislation is itself justified by a rational 
legislative purpose.'' Pension Benefit Guaranty Corp. v. R.A. Gray & 
Co., 467 U.S. 717, 730 (1984).
    It would seem that the retroactive application of the increased 
liability limit in S. 3305 back to the April 20 spill satisfies this 
test. Congress reasonably could suppose that for the foreseeable 
future, most of the exceedance of the current OPA liability cap would 
derive from this one huge spill. To exclude that spill from the bill's 
cap increase would compromise substantially the (assumed) public 
purpose of S. 3305 to lay a greater portion of economic damages per oil 
spill at the feet of the responsible party. Similarly, not applying S. 
3305 to other existing leases (that is, confining it to leases entered 
into post-enactment) would greatly undercut the effectuation of that 
public purpose.
    As noted in the takings discussion above, all substantive due 
process challenges to the retroactive liability scheme in the Superfund 
Act have been unsuccessful.
    In sum, the sounder argument is that the retroactive application of 
the $10 billion liability cap in S. 3305 does not offend substantive 
due process.

          3. Bill of Attainder Clause.--The Constitution's Bill of 
        Attainder Clause bars enactments that effectively declare the 
        guilt of, and impose punishment on, an identifiable individual 
        or entity, without a judicial trial. See Nixon v. Administrator 
        of General Services, 433 U.S. 425, 468 (1977). Such enactments 
        are seen to usurp the judicial function, thereby offending 
        separation of powers and due process. As pertinent here, the 
        argument might be that S. 3305, by reaching back to April 15, 
        2010, departs from the usual prospective-only application of 
        enactments solely to bring in one particular oil spill: the 
        Deepwater Horizon incident. This narrow-focus retroactivity, 
        the argument might conclude, betrays an underlying intent to 
        punish parties responsible for that incident. Then, too, the 
        punishments that may be found constitutionally offensive are 
        ``not limited solely to retribution for past events, but may 
        involve deprivations inflicted to deter future misconduct.'' 
        Selective Service System v. Minnesota Public Interest Research 
        Group, 468 U.S. 841, 851-852 (1984). Thus, one can imagine an 
        argument that S. 3305 would punish existing offshore facilities 
        generally.

    In Nixon, the Court indicated that to offend the Bill of Attainder 
Clause, the law must (1) single out a specific person or class and (2) 
be punitive. The Court then listed several indicators that a federal 
law is punitive. The law may impose punishment traditionally judged to 
be prohibited by the Clause. The law may not be rationally describable 
as furthering a nonpunitive legislative purpose. And the legislative 
history may evince a congressional intent to punish. A statute need not 
satisfy all these factors; rather, a court weighs them together.
    Arguably, S. 3305 would meet the first, specificity requirement. 
One indication: the identity of the individual entity (British 
Petroleum) or class (responsible parties for offshore facilities 
generally) was easily ascertainable when the legislation was passed. We 
need not dwell on the specificity requirement, however, because it is 
likely--assuming Congress does not ``evince a congressional intent to 
punish'' in passing S. 3305--that a court would find the bill not to 
satisfy the second, punitive requirement. First, monetary liability for 
the injuries one causes is not a type of punishment historically 
prohibited by the Bill of Attainder Clause. Second, S. 3305 can 
reasonably be said to further a nonpunitive legislative purpose: 
attaching liability to the entity that caused the oil spill injury in 
lieu of the taxpayer. In language plainly relevant to the Deepwater 
Horizon spill, a court has noted: ``[E]ven if the [law in question] 
singles out an individual on the basis of irreversible past conduct, if 
it furthers a nonpunitive legislative purpose, it is not a bill of 
attainder.'' Seariver Maritime Financial Holdings, Inc. v. Mineta, 309 
F.3d 662, 674 (9th Cir. 2002). Thus, as long as the committee reports 
and floor debates on S. 3305 do not suggest punitive motive, the bill 
is unlikely to be deemed a bill of attainder. It would seem, as 
suggested above, that there are obvious candidates for nonpunitive 
purposes that Congress might put forward in the legislative history of 
S. 3305.

          4. Impairment of Contracts Clause.--The Supreme Court has 
        held that the Impairment of Contracts Clause in the 
        Constitution, by its terms applicable only to the states, does 
        not apply to the federal government indirectly through the 
        Fifth Amendment Due Process Clause. Pension Benefit Guaranty 
        Corp., 467 U.S. at 733. Therefore, this clause is no impediment 
        to S. 3305.
          5. Ex Post Facto Clause.--This clause prohibits Congress from 
        passing laws attaching new negative legal consequences to pre-
        enactment conduct. Since the early years of the nation, the 
        Supreme Court has construed the clause to apply only to penal 
        legislation. Landgraf v. USI Film Products, 511 U.S. 244, 266 
        n.19 (1994), citing Calder v. Bull, 3 Dall. 386, 390-391 
        (1798). By contrast, the OPA liability to which the $75 million 
        cap and S. 3305 apply is civil, not criminal, liability. Thus, 
        the Ex Post Facto Clause poses no obstacle to S. 3305.
Constitutionality of S. 3346's Retroactive Increase in OCSLA's Civil 
        Penalty Cap, and Increase in OCSLA's Criminal Penalty Cap
    While S. 3305 addresses compensatory liability, S. 3346 deals with 
penalties. S. 3346, titled the Outer Continental Shelf Lands Act 
Amendments Act of 2010, would increase both the civil and criminal 
penalty caps under the OCSLA. 43 U.S.C. Sec. Sec.  1350(b) (civil), 
1350(c) (criminal). Under the bill, a person (including corporations) 
not complying with, among other things, any OCSLA lease term or 
regulation would, after the allowed period for corrective action, be 
liable for a civil penalty up to $75,000 per day, rather than the 
current $20,000 per day. Noncompliance posing a serious threat of harm 
must result in a civil penalty up to $150,000 for each day of violation 
without regard to the corrective period, rather than the current 
discretionary civil penalty, which appears to adopt the $20,000 per day 
cap. These civil-penalty amendments take effect preenactment, S. 3346 
specifies, on April 15, 2010, just as S. 3305 would. Finally, under the 
bill a person who knowingly and willfully commits an act falling into 
any of four categories must, upon conviction, be punished by a criminal 
fine of not more than $10 million, rather than the current $100,000. 
The bill states no effective date for this criminal-penalty amendment.
    As for the increase in OCSLA's civil penalty caps effective April 
15, it would seem that the constitutionality analysis of retroactivity 
generally tracks that above for a retroactive increase in OPA's 
compensatory liability caps--and with the same caveats. That is, a 
taking claim is still likely to founder because there is no property 
right to have the law remain unchanged, because the additional money 
paid in fines is a generalized monetary liability not recognized under 
emerging case law as a basis for takings claims, and because any lease/
contract right to be immune from civil penalties above the statutory 
cap in effect when the lease was entered into more likely would base a 
possible breach of contract than a possible taking.
    As for the increased criminal penalty cap, the Ex Post Facto Clause 
calls for added analysis. Because S. 3346 states no effective date for 
its increase in this cap, the normal presumption is that the increase 
would take effect as of date of enactment. ``[A]bsent a clear direction 
by Congress to the contrary, a law takes effect on the date of its 
enactment.'' Gozlon-Peretz v. United States, 498 U.S. 395, 404 (1991). 
Nothing in the bill appears to meet this high ``clear direction . to 
the contrary'' standard, so it seems very likely that the normal 
presumption applies.
    A date-of-enactment effective date for the proposed criminal-
penalty increase eliminates the ex post facto infirmity that a pre-
enactment date such as April 15 would fall victim to, should S. 3346 be 
applied to conduct between April 15 and date of enactment. (Indeed, the 
avoidance of this constitutional problem is another reason a court 
likely would adopt a date-of-enactment effective date.) As long as the 
conduct to which the increased criminal penalty attaches is conduct 
occurring after the date of enactment, there is no ex post facto issue. 
Note in this regard that a statute increasing a criminal penalty cap 
for conduct beginning before its enactment date, but which continued 
beyond that date, would likely not be held ex post facto as to the 
postenactment-date conduct. See, e.g., United States v. Julian, 427 
F.3d 471, 482 (7th Cir. 2005). Thus, if hypothetically British 
Petroleum knowingly and willfully began to violate a lease term or 
OCSLA regulation before S. 3346's enactment, that likely would not 
preclude punishment up to the S. 3346-increased penalty cap for the 
continuation of that violation after enactment.

    The Chairman. OK, thank you all for your testimony.
    Let me ask, starting with Mr. Ramseur, the--it would seem 
to me that if we follow the recommendation of the Department of 
Justice and eliminate any liability cap, that that brings into 
question, What is the purpose in setting up this--or in 
continuing with this Oil Spill Liability Trust Fund? I mean, if 
you're going to say that companies that engage in these 
drilling activities are liable for any and all damages, and 
you're going to also put in requirements for them to maintain 
adequate insurance or solvency to meet whatever damages might 
result, why would we continue with an Oil Spill Liability Trust 
Fund?
    Mr. Ramseur. That's a good question. As you know, currently 
the trust fund serves as a backstop, if you will. If the 
liability is indeed capped in any particular situation, the 
excess amount of damages could be paid by the trust fund. But, 
under a scenario where liability caps do not exist, the trust 
fund would have different purposes. Its primary purpose, of 
providing immediate funds to the Federal agencies, like the 
Coast Guard or EPA, to respond to an oil spill, would still be 
necessary.
    The Chairman. But, as I understand it, that would be a 
short-term need that--at least in the case that we're dealing 
with, I believe BP has said they are going to reimburse the 
government for those costs, and although the Oil Spill Trust 
Fund is--Liability Trust Fund--is advancing funds to meet the 
needs right now, BP is committing to go ahead and reimburse for 
that. Am I right about that?
    Mr. Ramseur. I have seen similar statements in the press, 
but, as others have indicated today, and is allowed under the 
statute, the responsible party, assuming that their liability 
cap remains intact--and there are various reason that can go 
away, as has been discussed today--down the road, the 
responsible party could submit a claim to the trust fund for 
moneys paid out in excess of their liability limit. That--I'm 
not sure, offhand, what that timeframe is. I can look into that 
further.
    The Chairman. OK. It does seem to me, just thinking about 
it, that either we could sort of put our emphasis on 
eliminating limits on liability for companies that engage in 
these activities and have much less, if any, reliance on a Oil 
Spill Liability Trust Fund--that would be one regime. Another 
regime would be to substantially increase the amount of money 
in the Oil Spill Liability Trust Fund and expect, in the 
future, that individual companies would have somewhat limited 
liability--would continue to have somewhat limited liability, 
but the trust fund would have been funded at an--adequate 
levels that meet any needs that occurred. Is that a fair way to 
think about it?
    Mr. Ramseur. Yes. That's the current situation. One 
potential policy matter Congress may consider, if you remove 
the liability caps--if an oil spill were to occur in the 
future, the current situation serves as a backstop to help 
people receive awards in a very short amount of time without 
going through litigation; and if you remove that backstop, then 
I'm not sure what would occur, but----
    The Chairman. But, then we would be looking at the trust 
fund as a short-term--as a way to speed up the ability of folks 
to get compensated for damages done. So that if--in case 
someone wanted to litigate a liability--but, we still might 
adopt the recommendation of the Department of Justice, and go 
ahead and try to put in place a legal regime that ensured that 
the trust fund would be reimbursed, at some stage.
    Mr. Ramseur. That's certainly one avenue to take.
    The Chairman. OK.
    Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman. Isn't one reason 
why we need the Oil Spill Liability Trust Fund is that we don't 
always know who's responsible for the spill, and so, you want 
somebody cleaning up the spill even before you determine 
liability?
    Mr. Ramseur. Absolutely, that's one of the primary purposes 
of the fund, to have this access to immediate funds for a 
Federal response.
    Senator Cantwell. We've had that unfortunate situation in 
Puget Sound, so that's why I bring that up.
    Mr. Meltz, if Congress tries retroactivity or a higher 
liability limit to the Deepwater Horizon spill, would you say 
that it's nearly certain its constitutionality would be 
challenged in court?
    Mr. Meltz. I would imagine that, given the broadness of 
many constitutional principles, and given that different judges 
of different ideological stripes take different views of the 
breadth of constitutional protections, it might very well be 
worth their while to consider a challenge.
    Senator Cantwell. If that's the case, that it is this legal 
gray area, wouldn't it take years to resolve through the court 
system?
    Mr. Meltz. It certainly could, yes. I think--I mean, 
initially you'd have a--you know a trial court decision, I 
think, saying it's constitutional. Then it would go through 
appeal, and possibly to the Supreme Court. So, it's a little 
hard to predict how many years that full spectrum of procedures 
could take.
    Senator Cantwell. If we look at the Exxon Valdez, it took 
20, so that's an idea. So----
    Thank you, Mr. Chairman.
    The Chairman. All right. Thank you, all 3, for your 
testimony. It's been helpful to us. We appreciate it.
    We'll conclude the hearing with that.
    [Whereupon, at 12:22 p.m., the hearing was adjourned.]
                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

