4 Liability and Compensation |
82. The liability and compensation provisions in
the UK could be inadequate given the high costs of dealing with
the blowout of the Macondo well. Oil and Gas UK told us that companies
operating in the UK "bear the full responsibility in the
case of environmental or other material damage resulting from
accidents or critical situations".
The Minister told us: "The liability is quite clearly with
In contrast, Ms Wilks, a biodiversity lawyer with ClientEarth,
argued that there was an absence "of any [...] clear, consistent
and reliable regulatory framework for determining liability and
compensation arrangements in the case of a spill".
Ms Wilks explained to us that existing EU directives on environmental
liability would likely "be of limited application in the
case of a big spill in European waters".
Cost of the Deepwater Horizon
83. On 3 May 2010 President Obama announced that
it was his Administration's view that BP was responsible for the
oil spill, and that BP would be paying for the costs of the clean-up
operation. By 7 June the estimated clean-up costs (including the
cost of the spill response, containment, relief well drilling,
grants to the US gulf states, claims paid, and federal costs)
was $1.25 billion. On 16 June BP's Dr Hayward attended a high-level
meeting with President Obama at which BP announced it would suspend
shareholder dividends until at least the end of the year and set
aside $20 billion (£12.5 billion) for an escrow fund to cover
compensation claims stemming from the disaster.
84. BP agreed to set aside $5 billion a year for
four years, and decided to try and sell $10 billion worth of its
assets to fund this. Some analysts suggested BP should sell its
North Sea assets, as although it is a mature province, BP's North
Sea portfolio still holds an estimated 3 billion barrels of oil.
It emerged on 3 August that BP faced an additional penalty of
$15 billion under the US Clean Water Act if the company was found
liable for gross negligence.
On 9 August 2010 BP announced that the oil spill had cost the
group $6.1 billion, including $319 million paid out in compensation,
and deposited the first $3 billion into the escrow compensation
fund. By early September the cost of the incident had risen to
$8 billion and $399 million had been paid out in compensation.
OFFSHORE POLLUTION LIABILITY ASSOCIATION
85. In the UK DECC will not issue a licence for exploration
unless the operator is a member of the Offshore Pollution Liability
Association Ltd (OPOL). The use of this fund represents a back
up to a company's own insurance provision should it be insufficient
to deal with compensation claims arising from offshore pollution
incidents from exploration and production facilities. Since OPOL
came into effect in 1975 its limits of liability have been increased,
and they now stand at $250 million (£158 million) per incident.
The annual aggregate is the predetermined amount to which an insurer
will cover the insured each year, regardless of the number of
claims submitted or defence costs associated with these claims.
Mr McAllister of OSPRAG told us:
If the third party liability under the OPOL [Offshore
Pollution Liability Association Ltd] scheme for some reason does
not materialise, and somebody defaults on that payment, the entire
industry has a collective responsibility to meet those payments.
86. However, Ms Wilks of ClientEarth argued that
"the limit of that [voluntary OPOL scheme] is $250 million
and it's not enough [...] voluntary means that it has no legal
footing. There is no legal control over it".
Ms Wilks went on to explain to us:
[...]the OPOL scheme covers direct pollution damage
[...] it is debatable whether some of the widespread ecological
effects that you can see and that [...] [Dr Jonathan Wills] has
talked about would qualify as direct damage according to the oil
company that is going to be paying for it. So we need to have
that system on a legal footing.
87. The Minister explained that membership of the
OPOL scheme was voluntary, but it was simultaneously a pre-requisite
for obtaining a licence from DECC.
The Minister also told us that the limit of the OPOL scheme sounded
small in comparison to the sums of money discussed in relation
to the Deepwater Horizon incident because "economic activity
in the north of Scotland compared to the [...] Gulf of Mexico
[...] have resulted in a greater need there [the Gulf] for greater
UK (the Local Authorities International Environmental Organisation)
told us: "the current compensation regime [...] would leave
oil spill responders out of pocket and the costs would ultimately
rest with the taxpayer".
88. In July 2010 the US House of Representatives
retroactively removed the liability limitation regime for vessel
owners (including offshore oil and gas operations) for all claims
arising on or after the date of the Macondo Well blowout, with
similar legislation pending before the Senate.
