Resource type: Article: other

Status: Law stated as at 15-Feb-2011

Jurisdictions: Brazil, Canada, Mexico, USA, United Kingdom

This article examines the legal and commercial consequences of the 2010 BP Gulf of Mexico oil spill and considers how the future of the global oil and gas industry might be shaped as a result.

Aditi Mene, PLC Cross-border

On 20 April 2010, an explosion on the Deepwater Horizon rig, (or the Macondo oil well, as it was also known), located in the deep waters of the Gulf of Mexico off the coast of Louisiana, resulted in 11 rig workers dying, the rest of the crew being evacuated, and a large rupture in the oil well. Efforts to contain the vast amounts of oil spilling from the rupture took many months and were conducted under intense media, political and public pressure. A permanent seal was finally established in September 2010, but not before four million barrels of oil had been released, making the Gulf of Mexico oil spill the largest accidental ocean oil spill in history.

It was an environmental disaster and a public relations nightmare for oil company BP, who operated the rig. The effects have been wide-ranging, and are likely to be felt for years to come, not just by the businesses and communities in the immediate vicinity of the spill, but by oil and gas companies all over the world.

The oil spill has focused attention on, and prompted a review of, the laws, regulations and safety standards pertaining to oil exploration and extraction and environmental liability, not only in the US but around the globe.

Further, the oil spill may also result in changes in the way oil and gas companies operate their businesses, to contain liabilities and deal with increased costs, as well as taking measures to restore their tarnished public image and ensure that a similar accident will not happen again.

Against this background, this article examines the legal and commercial consequences of the oil spill and considers how the future of the global oil and gas industry might be shaped as a result. Specifically, it discusses the following:

·         The immediate aftermath, including the US moratorium on deep-sea drilling.

·         The legal actions and costs.

·         New laws and regulations in the US and around the world.

·         The civil and criminal investigations.

·         Commercial effects of the spill.

·         The future.

While BP was attempting to plug the spill, an environmental clean-up and rescue operation was immediately mobilised to save the wildlife, beaches and habitats in the Gulf of Mexico, and the US government imposed a moratorium on deep-sea oil drilling. At the same time, legal actions against BP from business owners affected by the oil along the Gulf Coast were set in motion, along with the US government′s own civil and criminal investigation of the spill.

By the time the well was finally plugged in September 2010, a huge amount of discussion and scrutiny of the oil and gas industry and of deep-sea drilling had already taken place. Oil-producing governments, the global press and environmental groups were (and continue to be) actively engaged in the issues surrounding the spill, and its causes, costs and lessons.

Scrutiny of the industry′s exploration and production methods, as well as its commercial impetus, has increased since the explosion.

The US government began a lengthy criminal and civil investigation into the incident and began reviewing the laws and regulations governing health and safety, and environmental standards on rigs and oil drilling operations.

In Europe and elsewhere around the world, there were also discussions about a potential moratorium on drilling, as well as debates about amending legislation governing health and safety, and environmental compliance in oil and gas exploration.

In March 2010 (before the spill), the US government had announced plans to expand its offshore drilling operations in the Gulf of Mexico area to increase domestic oil production. However, after the spill, and while BP was attempting to plug the well, the US government produced a report called the "30-day safety report to the President" (27 May 2010). The report included consultations with industry experts on their safety recommendations for deep-sea drilling (see Department of Interior: Increased safety measures for energy development on the outer continental shelf, 27 May 2010). Following the report, the government issued an immediate moratorium on deep-sea oil drilling.

The US moratorium, which was planned to be in place until November 2010 but was lifted earlier on 12 October, attracted intense criticism from the oil and gas industry which felt that it placed an unsustainably heavy economic burden on the industry (see US oil industry protests against drilling moratorium, ft.com, 1 September 2010 (requires registration)). According to the US oil and gas industry lobby body, the American Petroleum Institution, the moratorium affected a number of deep-sea oil rigs, along with thousands of jobs and businesses dependent on the rigs (see BP spill won′t change oil sector radically, ft.com, 30 August 2010). Shallow water drilling was less affected, although it was also subject to a moratorium which was lifted sooner than the deep-water moratorium.