     Responses of Craig Bennett to Questions From Senator Murkowski
    Question 1. To what extent does the Oil Spill Liability Trust Fund 
serve as an insurance policy for companies operating in the OCS, so 
that while each one may or may not be personally capable of paying for 
all the costs of a huge spill, the entire industry has funded an 
insurance policy to protect victims and taxpayers?
    Answer. The Oil Spill Liability Trust Fund (OSLTF) is not an 
insurance policy for companies operating in the outer continental shelf 
(OCS). The OSLTF, established in the Treasury, is available to pay the 
expenses of the Federal response to oil pollution under the Federal 
Water Pollution Control Act (FWPCA)(33 USC Sec. 1321) and to compensate 
third parties for claims for oil removal costs and certain damages 
caused by oil pollution that responsible parties do not pay. These 
OSLTF uses are generally recovered from responsible parties liable 
under Oil Pollution Act (OPA) when there is a discharge of oil to 
navigable waters, adjoining shorelines, or the exclusive economic zone 
(EEZ).
    Question 2. Can you describe the claims process for spill victims 
and for responsible parties in terms of whether the existing system 
provides compensatory relief in an adequately fast manner?
    Answer. A new, independent claims process is being created with the 
mandate to be fairer, faster, and more transparent in paying damage 
claims by individuals and businesses. To assure independence, Kenneth 
Feinberg, who previously administered the September 11th Victim 
Compensation Fund, will serve as the independent claims administrator.
    Question 3. Has BP taken any action that indicates it may be 
reluctant or slow to pay any claims for compensatory damages related to 
this spill?
    Answer. The Coast Guard has received complaints about BP's claims 
process, and we are working to address those complaints. On June 8, for 
example, Admiral Allen wrote to BP, ``[w]e need complete, ongoing 
transparency into BP's claims process including detailed information on 
how claims are being evaluated, how payment amounts are being 
calculated, and how quickly claims are being processed.''
    Question 4. Has BP made any claims against the Oil Spill Liability 
Trust Fund?
    Answer. BP has not made any claims against the Oil Spill Liability 
Trust Fund (OSLTF) in the context of this spill.
    Question 5. If the responsible party were to make claims against 
the fund and the fund were depleted by a major spill, would it be 
useful to have a mechanism whereby the fund could take a loan from the 
Treasury to temporarily give the fund what it needs?
    Answer. We would want to engage more substantively on this topic 
before making a recommendation.
    Question 6. How much experience does your office at National 
Pollution Funds Center have in dealing with claims from major spills 
that affect so many lives?
    Answer. National Pollution Fund Center (NPFC) has 19 years of 
experience in adjudicating claims, but this case is unprecedented in 
its size and scope.
     Responses of Craig Bennett to Questions From Senator Sessions
    Question 1. Are the current levels of financial responsibility 
sufficient in a worst case scenario situation for drilling on the OCS?
    Answer. The Gulf Oil Spill necessitates a reassessment of the 
current levels of financial responsibility sufficient to address a 
worst case scenario. For this reason, the Administration has proposed 
working with Congress to appropriately adjust the limitations of 
liability for responsible parties.
    Question 2. In your opinion, do the current liability caps need to 
be increased?
    Answer. Yes. The Administration supports a significant increase in 
liability for offshore oil and gas developers whose actions pollute our 
oceans and coastlines and threaten our wildlife and other natural 
resources. The Administration has proposed removing caps on liability 
under the Oil Pollution Act for oil companies that engage in offshore 
drilling, and looks forward to working with Congress to increase 
various limits and caps as appropriate.
    Question 3. What are the Constitutional or breach of contract 
issues in holding a responsible party retroactively liable? Is there 
procedure to allow retroactive legislation?
    Answer. The Coast Guard defers to the Department of Justice with 
regard to any and all constitutional and breach-of-contract issues 
surrounding any legislative proposal to make a party liable 
retroactively or alter the terms of liability retroactively.
    Question 4. In your opinion, are there factors that should be 
considered when assessing strict liability limits? For example: past 
safety issues/violations, water depths, pressure depths, or natural gas 
vs. oil production.
    Answer. Per our attached limit of liability report, we consider the 
costs of spills to be the critical factor in determining the adequacy 
of Oil Pollution Act liability limits.
                                 ______
                                 
    Responses of David J. Hayes to Questions From Senator Murkowski
    Question 1. Secretary Salazar testified that the number for the 
strict liability cap should be determined in such a way as to not be 
arbitrary, but to ensure that the OCS not be only accessible to ``the 
BP's of the world.'' What are some factors in determining what the 
strict liability cap, above cleanup costs and lawsuits, should be?
    Answer. The Administration is convinced that the current liability 
framework is simply inadequate to deal with the potentially 
catastrophic consequences of oil spills.
    As noted at this hearing and subsequent others, the Administration 
has supported significant increases in liability for offshore 
developers whose actions pollute our oceans and coastlines and threaten 
our wildlife and other natural resources, including removing caps on 
liability for oil companies engaged in offshore drilling. Companies 
participating in such risky activities should have every incentive to 
maximize safety and must bear full responsibility for all of the 
damages their actions impose on individuals, businesses, and the 
environment. The liability caps for other activities covered by OPA, 
which have not been updated in some time, should be reviewed and 
increased as appropriate to more fully reflect the risks associated 
with those activities.
    In testimony for this hearing, the Department of Justice raised 
several factors to be considered in developing appropriate caps and 
transition rules for some of the activities that are covered by OPA. 
These included:

   ensuring that the liability rules provide the appropriate 
        incentive for companies working in this field to fully account 
        for the damages their actions may cause and to mitigate the 
        risks of a catastrophic event;
   establishing a legal framework that provides confidence that 
        an individual or business harmed by an oil spill will be able 
        to seek and receive fair compensation, and that the trustees 
        charged with protecting our precious natural resources can 
        secure adequate restoration and other compensation for any harm 
        done to those resources;
   considering ways in which new liability rules may affect the 
        structure of the offshore oil industry and the number of market 
        participants; and
   analyzing how changes in the caps will interact with the 
        current liability structure under OPA.

    Question 2. Is there an energy forecast and/or economic analysis 
being conducted by the Interior Department in terms of what the impact 
would be on Gulf of Mexico production and exploration under the 
legislation proposed to raise the strict liability caps under OPA `90?
    Answer. The Administration is looking at a number of factors, 
including how changes in liability will impact industry structure and 
markets.
    Question 3. How much of the current exploration and production in 
the outer Continental Shelf is currently undertaken by ``independent'' 
companies?
    Answer. The relevant regulations do not require this information 
when a company qualifies and the agency does not maintain information 
in this fashion. However, relying on institutional knowledge from the 
Region, oil production in 2009 was approximately 570 million barrels 
with major companies accounting for about 65 percent (e.g., BP, Shell, 
and Chevron); independents and smaller companies responsible for 
approximately 25 percent; and National Oil Companies responsible for 
the remaining 10 percent.
    For natural gas production in the Gulf during that same period, 
total production was approximately 2.5 trillion cubic feet, with the 
majors accounting for approximately 31 percent; independents and 
smaller companies responsible for 60 percent; and National Oil 
Companies for the remaining 9 percent of production. Exploration is a 
necessary precursor to production, and many successful exploration 
wells are later converted to development wells due to the high cost of 
drilling and completing these wells.
    The GOMR website, http://www.gomr.boemre.gov/homepg/offshore/
offshore.html, has information available to the public on exploration 
plans, well permits, wells drilling, and development plans.
     Responses of David J. Hayes to Questions From Senator Sessions
    Question 1. Are the current levels of financial responsibility 
sufficient in a worst case scenario situation for drilling on the OCS?
    Answer. For facilities located wholly or partially in the OCS the 
applicable amount of oil spill financial responsibility to be assured 
ranges from $35 million, for worst case oil spill discharge volumes of 
over 1,000 to up to 35,000 barrels, to $150 million for worst case oil 
spill discharge volumes of over 105,000 barrels. Responsible parties 
must provide financial responsibility certification by surety bond, 
insurance, self-insurance or guarantee. Coverage must be continuously 
maintained by the responsible party for all its leases, permits, and 
rights of use and easements.
    While the United States has one of the most comprehensive offshore 
oil and gas regulatory regimes in the world, we recognize there are 
many areas that would benefit from careful review and improvement. We 
are awaiting and will carefully review the recommendations of the 
special Presidential commission that has been established once the 
commission has completed its review. However, the Deepwater Horizon oil 
spill response effort already has required the expenditure of funds far 
in excess of these amounts. The Administration supports increasing the 
required amount of financial responsibility for offshore facilities.
    Question 2. In your opinion, do the current liability caps need to 
be increased?
    Answer. Yes. The Administration has stated that the current 
liability caps are inadequate to deal with the potentially catastrophic 
consequences of oil spills. Removing the arbitrary limitation on 
liability for offshore development will create incentives for industry 
to comply with new standards and seek out and implement best practices 
for safety. The Administration strongly supports the repeal of the 
limit on damages liability for offshore drilling.
    Question 3. What are the Constitutional or breach of contract 
issues in holding a responsible party retroactively liable? Is there 
procedure to allow retroactive legislation?
    Answer. The Department defers to the Department of Justice for 
information related to the legal issues raised in this question.
    Question 4. In your opinion, are there factors that should be 
considered when assessing strict liability limits? For example: past 
safety issues/violations, water depths, pressure depths, or natural gas 
vs. oil production.
    Answer. As noted above, the current liability caps are inadequate 
to deal with the potentially catastrophic consequences of oil spills.
    The Administration supports removing arbitrary limitation on 
liability for offshore development, which will create incentives for 
industry to comply with new standards and seek out and implement best 
practices for safety. Companies participating in risky activities 
should have every incentive to maximize safety and must bear full 
responsibility for any damages their actions impose on individuals, 
businesses, and the environment. The liability caps for other 
activities covered by OPA, which have not been updated in some time, 
should be reviewed and increased as appropriate to more fully reflect 
the risks associated with those activities.
    In testimony for this hearing, the Department of Justice raised 
several factors to be considered in developing appropriate caps and 
transition rules for some of the activities that are covered by OPA. 
These included:

   ensuring that the liability rules provide the appropriate 
        incentive for companies working in this field to fully account 
        for the damages their actions may cause and to mitigate the 
        risks of a catastrophic event;
   establishing a legal framework that provides confidence that 
        an individual or business harmed by an oil spill will be able 
        to seek and receive fair compensation, and that the trustees 
        charged with protecting our precious natural resources can 
        secure adequate restoration and other compensation for any harm 
        done to those resources;
   considering ways in which new liability rules may affect the 
        structure of the offshore oil industry and the number of market 
        participants; and
   analyzing how changes in the caps will interact with the 
        current liability structure under OPA.
                                 ______
                                 
