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Spill triggers effort to up liability cap

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WASHINGTON—Lawmakers are jockeying to adjust the size of liability damages facing the companies involved in the massive Gulf of Mexico oil spill, and insurers have reacted by reducing capacity for oil-drilling operations.

The April 20 fire and explosion aboard the Deepwater Horizon, which sank April 22, killed 11 workers and resulted in three leaks some 5,000 feet below the Gulf's surface that were spewing anywhere from 5,000 to 100,000 barrels of oil a day into the ocean, depending on the estimate.

BP P.L.C., which owned the operating permit for the semisubmersible rig, had limited success last week slowing the rate of the leaks. London-based BP said it would attempt to plug the leak by injecting special mud and concrete into the well as early as May 23.

BP has taken responsibility for the cost of cleaning up the spill, but executives at the four companies involved in the drilling operation have accused each other of deserving the blame. As of last week, BP said 19,000 claims had been filed related to the oil spill and 8,000 payments had been made.

Previous estimates have put insured losses from the spill as high as $3.5 billion, with pollution liability and business interruption major components of anticipated losses. Commercial fishing was banned in a wide swath of the Gulf and wary travelers canceled vacations along the coast.

Meanwhile, the owner and operator of the sunken rig has asked a court to limit its liability to the value of the rig after the accident (see related story).

Under the Oil Pollution Act of 1990, BP's liability would be limited to $75 million. That law also set up the Oil Spill Liability Trust Fund, which is financed primarily through a fee on imported oil, to pay damages beyond the $75 million up to a limit of $1 billion per incident.

BP CEO Tony Hayward, who has said the firm will honor “all legitimate claims” related to the spill, called the liability limit “irrelevant.” In a letter to administration officials, BP said it would pay for all cleanup and remediation “costs and damages, regardless of whether the statutory liability cap contained in the Oil Pollution Act applies,” Interior Secretary Ken Salazar said last week.

“That liability limitation does not apply to this incident because BP has affirmatively stated and has memorialized in writing that they will pay for all damages resulting from this incident,” Mr. Salazar said during a hearing before the Senate Committee on the Environment and Public Works.

Still, Democratic lawmakers sought to pass legislation that would increase the liability limit to $10 billion. However, Sens. James Inhofe, R-Okla., and Lisa Murkowski, R-Alaska, on several occasions blocked the bill sponsored by Sen. Robert Menendez, D-N.J., from moving forward.

Sen. Inhofe said he supports increasing the $75 million liability limit. But he and industry officials said boosting it to $10 billion would drive small and midsize operators out of the Gulf of Mexico because only the supermajor oil companies could afford it.

Independent natural gas and oil producers hold 90% of the leases and produce about 30% of the oil in the Gulf of Mexico, according to the Independent Petroleum Assn. of America.

“The bill is so punitive that the only producers to stay afloat would be big oil companies, such as BP, and it would in turn make us more dependent on foreign and state-owned oil companies,” Sen. Inhofe said last week.

An analysis by the American Petroleum Institute, an oil industry trade group, estimated that a $10 billion liability limit would increase offshore operational costs 25% and make adequate insurance coverage unavailable.

The OPA requires operators to demonstrate the financial ability to pay up to the liability limit through a letter of credit, surety bond, insurance or self-insurance. To demonstrate adequate self-insurance, the API says a company's stockholder equity must be 10 times the financial responsibility threshold, meaning that a $10 billion cap would require energy companies operating in the Gulf to have $100 billion in shareholder equity.

Alternatively, companies could demonstrate financial responsibility with insurance, but API says it would be impossible to obtain $10 billion per-well coverage. Others agree.

Capacity for third-party pollution liability coverage was about $1.5 billion per project and likely decreased 15% after the Deepwater accident, said Benjamin D. Wilcox, executive vp and director of marine and energy at Alliant Insurance Services Inc. in Houston.

If Congress significantly increases “the $75 million liability limit, based on our experience, operators and nonoperators in the U.S. Gulf of Mexico will be unable to obtain adequate protection from insurance,” Mr. Wilcox wrote in a letter to Sen. Menendez. In “our view, only major oil companies and national oil companies will be financially strong enough to continue current exploration and development efforts,” Mr. Wilcox said in the letter.

John Lloyd, chairman and CEO of London-based Lloyd & Partners Ltd., largely agreed. In a separate letter to Sen. Menendez, Mr. Lloyd said capacity likely will decrease because insurers fear they may face exposure from all the companies involved in a project, including operating groups, drilling contractors, mud and cementing contractors, manufacturers of blowout preventers and other service contractors.

“We have therefore already seen in the market a realization that if every party involved in the loss...are successfully sued, then the market will be exposed to a degree much larger than anticipated when committing capacity to individual insureds,” Mr. Lloyd wrote.

Although President Barack Obama chided Republicans for delaying the measure to raise the liability limit, Mr. Salazar expressed some agreement with those arguing against a $10 billion liability cap in a Senate hearing last week.

“You don't want only the BPs of the world to essentially be the ones that are involved in these efforts,” Mr. Salazar said. “But having said that, it ought to be high enough so that we make sure that the responsible party will be able to live up to whatever consequences result from their activity.”

If smaller operators create the same risk as larger companies, they should face the same liability cap, countered Sen. Menendez, who said lawmakers would consider an unlimited liability cap—a position Senate Majority Leader Harry Reid, D-Nev., has advocated.

“Regardless of what BP ends up committing to pay for this disaster, there is no such thing as a "too-safe-to-spill' oil rig, and there should be no legal wiggle room for oil companies that devastate coastal businesses and communities,” Sen. Menendez said.

Sens. David Vitter, R-La., and Jeff Sessions, R-Ala., introduced separate legislation that would raise the liability limit to $150 million or the amount of profits the responsible company earned in the past four quarters, whichever is greater.

In separate action, Sens. Max Baucus, D-Nev., and Carl Levin, D-Mich., included a provision in the American Jobs and Closing Tax Loopholes Act that would raise the Oil Spill Liability Trust Fund's $1 billion per incident limit to $5 billion and raise the 8 cents per barrel tax to 32 cents per barrel.