Deepwater Horizon Oil Spill: Actions Needed to Reduce Evolving but Uncertain Federal Financial Risks
Published: 2011-10-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: On April 20, 2010, an explosion of the Deepwater Horizon oil rig leased by BP America Production Company (BP) resulted in a significant oil spill. GAO was requested to (1) identify the financial risks to the federal government resulting from oil spills, particularly Deepwater Horizon, (2) assess the Coast Guard's internal controls for ensuring that processes and payments for spill-related cost reimbursements and claims related to the spill are appropriate, and (3) describe the extent to which the federal government oversees the BP and Gulf Coast Claims Facility cost reimbursement and claims processes. We issued status reports in November 2010 and April 2011. This is the third and final report related to these objectives. We obtained and analyzed data on costs incurred from April 2010 through May 2011 and claims submitted and processed from September 2010 through May 2011. We reviewed relevant policies and procedures, interviewed officials and staff at key federal departments and agencies, and tested a sample of claims processed and cost reimbursements paid for compliance with internal controls..
section_title: What GAO Found
paragraphs: Both the individual circumstances of the Deepwater Horizon incident, as well as the overall framework for how the federal government responds to oil spills, present a mix of evolving, but as yet uncertain, financial risks to the federal government and its Oil Spill Liability Trust Fund (Fund). The extent of financial risks to the federal government from the Deepwater Horizon is closely tied to BP and the other responsible parties. BP established a $20 billion Trust to pay for individual and business claims and other expenses. As of May 31, 2011, BP has paid over $700 million of federal and state government costs for oil spill cleanup. Federal agency cleanup and restoration activities are under way and agencies continue to incur costs and submit them for reimbursement. However, the full extent of these costs, particularly those related to environmental cleanup, may not be fully realized for some time. As cleanup costs continue to mount, it is possible that expenditures from the Fund will reach the $1 billion total expenditure per incident cap. Expenditures were over $626 million on May 31, 2011. If these amounts reach the total expenditure cap of $1 billion, the Fund can no longer be used to make payments to reimburse agencies' costs (or to pay valid individual or business claims if not paid by the responsible parties). At that point, government agencies would no longer be able to obtain reimbursement for their costs. In November 2010, GAO suggested that Congress may want to consider setting a Fund per incident cap based on net expenditures (expenditures less reimbursement), rather than total expenditures. Finally, GAO found the federal government's longer-term ability to provide financial support in response to future oil spills is also at risk because the Fund's primary source of revenue, a tax on petroleum products, is scheduled to expire in 2017. GAO's testing of the Coast Guard's internal controls over Deepwater Horizon claims processed and cost reimbursements processed and paid showed that adjudicated claims processed and costs reimbursed were appropriate and properly documented. In November 2010, GAO made four recommendations regarding establishing and maintaining effective cost reimbursement policies and procedures for the Fund. The Coast Guard changed its operating practices to reflect lessons learned from the initial response to the Deepwater Horizon incident, and it has updated its cost reimbursement procedures accordingly. However, the Coast Guard has not yet updated its procedures for processing significant claims, so lessons learned from its experiences processing Deepwater Horizon claims could be lost. The federal government has used a variety of approaches to oversee BP's and GCCF's cost reimbursement and claims processing. Soon after the Deepwater Horizon oil spill, the federal government established a Deepwater Integrated Services Team (IST), which was initially responsible for monitoring BP's claims process, among other things. Subsequently, the oversight of cost reimbursement and claims activities transitioned to the Department of Justice, which continues to lead this and other efforts. In addition, the Department of the Interior and the National Oceanic and Atmospheric Administration are serving as the federal government's representatives for the natural resource trustees in evaluating the environmental impact of the Deepwater Horizon spill and selecting and implementing restoration projects to be funded by BP. GAO is (1) reiterating that Congress may want to consider setting a Fund cap per incident based upon net expenditures, (2) presenting a new matter concerning extending the barrel tax used to finance federal oil spill responses to sustain program funding, and (3) making a recommendation to improve procedures for future significant spills. In responding, the Department of Homeland Security concurred with the recommendation.

