ISSUES CONCERNING INCIDENTS ON TANKER ROUTES
Economics and Technical Perspectives
Economic Evaluation of Oil Spill Damage
Sponsored by Petroleum Association of JapanTokyo, Japan
February 27-28, 2003

Evaluation of Environmental Damage
by the Exxon Valdez Incident
Molly McCammon
Executive Director
Exxon Valdez Oil Spill Trustee Council
February 28, 2003

Introduction
I am pleased to be here with you today at the conference. I have had the honor of serving
as the Executive Director of the Exxon Valdez Oil Spill Trustee Council since 1994.
There have been larger oil spills than the Exxon Valdez oil spill, but none that involved
the release of such a large quantity of oil into such a rich and pristine environment. From
the first day, this oil spill engaged the imagination and concern of the public, and createdan interest that still exists to this day, nearly fourteen years later. I will first give yousome background on the spill, the original extent of the injury, the valuation of damages,
and the status of recovery today.

The oil
Alaska North Slope crude oil is produced along the northern coast of Alaska in various
fields such as Prudhoe Bay and Kuparuk. The oil is heavy crude, highly toxic and slow
to disperse when released into the environment. It is gathered in Prudhoe Bay and sent
800 miles through a pipeline to an ice-free terminal in Valdez, Alaska. From there the oil
is loaded on tankers and shipped south, through Prince William Sound, down to
Washington or California, where it is refined and distributed for use.

The Spill
On Thursday evening March 23, 1989, the Exxon Valdez, a very large crude carrier andone of Exxon’s two largest oil tankers, left the Port of Valdez bound for Long Beach,
California. Due to a variety of human errors, the ship was directed off course and shortly
after midnight on Friday March 24, 1989, struck Bligh Reef and fetched up hard aground.

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The grounding punctured the single-hulled vessel, resulting in the rupture of eleven of thevessel’s crude oil tanks and releasing over 11 million gallons of crude oil into the pristine
environment of Prince William Sound. It was the largest oil spill in United States history.

Response
For almost three days, the weather in Prince William Sound was unusually quiet.
However, Alyeska Pipeline Company, the initial responder, was not ready and few piecesof equipment were in the area in a timely manner. There was little or no containment
boom deployed and what was in the water was of little help. A test burn was conducted,
which worked to some extent, but the water content of the oily mousse soon madeburning impractical or impossible. Although dispersants were a primary response tool,
and were tested with somewhat inconclusive results, Exxon and Alyeska had neither
sufficient dispersant or equipment to adequately deploy it.

In any event, a natural gyre and the weather soon put an end to any hope of containment.
A severe winter storm blew into Prince William Sound, and the oil slick quickly wentfrom a relatively compact mass to a widely dispersed uncontrollable collection of patches
and streaks. Oil began to hit the beaches of western Prince William Sound,
overwhelming almost all efforts to stop it.

Over the next five and a half months, the cleanup operations grew exponentially,ultimately becoming the largest private project in Alaska since construction of the TransAlaska Pipeline, with over 11,000 people working on cleanup at its high point. At times3

it looked like an invasion force had entered Prince William Sound. About $2 billion total
was spent over the four year period to clean up more than 1,500 miles of oiled shorelinethat stretched nearly 500 miles.

But even as cleanup continued, government officials began to plan for the day when it
ended. They began to ask questions, such as: What is the injury to the environment?
What can be done to restore it? What will it cost and how can we pay for it? Thosequestions led to the conclusions that the state and federal governments, working together,must assess the extent of the damages to the environment, value those damages, require
Exxon to pay for them, and use the money received to restore the damages.

Assessment
The single biggest problem with assessing the extent of environmental damage caused by
the oil spill was that, with a few exceptions, there was little baseline information on thenatural resources in the oil spill area. As the spill expanded some scientists raced togather data ahead of oil hitting the beaches. However, the spill was too big and too fast
for much of this. Even where data existed, such as data on local salmon runs, the naturalvariation in those resources made pre-spill and post-spill comparisons suspect. Thus, todocument the extent of damages, one of the crudest measures, a body count, became aprimary yardstick for describing the damage to the public. Much of the early science
program was oriented toward documenting injuries and changes in populations of single
species, rather than entire ecosystems, and by tracking the fate and persistence of the oil.

