It’s a sensitive question for some and several media outlets created a buzz when rumors circulated that BP and the Department of Interior had reached a deal to commence drilling again nearly a year after the spill. Department of Interior Secretary Ken Salazar quickly rebuffed any claims that BP and his agency had reached some sort of agreement to resume drilling in the Gulf of Mexico. Bureau of Ocean Energy Management, Regulation and Enforcement spokeswoman Melissa Schwartz confirmed that there was no special deal in place with BP, saying, “There is no deal. There is no agreement. There is no draft agreement. There are no ongoing talks. There are no ongoing negotiations. We issue permits based on the merits of the application. We have issued no permits to BP to date.”
Secretary Salazar emphasized that “We treat every company with the same set of standards that we would treat everybody else. There is nothing here with BP that is different from what we will be doing with all the other companies that operate in the Gulf of Mexico.”
And that is part of the problem: treating every company with the same set of standards. Under the current system, there is no alignment of risk and behavior. An auto insurance company does not treat the driver with four crashes on his record the same as the driver with the spotless record. BP’s record has been far from spotless.
Yet, the current system is set up to treat everyone equally. The law currently caps liability, (the secondary costs that stem from offshore oil and gas accidents) at $75 million, with up to an additional $1 billion available from the Oil Spill Liability Trust Fund paid for by a per-barrel tax on imported and domestic oil. The liability structure in place does not sufficiently align risk and liability with individual behavior. It socializes risk by spreading the costs across the entire industry and does not inherently promote safe operations. One could argue that the cost of a spill alone (economic, environmental, bad press, having an administration shut down permits and production) is enough incentive to promote safe drilling. But the current liability system removes part of that incentive and policymakers should work to fix it.
A large part of the solution should be to allow private risk assessors to determine liability. Private risk assessors, not bureaucrats and politicians, should determine the liability associated with covered activities. These professionals maintain the specialized knowledge and expertise to accurately assess the risk of offshore oil and gas operations. They use many variables, such as safety records and depth and pressure of wells, to calculate their assessments. Private insurers can then use that information to determine the premiums required to insure against potential liabilities. It would create a better system where premiums would increase as a result of spills and safety violations. Thus, BP’s liability and insurance premium would be much higher than that of a company with a better safety record.
A comprehensive oil spill liability reform proposal would integrate the ideas of risk assessment and tie it together with a newly established insurance pool. To further promote safe operations, industry should set up an independent safety organization. The organization would share safety standards and practices, including quality assurance and operating and management procedures and would safety rating system. Insurance companies could then choose to base their premiums in part on the rating.
A new liability structure would seamlessly transition us to a system that removes the liability cap and ensures that companies will have the ability to go out and drill if they can prove they can handle the liability. It would promote safety and allow drilling to continue offshore if a company can cover its liability. In this instance, the market will determine if BP should go back to work in the Gulf.