     Responses of Rawle O. King to Questions From Senator Murkowski
    Question 1. Your testimony states that many insurance market 
experts would support a more efficient pre-disaster risk financing 
approach to managing and financing large-scale oil spill disasters. Is 
this feedback you've received directly from energy insurers or is it a 
general sense you've detected?
    Answer. Since the 1990s, financial markets have increasingly been 
used as a major tool of the transfer and mitigation of a variety of 
global risk, including oil spill risks. A pre-disaster risk financing 
approach, rather than a post-disaster risk financing regime, could be 
supported by insurance market experts on behalf of operators of 
offshore energy facilities given: (1) the similarity of the risks 
between a catastrophic oil spill (a man-made disaster) and natural 
catastrophic risks (such as a major earthquake striking a major West 
Coast city or a Category 4 hurricane striking Miami), since both events 
cause widespread destruction of homes, businesses, and public 
infrastructure in the impacted geographic areas; (2) the limitations in 
the commercial insurance market capacity to meet future demand for 
offshore energy insurance in the aftermath of the Deepwater Horizon oil 
spill incident; and (3) the enormous up-front self-insurance capital 
that operators of offshore energy facilities will likely be required to 
show as part of their oil spill financial responsibility (OSFR) 
requirements.
    Oil spill risk could be considered a ``peak'' risk similar to 
earthquake or hurricane risk in that it cannot be currently covered 
adequately by traditional insurance and reinsurance. An oil spill can 
be classified as such for several reasons: (1) they are low 
probability, high severity events; (2) individual exposures are 
correlated; (3) there are a limited number of individual risk exposures 
(infrequent major oil spills) to allow the use of statistical 
predictions of future losses; (4) actions of operators of offshore 
energy facilities could affect the probability that a loss will occur; 
(5) losses are not predictable, preventing insurers from setting 
premiums properly; and (6) risks cannot be pooled over a short period 
of time so that one year's premiums covers one year's losses. 
Traditional insurance principles suggest that the risk of a major oil 
spill would meet these six criteria and, therefore, might be considered 
uninsurable, and alternative risk transfer or financing strategies 
could be deemed appropriate.
    Question 2. What would a more efficient pre-disaster risk financing 
approach look like? For instance, would it be consistent with risk 
financing practices for laws to consider different risks that may exist 
between shallow water rigs dealing purely with dry natural gas as 
opposed to a deepwater oil rig?
    Answer. Going forward, investment bankers, financial engineers, 
insurers and reinsurers could create reinsurance sidecars and 
catastrophe bonds for operators of offshore energy facility to manage 
and finance their oil spill risk exposure. The challenge for Congress 
might be to help the private sector address several issues: (1) the 
apparent incompatibility between the ``long-tail'' nature of oil spill 
liabilities (defined as claims that are filed long after the accident 
or event occurred) and potential investors' apparent desire for short-
term certainty with respect to the investment return; (2) the fact that 
insurance-linked securities (ILS) have been more expensive than 
traditional reinsurance and can take longer to issue then buying 
reinsurance; (3) insufficient investor interest; and (4) the lack of 
liquidity and need for a secondary market in which these instruments 
could be traded.
    The Deepwater Horizon oil spill incident is likely to precipitate a 
shortage of financial capacity in the offshore energy insurance market. 
The financial industry could respond to this situation by issuing 
innovative products designed to spread the excess oil spill risk more 
widely among international investors (risk securitization). The 
development of innovative ILS and other financial instruments are being 
used to increase risk transfer, diversify risk in capital markets and 
increase the pool of capital available for insurance.
    Congress may wish to consider the feasibility of catastrophe bonds 
and reinsurance ``sidecars,'' a type of contingent risk structured 
financing, for spreading third-party liability risks among capital 
market investors. Insurers have used catastrophe bonds to manage their 
exposure to natural disasters by transferring potential losses to 
investment funds. Investors typically receive a high rate of interest 
but risk losing part of the principal if a catastrophe occurs. There 
have been only a handful of companies outside the insurance and 
reinsurance sectors that have sponsored ILS. The precedent for an ILS 
in the oil spill risk financing market is a catastrophe bond (Avalon 
Re) brought to market in 2005 by Goldman Sachs on behalf of Bermuda-
based casualty insurer Oil Casualty Insurance, Ltd. (OCIL).\1\ OCIL is 
an excess liability insurance company formed by energy companies in 
1986 at a time when the commercial markets had ceased to provide 
adequate insurance coverage for liability risk. OCIL sold three $135 
million tranches of catastrophe bonds via Cayman Islands-based vehicle 
Avalon Re in 2005. The OCIL catastrophe bond, however, was considered 
too expensive and investors did not fare well because the trigger 
amounts were considered too low. On September 9, 2009, OCIL bought back 
$7 million of its catastrophe bond at $850 per $1,000 principal amount, 
equivalent to 85 cents on the dollar, to repurchase part of Avalon Re 
Ltd's $135 million Class B variable rate notes due June 6, 2008.
---------------------------------------------------------------------------
    \1\ Bermuda Insurance Update, ``First Casualty Bond Launched,'' 
2005, vol. 4, located at [http://www.ocil.bm/ocil/documentcenter/
Media%20Articles/BDA%20Ins.%202005.pdf].
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    The solution could be the development of a ``parametric'' trigger. 
A parametric trigger would be popular with investors because it 
dictates an insurance payment when a predetermined level of catastrophe 
occurs. For example, an insurance payment may be required if there is a 
specific amount of oil spilled. The parametric trigger would work for 
investors because of the long-tail nature of the oil spill risks and 
their desire not to wait years for the oil spill clean-up to be 
completed and costs finalized before they reclaim their principal. A 
parametric trigger would be transparent and involve probabilities that 
are relatively easy to calculate, rather than an actual loss trigger, 
which in the case of oil spill could take years to determine.
    Figure 1* illustrates a typical reinsurance sidecar transaction 
that could be created to increase the pool of capital available for 
insurance. The sidecar allows a ceding insurer or reinsurer to transfer 
oil spill risks to a newly licensed reinsurance company that assumes 
risk, collects premiums, and pays claims losses to the ceding insurer 
or reinsurer via a reinsurance agreement.
---------------------------------------------------------------------------
    * All figures and tables have been retained in committee files.
---------------------------------------------------------------------------
    Reinsurers typically create sidecars by transferring policies and 
premiums to a special purpose reinsurer (SPR) that uses them as 
collateral for bonds, loans, and equity. This allows the sidecar to 
diversify (or spread) individual reinsurers' risk among the global 
reinsurance marketplace. Proceeds from the security offering, as well 
as premium and investment income, are transferred to a collateral 
trust, which invests the proceeds and disburses funds to the ceding 
insurer or reinsurer on behalf of the sidecar to pay claims. Funds are 
also disbursed to the holding company, via the sidecar, to pay interest 
on debt and dividends, if any, to the shareholders. Sidecar payouts are 
determined via the reinsurance agreement contract between the ceding 
company and the sidecar, and triggered by the loss experience of the 
ceding company.
    Hedge funds, private equity investors and other institutional 
investors provide the bulk of the funds via equity and debt financing 
to capitalize the alternative risk transfer instruments. Thus, capital 
market investors were able to get into the lucrative post-Katrina 
reinsurance business without having any underwriting loss experience 
from the devastating loss event. In these cases, investors agreed to 
invest the funds for 2 to 3 years and typically earned 20% to 30% or 
more return on their investment. At the end of the time period, the 
reinsurer receives a commission, investors get interest and dividend 
payments from the collateral trust, when the sidecar expires (assuming 
that all of the capital has not been used to meet claims.)
    Another pre-disaster financing option to increase risk transfer 
would be the creation of an ``association-type'' captive that would be 
owned by a trade, industry, or service group for the benefit of its 
members or a ``group-type'' captive that is jointly owned by a number 
of oil companies to provide a vehicle to meet a common insurance need. 
Major oil companies typically organize captives in countries that have 
a favorable tax regime with more relaxed controls. The tax advantage 
allows the oil company to have a larger percentage of the premium for 
claims payments. The association or group captive could assume the oil 
spill risk, purchase reinsurance to spread the risk to another global 
insuring entity, or transfer the risk to the financial markets through 
innovative risk transfer or financing instruments that are traded 
either on an electronic exchange or over the counter.
    A final point about insurance arrangements is worthy of mention. 
The major oil companies that self insure their cleanup costs typically 
establish a captive insurance company offshore to insure their 
international oil and gas assets and risks. These captives are usually 
located in a special purpose vehicle (SPV), which prevents the parent 
owner from having to make public the firm's assets or liabilities. Such 
is the case for Jupiter Insurance LTD, BP's captive insurance company.
    Question 3. On Page 4 of your testimony you list ``Business 
Interruption'' as one of the relevant types of coverage available for 
offshore facilities. Is this coverage readily available and commonly 
purchased by offshore operators?
    Answer. Operators of offshore energy facilities maintain various 
types of marine insurance including business interruption (BI) 
insurance coverage. BI indemnifies the insured for lost net income that 
would have been earned had the damage not occurred, as well as for 
refunding fixed expenses incurred during the period of indemnity. 
Companies filing a business interruption insurance claim must show that 
their business operation sustained actual direct physical loss of or 
damage to the insured property. Without this proof the BI claim could 
be denied because, as many experts agree, the consequences of an oil 
spill can be far reaching without any need for the oil itself to 
actually reach those affected. Contingent business insurance coverage 
provides payments for damages based upon loss of income due to damage 
to upstream facilities such as processing plants, trunklines, and 
refineries owned by third parties but upon which the insured's income 
depended. This coverage is usually written in conjunction with offshore 
physical damage coverage on standardized forms published by Insurance 
Services Office, Inc. or those that resemble the ISO form. BI coverage 
is thought to be readily available to offshore operators through mutual 
insurance associations (P&I Clubs).
    Question 4. Which companies (or how many companies) would still 
meet the financial qualification to operate in the Gulf of Mexico if 
the strict liability cap for economic damages was raised to $10 billion 
and no other changes were made to the financial assurance formula?
    Answer. This question is beyond the scope of the CRS panel's 
expertise. However, a May 2010 report by Wood Mackenzie Ltd., entitled, 
Deepwater Horizon Tragedy: Near-Term and Long-Term Implications in 
Deepwater Gulf of Mexico, indicated that ``the increase in the cap on 
oil companies' liability for oil spill to $10 billion would not deter 
global supermajors and national oil companies from operating in the 
Gulf of Mexico, but many U.S. independents and their investors may not 
be able or willing to expose themselves to such an amount.'' For 
example, BP has indicated in its U.S. Securities and Exchange 
Commission Annual Report on Form 20-F, 2009, that ``the group generally 
restricts its purchase of insurance to situations where this is 
required for legal or contractual reasons. This is because external 
insurance is not considered an economic means of financing losses for 
the group. Losses are therefore borne as they arise, rather than being 
spread over time through insurance premiums with attendant transaction 
costs. This position is reviewed periodically'' (p. 40).
    What is less obvious, as your question suggests, is what would 
happen if the liability cap was raised from $75 million to $10 billion 
without changes to the financial assurance (insurance) formula. 
Operators of offshore energy facilities, whether drilling in deepwater 
or on the shelf, would likely continue to meet their oil spill 
financial responsibility (OSFR) requirements through self-insurance. 
The corporate entity itself, however, could become financially liable 
for up to $10 billion in potential losses and face uncertain 
reputational risk. In other words, it is possible that oil and gas 
exploration and production firms could continue to drill but the 
investors and owners of the firm would be exposed to a higher level of 
reputational risk or possible insolvency in the event losses exceed the 
firm's net worth.
    Question 5. How many of these companies would be American?
    Answer. This question is beyond the scope of the CRS panel's 
expertise.
    Question 6. In your written testimony you highlight three 
insurance-related risks to raising the liability limit for damages to 
$10 billion. Is it correct that your testimony suggests that there's 
some possibility that the rest of the American companies who have been 
producing safely in the Gulf of Mexico could be squeezed out because of 
resulting changes to the insurance structure under OPA 90?
    Answer. The key issue is not the amended limits of liability for 
offshore facilities under OPA 90 from $75 million to $10 billion, but 
whether commercial insurance companies would be able to issue insurance 
certificates to provide operators of offshore energy facilities in 
deepwater or shallow water with the evidence of oil spill financial 
responsibility (OSFR) under OPA. The point is that the energy insurance 
market has limited financial capacity for pollution. We do not yet know 
the insurance structure under OPA 90 that would eventually correspond 
to a new $10 billion liability cap or the extent to which oil 
companies, both super majors and small independents, would be able to 
provide alternative security.
    Question 7. Are any insurers already adjusting premiums to address 
increased risk as a result of the Deepwater Horizon incident?
    Answer. According to a June 3, 2010, Reuters article, global 
reinsurers have begun to raise prices for offshore energy-related 
insurance premiums by 50% following insurance losses from the Deepwater 
Horizon oil spill in the Gulf of Mexico that are expected to be between 
$1.4 billion and $3.5 billion.\2\ Actual insured losses, and therefore 
probable premium increases, would have been higher had BP, the operator 
of the Deepwater Horizon oil rig, purchased liability insurance instead 
of self-insuring its risk through its captive insurance program.
---------------------------------------------------------------------------
    \2\ Reuters, June, 3, 2010, ``Offshore Premia Soar as BP Spill Hits 
Reinsurers,' June 3, 2010, located at: [http://www.hindustantimes.com/
StoryPage/Print/552722.aspx].
---------------------------------------------------------------------------
    Moody's Investors Services reported that the Deepwater Horizon 
incident will have a ``meaningful'' impact on the market for offshore 
energy-related insurance coverage, with preliminary reports indicating 
a 15% to 25% increase in property coverage for rigs operating in 
shallow waters and up to 50% higher for deepwater rigs. Pricing for 
offshore energy liability insurance is likely to trend higher as 
insurers and reinsurers reassess their overall risk exposure from 
drilling in deep waters in the Gulf of Mexico.
    By self insuring the exposure from the Deepwater Horizon incident, 
the exposure of the commercial reinsurance industry to the event, along 
with the need for insurers to raise rates, was significantly reduced, 
according to Moody's Investors Service.\3\ Like most major oil 
companies, BP self insures its oil spill cleanup and containment costs 
and business interruption exposures through its wholly owned subsidiary 
captive insurer Jupiter Insurance Ltd.\4\ Captive insurance companies 
are insurance companies set up specifically to finance risk (i.e., 
retained losses) from a parent group or its customers. Jupiter's 
business is 95% fronted through AIRCO, a unit of American International 
Group because under British tax law the company would not be able to 
write business in the U.S. where BP is active. Jupiter does not 
purchase any reinsurance protection, but does have a significant 
capital base, which was about $6 billion at the end of 2009.\5\ The 
captive limits its loss exposure to $700 million per event 
(approximately 13% of capital and surplus at December 2009) and, at the 
time of the Deepwater Horizon incident, had established loss reserves 
to meet its policy limit of $700 million. BP received payment of $700 
million for losses from the sinking of the Deepwater Horizon offshore 