section_title: Letter
paragraphs: The explosion on the BP America Production Company’s (BP) leased  Deepwater Horizon oil rig in the Gulf of Mexico on April 20, 2010 resulted  in one of the largest environmental disasters in U.S. history. Along with  the devastating environmental impact, the Deepwater Horizon oil spill  affected the livelihoods of thousands of Gulf Coast citizens and  businesses. The total costs to clean up this unprecedented spill, ease the  economic suffering of affected parties in the region, and assess and  mitigate its eventual environmental impact remain unknown but have  been estimated in the tens of billions of dollars.
The Oil Pollution Act of 1990, as amended (OPA), which was enacted  after the Exxon Valdez oil spill in 1989, established a “polluter pays”  system that places the primary burden of liability for costs of spills up to a  statutory maximum, on the responsible parties—BP and several other  companies in this case. However, responsible parties are liable without  limit if the oil discharge is the result of gross negligence or willful  misconduct, or a violation of federal operation, safety, and construction  regulations. OPA provides the Oil Spill Liability Trust Fund (Fund) to pay  for oil spill costs when the responsible party cannot or does not pay. The  Fund is administered by the Coast Guard through its National Pollution  Funds Center (NPFC), is primarily financed through a tax on petroleum  products, and is subject to a $1 billion cap on the amount of expenditures  from the Fund per incident. NPFC administers the Fund by disbursing  funds to government agencies to reimburse them for their oil spill cleanup  costs (cost reimbursements), monitoring the sources and uses of funds,  adjudicating claims submitted by individuals and businesses to the Fund  for payment (claims), and pursuing reimbursement from the responsible  party for costs and damages paid from the Fund (billing the responsible  party).
In the case of the Deepwater Horizon oil spill, BP, as well as others, have  been identified as responsible parties. In this capacity, BP established  multiple claims centers along the Gulf Coast to receive and process  individuals’ and businesses’ damage claims; on May 3, 2010, BP began  paying emergency compensation to them. In June 2010, as part of an oral  agreement between the Obama Administration and BP, BP established a  new claims processing facility, the Gulf Coast Claims Facility (GCCF).  GCCF, administered by Kenneth Feinberg, began operations on August  23, 2010, and is responsible for handling claims from individuals and  businesses for damages resulting from the spill. BP also established an  irrevocable trust in August 2010—primarily to pay claims approved by  GCCF among other purposes—and pledged to incrementally provide a  total of $20 billion to the trust by 2014.
Shortly after the April 20, 2010 explosion, members of Congress  requested that we (1) identify the financial risks to the federal government  resulting from oil spills, particularly Deepwater Horizon, (2) assess  NPFC’s internal controls for ensuring that processes and payments for  cost reimbursements and processes for claims related to the Deepwater  Horizon spill were appropriate, and (3) describe the extent to which the  federal government oversees the BP and GCCF Deepwater Horizon oil  spill-related claims processes.
This report is the third and final in a series of reports related to these  objectives. In November 2010, we provided our preliminary assessment  of the financial risks and the cost reimbursement and notification policies  and procedures associated with the Deepwater Horizon oil spill. We  expressed the view that Congress should consider changing the  calculation of expenditures made against the Fund’s $1 billion per  incident expenditure cap to take into account reimbursements from  responsible parties. We also made four recommendations to NPFC  directed at helping NPFC establish and maintain effective cost  reimbursement policies and procedures for the Fund and update NPFC’s  current policies to reflect current organization, structure, and  management directives. (See appendix I for the specific  recommendations and their status.) In April 2011, we provided updated  information on the financial risks to the federal government associated  with the Fund’s cap on total, rather than net, expenditures, as well as  claims submitted to and reviewed by NPFC and GCCF. This final report  provides an update on the issues and risks to the federal government, the  results of our testing of NPFC’s internal controls over the processes and  payments for cost reimbursement and the claims process, and an  overview of the federal government’s oversight of BP and GCCF’s claims  processes.
