UK Deepwater Drilling - Implications of the Gulf of Mexico Oil Spill - Energy and Climate Change Contents

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".[116] The Minister told us: "The liability is quite clearly with the operator".[117] 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".[118] 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".[119]

Cost of the Deepwater Horizon Incident

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.[120]

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.[121] 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.[122]


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.[123]

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".[124] 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.[125]

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.[126] 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 cover".[127] KIMO 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.[128] 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 insurance rates.[129] 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.[130] 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".[131] 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).[132] The Exxon Valdez struck a reef off the coast of Alaska in March 1989, spilling almost 285,000 barrels of oil—the remoteness of the area made it difficult to mitigate the impact of the spill on the surrounding environment.[133] 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.[134] 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.[135]

90. Given 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 voluntary—despite it being a pre-requisite for a licence—its 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".[136] 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 to insure".[137] 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".[138]

93. We recommend that the Government consider whether compulsory third-party insurance should become a necessary requirement for small exploration and production companies.

116   Ev 63 Back

117   Q 274 Back

118   Q 215 Back

119   Q 215 Back

120   An escrow fund is money held by a third-party. Back

121   BBC News Blog - Robert Peston, 8 September 2010, Back

122   "BP Says Cost of Spill Has Hit $8 Billion", The Wall Street Journal, 4 September 2010 Back

123   Q 61 Back

124   Q 217 Back

125   Q 217 Back

126   Q 273 Back

127   Q 272 Back

128   Securing Protections for the Injured from Limitations on Liability Act, US House of Representatives (H.R. 5503) Back

129   Ev 59 Back

130   Speech by Commissioner Oettinger, 13 October 2010, Back

131   Ev 593 Back

132   "Amoco Cadiz-the largest ever oil spill", June 2007,  Back

133   "Exxon Valdez-the most expensive oil spill in history", March 2008, Back

134   Scottish Executive Fisheries Research Service, Ten Years on - MV Braer Oil Spill, 2003 Back

135   Ev 593 Back

136   Q 221 Back

137   Q 162 Back

138   Q 324 Back

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Prepared 6 January 2011