oil drilling rig. According to A. M. Best Company, Jupiter made a 
profit of $740 million in 2009 and profits are expected to approach $1 
billion in 2010.
---------------------------------------------------------------------------
    \3\ Moody's Investors Service, ``Moody's Deepwater Horizon Losses 
Hit Insurers and Reinsurers,'' June 3, 2010, located at: [http://
www.alacrastore.com/research/moodys-global-credit-research-
Moody_s_Deepwater_Horizon_Losses_Hit_Insurers_and_Reinsurers-
PR_200382_820466266]
    \4\ On June, 8, 2010, Jupiter's long-term counterparty credit and 
insurer financial strength rating from Standard and Poor's was 
downgraded, along with the BP itself due to the operational challenges 
the firm faces in cleaning up the oil spill in the Gulf of Mexico.
    \5\ Michael Bradford, Business Insurance, ``BP Can Tap Captive for 
$700 million in Loss of Rig.'' May 10, 2010, located at [http://
www.businessinsurance.com/article/20100509/ISSUE01/305099971] .
---------------------------------------------------------------------------
    Question 8. On page 7 of your testimony you stated that ``The 
availability of alternative sources of speedy financial risk, perhaps 
through catastrophe bonds or energy insurance financial futures and 
options (meaning derivative financial instruments that securitize 
insurance risk, turning an insurance policy or reinsurance contract 
into a security) could provide the added capital needed in the 
insurance industry to cover the higher liability.'' These are all 
highly complex transactions; can you define what you mean by 
characterizing them as ``speedy?'' Are these currently practical 
alternatives for energy companies?
    Answer. The term ``speedy'' was a typographic error. The correct 
word was ``spreading.'' (See the answer for question # 2.)
    Question 9. Can a member of the panel describe the way in which an 
exploration rig like the Deepwater Horizon obtains financing?
    Answer. This question is beyond the scope of the CRS panel's 
expertise.
    Question 10. Can a member of the panel describe the way in which a 
small exploration rig with very low exploration risks obtains financing 
relative to a much larger operation?
    Answer. This question is beyond the scope of the CRS panel's 
expertise.
    Question 11. Can the panel describe the current state of the energy 
industry insurance market in the wake of the Deepwater Horizon 
incident, specifically whether sufficient insurance products even exist 
to cover an individual operator's potential liability?
    Answer. With capacity in the offshore energy insurance market now 
at about $1.5 billion, there has been uncertainty about offshore 
facility operator's ability to obtain insurance certificates to 
demonstrate evidence of financial responsibility under Section 1061 of 
the OPA. Underlying this issue is the unique low-frequency, high-
severity nature of oil spill catastrophe risk exposures and the 
difficulties insurers and reinsurers have in raising capital to insure 
such risks.
    Table 1* shows ocean marine global premiums by class for first-
party physical damage coverage. Importantly, these figures do not 
include third-party liability coverage for bodily injury and property 
damages and clean up and containment of oil spills. These data are not 
readily available because the main market players are based principally 
in London and Bermuda and beyond the reach of state insurance 
regulators. Based on conversations with offshore energy insurance 
brokers, the estimated total offshore energy property insurance 
premiums is in the range of $3 to $3.5 billion annually. There is an 
additional $500 million in third-party liability capacity. Most 
operators of offshore energy facilities (e.g., MODU) carry about $300 
to $500 million of operator extra expense insurance.
---------------------------------------------------------------------------
    * Table has been retained in committee files.
---------------------------------------------------------------------------
    In 2009, the offshore energy insurance market experienced surplus 
capacity due to two main factors. First, mobile offshore drilling units 
(MODU) rig utilization and, hence, demand for insurance declined 
sharply in all oil and gas exploration and production areas of the 
world, but particularly in the Gulf of Mexico because of heightened 
hurricane activity in 2004, 2005, 2006, and 2008. According to the 
International Union of Marine Insurance (IUMI), the worldwide rig 
capacity utilization rate stood at 75% in 2009, down from 88% in 
2008.\6\ The Gulf of Mexico rig utilization rate was 49%, down from 75% 
in 2008. Second, the demand for ocean marine insurance has been 
adversely affected by the global economic downturn, the decline in 
world trade, and the drop in market price for oil and natural gas.
---------------------------------------------------------------------------
    \6\ International Union of Marine Insurance, ``PressRelease: Sharp 
Drop in Offshore Rig Operation in 2009,'' located at: [http://
www.iumi.com/index.cfm?id=7198].
---------------------------------------------------------------------------
    Despite efforts to improve safety, risk management and loss 
prevention across the offshore energy business, natural catastrophe 
risk remains ever present. The 2010 hurricane season is forecast by the 
National Oceanic and Atmosphere Administration (NOAA) to be intense 
with 14 to 23 named storms, including 8 to 10 hurricanes, of which 3 to 
7 could be major hurricanes in the Atlantic Basin.\7\
---------------------------------------------------------------------------
    \7\ National Oceanic and Atmosphere Administration, ``NOAA Expects 
Busy Atlantic Hurricane Season,'' May 27, 2010, located at: [http://
www.noaanews.noaa.gov/stories2010/20100527_hurricaneoutlook.html].
---------------------------------------------------------------------------
    Question 12. If insurance is becoming more expensive and less 
available, and if a $10 billion increase in strict liability for 
economic damages were to be levied, can the panel speak to whether 
independent oil and gas companies operating in the Gulf of Mexico are 
likely to be able to provide any alternative method of financial 
responsibility such as bonds and lines of credit?
    Answer. This question as it relates specifically to independent oil 
and gas companies operating in the Gulf of Mexico is beyond the scope 
of the CRS panel's expertise. However, under Section 1016 of the Oil 
Pollution Act of 1990, oil and gas exploration and production (E&P) 
leases issued by the U.S. Minerals Management Services for operation in 
the Gulf of Mexico must establish and maintain oil spill financial 
responsibility (OSFR) capability to meet their liabilities for the 
removal costs and damages caused by oil discharges from an offshore 
facility and associated pipelines.\8\ Besides commercial insurance, 
operators of offshore energy facilities could demonstrate their OSFR in 
various ways including surety bonds, guarantees, letters of credit and 
self insurance, but the most common method for most operators of both 
deepwater and shallow water drilling is by means of an insurance 
certificate.
---------------------------------------------------------------------------
    \8\ This requirement applies to the Outer Continental Shelf (OCS), 
state waters, and certain coastal inland waters.
---------------------------------------------------------------------------
    It would appear that the cost of insurance is not a major factor 
for major oil companies, because they will likely continue to self 
insure their offshore oil and gas exploration risks through wholly 
owned subsidiary captive insurance companies. Captives are usually 
organized offshore and outside the reach of government taxing 
authorities and, therefore, typically pay no taxes on profits and the 
premiums that the parent pays are tax deductible. In the case of BP, 
the parent has tapped Jupiter for a discount note (means borrowing 
against the assets and invest the proceeds) worth about 98% of its $6.6 
billion in total assets.\9\
---------------------------------------------------------------------------
    \9\ The Wall Street Journal, ``BP Oil Spill Sparks Debate on 
Captive Insurers,'' June 9, 2010, located at: [http://blogs.wsj.com/
source/2010/06/09/bp-oil-spill-sparks-debate-on-captive-insurers]
---------------------------------------------------------------------------
     Responses of Rawle O. King to Questions From Senator Sessions
    Question 13. Insurance for offshore oil and gas production is 
purchased to meet the oil spill financial responsibility requirements 
and to protect a company from the costs associated with a blow-out 
including-cost to redrill, pollution liability for third-party claims 
and cleanup, and physical loss of platforms, rigs, and equipment. Who 
are the main purchasers of this type of liability insurance for 
offshore drilling? The small to midsize independent or the majors?
    Answer. For legal or contractual reasons, all operators of offshore 
energy facilities purchase some type of marine liability insurance that 
covers the costs associated with a blow-out including the cost to 
redrill, pollution liability for third-party claims and cleanup, and 
physical loss of platforms, rigs, and equipment. Under Section 1016 of 
Oil Pollution Act of 1990 (OPA), oil and gas exploration and production 
(E&P) leases issued by the U.S. Minerals Management Services for 
operation in the Gulf of Mexico must establish and maintain oil spill 
financial responsibility (OSFR) capability to meet their liabilities 
for removal costs and damages caused by oil discharges from an offshore 
facility and associated pipelines.\10\ OPA established a $75 million 
cap on economic damage above which a responsible party is not liable 
for paying for the costs of an oil spill unless the damages were the 
result of acts of gross negligence or willful misconduct.\11\ A 
Certificate of Financial Responsibility (COFR) is issued to vessel 
operators who have demonstrated their ability to pay for cleanup and 
damage cost up to the liability limits required by the OPA.\12\ OSFR is 
demonstrated in various ways including surety bonds, guarantees, 
letters of credit and self insurance, but the most common method is by 
means of an insurance certificate.
---------------------------------------------------------------------------
    \10\ This requirement applies to the Outer Continental Shelf (OCS), 
state waters, and certain coastal inland waters.
    \11\ Lease holders of a covered offshore facility (COF) must 
demonstrate a minimum amount of OSFR of $35 million per 35,000 barrels 
of ``worst case oil-spill discharge'' up to a maximum of $150 million 
for COF located in the OCS and $10 million in state waters. As an 
illustration, a worst case oil-spill discharge volume of 35,000 barrels 
(bbls) requires $35 million in OSFR while a volume of 35,001 bbls 
requires $70 million. The MMS calculates the worst case oil-spill 
discharge volume for a facility. An exemption to the OSFR is provided 
for persons responsible for facilities having a potential worst case 
oil-spill discharge of 1,000 bbls or less
    \12\ Federal Register, ``U.S. Minerals Management Service, Oil 
Spill Financial Responsibility for Offshore Facilities,'' vol. 63, No. 
154, Aug. 11, 1998, p. 42699.
---------------------------------------------------------------------------
    I am not able to say with specificity whether small to midsize 
independent or major oil companies purchase commercial insurance, as 
this information is considered proprietary. However, it is generally 
known that the major oil companies typically self insure their offshore 
energy risks through their wholly owned subsidiary captive insurance 
and that they indemnify losses through retained corporate earnings. 
Major oil companies with large operating revenue relative to small to 
midsize independent oil companies tend to self insure because it does 
not make economic sense to pay the kind of premiums they would be 
charged to cover themselves in what is fundamentally a risky business. 
Small and midsize firms usually purchase coverage through a mutual 
insurance company like Oil Casualty Insurance Ltd.
    Question 14. What is the amount of insurance that is available from 
the commercial market for third party pollution liability for operators 
and non-operators before and after the Deepwater Horizon incident?
    Answer. While capacity in the offshore energy insurance market 
before the Deepwater Horizon incident was between $500 million and $1.5 
billion worldwide, there is now uncertainty about offshore facility 
operators' ability to obtain insurance certificates to demonstrate 
evidence of financial responsibility under Section 1061 of the OPA. 
Underlying this issue is the unique low-frequency, high-severity nature 
of oil spill catastrophe risk exposures and the difficulties insurers 
and reinsurers have in raising capital to insure such risks.
    Congress may wish to consider the feasibility of alternatives to 
traditional insurance and reinsurance products designed to spread 
catastrophic risk among capital market investors. The development of 
innovative catastrophe-linked securities and other alternative risk 
transfer (ART) instruments that transfer income received in the form of 
insurance premiums to the capital market for their assumption of risk 
is one proposed alternative to traditional offshore energy insurance 
and reinsurance.
    Question 15. Will insurance be available for offshore production if 
the liability caps were increased to $10 billion? What would be the 
impacts on the industry of such increase? Would this only impact very 
small companies or would larger, American-based international companies 
be impacted as well?
    Answer. We do not have the information on how much it currently 
costs small independent oil companies to insure against oil spills. The 
offshore energy insurance market is highly specialized. The limits of 
insurance needed are so high--in excess of $1 billion in some cases--
that no single insurer provides them alone; therefore, it is a common 
practice for oil and gas operators to obtain insurance on a 
subscription basis, whereby several insurers each agree to accept a 
share of the exposure. These subscription transactions are handled by 
insurance brokers who negotiate with underwriters recognized as 
specialists in the energy field.
    The issue is not the liability limit, but whether insurers would 
offer insurance at the cap or whether they even have enough capacity. 
Currently, the capacity limit is apparently somewhere between $500 
million and $1.5 billion worldwide.
    Question 16. Are insurers already adjusting premiums to address 
increased risk as a result of the Horizon incident?
    Answer. According to a June 3, 2010, Reuters article, global 
reinsurers have begun to raise prices for offshore energy-related 
insurance premiums by 50% following insurance losses from the Deepwater 
Horizon oil spill in the Gulf of Mexico that are expected to be between 
$1.4 billion and $3.5 billion.\13\ Actual insured losses, and therefore 
probable premium increases, would have been higher had BP, the operator 
of the Deepwater Horizon oil rig, purchased liability insurance instead 
of self-insuring its risk through its captive insurance program.
---------------------------------------------------------------------------
    \13\ Reuters, June, 3, 2010, ``Offshore Premia Soar as BP Spill 
Hits Reinsurers,'', June 3, 2010, located at: [http://
www.hindustantimes.com/StoryPage/Print/552722.aspx].
---------------------------------------------------------------------------
    Moody's Investors Services reported that the Deepwater Horizon 
incident will have a ``meaningful'' impact on the market for offshore 
energy-related insurance coverage, with preliminary reports indicating 
a 15% to 25% increase in property coverage for rigs operating in 
shallow waters and up to 50% higher for deepwater rigs. Pricing for 
offshore energy liability insurance is likely to trend higher as 
insurers and reinsurers reassess their overall risk exposure from 
drilling in deep waters in the Gulf of Mexico.
    By BP self insuring the exposure from the Deepwater Horizon 
incident, the exposure of the commercial reinsurance industry to the 
event, along with the need for insurers to raise rates, was 
significantly reduced, according to Moody's Investors Service. Like 
most major oil companies, BP self insures its oil spill cleanup and 
containment costs and business interruption exposures through its 
wholly owned subsidiary captive insurer Jupiter Insurance Ltd. 
Jupiter's business is 95% fronted through AIRCO, a unit of American 
International Group because under British tax law the company would not 
be able to write business in the U.S. where BP is active. Jupiter does 
not purchase any reinsurance protection, but does have a significant 
capital base, which was about $6 billion at the end of 2009.\14\ The 
captive limits its loss exposure to $700 million per event 
(approximately 13% of capital and surplus at December 2009) and, at the 
time of the Deepwater Horizon incident, had established loss reserves 
to meet its policy limit of $700 million. BP received payment of $700 
million for losses from the sinking of the Deepwater Horizon offshore 
oil drilling rig. According to A. M. Best Company, Jupiter made a 
profit of $740 million in 2009 and profits are expected to approach $1 
billion in 2010.
---------------------------------------------------------------------------
    \14\ Michael Bradford, Business Insurance, ``BP Can Tap Captive for 
$700 million in Loss of Rig,'' May 10, 2010, located at [http://
www.businessinsurance.com/article/20100509/ISSUE01/305099971].
---------------------------------------------------------------------------
    Question 17. In your opinion, are there factors that should be 
considered when assessing strict liability limits? For example: past 
safety issues/violations, water depths, pressure depths, or natural gas 
vs. oil production.
    Answer. This question is beyond the scope of the CRS panel's 
expertise.
                                 ______
                                 