As part of our analysis of financial risks to the federal government and the  Fund, we identified and analyzed applicable laws and regulations to  determine statutory and regulatory limitations on the liability of  responsible parties that may pose financial risks to the Fund and federal  government. As one of OPA’s goals is to make the environment and  public whole for injuries to natural resources resulting from an oil spill, we  reviewed applicable guidance, regulations, and NPFC annual reports to  gain an understanding of the Natural Resource Damage Assessment  process. These processes involve determining the type and amount of  restoration needed to compensate the public for harm to natural  resources as a result of an oil spill, and the length of time these  assessments may take to complete. In addition, we reviewed publicly  available quarterly financial information of responsible parties through  June 2011 to gain an understanding of the extent to which these  companies reported contingent liabilities. To determine the amounts  obligated and actual costs incurred in relation to the Fund’s $1 billion per  incident cap, we obtained and analyzed daily financial summary data  NPFC uses to track costs for the Deepwater Horizon oil spill. We obtained  invoices NPFC sent to the responsible parties to reimburse the Fund,  analyzed the requests for reimbursements submitted by federal and state  agencies, and compared the invoiced amounts to the amounts federal  and state agencies had submitted for payment from the Fund.
To assess the extent to which NPFC’s internal controls ensured that cost  reimbursements were appropriate, we tested a statistical sample of  payments made to federal and state agencies between April 2010 and  April 2011 for Deepwater Horizon removal and response activities for  compliance with NPFC’s policies and procedures. In addition, while NPFC  had not made any payments in response to claims from individuals and  businesses submitted as of April 30, 2011, we tested a statistical sample  of Deepwater Horizon final claim determinations—all denials or withdrawn  by the claimant—that had been made by NPFC officials for compliance  with NPFC’s policies and procedures to implement OPA requirements.  We also obtained information on NPFC’s claims contingency planning for  handling a potentially large number of claims related to the Deepwater  Horizon oil spill. In order to update information about claims submitted  and reviewed by NPFC and GCCF, we used available NPFC and GCCF  claims data through May 31, 2011.
To provide an overview of the extent to which the federal government  oversees the BP and the GCCF claims processes, we interviewed agency  officials about oversight of BP’s claims process. Specifically, we  interviewed Department of Justice (Justice) officials who worked with BP  to establish the GCCF and its claims processes, among other things. We  also interviewed NPFC officials who monitor GCCF’s actions to approve  and deny claims from individuals and businesses. We interviewed Justice  and Office of Management and Budget (OMB) officials about any plans to  pursue payment from the responsible parties for federal government  costs for the Deepwater Horizon oil spill that are not reimbursed through  an intragovernmental agency agreement. Appendix II provides additional  details on our scope and methodology.
We conducted this performance audit from July 2010 to October 2011, in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Legal Framework Establishing Responsibilities to Pay Oil Spill Costs and Claims
paragraphs: The legal framework for addressing and paying for maritime oil spills is  identified in OPA, which was enacted after the 1989 Exxon Valdez spill.  OPA places the primary burden of liability and the costs of oil spills on the  owner and operator of the vessel or on shore facility and the lessee or  permittee of the area in which an offshore facility is located. This “polluter  pays” framework requires that the responsible party or parties assume the  burden of spill response, natural resource restoration, and compensation  to those damaged by the spill, up to a specified limit of liability. In general,  the level of potential exposure under OPA depends on the kind of vessel  or facility from which a spill originates and is limited in amount unless the  oil discharge is the result of gross negligence or willful misconduct, or a  violation of federal operation, safety, and construction regulations, in  which case liability under OPA is unlimited. For oil spills from an offshore  facility, such as the Deepwater Horizon, liability is limited to all removal— or cleanup—costs plus $75 million.
Under OPA, before any vessel larger than 300 gross tons can operate in  U.S. waters, the owner/operator must obtain a Certificate of Financial  Responsibility (COFR) from NPFC. This COFR demonstrates that the  owner/operator has provided evidence of financial responsibility to pay for  removal costs and damages up to the liability limits required by OPA.  These OPA requirements for demonstrating financial responsibility apply  only to the statutory maximum amount of potential liability under OPA,  although states may impose additional liabilities and requirements related  to oil spills in state waters.
