The People of America's Oil and Natural Gas Indusry

Who Pays for the Oil Spill?

Jane Van Ryan

Jane Van Ryan
Posted May 12, 2010

We've received several telephone calls from reporters who are wondering who pays for oil spill cleanup activities. With regard to the Deepwater Horizon spill, BP has assumed responsibility for the cleanup.

As BP America President and Chairman Lamar McKay told a Senate panel yesterday, "No resource available to this company will be spared." He added, "Our obligation is to deal with the spill, clean it up and make sure the impacts of that spill are compensated, and we're going to do that."

There also is a federal Oil Spill Liability Trust Fund, which amounts to an insurance policy supported and funded by the oil industry to make sure there are adequate resources to pay for oil spill damages.

But before any money from the trust fund can be used, the responsible company must pay ALL of the response costs, including any costs incurred by the government--such as those from the U.S. Coast Guard and National Guard--during the response.

The responsible company also is required to restore damaged natural resources to their pre-incident condition.

Under federal law, the responsible company is required to pay damage claims up to $75 million after it has paid for all cleanup efforts. Once the damage-claim cap is reached, claims can be paid by the trust fund. This fund is paid through a tax--currently $.08 per barrel on imported and U.S. produced crude oil--on the oil industry.

Therefore, damage claims paid by the trust fund are spread out over the entire industry as opposed to these costs being paid through taxpayer dollars. There is a $1 billion cap per incident on payouts from the trust fund and a $500 million cap on natural resource claims. Currently, there is about $1.6 billion in the trust fund.

Companies may choose to pay claims beyond the $75 million damage-claim cap. BP has stated that it accepts full responsibility for the Deepwater Horizon response costs and will honor legitimate claims for damages caused by the spill.

Congress is considering two proposals to alter the trust fund before the Memorial Day recess. API believes it would be better to wait until there is a clear sense of the resource needs arising from the accident.

That would allow lawmakers to consider changes thoughtfully and give interested parties the opportunity to be heard. Any proposed changes to the insurance fund should protect its availability for future incidents and take care not to undermine the oil and natural gas industry's ability to obtain private insurance or discourage investments in fuels for the future.