          Responses of Robert Metz to Questions From Murkowski
    On June 7, 2010, the Committee asked CRS to respond to questions 
pertaining to CRS testimony at a Committee hearing on May 25, 2010. The 
questions were relayed to CRS in three memoranda, delivered separately 
to Rawle King, Robert Meltz, and Jonathan Ramseur. Some of the 
questions in these memoranda were duplicative; others were unique. This 
memorandum contains responses to four of the questions. My colleagues, 
Rawle King and Jonathan Ramseur, are submitting separate memoranda to 
respond to the remaining questions. Your questions, some slightly 
paraphrased, are indicated below in boldface.
    Question 1. Jonathan Ramseur's testimony notes that under Oil 
Pollution Act section 1001(14), an ``incident'' means ``any occurrence 
or series of occurrences having the same origin, involving one or more 
vessels, facilities, or any combination thereof, resulting in the 
discharge or substantial threat of discharge of oil.'' The 
Administration has indicated in several briefings that this definition 
gives it ample room to define more than one ``incident'' in order to 
avoid the $1 billion per incident payout cap on the Oil Spill Liability 
Trust Fund. Might the Administration be able to define more than one 
``incident'' from the Deepwater Horizon oil spill?
    Answer. At this early date, the facts surrounding the Deepwater 
Horizon spill are not sufficiently well known to venture a definitive 
answer to your question. Moreover, OPA legislative history sheds little 
light on the meaning of ``incident''--the conference report notes only 
that the term derives from the House bill,\1\ and the House committee 
report discussing the meaning of ``incident'' says nothing pertinent to 
your question.\2\
---------------------------------------------------------------------------
    \1\ H.R. Conf. Rep. 101-653 at 101 (1990).
    \2\ H.R. Rep. 101-242 at 52 (1989).
---------------------------------------------------------------------------
    CRS research reveals only one court decision to opine on the 
meaning of ``incident.'' In Water Quality Insurance Syndicate v. United 
States,\3\ a federal district court addressed a challenge, brought by 
the guarantor of a responsible party, to the refusal by the National 
Pollution Funds Center (NPFC) to reimburse the guarantor under OPA. In 
denying the claim, the NPFC reasoned that under OPA section 
1016(f)(1)(c), reimbursement was required only where ``the incident was 
caused by the willful misconduct of the responsible party,'' and there 
was no willful misconduct here. In the process of rejecting the NPFC's 
finding that there was no ``willful misconduct,'' the court noted:
---------------------------------------------------------------------------
    \3\ 522 F. Supp. 2d 220 (D.D.C. 2007).