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Following the oil spill, animal carcasses were found in large numbers, including
approximately 21,000 murres, 1,100 marbled murrelets, 838 cormorants, 151 bald eagles,
and 1,000 sea otters. However, this measure clearly understated the actual losses sinceanimal carcasses sank or were never discovered in the huge area covered by the oil spill.
As an example, even though “only” about 21,000 murre carcasses were found, theestimated total loss, based on studies done at the time, was 250,000. This was about 40%of the pre-spill population of the oil spill area. Immediate mortalities were estimated toinclude 2,800 sea otters, 300 harbor seals and 22 killer whales.

No oiled killer whale carcasses were found following the oil spill, but 14 out of the 36
killer whales in the resident Prince William Sound pod disappeared in 1989 and 1990.
During that same period, no whales were born in that pod, and the pod’s complex social
structure appeared to be deteriorating. The link between these losses is circumstantial –but the public and the Trustee Council have continued to monitor killer whales and report
regularly on their status.

Another case of circumstantial evidence of injury was with Pacific herring in Prince
William Sound. That population collapsed in 1993, the first year when large numbers of
herring from eggs spawned on oiled shorelines in 1989 were recruited to the spawning
population. Subsequent studies have shown that the collapse was due to a usually latentviral disease and that exposure to hydrocarbons – a known stressor – can induce its
expression. It can’t be “proven” that in this case, the oil spill was the “stressor”.

5However, this ecologically vital and commercially important species has yet to recruit thekind of large year-class that is essential for full recovery.

Sublethal injuries to natural resources were even more subtle. For example, following
the oil spill cutthroat trout in oiled streams grew more slowly than those in unoiled
streams, possibly as a result of reduced food supplies or exposure to oil. Reduced growth
rates may lead to reduced survival.

An even more complex problem arose with pink salmon. Pink salmon in the Sound areboth wild and hatchery raised. Wild pink salmon spawn in intertidal areas as well as instreams. These fish spawned in an oiled intertidal zone, swam through oiled waters andingested oil particles and oiled prey as they foraged in the Sound and emigrated to the sea.
As a result, post-spill studies indicated three types of injury. First, growth rates injuvenile salmon from oiled areas of Prince William Sound were reduced; second, there
was increased egg mortality in oiled versus unoiled streams; and third, genetic damage
appears to have occurred. Trustee Council researchers have shown that even very low
concentrations of weathered oil can have toxic effects on early life stages of pink salmon.

Thus, we know there was injury to wild pink salmon stocks from the oil spill, but thequestion remains, to what extent. Natural variability in wild pink salmon in the Sound ishuge, ranging in the years before the oil spill from a high of 21 million fish in 1984 to a
low of 1.8 million in 1988. Since the oil spill, the return has varied from a high of 14.4
million in 1990 to a low of 2.2 million in 1992. While we can monitor growth and egg

6mortality rates to assess recovery, it is very difficult, in light of the natural variability, todetermine the effect on Prince William Sound pink salmon stocks that can be attributed tothe spill.

The oil-related loss of about 300 harbor seals was added to a pre-spill decline in its Prince
William Sound population. This decline continues today, for reasons probably not
related to the oil spill.

In summary, while we know there was tremendous immediate injury to individual species,
there was, and is, much uncertainty as to the exact amount of that injury.

Valuation
As difficult as it seemed to be to assess the extent of injury to natural resources, placing adollar value on that injury was even more daunting. What is the value of an otter, a seal
or a common murre? What is the financial cost of a cutthroat trout that grows slower? To
answer these questions, state and federal lawyers looked, for the most part, to the value ofthe services that these resources provide to people, such as sport fishing and tourism.

One of the first studies initiated was a “replacement cost” analysis. This study estimates
the value of injuries to natural resources based on the costs of relocation of adult animals
from areas where they are abundant, the replacement of animals, and the rehabilitation of
injured animals.

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Relocation costs are the costs of capturing an animal, acclimating it to a new location andreleasing it in that location. Thus, for example with eagles, the costs of capture andrelocation were $1,000 - $1,500 per eagle. However, eagles tend to “home” so this cost
was not truly indicative of the costs of replacing a breeding pair. Because this factor is
not well understood, this number was not particularly useful for setting value.

