- DEEPWATER HORIZON LIABILITY

[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

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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61-828 PDF WASHINGTON : 2010

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Washington, DC 20402-0001

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

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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

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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.
---------------------------------------------------------------------------
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:
---------------------------------------------------------------------------
\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\
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\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.
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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\
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\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\
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\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/]
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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:

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].
---------------------------------------------------------------------------
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.
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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].
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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.
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\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] .
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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\
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\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].
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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]
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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.
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\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.
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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].
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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'').
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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).
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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).
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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).
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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).
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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.
---------------------------------------------------------------------------
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\
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\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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.