          An ``incident'' is defined in the statute as . . . [repeats 
        OPA's definition]. The ``incident,'' therefore, is not the oil 
        spill. Under the plain language of the statute, the incident is 
        what caused the spill. More importantly, the ``incident'' may 
        be a ``series of occurrences'' resulting in the oil spill. 
        While the faulty repair of the tow line was part of the series 
        of occurrences that led to the discharge of the oil, the [NPFC] 
        was wrong under the statute to focus on any one occurrence, 
        event or cause as the proximate cause of the spill. It should 
        have looked at the ``series of occurrences'' or events that 
---------------------------------------------------------------------------
        together constitute the ``incident'' that led to the spill.

    This quote highlights the fact that the NPFC should ``look[] at the 
`series of occurrences','' rather than any one occurrence, in defining 
an OPA ``incident. It does not, however, make clear how closely related 
a group of occurrences must be before they qualify under OPA as a 
``series of occurrences having the same origin.'' Thus, CRS must assume 
that the NPFC retains wide discretion in grouping individual 
occurrences into one, or more than one, ``series of occurrences''--and 
thus, one or more incidents. If challenged in court, the NPFC's 
determination as to the number of incidents likely would be reviewed 
under the Administrative Procedure Act standard of review, generally 
considered highly deferential to the agency.\4\
---------------------------------------------------------------------------
    \4\ See, e.g., Bean Dredging LLC v. United States, 2010 WL 1189903 
(D.D.C. Mar. 30, 2010) (adopting Administrative Procedure Act standard 
of review for purposes of reviewing NPFC's denial of reimbursement 
claim under OPA, and characterizing that standard as ``highly 
deferential'').
---------------------------------------------------------------------------
    Question 2. Your testimony states: ``OPA liabilities for removal 
costs and damages should be kept in context, as they do not exhaust the 
potential liabilities of parties connected to the Deepwater Horizon 
spill. For example, Clean Water Act section 311 imposes civil and 
criminal penalties for oil spills, and the Outer Continental Shelf 
Lands Act (OCSLA) contains civil and criminal penalties for, among 
other things, violation of OCS lease terms or the Act and its 
regulations. In addition, the OCSLA extends the laws of the United 
States, and the law of the ``adjacent state'' where not inconsistent 
with federal law, to the OCS. Thus, for example, there could 
conceivably be civil or criminal violations of the Endangered Species 
Act, Marine Mammal Protection Act, or Migratory Bird Treaty Act in 
connection with the Gulf spill. The Solid Waste Disposal Act also may 
apply. Finally, OPA specifies that state law ``imposing any additional 
liability or requirements with respect to the discharge of oil or other 
pollution by oil within such State'' is not preempted. A yes or no 
question: is there a hard statutory limit to the overall amount of 
money the responsible parties will have to pay for this spill.
    Answer. The answer is no. Note that at least as regards BP 
Exploration & Production, Inc., the entity that may prove the principal 
responsible party for the Gulf spill, the ``no'' answer would be clear 
even without referring to the statutes above: in the event of a spill 
from an offshore facility, OPA itself places no cap on the removal cost 
liability of such lessee.\5\
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    \5\ OPA Sec.  1004(a)(3); 42 U.S.C. Sec.  2704(a)(3).
---------------------------------------------------------------------------
    Question 3. Your testimony states: ``The retroactive increase [made 
by S. 3305 in the OPA damages liability cap for offshore facilities] is 
. . . ikely to be litigated, if at all, as a possible breach of BP's 
lease contract, an issue this testimony does not reach.'' Can you speak 
here to why there might or might not be a breach of contract if a 
retroactive bill is enacted?
    Answer. The argument that S. 3305 constitutes a breach of BP's 
lease contract closely parallels my testimony on whether the bill 
raises a Fifth Amendment taking issue--asking this time whether a BP 
lease right was ``breached'' (or repudiated) rather than ``taken.'' As 
noted in my testimony, the taking argument----

          would focus on the clause in the company's lease stating that 
        ``The lease is issued subject to [the Outer Continental Shelf 
        Lands Act, existing regulations thereunder, and certain future 
        regulations thereunder] and all other applicable statutes and 
        regulations.'' The company might contend that ``all other 
        applicable statutes'' refers solely to statutes existing when 
        the company entered into its lease--not those, such as S. 3305, 
        enacted later on. There is solid Supreme Court support for this 
        interpretation: in 2000, the Court interpreted the same 
        ``catchall'' language in another Outer Continental Shelf lease 
        to ``include only statutes and regulations already existing at 
        the time of the contract . . . '' Mobil Oil Exploration & 
        Producing Southeast, Inc. v. United States, 530 U.S. 604, 616 
        (2000). The argument would conclude that ``all other applicable 
        statutes'' embraces the current $75 million cap in OPA, which 
        S. 3305 abrogates.

    Based on the last sentence in the quote, the critical issue for 
whether S. 3305 effects a breach (or repudiation) of a lease term is 
this: does the Supreme Court's holding in Mobil Oil that ``all 
applicable statutes'' includes only statutes existing when the lease 
was signed necessarily mean that any later-enacted statute violates the 
lease contract? In both Mobil Oil and another, quite similar case,\6\ 
the later-enacted statute found to effect a repudiation of the lease 
contract by the United States was one that directly related to the 
federal leasing process itself. Thus, there remains latitude to argue 
that notwithstanding these decisions, some statutes enacted after a 
lease is signed--those not directly impinging on matters addressed in 
the lease or the OCSLA--do not violate prior leases. This proposition 
seems compelling, in that surely an oil company with an OCS lease is 
not immune from all changes in federal law--tax laws, occupational 
safety laws, employee pension plan laws, etc.--during the duration of 
its lease. Accepting this proposition, only one question remains: on 
which side of the line between the post-lease-signing laws found 
unacceptable by the courts and those just suggested as acceptable (tax 
laws, etc.) does an increase in an offshore facility's liability cap 
fall? CRS can say only that there are plausible arguments on both sides 
of this issue.
---------------------------------------------------------------------------
    \6\ Amber Resources Co. v. United States, 538 F.3d 1358 (Fed. Cir. 
2008).
---------------------------------------------------------------------------
        Response of Robert Metz to Question From Senator Session
    Question 4. hat are the constitutional or breach of contract issues 
in holding a responsible party retroactively liable? Is there procedure 
to allow retroactive legislation?
    Answer. The constitutional provisions implicated when a statute 
applies retroactively are set out in my testimony. As there explained, 
five constitutional provisions are potentially involved as a general 
matter: the Takings Clause, substantive due process, Bill of Attainder 
Clause, Impairment of Contracts Clause, and Ex Post Facto Clause. CRS 
refers to the testimony for further explication of the limits on each 
of these provisions' applicability and how those limits apply to 
holding an OPA responsible party retroactively liable. As for the 
breach of lease contract issues raised by holding an OPA responsible 
party retroactively liable, these are addressed under question 3 as 
they relate to a retroactive increase in the $75 million liability cap 
for damages caused by offshore facilities under existing leases.
    CRS interprets your second question, asking whether there is any 
``procedure to allow retroactive legislation,'' to refer to 
congressional procedure leading up to the enactment of such 
legislation. We are unaware of any congressional procedure whose use is 
required or otherwise allowed specifically because a piece of 
legislation (other than tax legislation) is retroactive, nor any 
congressional procedure whose use would affect how the courts would 
address challenges to the ultimately enacted retroactive legislation.
                                 ______
                                 
  Responses of Thomas J. Perrelli to Questions From Senator Murkowski
    Question 1. The Oil Pollution Act provides that a responsible party 
is strictly liable for $75 million in economic damages. This means 
there are very limited defenses to that level of liability. Can a 
responsible party be held liable, but not strictly liable, for a 
greater amount than the $75 million but have some defenses?
    Answer. The Oil Pollution Act (OPA) imposes strict liability on 
responsible parties for removal costs and damages related to discharges 
of oil or substantial threats ofdischarge in the waters of the United 
States, adjoining shorelines, or the exclusive economic zone. Question 
I refers to ``$75 million,'' which is the applicable limitation on 
liability for damages for offshore facilities under OPA Section 
1004(a)(3). OPA Section 1004(c)(1) provides that this limitation will 
not apply, and thus liability for damages will be unlimited, ifthe 
incident was caused by the responsible parties' gross negligence, 
willful misconduct, or by the violation of an applicable federal 
safety, construction, or operating regulation. Section 1004(c)(2) of 
OPA provides that the limitation also will not apply if the responsible 
party fails to report an incident as required by law, fails to 
cooperate as requested in connection with removal activities, or fails 
to follow an order issued under Section 311(c) or (e) ofthe Federal 
Water Pollution Control Act, commonly known as the Clean Water Act, or 
the Intervention on the High Seas Act. Under OPA Section 1004(a)(3), 
liability for removal costs for offshore facilities is unlimited.
    Question 2. To what extent does the Oil Spill Liability Trust Fund 
serve as an insurance policy for companies operating in the OCS, so 
that while each one mayor may not be personally capable of paying for 
all the costs of a huge spill, the entire industry has funded an 
insurance policy to protect victims and taxpayers?
    Answer. The Oil Spill Liability Trust Fund (OSLTF) is a fund 
established under 26 U.S.C. Sec.  9509 and managed by the National 
Pollution Funds Center, an agency ofthe U.S. Coast Guard. The OSLTF is 
funded by various sources, including by a tax on petroleum and by 
penalties paid under several statutes, including certain provisions of 
the Clean Water Act. Under OPA Section 1002(a), each responsible party, 
and not the OSLTF, is liable to pay the costs and damages that result 
from incidents for which they are responsible. Pursuant to 26 U.S.C. 
Sec.  9509(c) and OPA Section 1012, the OSLTF may be used to pay for, 
among other things, removal costs determined by the President to be 
consistent with the National Contingency Plan and damages that are not 
paid directly by a responsible party in accordance with OPA Section 
1013. The Fund currently has a per incident limit of $1 billion, making 
it insufficient to provide a backstop for major disasters ofthe 
magnitude of the Deepwater Horizon disaster.
    Question 3. Does the Department ofJustice have a position on what 
the dollar amount should be, if any, regarding increases in the strict 
liability limit of$75 million for economic damages in the OPA '90 
context?
    Answer. The Administration supports removing the cap on liability 
for damages for offshore facilities. Removal ofthe cap will promote 
investment in safety and eliminate an implicit subsidy ofthe oil and 
gas industry.
    Question 4. Is the Department ofJustice aware of any instance, 
alleged or proven, of the responsible parties for the Deepwater Horizon 
spill engaging in gross negligence, willful misconduct, or regulatory 
noncompliance?
    Answer. The Attorney General has confirmed that the Department is 
conducting civil and criminal investigations ofthe events surrounding 
the Deepwater Horizon explosion and resulting oil spill. The Department 
will conduct a full and thorough evaluation of all potential violations 
oflaw and will pursue any violations to the fullest extent of the law.
   Responses of Thomas J. Perrelli to Questions From Senator Sessions
    Question 1. Are the current levels offinancial responsibility 
sufficient in a worst case scenario situation for drilling on the OCS?
    Answer. Under OPA Section 1016 and the Department ofthe Interior 
regulations, a responsible party for an offshore facility must 
establish and maintain evidence of financial responsibility for that 
party's liability under the law. Under OPA Section 1016, such amounts 
for offshore facilities are currently set between $35 million and $150 
million. The Deepwater Horizon oil spill response effort already has 
required the expenditure offunds far in excess ofthese amounts. The 
Administration supports increasing the required amount of financial 
responsibility for offshore facilities.
    Question 2. In your opinion, do the current liability caps need to 
be increased?
    Answer. Yes. The Administration supports removing the cap on 
liability for damages for offshore facilities. Removal ofthe cap will 
promote investment in safety and eliminate an implicit subsidy of the 
oil and gas industry.
    Question 3. What are the Constitutional or breach of contract 
issues in holding a responsible party retroactively liable? Is there 
procedure to allow retroactive legislation?
    Answer. It is not uncommon for Congress to legislate retroactively, 
and such legislation is often upheld as long as it is justified by a 
rational legislative purpose. Congress must, however, make clear its 
intention to legislate retroactively. An example ofsuch legislation in 
the environmental context is the Comprehensive Environmental Response, 
Compensation, and Liability Act of 1980 (CERCLA), commonly known as 
Superfund. CERCLA, which retroactively provided liability for releases 
of hazardous waste, has repeatedly been up held by the courts. If 
Congress were to retroactively increase the limitations on liability 
under OPA, the Department believes that it would have strong arguments 
that Congress, in legislating to ensure that there are sufficient funds 
for cleanup and compensation, would not run afoul ofconstitutional 
protections. In addition, an increased liability cap would only be 
retroactive in a narrow range of circumstances: when the oil discharge 
occurred prior to the enactment ofthe legislation raising the cap and 
when the exceptions to the existing limitations on liability did not 
apply.
    As to possible breach-of-contract issues, we recognize that there 
is litigation risk associated with increasing the limitations on 
liability retroactively, but we believe that the United States would 
have substantial defenses to such claims. We welcome the opportunity to 
work with Congress to address the issues associated with the 
legislative proposals that have retroactive application.
                                 ______
                                 
       Responses of Jonathan Ramseur to Questions From Murkowski
    Question 1. Your testimony indicates that the Oil Spill Liability 
Trust Fund is vulnerable to depletion and I think we are witnessing 
that now. Let's presume the fund were many times its current level, at 
around $10 billion. To be clear, what are the categories of costs 
associated with an oil spill which cannot be covered by the trust fund?
    Answer. OPA does not explicitly exclude certain categories of costs 
(or damages) that the Oil Spill Liability Trust Fund (OSLTF) could 
address. However, OPA Section 1012 (33 U.S.C. 2712--``Uses of the 
Fund'') lists specific applications of the Fund that ``shall be 
available to the President.'' The most pertinent available applications 
in the context of your question include the following:

   payment of removal costs, including the monitoring of 
        removal action;
   payment of the costs incurred by the federal and state 
        trustees of natural resources for assessing the injuries to 
        natural resources caused by an oil spill, and developing and 
        implementing the plans to restore or replace the injured 
        natural resources; and
   payment of claims for uncompensated removal costs or 
        uncompensated damages.