Replacement costs are essentially the cost of raising young animals to maturity. Again
looking at eagles, there have been several efforts to raise young eagles and introduce
them into the wild. One of these efforts reported a cost of approximately $22,500 tosuccessfully produce one adult eagle living in the wild. Another had costs of $12,500 $15,000 per eagle, while a third reported costs of about $21,500.

Rehabilitation costs for injured animals was a third option. In 1989 Exxon spent about$100,000 per eagle in its rehabilitation program for animals injured by the oil spill.
Looking at all of these figures, eagles were valued at about $22,000 per bird.

SportfishingSportfishing was an activity clearly impacted by the oil spill. It is also an activity forwhich there is historic data. In 1989 the number of anglers decreased by 13%, the days
fished decreased by 6%, and the fish caught decreased by 10%. To place a value on thisdecrease, economists, through interviews with anglers, determined that the average
person spent $250 a day to fish in this area. This was assumed then to be the value to an
average person of the fishing experience. By multiplying this value by the number of lost8

angler days (124,185), economists determined that the lost value of sportfishing in 1989
was approximately $31 million.

Tourism
The impact of the oil spill on tourism was measured by surveys of planned and actual
visitors to the state and the general population. These surveys indicated that visitor
spending in 1989 decreased 8% in Southcentral Alaska and 35% in Southwest Alaska. In
the spill area 59% of businesses reported cancellations. Of visitors who actually traveled
to Alaska, 16% reported that the oil spill affected their travel plans and half of these said
they avoided Prince William Sound altogether. The result was an estimated loss of $19
million in 1989. The impact in 1990 was much less severe, and since then, there has been
little long term impact, although some recreation providers still avoid certain oiled
beaches and report fewer wildlife sightings.

Passive Use
Ironically, the largest damage, in monetary terms, came not from the direct use of injured
resources by individuals such as sport or commercial fishermen but rather, from people
who have only an indirect connection to Prince William Sound. These uses are called“passive uses” and include the loss felt by people who have not visited the oil spill area
but wish to visit some day, those who have no plans to use the area but want theirchildren to have the opportunity and those who have no plans for direct use but simply
value the fact that unspoiled wilderness exists. If lands or waters or wildlife are despoiled,9you have suffered a loss, and that loss can be measured by the amount of money youwere willing to give to see that they remained unspoiled.

How then does one measure passive loss for an event such as the Exxon Valdez, and canthat measurement stand up in court in an action to recover damages.

To answer this question the State of Alaska brought together a team of the mostprominent economists in the country working in the area of measurement of passive loss.
Peer review for the team was provided by Dr. Robert Solo, a recipient of the Nobel prize
for economics. Ultimately, the state spent over $3 million to complete the study
measuring lost passive use.

The most accepted measurement of passive loss at the time was through a method called
continent valuation. In essence this calls for determining the loss suffered by individuals
through a public opinion survey that could be extrapolated across the population that was
injured. Although the theory of this methodology was well developed and used on anumber of occasions, it had never been tested in court and was controversial among
economists. For that reason whenever the state was presented with a choice on how todesign or administer the survey, they always opted for the more conservative, defensible
path.

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First, it was necessary to determine the population that suffered the loss. Because of theextent and depth of the public knowledge and feelings about the Exxon Valdez oil spill, it
was clear that the appropriate population was the nation.

The key to measurement of lost passive use is to design and implement a survey throughwhich people are asked how much they value the attribute that is lost. This can be doneby measuring either the amount a person would be willing to pay to prevent the oil spillor the amount a person would be willing to accept to allow it to happen. Studies haveshown that use of a willingness to pay concept is more conservative and defensible, andfor that reason it was the approach taken.

Once this decision was made the team set about to design a survey that would answer thequestion in the most accurate manner: focus groups, test surveys and pilot surveys wereused. Conservative numbers to describe the damages were used. Damages claimed byother litigants, such as commercial fishermen, were not included.

The survey was given in person to 1,200 persons, and not in Alaska. Over 90% of the
respondents were aware of the oil spill. The survey results, after being run through aseries of complicated formulas, found a median willingness to pay of $31 per household.
Multiplied by the number of English-speaking households in the United States (nearly 91
million), the total passive use damages came to $2.8 billion.