OPA requires that, subject to certain exceptions, such as removal cost  claims by states, all nonfederal claims for OPA-compensable removal or  damages be submitted first to the responsible party or the responsible  party’s guarantor. If the responsible party denies a claim or does not  settle it within 90 days, a claimant may present the claim to the federal  government to be considered for payment. To pay specified claims  above a responsible party’s liability limit, as well as to pay claims when a  responsible party does not pay or cannot be identified, OPA authorizes  use of the Fund subject to limitations on the amount and types of costs.  For example, under OPA, the authorized limit on Fund expenditures for a  single spill is currently set at $1 billion (without consideration of whether  the Fund was reimbursed for any expenditures). In addition to paying  claims, the Fund is used to reimburse government agencies for certain  eligible costs they incur. Further, within the $1 billion cap, the costs for  conducting a natural resource damage assessment and claims paid in  connection with any single incident shall not exceed $500 million. OPA  provides that the President designate the federal officials and that the  governors designate the state and local officials who act on behalf of the  public as trustees for natural resources. OPA regulations provide that  the trustees may recover costs for natural resource damage assessment  and restoration. The Fund may not be used for certain types of personal  injuries or damages that may arise related to an oil spill incident, such as  financial losses associated with oil company investments by members of  the public. Recovery for such damages and injuries may be governed by  other federal statutes, common law, or various state laws.
Federal agencies are authorized to use the Fund to cover their oil  removal costs from the affected areas to the extent the Fund has funds  available within the $1 billion cap. The federal government is entitled to  reimbursement from responsible parties for such costs.
The Coast Guard’s NPFC administers uses of the Fund to reimburse  government agencies for their removal and cleanup costs; adjudicating  individual and business claims submitted to the Fund for payment; and  pursuing reimbursement from the responsible party for costs and claims  paid by the Fund. NPFC bills the responsible parties directly, including BP  in this case, for costs government agencies have incurred, and all  payments received from responsible parties are deposited into the Fund.
OPA defines the costs for which responsible parties are liable and for  which the Fund is made available for compensation in the event that the  responsible party does not pay, cannot pay, or is not identified. As  described in greater detail in appendix V, “OPA compensable” costs  include two main types:    Removal Costs: Removal costs are incurred by the federal  government or any other entity taking approved action to respond to,  contain, and clean up the spill. For example, removal costs include  cleaning up adjoining shoreline affected by the oil spill and the  equipment used in the response—skimmers to pull oil from the water,  booms to contain the oil, planes for aerial observation—as well as  salaries, travel, and lodging costs for responders.    Damages: OPA-compensable damages cover a wide range of both  actual and potential adverse impacts from an oil spill. For example,  damages from an oil spill include the loss of profits to the owner of a  commercial charter boat if the boat was trapped in port because the  Coast Guard closed the waterway in order to remove the oil, or  personal property damage to the owner of a recreational boat or  waterfront property that was oiled by the spill, for which a claim may  be made first to the responsible party, if possible, or to the Fund.
In addition to OPA-compensable costs, the federal government can also  incur other non OPA-compensable costs associated with oil spills. For  example, the federal government had various non-OPA-compensable  costs for the Deepwater Horizon oil spill, such as Department of  Homeland Security (DHS) costs associated with providing additional staff  to NPFC for receiving and processing claims.
section_title: Four Operational Response Phases for Oil Removal
paragraphs: The National Oil and Hazardous Substances Pollution Contingency Plan,  more commonly called the National Contingency Plan is the federal  government’s blueprint for responding to oil spill and hazardous  substance releases. The National Contingency Plan provides the  organizational structure and procedures for preparing for and responding  to discharges of oil and releases of hazardous substances, pollutants,  and contaminants. The plan outlines approved procedures and removal  activities when responding to an oil spill and identifies the following four  phases of response operations for oil discharges:  1.  Discovery and Notification include activities conducted to discover oil  spills or to notify appropriate authorities of oil spills.  2.  Preliminary Assessment and Initiation of Action include activities  conducted to assess the magnitude and severity of the spill and to  assess the feasibility of removal and plan appropriate actions. These  activities are necessary whether or not the responsible party is taking  action.  3.  Containment, Countermeasures, Cleanup, and Disposal include oil  spill cleanup activities such as hiring contractors and transporting and  staging required supplies and needed equipment.  4.  Documentation and Cost Recovery include the activities necessary to  support cost recovery and record uses of the Fund.