Even after the deep-water moratorium was lifted, it continued to provoke controversy. Media reports in November 2010 stated that the initial safety report presented to President Obama in May, and which suggested a moratorium was necessary, was re-written to suggest that a panel of experts had endorsed this view when, in fact, it had not (see BP oil spill: White House rewrote drilling ban report, guardian.co.uk, 10 November 2010).

Furthermore, despite both the deep and shallow water drilling bans being lifted, oil companies continued to criticise the slow speed at which the backlog of drilling permits were, and continue to be, handed out. Oil companies also complained that new safety rules that were put in place by the US oil and gas regulator slowed down the progress of new permits being granted (see below, New laws and regulations in the US). Up until the moratorium was reinstated in December 2010, there continued to be pressure from the oil and gas industry to speed up the process for granting permits.

At the same time, environmental and safety lobbying groups in the US raised concerns that the moratorium was lifted without enough evaluation of the risks that deep-sea drilling poses on the environment. The Center for Biological Diversity applied for an injunction against the US Interior Department′s policy of lifting the moratorium, and argued that a rigorous environmental review was necessary before any further permits were given (see Lawsuit seeks renewed moratorium on deepwater oil drilling, demands environmental review, Center for Biological Diversity, 23 October 2010). The Interior Department argued that the new safety requirements and a new permit procedure would deal with the issues raised by the Center for Biological Diversity.

However, on 1 December 2010, in a reversal of its earlier decision, Kenneth Salazar, the US Interior Secretary, announced that the Obama administration would once again impose a moratorium on deep-sea drilling in the eastern section of the Gulf of Mexico and along the Atlantic Coast, as a result of lessons learned from the BP oil spill (see US halts plan to drill in Eastern Gulf, The New York Times, 1 December 2010). It is thought that the moratorium will be in place until 2017, although drilling will continue in the central and western parts of the Gulf of Mexico under new safety rules announced by Interior Secretary Ken Salazar (see Department of Interior: Salazar announces revised OCS leasing program, Department of Interior, 1 December 2010). Oil companies immediately criticised the decision and suggested that the new regulations would be enough to safeguard environmental safety, as would the industry′s own commitment to the environment. Environmental campaigners praised the decision.

In Europe, discussions about a similar moratorium also took place. In September 2010, the European Parliament proposed that a moratorium should be considered for deep-sea drilling rigs until the cause and effects of the Gulf of Mexico oil spill were fully understood (see European Parliament: Environment Committee calls for deep sea drilling moratorium, 28 September 2010).

The reaction from the UK government to this proposal was critical and it indicated that there would not be any need for a moratorium, due to the already stringent UK regulatory regime (see Brussels plans strict new controls for offshore oil drilling, guardian.co.uk, 12 October 2010).

By the middle of October, the European Commission had instead proposed that new stricter regulations on deep-water drilling activities were necessary, rather than a moratorium (see European Commission: Communication from the Commission to the European Parliament and the Council, Facing the challenge of the safety of offshore oil and gas activities, 12 October 2010).

In September 2010, the environmental activist group Greenpeace also called for the UK government to impose a moratorium on deep-sea drilling. Greenpeace also said it would begin legal action against the government if it continued to grant drilling licences without carrying out new and more stringent environmental assessments, and before understanding the full cause and effects of the BP oil spill (see New deep sea drilling is not only irrational, our lawyers say it′s illegal too, Greenpeace UK, 2 September 2010). Greenpeace claimed that the UK government failed to undertake the necessary environmental assessments when granting new licences for deep-sea drilling, under EU Directive 2001/42/EC (the SEA Directive) and the Environmental Assessment of Plans and Programmes Regulations 2004 (SI 2004/1633), which state that authorities have to carry out a strategic environmental assessment (SEA) where a proposed plan is likely to have a significant effect on the environment (see legislation.gov.uk: Environmental Assessment of Plans and Programmes Regulations 2004). Greenpeace argued that the deep-sea rigs were located in areas off the Scottish coast that were environmentally important and home to marine creatures such as dolphins and whales and that, until an SEA of the area was carried out, no new licences should be granted.

In October 2010, the pressure group began preparing a legal claim against the UK government when it granted new drilling permits to oil company Chevron, to explore the deep water west of the Shetland Islands (see Chevron to begin deep-water drilling off UK coast, guardian.co.uk, 1 October 2010).