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Settlement
Even though this approach had been used conservatively, problems remained in obtaining
this amount through the courts. The methodology was controversial and never tried incourt. There were some methodological problems that other economists said should
reduce the amount by 50%. Taking these uncertainties into account, the state felt theclaim was worth somewhat less than half of its face value. $1 billion was decided uponas an acceptable amount for purposes of settlement.

With a federal criminal trial looming on the horizon, Exxon was interested in settling its
disputes with the governments. On August 28, 1991, a Memorandum of Agreement
setting out the rules by which the governments would work together to recover and spend
any settlement money received from Exxon was approved by the federal district court. In
late September the governments and Exxon signed a civil settlement agreement andExxon and the United States reached a criminal plea agreement. These agreements wereapproved by the court on October 8, 1991.

Under the civil settlement agreement, the governments were to receive $900 million from
Exxon over a 10 year period, with a provision for payment of an additional $100 million
for damages not known at the time of the settlement. The money was to be used toreimburse the governments for their expenses in the oil spill, to pay for any additional
cleanup, and to pay for restoration. Through the criminal judgment, Exxon was to pay
each government $50 million in criminal restitution and $25 million to the United States
for a criminal fine.

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Restoration
The Memorandum of Agreement between the State of Alaska and the United States
governments called for the expenditure of settlement money to be overseen by six
Trustees – three federal and three state. The trustees created a Trustee Council in Alaska
to handle the day to day decisions on expenditures. The Council hired independent
professional staff that report directly to them. The Council also had to decide on a generaloutline of how to spend the settlement monies.

Early on there was much discussion by the public as to whether the money should be
used for scientific research, direct restoration activities, habitat acquisition, or oil spill
prevention. Some advocated spending most of the money on injured natural resources;
others felt that people who suffered from the spill should benefit directly.

State and federal lawyers determined that some of these were not legally permissible –such as prevention of future oil spills. Following a massive public outreach process, theTrustee Council decided on what became known as a “balanced and comprehensive” plan
for restoration: money for habitat protection, scientific research, and direct –hands on –restoration. The Council also adopted the request of the public to not spend all of themoney as it came in, but to set some aside in a reserve account for long term restoration
activities.

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The Trustee’s scientific advisors argued that an essential first step was to prevent further
harm to the habitats on which stressed fish and wildlife populations depend. The public
agreed, and to date, the Trustees have protected about 650,000 acres of privately-owned
lands in the spill area at a cost of close to $400 million, lands important for marbled
murrelets and other birds, salmon and other fish, and marine mammals.

The research and monitoring program had three main purposes: to track injury andrecovery; to understand the ecological factors that influence productivity and, therefore,
recovery; and to improve resource management and stewardship.

Public Involvement
The public has always been a major partner in the restoration effort. The Trustee Council
has a 20-member Public Advisory Committee, holds public meetings throughout thespill-impacted area, and seeks public comment on all activities. This is not always easy
since the Council’s program is somewhat restricted and there are numerous, diverse
audiences, including isolated Alaska Native villages, commercial fishing interests, urban
dwellers, and scientists.

Recovery 14 Years after the Spill
The Trustee Council established a list of resources which suffered population-level
injuries due to the spill. Our goal is to get these populations back to the level they would
have been if the spill had not occurred. However, many of these resources are also
experiencing the effects of other natural and human factors, resulting in significant

14population declines. A major concern with lingering oil effects is how the changes inoverall population or abundance from the initial oil-related damage may combine withother kinds of changes and disturbances in the marine ecosystem. Recovery objectives
are as specific and measurable as possible, but placement of a resource in a discrete
category requires considerable judgment on the part of the Trustee Council, and in fact,
may not necessarily reflect a resource’s overall status or health.

Of the 29 species on the list of injured resources, seven have now been declared“Recovered” from the effects of the oil spill: archaeological resources, bald eagles, black
oystercatcher, common murre, pink salmon, river otter, and sockeye salmon.

Eight other resources are considered to have made substantive progress toward recovery
and are listed as “Recovering”.

For some species, we know very little about the actual extent of the original injury, theoverall population and life history, or the status of recovery. These are called “Recovery
Unknown”: cutthroat trout, Dolly Varden, Kittlitz’s murrelets, rockfish, and subtidal
communities. We may never get enough information to take them off this list.