    The term ``damages'' is defined in OPA Section 1001 (33 U.S.C. 
2701) as the damages specified in Section 1002(b) (33 U.S.C. 2702(b)) 
and includes the cost of assessing these damages.
    The damages in 1002(b) include the following:

          (A) Natural resources--Damages for injury to, destruction of, 
        loss of, or loss of use of, natural resources, including the 
        reasonable costs of assessing the damage, which shall be 
        recoverable by a United States trustee, a State trustee, an 
        Indian tribe trustee, or a foreign trustee.
          (B) Real or personal property--Damages for injury to, or 
        economic losses resulting from destruction of, real or personal 
        property, which shall be recoverable by a claimant who owns or 
        leases that property.
          (C) Subsistence use--Damages for loss of subsistence use of 
        natural resources, which shall be recoverable by any claimant 
        who so uses natural resources which have been injured, 
        destroyed, or lost, without regard to the ownership or 
        management of the resources.
          (D) Revenues--Damages equal to the net loss of taxes, 
        royalties, rents, fees, or net profit shares due to the injury, 
        destruction, or loss of real property, personal property, or 
        natural resources, which shall be recoverable by the Government 
        of the United States, a State, or a political subdivision 
        thereof.
          (E) Profits and earning capacity--Damages equal to the loss 
        of profits or impairment of earning capacity due to the injury, 
        destruction, or loss of real property, personal property, or 
        natural resources, which shall be recoverable by any 
        claimant.\1\
---------------------------------------------------------------------------
    \1\ Statements in OPA's legislative history indicates that a 
``claimant need not be the owner of the damaged property or resources 
to recover for lost profits or income. For example, a fisherman may 
recover lost income due to damaged fisheries resources, even though the 
fisherman does not own the resources'' (U.S. Congress, Conference 
Report accompanying H.R. 1465, Oil Pollution Act of 1990, 1990, Conf. 
Rept. 101-653, 101st Cong., 2nd session). In another identified 
example, ``a worker at a coastal hotel might have standing to bring a 
claim for damages even though he owns no property which has been 
injured as a result of the discharge of oil'' (U.S. Congress, House 
Committee on Merchant Marine and Fisheries, Report accompanying H.R. 
1465, Oil Pollution Prevention, Removal, Liability, and Compensation 
Act of 1989, 1989, H.Rept. 101-242, Part 2, 101st Cong., 1st session).
---------------------------------------------------------------------------
          (F) Public services--Damages for net costs of providing 
        increased or additional public services during or after removal 
        activities, including protection from fire, safety, or health 
        hazards, caused by a discharge of oil, which shall be 
        recoverable by a State, or a political subdivision of a State.

    Although it would be impossible to provide an exhaustive list of 
the costs/damages that the OSLTF does not address, two categories that 
may be of interest are claims involving individual health effects and 
punitive damages. Claims regarding individual health effects (acute or 
chronic) related to the spill are not specifically addressed in Section 
1002, nor are they specifically excluded. However, documents from OPA's 
legislative history suggest that individual health effects were not 
considered to be a part of the liability framework during OPA's 
creation.\2\
---------------------------------------------------------------------------
    \2\ See e.g., Clifton Curtis (Oceanic Society), Testimony before 
the Subcommittee on Coast Guard and Navigation of the House Committee 
on Merchant Marine and Fisheries Concerning Oil Pollution Liability and 
Compensation Legislation, May 11, 1989.
---------------------------------------------------------------------------
    In addition, OPA does not expressly prohibit the recovery of 
punitive damages against a responsible party, but some courts have 
considered the issue and held that punitive damages are not recoverable 
under OPA.\3\
---------------------------------------------------------------------------
    \3\ See South Port Marine, LLC v. Gulf Oil, LP, 234 F.3d 58 (1st 
Cir. 2000) (OPA displaces maritime-law punitive damages); Clausen v. M/
V New Carissa, 171 F. Supp. 2d 1127 (D. Or. 2003) (OPA provides 
exclusive federal remedy for property damage claims resulting from oil 
spill, and thus precludes award of punitive damages for any claim for 
which the act could provide relief).
---------------------------------------------------------------------------
    Congress did not intend for OPA's liability and compensation 
framework to cover all costs and damages. As stated in the Senate 
Report from OPA's legislative history: ``while setting a Federal 
liability standard and stating what damages are compensable, these 
provisions do not preclude States from adopting different standards or 
definitions of damages.''\4\. Additional statements from OPA drafters 
indicate that state laws and analogous state trust funds would 
supplement (if necessary) the federal liability framework under OPA.\5\
---------------------------------------------------------------------------
    \4\ U.S. Congress, Senate Committee on Environment and Public 
Works, Report accompanying S. 686, Oil Pollution Liability and 
Compensation Act of 1989, 1989, S.Rept. 101-94, 101st Cong., 1st 
session.
    \5\ See George Mitchell, ``Preservation of State and Federal 
Authority under the Oil Pollution Act of 1990,'' Environmental Law, 
Vol. 21, no. 2 (1991).
---------------------------------------------------------------------------
    Question 2. Would increasing the per-incident limit on expenditures 
increase protection of coastal residents from the economic impacts of 
an oil spill?
    Answer. The OSLTF managers are limited in the amount of payments 
that may be awarded for each incident.\6\ Under current law, this per-
incident cap is $1 billion. Increasing the per-incident cap would 
reduce the risk that parties (private citizens and governments) would 
not be fully compensated for losses associated with an oil spill.
---------------------------------------------------------------------------
    \6\ ``Incident'' means any occurrence or series of occurrences 
having the same origin, involving one or more vessels, facilities, or 
any combination thereof, resulting in the discharge or substantial 
threat of discharge of oil. 33 U.S.C. 2701(14).
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    Answer. Statements from OPA's legislative history suggest that 
drafters intended the fund to cover ``catastrophic spills.''\7\. 
However, $1 billion today does not have the same value as it did in 
1990, when OPA was enacted. Although OPA requires the President to 
issue regulations to adjust liability limits at least every three 
years,\8\ an analogous provision for the per-incident cap does not 
exist. As a point of reference, if the $1 billion figure had been 
adjusted for inflation, it would be approximately $1.6 billion in 
today's dollars.
---------------------------------------------------------------------------
    \7\ U.S. Congress, House Committee on Merchant Marine and 
Fisheries, Report accompanying H.R. 1465, Oil Pollution Prevention, 
Removal, Liability, and Compensation Act of 1989, 1989, H.Rept. 101-
242, Part 2, 101st Cong., 1st sess., p. 36.
    \8\ 33 USC 2704(d)(4).
---------------------------------------------------------------------------
    The Administration and Members have offered legislative proposals 
that would increase the per-incident cap. For example, the 
Administration submitted a proposal to raise the cap to $1.5 
billion.\9\ The version of H.R. 4213 (the American Jobs and Closing Tax 
Loopholes Act of 2010) that passed the House May 28, 2010, would raise 
the per-incident cap to $5 billion.\10\ As of June 17, 2010, the Senate 
was considering this legislation and Senators have offered several oil-
spill-related amendments to this legislation.
---------------------------------------------------------------------------
    \9\ The Administration submitted its request for supplemental 
appropriations to respond to the Deepwater Horizon oil spill in the 
Gulf of Mexico in a budget amendment on May 12, 2010 (OMB, ``Oil Spill 
Request;'' at www.whitehouse.gov/omb/assets/budget--amendments/
supplemental--05--12--10.pdf.)
    \10\ See note 52 supra.
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    In addition, on June 16, 2010, the President announced that BP has 
agreed to set aside $20 billion to pay economic damage claims to people 
and businesses that have been affected by the oil spill. Although this 
development may render the per-incident cap a moot issue for the 2010 
Gulf spill, a subsequent catastrophic spill could threaten the current 
per-incident cap threshold. As a reference point, the 1989 Exxon Valdez 
spill tallied approximately $2 billion in cleanup costs and $1 billion 
in natural resource damages in 1990 dollars. These combined figures 
equate to approximately $5 billion in today's dollars and would not 
include the wider array of claims for which responsible parties are now 
liable.
    Question 3. Can a member of the panel describe the way in which an 
exploration rig like the Deepwater Horizon obtains financing?
    Answer. This question is beyond the scope of the CRS panel's 
expertise.
    Responses of Jonathan Ramseur to Questions From Senator Sessions
    Question 1. In your opinion, are there factors that should be 
considered when assessing strict liability limits? For example: past 
safety issues/violations, water depths, pressure depths, or natural gas 
vs. oil production.
    Answer. Precedent exists in OPA for setting different liability 
limits to account for different oil spill risks. In particular, the 
liability limit for single-hulled tank vessels ($3,200 per gross ton) 
is approximately 50% higher than for double-hulled vessels ($2,000 per 
gross ton).\11\ A 1998 study from the National Research Council 
concluded: ``in the event of an accident involving a collision or 
grounding, an effectively designed double-hull tanker will 
significantly reduce the expected outflow of oil compared to that from 
a single-hull vessel..complete conversion of the maritime oil 
transportation fleet to double hulls will significantly improve 
protection of the marine environment.''\12\
---------------------------------------------------------------------------
    \11\ This distinction was not made in OPA when it was enacted, but 
was added by the Coast Guard and Maritime Transportation Act of 2006 
(P.L. 109-241). The Coast Guard further increased the limits through a 
rulemaking in 2009. See U.S. Coast Guard, ``Consumer Price Index 
Adjustments of Oil Pollution Act of 1990 Limits of Liability-Vessels 
and Deepwater Ports,'' Federal Register Volume 74, No. 125 (July 1, 
2009), pp. 31357-31369.
    \12\ National Research Council, Double-Hull Tanker Legislation: An 
Assessment of the Oil Pollution Act of 1990, National Academy Press, 
1998.
---------------------------------------------------------------------------
    In the outer continental shelf (OCS) oil exploration and 
development sector, policymakers may consider a wide array of factors 
that could influence (1) the risk of an oil spill occurring and (2) the 
risk that the oil spill could not be contained before impacting 
sensitive ecosystems and/or affecting large populations. Policymakers 
could then structure the liability limit framework based on certain 
behavior, the use of specific technologies, and/or the location of the 
activity. However, CRS is not aware of a comprehensive risk assessment 
of individual factors (or their combinations) regarding OCS drilling 
activities. A rigorous analysis of possible risk factors would be 
instructive to policymakers. With these caveats in mind, examples of 
potential factors may include:\13\
---------------------------------------------------------------------------
    \13\ For more information, see CRS Report R41262, Deepwater Horizon 
Oil Spill: Selected Issues for Congress, coordinated by Curry L. 
Hagerty and Jonathan L. Ramseur.
---------------------------------------------------------------------------
Technological factors
   ability to use human-operated submarines to fix a blowout 
        preventer or install containment devices
   relief wells drilled and ready to plug an uncontained well
   acoustic switch for the blowout preventer
Geographic factors
   water depth
   risk of spill near environmentally-sensitive areas
   risk of spill near economically-sensitive areas
Geologic factors
   gas reservoirs versus oil reservoirs
   prevalence of methane hydrates
Company-specific factors
   a company's safety record or compliance record
   foreign versus U.S. ownership
   company size or recent profits