Three of the four phases for oil removal remain under way for the  Deepwater Horizon incident, and the operational response is likely to  continue for years. The first phase, discovery and notification, is  substantially complete. Subject to certain thresholds, the costs incurred in  phases two, three, and four are eligible to be paid from the Fund.
section_title: The Fund’s Financial Resources to Pay Oil Spill Costs and Claims
paragraphs: The Fund’s primary revenue source is an 8 cent per barrel tax on  petroleum products either produced in the United States or imported from  other countries. Other revenue sources include recoveries from  responsible parties for costs of removal and damages, fines and penalties  paid pursuant to various statutes, and interest earned on the Fund’s U.S.  Treasury investments. In fiscal year 2009, the barrel tax was 92 percent  of the Fund’s revenue. As shown in figure 1, the Fund’s balance has  varied over the years. The barrel tax expired in December 1994 and was  reinstituted at 5 cents per barrel in April 2006 as mandated by the Energy  Policy Act of 2005. The Energy Improvement and Extension Act of 2008  increased the tax to 8 cents per barrel and provides that the Fund’s barrel  tax shall expire after December 31, 2017.
In fiscal year 2011, the increase to the Fund is primarily attributable to  reimbursements received from responsible parties for the Coast Guard’s  costs incurred in response to the Deepwater Horizon incident.  Specifically, as of May 31, 2011, the Coast Guard has billed and received  from responsible parties, $315.3 million for Coast Guard recoverable, or  indirect costs, such as personnel and equipment. According to the  agency, the Coast Guard has historically viewed its OPA recoverable  costs as activities normally funded through the agency’s operating  expense appropriation, and thus it has not sought reimbursement for  these costs from the Fund.
As shown in figure 2, the Fund has been administratively divided into two  major components—the Emergency Fund and the Principal Fund— administered by the Coast Guard’s NPFC. The Emergency Fund  authorizes the President to make available $50 million each year to cover  immediate expenses associated with mitigating the threat of an oil spill,  costs of oil spill containment, countermeasures, and cleanup and disposal  activities, as well as paying for other costs to initiate natural resource  damage assessments. Amounts made available remain available until  expended. For the Deepwater Horizon oil spill, the Coast Guard’s Federal  On-Scene Coordinator used the Emergency Fund to pay for oil spill  removal activities (i.e., the equipment used in removal activities and for  the proper disposal of recovered oil and oil debris), and the Federal  Natural Resource Damage Trustees also entered into reimbursable  agreements with NPFC with respect to funding for activities to initiate  natural resource damage assessments. To the extent that available  amounts are inadequate for an emergency (as was the case in the  Deepwater Horizon oil spill), the Maritime Transportation Security Act of  2002 granted authority for the Coast Guard to advance up to $100 million  to pay for oil spill removal activities, and that amount was advanced from  the Principal Fund to the Emergency Fund.
In June 2010, Congress amended OPA to authorize emergency  advances for the Deepwater Horizon oil spill in increments of up to $100  million for each cash advance, but the total amount of all advances may  not exceed the $1 billion per incident cap. In contrast to the Emergency  Fund, the Principal Fund is to be used to provide funds for natural  resource damage claims, loss of profits and earning capacity claims,  and loss of government revenues. The Principal Fund also provides for  certain agency appropriations including the Coast Guard, Environmental  Protection Agency (EPA), and the Department of the Interior (DOI)—each  of which receives an annual appropriation from the Fund through the  Principal Fund to cover administrative, operational, personnel, and  enforcement costs.
Consistent with its Fund management responsibilities, in response to the  Deepwater Horizon oil spill, NPFC is responsible for billing the  responsible parties, including BP, directly for costs that government  agencies have incurred. The payments NPFC receives from BP are to be  deposited into the Fund and NPFC reimburses agencies for their removal  costs.
Funds are to be disbursed from the Fund to government agencies using  two vehicles—Pollution Removal Funding Authorizations (PRFA) and  Military Interdepartmental Purchase Requests (MIPR). The PRFA  commits the Fund to reimburse costs incurred for agreed-upon pollution  response activities undertaken by a federal agency assisting the Federal  On-Scene Coordinator. The terms of a PRFA include relevant                 (1) personnel salary costs, (2) travel and per diem expenses, (3) charges  for the use of agency-owned equipment or facilities, and (4) expenses for  contractor or vendor-supplied goods or services obtained by the agency  for removal assistance. Similarly, the Federal On-Scene Coordinator may  issue a MIPR for agreed-upon activities of the Department of Defense  (DOD) or its related components and for some other agencies’ activities.  In contrast to PRFAs, MIPRs generally commit the Fund to disburse  funds for oil spill response activities prior to conducting the activity and  incurring the related costs. However, for the Deepwater Horizon oil spill,  both NPFC and DOD established procedures for submitting  documentation on a regular basis for MIPRs authorized in response to  this spill of national significance.
