Monday, July 26, 2010

EC: Heavy liability could sink small oil drillers

Patrice Hill

One of the biggest of the big oil companies may be responsible for the worst environmental disaster in U.S. history, but Washington's response to the BP PLC spill would give an advantage to such major oil companies while threatening to put their small competitors out of business. Energy legislation that Senate leaders said they may take up this week would sharply raise or eliminate a $75 million cap on oil company liability for economic damage from spills - a change that poses no great threat to giants like BP, which is setting aside $10 billion out of its huge profits and assets to pay for claims related to the spill and has already paid out billions.

But opening up smaller companies to large or unlimited liability would make it prohibitively expensive for them to get the insurance they need to drill and would force many of them out of the deep-water drilling business, analysts say. Even some major oil companies might see open-ended liability in America's famously litigious society as a reason not to drill in U.S. waters again.

"This would effectively eliminate deep-water drilling in the Gulf and send oil companies to other countries to do the drilling," said Andrew B. Busch, global strategist at BMO Capital Markets, speaking of Senate and White House proposals to drop the liability cap that was established after the last major oil spill by the Exxon Valdez tanker in Alaska in 1989.

"While it may be seen as a good thing until safety precautions can be proven for this type of drilling," he said, "the U.S. runs the risk of losing a large source of energy that is not coming from a foreign source."

The potential for wiping out independent wildcatters and other small operators - which make up the majority of U.S. oil firms - is not entirely unintentional.

White House officials and some members of Congress have suggested that given the risks of huge spills, as demonstrated by the Macondo disaster, perhaps it would be best to limit drilling to those companies that can more easily shoulder the enormous costs of cleanup.

"Many in the current administration and congressional leadership have indicated that it is perfectly acceptable to reduce the number of oil and gas exploration companies to those judged to be big enough to pay," said David Welch of the National Ocean Industries Association.

An unlimited liability cap, along with measures in the Senate legislation that would dramatically increase financial responsibility requirements on companies bidding for Gulf of Mexico leases, would "without a doubt, result in many companies being no longer able to stay in business," he said. That will lead to "more and more jobs lost and less energy produced at home."

A study conducted by the IHS Global Insight forecasting firm found that last year about half of the 400,000 oil and gas jobs in the Gulf of Mexico were at independent oil firms. If all those companies were pushed out of business, the industry would lose about 300,000 jobs in the next decade, while federal and state revenues from oil leasing would drop by $147 billion, it estimated.

"The resulting vacuum would likely be filled only marginally by the major oil companies, if at all, and the loss of independents could actually precipitate a decline in activity by majors," because the independents play an important role in joint exploration and development projects with larger firms, the study said.

While they often team up with big oil companies on deep-water projects, small, independent companies predominate in the extraction of oil from the shallow waters of the Gulf, where there has not been a major spill in 50 years of drilling.

The yield from wells in the largely tapped-out shallow waters is so low that most major oil companies are not interested in drilling there. BP and other big companies are interested primarily in the big, deep-water fields, where the potential for revenue and profit is higher.

Samuel H. Gillespie, executive vice president of the independent firm Cobalt International Energy Inc., said he commissioned the IHS economic study because of the widespread view in Washington that "the only people that ought to be drilling out in the Gulf of Mexico in the deep water are the majors," despite the harm that would do to overall energy production in the United States.

The development has caused considerable alarm among workers in Louisiana and Texas, where many people work for independent firms. But their interests clash with people victimized by the BP spill, who have been pushing for higher payouts and limits on liability.

Sen. Lisa Murkowski, Alaska Republican, said she is concerned about the "unintended consequences" of sharply raising the liability cap to $10 billion or eliminating it altogether.

"That would exclude all but the biggest oil companies from operating offshore," she said. "The irony is that under such a bill, only BP and other foreign supermajors - most of them nationalized companies such as Saudi Aramco, the China National Petroleum Corp., Russia's Gazprom, and Venezuela's state-owned oil giant PDVSA - could produce America's offshore resources."

As the ranking Republican on the Senate Energy and Natural Resources Committee, Mrs. Murkowski said she is working with Democrats to find an appropriate level for the liability cap.

She and other Republicans as an alternative are pushing to raise the amount in the federal Oil Spill Liability Trust Fund to $10 billion, funded with taxes on oil companies, to ensure future oil spills are covered.

Kate Gordon of the Center for American Progress defended eliminating the liability cap, saying that would "force companies engaged in deep-water drilling and large-scale oil importation to better internalize the risk of an oil disaster" so spills would be less likely to occur.

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