CCS indemnification

Natural gas fracking well in Louisiana

With billions of dollars on the line and public wrath at extremely high levels, is it any surprise that every group involved with the BP drilling site are blaming everybody but themselves?  The benefits to the firms of deflecting responsibility and delaying payouts can be immense.  The 1989 Exxon Valdez spill was not finally paid until August 2008, nearly 20 years later -- and at amounts paid were far less than the original awards.  In games like this, even high-priced lawyers are cheap if you can get the damages reduced and hang on to the funds within the company for much longer.  

The greatest point of influence for dealing with catastrophic liabilities is in setting up appropriate insurance requirements before an accident, and ensuring government oversight agencies actually do their jobs on a recurring basis to flag poor safety practices before there is a large accident. 

It is not just about offshore oil and gas.  Adequate oversight seems to have been an issue in April's coal mine accident that killed 29 miners in West Virginia; and periodically in the nuclear power sector as well, as so clearly illustrated by the near breach of a reactor head at the Davis-Besse plant in Ohio. 

Unfortunately, our liability regimes are not well structured to deal with these types of incidents.  Indeed, the industry continually works to weaken them in order to reduce the operating costs of carrying higher levels of insurance. 

Consider nuclear accident risk.  Anybody carry $1,000 of coverage on their home, possessions, and bodily harm?  Unlikely, since aside from being far too low if there were a loss, the mortgage company wouldn't allow it.  But under the terms of the Price-Anderson Act, that is about the level of coverage anybody in the Baltimore Metropolitan Statistical Area would have were there to be an accident at Calvert Cliffs in Lusby, MD (see Table 4, p. 19).  And don't count on your existing policy filling in the gap:  all private homeowners and tenant policies explicitly exclude nuclear risks from their coverage. Price-Anderson is as good as it gets for third party nuclear liability; coverage levels in other countries are even lower.  Dam failures and problems from underground injection of CO2 from carbon sequestration are two other areas where the liability regime is, at present, not well structured to properly incent good safety behavior or protect the taxpayer.

Update, May 12th:  Big Oil Bailout Prevention Act, the first of what is likely to be many legislative efforts to increase oil spill liability levels appropriate for the type of damage that major spills can cause.  A less provocative title might increase the bill's chance of success.