Greenpeace′s lawyers filed their claim with the High Court on 12 November 2010 to stop the UK government from issuing further deep-sea drilling licences until the causes from the Gulf oil spill were properly established, and until the government had carried out a proper environmental assessment on the area where drilling would take place (see We take the government to court over oil drilling, Greenpeace UK, 12 November 2010).

According to Michael Barlow, a partner from UK firm Burges Salmon, the legal challenge from Greenpeace could potentially have a big impact if it is successful. Even if it is not successful, he notes that any increased scrutiny from a high-profile pressure group such as Greenpeace could make companies reconsider their risk and environmental compliance strategies and make it clear to the public that safety and environmental compliance is a priority (see below, Scrutiny and perception of the industry).

In January 2011, the UK government confirmed that there would be no moratorium of deep-sea drilling in UK waters. However, a report issued by the House of Commons Energy and Climate Change Committee instead emphasised the need for operators to have better and site-specific response plans to emergencies, as well as clarity regarding which parties would be liable in case of an accident. Smaller operators will also need to have compulsory third-party insurance (see Spill fears fail to curb deepwater drilling, ft.com, 5 January 2011).

In the US, BP faces a number of legal claims from a number of different parties under a range of laws, including:

·         The Oil Pollution Act 1990, under which BP must pay for all clean up costs, but liability can be limited to US$75 million. However, this cap on liability does not apply if BP, or any of its contractors, are found to have acted with gross negligence, or found to have breached state or federal safety laws and regulations.

·         The Clean Water Act 1972, under which BP will have to pay fines depending on the number of barrels of oil that were spilled. This is US$1,100 for each barrel, but could go up to US$4,300 per barrel if it is found that the spill was caused as a result of gross negligence or wilful misconduct.

·         US federal and state safety and operational regulations.

·         The Refuse Act 1899

·         The Endangered Species Act 1973

·         The Migratory Bird Treaty Act 1918

In the immediate aftermath of the spill, local fishing and tourist communities in Louisiana and along the Gulf Coast began >BP hit by avalanche of compensation claims over US oil spill, guardian.co.uk, 31 May 2010).

In May 2010, >BP Oil Spill Legal Network files >). The plaintiffs in the claim allege that the defendants (which include BP, Transocean, Halliburton and Cameron), owed them a duty of care to operate the rig safely, and knew, or should have known, that the rig presented a risk and that its equipment was faulty. As a result, the claimants are alleging that the defendants were negligent in a number of areas. These include:

·         Failure to inspect and monitor the rig′s equipment.

·         Failure to maintain and repair the rig′s equipment.

·         Failure to safely operate the rig′s equipment.

·         Failure to properly design, maintain, operate and function the blow out preventer (BOP) valve.

·         Failure to adequately cement the well head casing.

The claim also alleges that the nature of the drilling was extremely hazardous, and therefore presented a high risk and likelihood of substantial harm to people, property and land. As a result of the extreme risks involved, the claim states that the defendants could not have exercised reasonable care to avoid the risks, and is therefore subject to strict liability.

The claim then also alleges that due to the defendants′ gross negligence, the rig was unseaworthy and not fit for purpose. As a result, the claimants assert that they are entitled to punitive damages from BP and the other defendants (see Dugas v BP et al (Louisiana), BP Oil Spill Network, 3 May 2010 and Lockridge v BP (Southern District of Alabama), 5 May 2010 ).

These >Transfer order re: oil spill by the oil rig "Deepwater Horizon" in the Gulf of Mexico on 20 April 2010, United States Judicial Panel on Multi-district Litigation, BP Oil Spill Legal Network, 10 August 2010). The claim combines the economic damages claims with personal injury and wrongful death claims against the defendants.

In August 2010, BP set up a compensation fund to deal with the claims.

The US$20 billion compensation fund provides companies and individuals with the right to claim a lump sum of compensation in lieu of going to court. The fund is being administered by Kenneth Feinberg, who was appointed by the White House and who co-ordinated the compensation fund for victims of the September 11 2001 terrorist attack on the World Trade Center.