section_title: BP’s Claims Process for Individuals and Businesses
paragraphs: The Coast Guard, without in any way relieving the other responsible  parties it identified of liability, approved BP’s advertisement of its claims  process. In response to economic harm caused by the Deepwater  Horizon oil spill and to fulfill its obligations as a responsible party, BP  established a claims process and multiple claims centers throughout the  Gulf states. On May 3, 2010, BP began paying emergency compensation  to individuals and businesses. BP stated that emergency payments would  continue as long as individuals and businesses could show they were  unable to earn a living because of injury to natural resources caused by  the oil spill. According to BP, it would base emergency payments on         1 month of income and would be adjusted with additional  documentation. BP has been working to ensure that the other  Deepwater Horizon oil spill responsible parties contribute to the response.  On May 20, 2011, BP announced that it had reached an agreement with  MOEX Offshore 2007 LLC and its affiliates to settle all claims between  the companies related to the Deepwater Horizon oil spill, which included  MOEX paying $1.065 billion to BP. Additionally, on October 17, 2011, BP  announced that it had reached an agreement with Anadarko Petroleum  Company to settle all claims between the companies related to the  Deepwater Horizon oil spill, which included Anadarko paying $4 billion to  BP.
On June 16, 2010, President Obama announced that BP had agreed to  set aside $20 billion to pay certain economic damage claims caused by  the oil spill. On August 6, 2010, BP established an irrevocable Trust and  committed to fund it on a quarterly basis over 3-1/2 years to reach the  $20 billion total (as shown in fig. 3). The Trust is to pay some OPA- compensable claims as well as some other claims for personal injuries  that are not OPA-compensable, but for which BP would be liable under  other law.
On August 23, 2010, the GCCF took over the administration of claims  process and the centers BP had established. Since it began operating,  the GCCF has offered the following kinds of payments:    Emergency Advance Payments: Payments available to individuals  and businesses that were experiencing financial hardship resulting  from damages incurred from the Deepwater Horizon oil spill. GCCF  considered claims on emergency payments that were submitted by  November 23, 2010.    Quick Payment Final Claim: On December 13, 2010, BP announced  that individuals and businesses that had received emergency  payments from the GCCF were eligible for a quick payment final  claim, which offers a fixed amount of $5,000 for individuals and  $25,000 for businesses. Acceptance of such a claim would resolve all  claims by that claimant against BP including past and future alleged  damages. The GCCF Protocols for Interim and Final Claims provides  that final claims can be submitted to the GCCF through August 23,  2013.    Final Payment: Those who do not choose or are not eligible for the  quick payment may submit a full review final payment claim for all  documented losses and damages. Acceptance of a final claim would  resolve all claims by that claimant against BP including past and  future alleged damages. Under GCCF procedures, claimants will have  until August 23, 2013, to estimate damages and submit claims for final  payment.  Interim Payments: The alternative to a final payment is to make an  interim payment claim for past damages that have not been  compensated. Individuals and businesses receiving interim payments  are not required to sign a release of liability and may file a final claim  at a later date. The GCCF Protocols for Interim and Final Claims  provides that interim claims can be submitted to the GCCF through  August 23, 2013.
As of May 31 2011, GCCF has paid $4.2 billion for individual and  business claims as shown in table 1. While the GCCF is scheduled to  stop receiving claims on August 23, 2013, BP’s obligation, as a  responsible party under OPA, to receive claims will continue after the  GCCF closes.
section_title: Although the Total Federal Financial Risk Has Not Been Determined, Actions Are Needed to Reduce Known Risks
paragraphs: Both the individual circumstances of the Deepwater Horizon incident, as  well as the overall framework of how the federal government responds to  oil spills, present a mix of financial risks to the Fund and the federal  government. The extent of financial risks to the federal government from  the Deepwater Horizon is closely tied to BP and the other responsible  parties and guarantors. Because the federal government’s Fund would  pay if the responsible party (BP through its Trust, for example) did not,  and given the expectation for numerous expenses to be paid from the  Trust and the fact that the full amount of damages may not be fully  determined for some time, the extent of any long-term financial risks for  the federal government as a result of this spill is not clear. Federal agency  cleanup and restoration activities are underway and agencies continue to  incur costs and submit them for reimbursement. As a result, it is possible  that expenditures from the Fund for Federal removal costs and claims will  reach the $1 billion cap, as the cap balance was over $626 million on May  31, 2011. When the cap balance reaches the total expenditure cap of    $1 billion, no further payments to reimburse agencies’ costs (or to pay  individual or business claims if not paid by the responsible parties) can be  made from the Fund, so federal agencies would no longer be able to  obtain reimbursement for their costs. Finally, the federal government’s  longer-term ability to provide financial support in response to future oil  spills is also at risk because the Fund’s primary source of revenue, a tax  on petroleum products, is scheduled to expire in 2017.
