BP’s High Wire Act Continues — Why Marylanders Should Worry

While the jockeying was under way in June over the proposed BP victims’ compensation fund, Maryland Energy Report identified President Obama’s dilemma:

Here is President Obama’s balancing act.  On the one hand, BP may fall into crisis if its liability for damages is not somehow limited and made predictable — the swift and cruel judgement of the financial markets.  On the other hand, if BP’s liability cap is set too low, then we taxpayers will be on the hook for ballooning damage costs in the future.  President Obama does not want to let the company collapse nor does he want to let BP off too easily and face the wrath of the voters.

The balancing act continues.  The New York Times’ headline says it all: BP Says Limits on Drilling Imperil Oil Spill Payouts.  BP is alarmed at the prospect that it could be excluded from the Gulf of Mexico which is currently the source of 11 percent of the company’s total output.  Congress is attempting to do just that:

BP is particularly concerned about a drilling overhaul bill passed by the House on July 30. The bill includes an amendment that would bar any company from receiving permits to drill on the Outer Continental Shelf if more than 10 fatalities had occurred at its offshore or onshore facilities. It would also bar permits if the company had been penalized with fines of $10 million or more under the Clean Air or Clean Water Acts within a seven-year period.

Only one company fits that description — BP (formerly known as British Petroleum).

BP is pushing back by suggesting that its exclusion from the Gulf would threaten funding for the $20 billion victims’ compensation fund.

“If we are unable to keep those fields going, that is going to have a substantial impact on our cash flow,” said David Nagle, BP’s executive vice president for BP America, in an interview. That, he added, “makes it harder for us to fund things, fund these programs.”

According to an analysis by Tyson Slocum at Public Citizen, the linkage between the two things — the $20 billion fund and BP’s continued access to the Gulf — is actually quite direct and tight.

The Deepwater Horizon Oil Spill Trust Agreement is between “BP Exploration & Production Inc.” (“BPEP”) and Citicorp acting as corporate trustees (along with two individual trustees).  Executed on August 6, the Trust exists to supply funds for the “Gulf Coast Claims Facility” (GCCF) that is administered by Kenneth Feinberg.  These are the operational guts of the $20 billion deal announced by President Obama after his June 16 meeting with BP executives.

If the House legislation cited by the NY Times becomes law, then “BPEP” would lose its legal right to operate in the Gulf.  It’s not clear what would happen to BPEP’s licenses (could they sell or transfer them?) but clearly the operating revenues intended to fund the Trust and the GCCF would go away.  There would be no money for the GCCF other than the $3 billion deposited with Citicorp in early August.

Many Americans suffered real economic losses as a result of the Deepwater Horizon disaster that killed eleven workers.  These include losses from lost business, lost jobs and lost tax revenue.  They will never simply vanish but will be “compensated” by some combination of the following: (1) Uncompensated individuals might simply absorb the losses, some portion of which will come back to the rest of society in the form of indirect costs like food stamps, lower economic activity, Medicaid costs and so on; (2) Individuals can get compensation from BP and other responsible parties, either via the victim fund or through the courts; (3) Finally, the federal government could, in theory, compensate victims and spread the costs over all taxpayers.

It makes sense to put as much of the burden as possible on BP shareholders — without putting the corporation out of business.  However, if BP is allowed to limit its liability too much for past as well as future disasters, then the rest of us are at risk for the burden of BP’s mistakes.  It’s a high-wire balancing act in an increasingly windy political environment.

The Deepwater Horizon disaster raises several major issues that we as a society are grappling with: (a) How much should the responsible parties pay and to whom?; (b) Should BP be allowed to continue deepwater drilling in view of its safety record, if yes, under what conditions?; (c) What are the real risks of deepwater drilling, under what conditions should any company be doing it, if at all?

One would like to be able to discuss these issues calmly, rationally and separately.  Executing the Trust agreement with BPEP means that questions (a) and (b) are mixed up together.  While this was clever on BP’s part, it puts the Obama administration in an uncomfortable position — a very risky move.  BP not only needs to face down restrictions emanating from Congress but also from the Executive Branch.

BP’s gambit will more likely succeed if the Obama administration is crippled by the loss of Democratic Party control in one or both houses of Congresses in the November elections.

What does all this have to do with Maryland? It can’t happen here, right?  Immediately after the Gulf spill, Senators Cardin and Mikulski joined other East Coast Senators in a letter to the president opposing drilling near their states.  Governor O’Malley has repeated his opposition.

Marylanders need to take the long view and not be complacent about risks to the Chesapeake Bay from offshore drilling.  Governors change and federal laws also change, including the one that currently gives states a veto over drilling off their coasts.  The global oil situation is such that pressure to produce more oil from U.S. territory will grow more and more intense in the not-too-distant future.

Here is a link to a 2009 Department of Energy presentation that shows in stark detail the tightening global oil outlook.

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