The BP fund has been controversial, however, and there have been complaints that it is too restrictive in deciding who is eligible for compensation. There were also criticisms that BP deliberately delayed the claims process by citing the Oil Pollution Act 1990 to argue that claimants should not file their complaints in court before first going through the compensation fund process and then waiting 90 days to file their court claims (see Opposition grows to BP′s legal strategy, ft.com, 15 September 2010).

When the deadline of 23 November 2010 for emergency claims approached, media reports stated that the likely amount BP would have to pay to affected businesses would be much lower than expected because a number of the claimants did not have the proper documentation to support the damage that had been caused to their businesses. In the final three months of the compensation fund′s claim period, 450,000 claims were submitted but many of those were from fishermen from the Gulf region, who operated on a cash-only basis and could not provide enough documentation (see Half of BP oil spill damages claims ′inadequate′, says payout chief, guardian.co.uk, 24 November 2010).

On 24 November 2010, the second phase of administration of the compensation fund began, during which time the lump sum settlements were negotiated. Official guidance on the rules for the settlements was released on 22 November 2010 (see Gulf Coast claims facility protocol for interim and final claims, Gulf Coast Claims Facility, 22 November 2010 (updated 8 February 2011)). Claimants who seek compensation can still choose to sue BP and any other parties, unless they accept a final settlement. Once they accept a final settlement, claimants must waive their right to sue BP. Claimants will also have the option of receiving quarterly interim payments, with the option to sue BP for any outstanding money owed. An appeals process is also in place for claimants unhappy with their compensation offer. Claimants whose claims would normally fail in the US courts under the proximity test set by the Oil Pollution Act 1990 will be considered for compensation by Feinberg.

Despite these seemingly generous terms, there were calls for the claims process to be clearer (see Final settlement phase starts for BP oil spill, The New York Times, 24 November 2010).

In addition to the compensation fund payouts, BP is likely to face increasing costs for the clean-up operation, as well as a potentially large fine from the US government, following its civil and criminal investigations into the spill (see Box, Reports and investigations in the US). Media reports suggest that the total cost for BP could amount to US$40 billion (see BP oil spill costs to hit $40bn, guardian.co.uk, 2 November 2010).

BP has not so far invoked the US$75 million liability cap under the Oil Pollution Act 1990. Some US legal media reports suggest that the reason BP did not invoke this liability cap was because it knows that if it is found to have been grossly negligent, the cap would not apply in any case (see BP, Texas officials clash over general counsel′s alleged admission of negligence, Law.com, 3 August 2010). Under the Clean Water Act 1972, if BP were found to have been grossly negligent, it could face potentially huge fines from the US government.

Jeffrey Gracer, a partner at Sive Paget & Riesel in New York, comments that "if gross negligence or wilful misconduct was involved, not only would it eliminate the cap, but it would also point towards criminal liability for those involved in the decision chain". He notes that "if wanton disregard for public health and safety is found, the government is going to go after who it thinks is responsible". If senior level executives are targeted by the government and receive criminal convictions as a result of the spill, Gracer thinks this could lead to much more cautious behaviour from the oil and gas industry and from all industrial sectors in general.

One US energy lawyer who was interviewed notes that oil and gas companies will inevitably keep a close eye on the criminal investigation that is underway, to gauge what actual corporate liability exposure the parties involved will have.

On 15 December 2010, the US government′s Department of Justice (DoJ) announced that it would be suing BP, along with Anadarko, Transocean, Mitsui and Lloyds of London. The DoJ filed its civil lawsuit in a New Orleans court, stating that BP and others had breached federal safety and operational regulations, which included:

·         Failure to properly secure the Macondo well before the explosion on 20 April.

·         Failure to use the safest drilling technology to check the well′s condition.

·         Failure to maintain and survey the well.

·         Failure to use and maintain equipment that was necessary to ensure the safety and protection of staff, property, natural resources and the environment.

The DoJ asserts that these failures caused or contributed to the oil spill and that, under the Oil Pollution Act 1990, the defendants are therefore responsible for the government′s clean-up costs, as well as the losses suffered by local businesses and individuals and damage caused to the environment (see United States sues BP over Gulf oil disaster, guardian.co.uk, 16 December 2010). The DoJ is also seeking civil penalties under the Clean Water Act 1972 for the large amount of oil that was released into the Gulf before the well was capped.

Halliburton and Cameron International were not named in the lawsuit, but the DoJ stated that it might add more claims and defendants in the future.