    These factors can be related. For instance, water depth influences 
the use of human-operated submarines and the formation of methane 
hydrates. Moreover, deep water and ultradeep water drilling 
technologies must be built to withstand the harsher conditions of 
greater water depths. Necessary technologies for these depths are 
complicated, difficult to repair, and expensive. However, two oil well 
blowouts of note-the 1979 Ixtoc in Mexican Gulf waters and the 2009 
West Atlas off the West Australia coast-occurred in relatively shallow 
water depths. Both of these wells were ultimately contained-290 and 105 
days later, respectively-by pumping mud into geologically linked wells 
(similar to the relief well strategy being employed in the Gulf of 
Mexico).
    The Deepwater Horizon incident has brought considerable scrutiny to 
deepwater activities and their challenges. On May 27, 2010, the 
Administration called for a 6-month moratorium on deepwater drilling. 
However, some stakeholders have filed suit against the federal 
government for this decision.\14\
---------------------------------------------------------------------------
    \14\ Associated Press, ``Judge to hear bid to overturn halt on 
drilling,'' June 21, 2010.
---------------------------------------------------------------------------
    Stark distinctions in oil transportation design technology (double-
hull versus single-hull) may not have an analogue in the oil 
exploration and development sector. Determining a similar distinction 
would likely require a comprehensive analysis of the causes of oil 
spills resulting from oil exploration and development activities. 
Congress is not required to wait for a wide-ranging analysis before 
altering the liability structure, but a revised structure could yield 
unintended (and unforeseen) consequences. Potential consequences from a 
revised liability structure could compete with or contravene other 
policy objectives.
    Question 2. Are the current levels of financial responsibility 
sufficient in a worst case scenario situation for drilling on the OCS?
    Answer. The following response addresses this question as well as 
the subsequent question: ``In your opinion, do the current liability 
caps need to be increased?''
    Answer. The current levels of financial responsibility are related 
to the current liability limits for various sources (e.g., vessels, 
offshore facilities) of potential oil spills. The liability limits 
differ by potential source. In the case of vessels, whose liability 
limits are a single dollar amount encompassing both removal costs and 
other damages, the financial responsibility levels are directly tied to 
the corresponding liability caps. Current law requires responsible 
parties for vessels to demonstrate the ``maximum amount of liability to 
which the responsible party could be subjected under [the liability 
limits in OPA Section 1004; 33 U.S.C. 2704].''
    In comparison, offshore facilities, like the Gulf well leased to 
British Petroleum, have their liability capped at ``all removal costs 
plus $75 million.'' Because the structure of this liability limit is 
different than vessels, the corresponding financial responsibility 
limit provisions differ as well. Responsible parties for offshore 
facilities in federal waters must demonstrate $35 million financial 
responsibility, unless the President determines a greater amount (not 
to exceed $150 million) is justified (33 U.S.C. 2716(c)). The federal 
regulations that are authored by this statutory provision (30 CFR Part 
254) base the financial responsibility amount-between $35 million and 
$150 million-on a facility's worst-case discharge volume (as defined in 
30 CFR Section 253.14). For example, a facility with a worst-case 
discharge volume over 105,000 barrels\15\--the highest level of worst-
case discharge listed in the regulations-must maintain $150 million in 
financial responsibility.
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    \15\ This amount is significantly less than the estimated (30,000 
to 60,000 barrels per day) to have been released to date. See National 
Incident Command's Flow Rate Technical Group, Press Release, June 15, 
2010.
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    Although OPA requires the President to issue regulations to adjust 
the liability limits at least every three years to take into account 
changes in the consumer price index (CPI),\16\ offshore facility limits 
have remained at the same level since 1990. Pursuant to the Coast Guard 
and Maritime Transportation Act of 2006 (P.L. 109-241) Congress 
increased limits to double-and single-hulled vessels.\17\ Subsequently, 
the Coast Guard made its first CPI adjustment to the liability limits 
in 2009.\18\ According to the Federal Register preamble (July 1, 2009), 
the Coast Guard will join with the other relevant agencies-
Environmental Protection Agency, Department of the Interior, and 
Department of Transportation-to submit CPI adjustments together in 
2012. Thus, the first adjustment for offshore facilities' liability 
limits is scheduled for 2012-22 years after the passage of OPA.
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    \16\ 33 USC 2704(d)(4).
    \17\ This act increased limits to $1,900/gross ton for double-
hulled vessels and $3,000/gross ton for single-hulled vessels.
    \18\ This rulemaking increased the limits to $2,000 for double-
hulls and $3,200 for single-hulls. U.S. Coast Guard, ``Consumer Price 
Index Adjustments of Oil Pollution Act of 1990 Limits of Liability-
Vessels and Deepwater Ports,'' Federal Register Volume 74, No. 125 
(July 1, 2009), pp. 31357-31369.
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    If offshore facility liability limits had been adjusted every three 
years since 1990, the liability limit would be approximately $124 
million (plus all removal costs). Unlike vessels, an increase in the 
offshore facility liability limit would not trigger a corresponding 
increase in the financial responsibility level. (As a point of 
reference, the $150 million maximum financial responsibility level, 
which was established in 1990, would be approximately $250 million 
today if adjusted for inflation.) Altering the $150 million figure 
would require Congressional action.
    Your question asks for an evaluation of whether the financial 
responsibility limits are ``sufficient.'' As discussed above, this 
question is effectively also seeking an evaluation of the liability 
limits. However, the question of ``sufficiency'' may be applied in 
different contexts. One context may involve whether the financial 
demonstration/liability limits are ``sufficient'' to protect the 
viability of the OSLTF.
    The liability and compensation framework established by OPA assigns 
the primary burden of paying for oil spills to responsible parties. To 
cover costs/damages above individual liability limits, Congress 
established the OSLTF. This fund is financed primarily through a tax on 
the oil industry. From one perspective, the OSLTF acts as an insurance 
pool that is supplied by the industry that profits from oil markets. As 
mentioned above, Congress intended the OSLTF to serve as a backstop, 
which would be able to compensate for losses resulting from a 
catastrophic oil spill.
    A 2007 GAO report examined occurrences of liability limits being 
exceeded and resulting trust fund vulnerability. Although the report 
only assessed vessel incidents, the findings may be instructive. GAO 
found:

          Major oil spills that exceed a vessel's limit of liability 
        are infrequent, but their effect on the Fund can be 
        significant. In our 2007 report, we reported that 10 of the 51 
        major oil spills that occurred from 1990 through 2006 resulted 
        in limit-of-liability claims on the Fund.\19\
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    \19\ GAO, Oil Spills: Cost of Major Spills May Impact Viability of 
Oil Spill Liability Trust Fund, (updating a 2007 study) June 16, 2010.

    Another evaluation may involve whether the financial demonstration/
liability limits, combined with the backstop of the OSLTF and its per-
incident cap, are ``sufficient'' to address damages/costs associated 
with oil spills that may occur in U.S. waters. Although the 10 spills 
identified by GAO's 2007 report impacted the OSLTF, the per-incident 
cap was not a pressing issue and the viability of the fund was not 
threatened by these spills. Thus, one could argue that OPA's individual 
liability and trust fund framework has been sufficient to address all 
spills that have occurred since the 1989 Exxon Valdez. On the other 
hand, one could argue that fund was particularly vulnerable at periods 
during the past two decades. For instance, prior to two separate 
actions by the 109th Congress, fund managers projected the fund would 
be completely depleted by FY2009. In FY2006, the trust fund balance was 
approximately $600 million, and managers were concerned that one costly 
accidental could deplete the fund entirely. During this time period, 
the $1 billion per-incident cap was less of an issue.
    The current combination of liability limits and $1 billion per-
incident cap is not sufficient to withstand a spill with damages/costs 
that exceed the liability limit (assuming it would apply) by $1 
billion. Historically, such spills have been rare. The United States 
has not encountered a spill comparable to the current Gulf spill since 
the 1989 Valdez. However, if the Valdez were to occur today, its costs 
would exceed the $1 billion threshold several times over (assuming the 
responsible party's liability limits were applied). The Exxon Valdez 
spill tallied approximately $2 billion in cleanup costs and $1 billion 
in natural resource damages in 1990 dollars. These combined figures 
equate to approximately $5 billion in today's dollars and would not 
include the wider array of claims for which responsible parties are now 
liable. As the 2010 Gulf spill continues, with a magnitude eclipsing 
the Valdez spill several times over, the adequacy of the liability and 
compensation framework has received considerable scrutiny.
    These issues and concerns highlight a central policy debate: how 
should policymakers allocate the costs associated with a catastrophic 
oil spill (assuming liability limits would apply)? What share of costs 
should be borne by the responsible party (e.g., oil vessel owner/
operators) compared to other groups, such as the oil industry (e.g., 
through the per-barrel tax), and/or the general treasury (assuming 
Congress would appropriate funds to compensate for unpaid costs/
damages)? In addition, what role should state laws play? OPA does not 
preempt states from imposing additional liability or requirements 
relating to oil spills. Drafters expected that state laws and analogous 
state trust funds could supplement (if necessary) the federal liability 
framework under OPA. However, pursuing legal remedies outside of the 
OPA framework may require extensive litigation for claimants.
    As mentioned above, the liability limit and financial 
responsibility demonstration for offshore facilities are the same 
figures they were in 1990. Thus, due to inflation, the responsible 
party shares less of the potential cost today than it did in 1990. 
Restoring the 1990 OPA cost-sharing ratio would require an inflation 
adjustment in the offshore facility liability limits (to $124 million 
plus removal costs), financial responsibility demonstration (to $250 
million), and the per-incident cap for the OSLTF (to $1.6 billion). 
Although it is too early to accurately assess whether these revised 
figures would be sufficient to provide compensation and address the 
impacts from the current spill, many observers estimate and proposed 
legislation indicates that these figures would be inadequate.\20\
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    \20\ Recent legislative proposals offer some indication of 
obervers' expectations of potential costs. For example, the 
Administration proposed to raise the cap to $1.5 billion. The version 
of H.R. 4213 (the American Jobs and Closing Tax Loopholes Act of 2010) 
that passed the House May 28, 2010, would raise the per-incident cap to 
$5 billion. S. 3305 (Menendez) would raise the offshore facility 
liability limit to $10 billion; S. 3472 (Menendez) would remove the 
liability cap entirely. Further, on June 16, 2010, the President 
announced that BP has agreed to set aside $20 billion to pay economic 
damage claims to people and businesses that have been affected by the 
oil spill.
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    Question 3. In your opinion, do the current liability caps need to 
be increased?
    Answer. See response to the above question.

                                    

      
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