Last week, Andrew Mayeda of the National Post uncovered changes that Canada's National Energy Board (NEB) had quietly made to offshore drilling regulations. Before these changes, companies had to meet specific requirements, most notably, in the type of blowout preventer and other pressure safety equipment that had to be installed while drilling. Under the new regulations, companies only have to set goals that will protect the environment, the specific equipment they install is up to them.
In this posting, I will compare the penalties for environmental infractions in both the United States and Canada and will then discuss the size of the penalties in context of the profitability of the enterprises involved in drilling in frontier areas.
In the United States, the legislation that penalizes companies for environmental infractions, like what is presently occuring in the Gulf of Mexico, is administered by the Environmental Protection Agency (EPA). The Oil Pollution Act (or OPA) was signed into law in August 1990, largely as a result of the Exxon Valdez spill in Alaska. Its intent is to provide the resources necessary to respond to oil spills by fining those companies that are responsible for non-compliance.
Here's an excerpt:
Key Provisions of the Oil Pollution Act
§1002(a) Provides that the responsible party for a vessel or facility from which oil is discharged, or which poses a substantial threat of a discharge, is liable for: (1) certain specified damages resulting from the discharged oil; and (2) removal costs incurred in a manner consistent with the National Contingency Plan (NCP).
§1002(c) Exceptions to the Clean Water Act (CWA) liability provisions include: (1) discharges of oil authorized by a permit under Federal, State, or local law; (2) discharges of oil from a public vessel; or (3) discharges of oil from onshore facilities covered by the liability provisions of the Trans-Alaska Pipeline Authorization Act.
§1002(d) Provides that if a responsible party can establish that the removal costs and damages resulting from an incident were caused solely by an act or omission by a third party, the third party will be held liable for such costs and damages.
§1004 The liability for tank vessels larger than 3,000 gross tons is increased to $1,200 per gross ton or $10 million, whichever is greater. Responsible parties at onshore facilities and deepwater ports are liable for up to $350 millon per spill; holders of leases or permits for offshore facilities, except deepwater ports, are liable for up to $75 million per spill, plus removal costs. The Federal government has the authority to adjust, by regulation, the $350 million liability limit established for onshore facilities.
§1016 Offshore facilities are required to maintain evidence of financial responsibility of $150 million and vessels and deepwater ports must provide evidence of financial responsibility up to the maximum applicable liability amount. Claims for removal costs and damages may be asserted directly against the guarantor providing evidence of financial responsibility.
§1018(a) The Clean Water Act does not preempt State Law. States may impose additional liability (including unlimited liability), funding mechanisms, requirements for removal actions, and fines and penalties for responsible parties.
§4301(a) and (c) The fine for failing to notify the appropriate Federal agency of a discharge is increased from a maximum of $10,000 to a maximum of $250,000 for an individual or $500,000 for an organization. The maximum prison term is also increased from one year to five years. The penalties for violations have a maximum of $250,000 and 15 years in prison.
§4301(b) Civil penalties are authorized at $25,000 for each day of violation or $1,000 per barrel of oil discharged. Failure to comply with a Federal removal order can result in civil penalties of up to $25,000 for each day of violation.
From what I understand, under the Oil Pollution Act, BP will be on the hook for a maximum penalty of $75 million (and, of course, removal and other cleanup costs) as the holder of an offshore lease or permit as outlined in section 1004. That sounds like quite a bit, especially when you add in the cleanup costs, but let’s take a look at some of the financial numbers from BP and the other 4 largest publicly traded oil companies: