- The Foundry: Conservative Policy News from The Heritage Foundation - http://blog.heritage.org -

Second Gulf Explosion Doesn’t Take Away Need for Drilling

Posted By Nicolas Loris On September 2, 2010 @ 8:33 pm In Energy | Comments Disabled

A production platform caught fire in [1] the Gulf of Mexico this morning 80 miles south of Vermilion Bay, Louisiana. Fortunately, according to early reports, the 13 workers on the platform survived the scare, but rescue crews took the workers to the hospital for precautionary measures.

What exploded was not a drilling rig (like in the instance of the BP spill) but a production platform. AP reports that the shallow-water platform was not producing oil at the time of the explosion, although the well does normally produce approximately 58,800 gallons of oil and 900,000 cubic feet of gas per day [1]. Although an official for Mariner, the company that operates the rig, reported that no oil is leaking from the platform and they properly shut the well, a thin oil sheen was present. The latest speculation is that the sheen may be from spilled petroleum from the production platform.

Without a doubt this is a different case than BP’s Macondo well blowout that leaked over 200 million gallons of oil into the water—with BP’s posing a much bigger environmental and economic challenge. If anything, the silver lining from Mariner’s production platform fire is that their response in terms of closing the seven collection wells and evacuation of the 13 crew members seems to have been professionally and successfully carried out.

Figuring out what caused the fire should be a priority for Mariner and regulators, but this shouldn’t be used as justification for the drilling moratorium. We need to recognize that offshore oil drilling is still an important national and economic priority. Energy is the lifeblood of the American economy, and oil is a significant part of our country’s energy portfolio, and that is unlikely to change any time soon. Offshore drilling provides about one-third of the U.S.’s domestic oil. These much-needed sources off our coastal waters have the potential to provide energy to every aspect of the U.S. economy at a time when fuel shortages that lead to increased energy prices can mean death to struggling industries.

As rare as these occurrences are, the clear reality is that rig and platform fires that threaten human safety and can cause significant environmental damage cannot keep occurring. We need to transition to a system that promotes safety and allows drilling to continue instead of piling on regulations that make it unnecessarily and prohibitively expensive to drill of America’s coasts. An important part of that effort should be liability reform for the secondary costs that stem from offshore oil and gas accidents.

The current system places a $75 million cap for the responsible party for these costs. Liability costs above $75 million up to $1 billion are funded by the Oil Spill Liability Trust Fund (OSLTF). The OSLTF is financed by an eight-cent-per-barrel tax on imported and domestic oil. The Oil Pollution Act of 1990 stipulates different liability limits for different oil and gas operations.

This system distorts risk of oil and gas operations in two fundamental ways. The artificially low cap of $75 million established 20 years ago does not fully or directly capture the risk of offshore operations. Secondly, rather than placing responsibility with the liable company, the OSLTF shifts responsibility to the entire industry and, ultimately, the federal government, thereby reducing the incentive for individual companies to operate safely.

Although the fire on the Mariner production platform was not a result of the liability system, a new system is necessary that better promotes safe offshore drilling operations.

Congress should reform the OSLTF and remove the $75 million liability cap, replacing it with a new system that accurately assesses the risks of offshore oil and gas operations and appropriately assigns those risks to industry operators [2]. Companies should demonstrate to federal regulators an ability to insure against the liability risk associated with specific offshore oil and gas operations (exploration, extraction, and transportation, etc.) in federal waters. Private risk assessors would determine liability coverage requirements for specific activities, and federal regulators would certify that liability requirements are met. The means for meeting liability coverage requirements would not be limited but may include self-insurance, insurance pools, dedicated assets, or private insurance policies.

The federal government would create a private, tiered insurance framework and administrative process to manage claims. The central element of the insurance framework would be a private and voluntary pooled insurance fund [2] for claims above $1 billion. The claims process would ensure that legitimate claims are paid fully and efficiently while protecting responsible parties from frivolous lawsuits. This is a system that would better align risk and behavior and enhance the safety of America’s offshore oil and gas operations.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/09/02/second-gulf-explosion-doesn%e2%80%99t-take-away-need-for-drilling/

URLs in this post:

[1] production platform caught fire in: http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2010/09/02/national/a083728D22.DTL

[2] remove the $75 million liability cap, replacing it with a new system that accurately assesses the risks of offshore oil and gas operations and appropriately assigns those risks to industry operators: http://www.heritage.org/Research/Reports/2010/08/Oil-Spill-Liability-A-Plan-for-Reform

Copyright © 2011 The Heritage Foundation. All rights reserved.