Transocean (the owner of the Deepwater Horizon) called for the
UK Government "not [to] take action that could raise insurance
requirements to unsustainable levels" as a number of companies,
particularly small ones, would be unable to pay the increased
On 13 October 2010 the European Commission announced new measures
under which member states issuing drilling licences would have
to ensure oil companies had the financial means available to pay
for environmental damages.
These proposals are at an early stage of development.
89. Dr Wills, Independent Councillor for Lerwick
South and freelance environmental consultant, told us: "Compensation
for victims of oil tanker spills is typically slow, grudging and
inadequate [...] many Amoco Cadiz and Exxon Valdez claimants had
died before the final payouts were made, 18 and 21 years respectively
after the events".
In March 1978 the Amoco Cadiz oil tanker split into three off
the coast of Brittany, resulting in the largest ever oil spill
to that date (1.6 million barrels).
The Exxon Valdez struck a reef off the coast of Alaska in March
1989, spilling almost 285,000 barrels of oilthe remoteness
of the area made it difficult to mitigate the impact of the spill
on the surrounding environment.
In January 1993 the Braer oil tanker ran aground 10 miles off
the coast of Shetland, spilling almost 630,000 barrels of light
crude oil. Dr
Wills told us:
A spill such as the Braer can mean bills far beyond
the means of a small coastal local authority. In the end central
government has to pay up if, as in the case of the Braer, the
shipowners and their insurers contrive to escape full liability.
So all spills cost the taxpayer.
the high costs of the incident in the Gulf of Mexico, we believe
that the OPOL (Offshore Pollution Liability Association) limit
of $250 million is insufficient. We are concerned that the OPOL
provisions only cover direct damage and also that the precise
definition of "direct damage" is unclear. While membership
of OPOL remains voluntarydespite it being a pre-requisite
for a licenceits voluntary nature weakens its legality
and the control and deployment of its funds. We believe this lack
of legal control will allow polluters to claim that damages to
biodiversity and ecosystems are indirect, and therefore do not
qualify for compensation.
91. We conclude
there needs to be clarity on the identity and hierarchy of liable
parties to ensure that the Government, and hence the taxpayer,
do not have to pay for the consequences of offshore incidents.
We conclude that any lack of clarity on liability will inhibit
the payment of compensation to those affected by an offshore incident.
We recommend that it should be a requirement of the licensing
process that the licensee prove their ability to pay for the consequences
of any incident that could occur. We recognise that these measures
could add to the cost of investing in new UK oil and gas production
and urge the Treasury to reflect this when considering incentives
to such investments.
92. Dr Wills told us: "the insurance industry
could massively increase offshore standards tomorrow".
We see the need for many large oil companies to self-insure as
being indicative of the industry undertaking very large risks.
Dr Hayward told us: "the reason that BP moved to self-insure
[...] was that we found the insurance market was not deep enough
to provide us cover against some of the risks that we would want
In contrast, the Minister told us: "For smaller companies
involved [...] [in the UKCS] they would need to look more to the
market in order to get their [insurance] cover".
93. We recommend
that the Government consider whether compulsory third-party insurance
should become a necessary requirement for small exploration and
116 Ev 63 Back
Q 274 Back
Q 215 Back
Q 215 Back
An escrow fund is money held by a third-party. Back
BBC News Blog - Robert Peston, 8 September 2010, www.bbc.co.uk/blogs Back
"BP Says Cost of Spill Has Hit $8 Billion", The Wall
Street Journal, 4 September 2010 Back
Q 61 Back
Q 217 Back
Q 217 Back
Q 273 Back
Q 272 Back
Securing Protections for the Injured from Limitations on Liability
Act, US House of Representatives (H.R. 5503) Back
Ev 59 Back
Speech by Commissioner Oettinger, 13 October 2010, http://europa.eu/rapid Back
Ev 593 Back
"Amoco Cadiz-the largest ever oil spill", June 2007,
"Exxon Valdez-the most expensive oil spill in history",
March 2008, www.oilspillresponse.com Back
Scottish Executive Fisheries Research Service, Ten Years on
- MV Braer Oil Spill, 2003 Back
Ev 593 Back
Q 221 Back
Q 162 Back
Q 324 Back