subsections: section_title: BP Has Committed to Paying Deepwater Horizon Expenses, but the Extent of the Federal Government’s Financial Exposure Remains Unknown
paragraphs: BP has committed to set aside $20 billion to cover potential Deepwater  Horizon oil spill expenses—and has stated its intent to pay expenses  over the $20 billion if needed. BP’s track record for reimbursing federal  agencies for their expenses to this point has been favorable. For  example, as of May 31, 2011, NPFC had sent 11 invoices to all of the  responsible parties covering federal and state OPA-compensable costs  totaling $711 million and BP paid all 11 invoices. However, until the total  expenses of the Deepwater Horizon oil spill have been fully determined  and those amounts have then been paid by and reimbursed to the federal  government, the extent of any federal government financial exposure  remains unknown. The financial responsibility for the spill will ultimately  be determined through a lengthy and complex process involving the  application of different laws and regulations, and depends upon a  continuation of the ability of the responsible parties to pay expenses  associated with the Deepwater Horizon oil spill.
Although BP has established a $20 billion Trust to pay claims from  individuals and businesses harmed by the spill, a number of uncertainties  regarding the Trust’s uses may impact its ability to adequately reimburse  claimants, increasing the risk that the federal government will ultimately  be responsible for paying the remaining claims. Although all  uncertainties—and the associated expenses—may not be known for  many years, some uncertainties that are known relate to the following  issues.    The federal government has begun an extensive natural resource  damage assessment process, but the associated costs have yet to be  determined. In order to start the process, in May 2010, BP agreed to  provide $10 million to DOI and $10 million to the National Oceanic  and Atmospheric Administration (NOAA) in the Department of  Commerce. Also, in April 2011, BP committed up to $1 billion from the  Trust to projects to help restore damaged natural resources in the  Gulf of Mexico, such as the rebuilding of costal marshes,  replenishment of damaged beaches, conservation of sensitive areas  for ocean habitat for injured wildlife, and restoration of barrier islands  and wetlands that provide natural protection from storms. The natural  resource damage assessment and restoration process will take years  to complete, so the full costs for which BP and the other responsible  parties are liable have yet to be determined. The National  Commission on BP Deepwater Horizon Oil Spill and Offshore Drilling  report estimates that fully restoring the Gulf will take $15 billion to    $20 billion and over 30 years. If the responsible parties are unable  or unwilling to pay, then the agencies’ costs for the natural resource  damages, including the costs to assess and restore, rehabilitate,  replace, or acquire equivalent natural resources, would need to be  reimbursed from the Fund (provided that funds were still available,  given the $1 billion per incident cap).    The responsible parties also are likely to face fines and penalties  which have yet to be determined and which will be levied by federal  and state governments. In particular, under the Clean Water Act,  liable parties face substantial administrative and civil penalties that  may be imposed by EPA or DHS. According to the BP Oil Spill  Commission Report, the maximum Clean Water Act civil penalties  could range from $4.5 billion to $21 billion.    BP and the other responsible parties face over 500 lawsuits from the  federal government, states, investors, employees, businesses, and  individuals. The extent to which these lawsuits will impact the  responsible parties financially is uncertain at this time since they will  take years to litigate. BP has stated that it may use the Trust to pay  lawsuit settlements as well as for paying claims and for natural  resource damages.  Justice is continuing to evaluate federal government costs incurred  related to the Deepwater Horizon oil spill that are not OPA- compensable. On May 13, 2011, Justice sent the responsible parties  an invoice requesting reimbursement to the federal government for  $81.6 million (for agencies’ costs incurred through December 2010).