The list of eight species “Not Recovering” is our greatest concern. These are the species
which are having continued long-term declines in population, suffered severe losses
during the spill, or show continuing effects from the spill. They include: common loon,15

three species of cormorants, harbor seal, harlequin duck, Pacific herring, and pigeon
guillemot.

Lingering Oil Effects
Shoreline surveys in 2001 and 2002 found beaches in Prince William Sound stillcontaminated with oil equivalent to about 28 acres total. The results were surprising:more oil was found than expected, especially in the subsurface; subsurface oil was lessweathered and more toxic; and oil was found lower in the intertidal, closest to the zone of
biological production.

Other Trustee Council studies indicate that recovery of sea otters and harlequin ducks in
the heavily oiled region of western Prince William Sound has not occurred, with
continuing oil exposure suspected as a factor. Additional research on the bioavailabilityof this oil is being conducted, as well as on the potential impacts of this continued
exposure.

The conceptual model of this continuing injury is that oil still remains deep in the cobble
beaches, under mussel beds, and in the subtidal zone. Oil is now making its way into thefood web, contaminating prey that is consumed by sea ducks, such as harlequin ducks,
and by sea otters. That ingested oil is being metabolized, and the metabolic products are
causing tissue damage.

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GEM ProgramBecause it will be increasingly difficult over time to separate out an oil spill effect fromsome other factor affecting a species, the Trustee Council decided to use its remaining
funds – about $100 million – to establish an endowment for long term monitoring andresearch in the oil spill area – essentially the northern Gulf of Alaska. This program –called GEM – represents the Council’s ongoing legacy for promoting recovery of thespill-affected region by understanding the natural and human-caused changes to marine
ecosystems and marine species.

It is becoming increasingly clear that climate and oceanography play major roles incontrolling biological processes and populations of fish and wildlife important to people.
In fact, long-term monitoring now shows a major regime shift in the northern Gulf of
Alaska, with an ecosystem dominated by shrimp in the early 1970s, changing to one
dominated by cod and flatfish in the 1990s.

Added to natural ecosystem changes, we know that human activities play a prominentrole in this marine system and may have unintended consequences on the overall
ecosystem dynamics.

Human Effects
The governments’ settlement with Exxon was for damages to the “public’s natural
resources”. As for the people of the spill-impacted area, the event that took place on
Good Friday 1989 still has significant psychological and economic impacts. It would be17hard to overstate the psychological trauma that the spill imposed upon the people wholive in the spill area and were most affected by it. The Native Alutiiq people still call it“The Day the Water Died,” although we now know that that did not in fact happen andthat there has been remarkable overall recovery.

The Exxon Valdez oil spill has all the characteristics of a technological disaster:?? It was caused by human error.
?? It resulted in contamination of the biosphere.
?? The incident eroded families and communities.
?? There were physiological impacts – stress-related illnesses, higher incidents ofalcoholism.
?? The incident resulted in litigation that is still not resolved – 14 years later.
?? And, it has an ambiguous ending. There is still uncertainty about the extent of
injury and the status of recovery.

It has not been lost on the people that the governments were able to settle their claims
with Exxon, but private citizens haven’t. At the trial for the private plaintiff claims in
1994, the jury found compensatory damages for commercial fishermen in the amount ofapproximately $287 million, with another $3.5 million to other claimants such as
subsistence users, municipalities and area businesses. The jury also assigned $5 billion inpunitive damages. The private litigation is under appeal by Exxon and is still working its
way through the federal court system.

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Conclusions
We now know that oil spill effects can be subtle, indirect, long-term, and sometimes, notimmediately evident, such as the impact of small amounts of weathered oil – over a very
long time -- on sea otters and harlequin ducks. Oil spills don’t happen in a vacuum; spill
effects are added to those of natural changes, such as El Nino, and other human actions
unrelated to oil spills, such as fisheries harvests. We also know that you can’t possibly
have all the answers at the beginning, so it’s important to develop a restoration programthat is flexible and that can be modified and adapted as additional information is acquired.

The Trustee Council has determined that for the long term, it will be our understanding
and our ability to share information that will determine the future of the Gulf of Alaska
ecosystem and the people who depend on it.

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