The numerous legal claims against BP will likely be lengthy and complex to resolve. Adding to the complexity is the potential liability of the other parties involved, including Transocean (the drilling company), Halliburton (the cementing contractor of the well) and Anadarko and Mitsui (who both co-owned part of the well with BP), as well as Cameron International (who built the blow out preventer).

Some reports released in July 2010 suggest that Transocean may have shouldered some of the blame for the accident, with rig workers confidentially reporting days before the accident, that alarms were often switched off on the rig, and that various technical parts on the rig, including safety valves, were in need of replacement (see Workers on doomed rig voiced concern about safety, The New York Times, 21 July 2010). The majority of the rig workers worked for Transocean, rather than BP. The rig′s chief technician also confirmed to the US federal investigation′s hearing in July that alarms were switched off to stop false alarms going off on the rig, and to enable workers to sleep (see Deepwater Horizon′s alarms were switched off ′to help workers sleep′, guardian.co.uk, 23 July 2010).

In BP′s own report on the incident on 8 September 2010, it attributed the accident to eight separate causes, including the cement work done by Halliburton and the way in which the well was operated by Transocean (see BP releases report on causes of Gulf of Mexico tragedy, BP.com, 8 September 2010). By denying that its well design was the main cause of the accident, media commentators and other parties involved, such as Transocean, suggest BP has attempted to deflect any potential claims that it was grossly negligent in the design of the well (see Backlash greets BP′s internal report, ft.com, 8 September 2010). Transocean is already arguing that, under maritime law, its liability should be limited to US$27 million (see Oil disaster rig owner tries to escape liability, Maritime Journal, 26 May 2010).

A preliminary report on 28 October 2010 from the US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling (established by President Obama in May 2010) announced that Halliburton′s cement job was inadequate, and that Halliburton and BP knew this was the case (see Letter from National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, The New York Times, 28 October 2010). This finding raises the prospect of BP and Halliburton being found grossly negligent for the spill (see BP and Halliburton face bigger claims, ft.com, 29 October 2010). However, BP could still be found principally liable for damages because of the control it exercised over Transocean and Halliburton, according to commentators (see Legal battle over spill still wide open, ft.com, 8 September 2010).

Until further reports and investigations are concluded, there remains uncertainty about who will ultimately be found responsible for the accident. Investigations and reports look likely to continue for a number of months before any solid conclusions are reached.

In any case, there is no doubt that there will be a protracted and lengthy dispute between BP, Transocean, Halliburton, and the various other parties over who was primarily responsible for the spill and who will be liable for compensation to the numerous businesses affected by it. The oil and gas industry will no doubt be paying close attention to the dispute between the owners of the rig, the result of which may inform how third party contractors are dealt with in the future, with potentially stricter indemnity provisions within contracts. The conclusions of the various investigations and reports are also likely to affect the industry and the way it operates.

It is likely that new or revised safety and environmental regulations and legislation will be created as a result of the BP oil spill. Lawyers point out that there has been a historical precedent for this in the US and that these types of incidents inevitably result in new legislation. For example, in 1980, when 21,000 tons of toxic waste was found to have been buried by a chemical company in the Niagara Falls neighbourhood of Love Canal, the Comprehensive Environmental Response Compensation and Liability Act 1980 (CERCLA Superfund) was enacted, which taxed the chemical and petroleum industries, and gave federal authorities power to act against the release of harmful substances to the public and environment. In 1984, when the Union Carbide Corporation pesticide plant leaked chemicals into the town of Bhopal in India killing thousands of people, the Emergency Planning and Community Right to Know Act 1986 was enacted, which mobilised emergency planning at state and federal level, and gave local authorities information about potentially hazardous chemicals released in their area. The oil spill that occurred in Prince William Sound in Alaska, as a result of the Exxon Valdez oil tanker which ran aground in 1989, led to the Oil Pollution Act in 1990.

Oil Pollution Act cap

The current US$75 million cap on liability for oil spills, set by the Oil Pollution Act 1990 and put in place after the Exxon Valdez spill, is being debated by Congress. Gracer notes, however, that there are questions about whether Congress can change this cap retrospectively. In any case, operators and contractors will be watching closely, as any change will potentially affect all part