Although BP has stated that it will pay expenses over the $20 billion, if  necessary, it is uncertain how this would be accomplished over time, thus  posing an element of risk to the federal government. In addition, although  MOEX and its affiliates have settled with BP by paying $1.065 billion and  Anadarko settled with BP which included a payment of $4 billion, other  responsible parties have not reached a settlement. If BP becomes unable  to pay future cleanup costs, individual and business claims, and natural  resource restoration costs, the federal government may need to consider  paying costs and then pursuing reimbursement from the other responsible  parties.
section_title: Reaching the Fund’s $1 Billion Cap Could Result in Federal Agencies Needing Additional Funding for Oil Spill Response Costs
paragraphs: NPFC’s Deepwater Horizon oil spill amounts counted towards this cap  was $626.1 million as of May 31, 2011, and is thereby approaching the $1  billion per-incident cap mandated by OPA. The $626.1 million consists of  $128.0 million incurred by the Coast Guard and $498.1 million incurred by  other agencies. Once expenditures from the Fund reach the cap, NPFC  will be statutorily barred from reimbursing federal agencies for response  and restoration work, or paying individuals and businesses to settle  claims. Consequently, if federal agencies did not receive dedicated  appropriations for oil spill costs, the federal agencies would be faced with  reallocating their appropriated funding to cover oil spill costs, or seeking  additional funding from Congress. In November 2010, we suggested that  Congress may want to consider setting a Fund cap associated with an  incident, based upon net expenditures (expenditures less  reimbursements).
As of May 31, 2011, government agencies continue to submit  documentation of their Deepwater Horizon oil spill recovery costs for  reimbursement from the Fund. (App. VII provides information about  government agencies’ authorized response costs and amounts  reimbursed.) Further, although as of May 31, 2011 all individual and  business claims reviewed by NPFC have been denied, claims continue to  be submitted. According to NPFC officials, individuals and businesses  will continue to submit claims associated with the Deepwater Horizon oil  spill for several years. In addition, the natural resources restoration  process is beginning and these associated costs will accumulate over  many years.
section_title: Uncertainties Regarding Future Funding Availability
paragraphs: Uncertainties exist regarding the primary revenue source of the Fund,  which is set to expire in 2017, and the potential for future oil spills. If the  Fund’s primary source of revenue expires, this could affect future oil spill  response and may increase risk to the federal government. Also, although  the Deepwater Horizon oil spill was the largest oil spill disaster in U.S.  history, annually over 500 spills of varying size and response occur.    The per barrel tax revenue. A provision of The Energy Improvement  and Extension Act of 2008 mandates that the Fund’s primary source  of revenue, a per barrel tax, is set to expire on December 31, 2017.  Therefore, even with substantial amounts reimbursed by BP, the Fund  balance would likely decrease as a result of the expiration of its  primary source of funding and the expectation of future Deepwater  Horizon costs. This could raise the risk that the Fund would not be  adequately equipped to deal with future spills, particularly one of this  magnitude, and it will be important for Congress to determine a  funding mechanism for the Fund going forward. The two other  sources of revenue are cost recoveries from responsible parties and  interest on the Fund principal from U.S. Treasury investments. As  we reported in September 2007, the balance of the Fund generally  declined from 1995 to 2006 mostly because the per barrel tax expired  in December 1994 and revenue was not collected from January 1995  to March 2006.    The potential need to fund the response to future spills poses risks.
The possibility of needing to respond to another spill of national  significance increases the risk to the Fund and the federal  government. In fiscal year 2011 alone, the Fund has already paid for  267 oil spills through May 31, 2011. According to NPFC officials, on  an annual basis, approximately 500 spills with varying costs and  magnitude occur. In 2007, we reported that since 1990 approximately  51 spills amounting to over $1 million have occurred, and that  responsible parties and the Fund have spent between $860 million  and $1.1 billion for oil spill removal costs and compensation for  damages. Responsible parties paid between 72 and 78 percent of  these expenses, while the Fund paid the remainder. As of May 31,  2011, the Fund’s balance was approximately $2.0 billion. The federal  government would need to consider using other sources of funds  particularly if another spill of national significance occurs and if the  responsible party(ies) are unable or unwilling to pay.
section_title: The Coast Guard Has Effective Claims Processing and Cost Reimbursement Controls, However Could Benefit by Documenting Changes Made in Claims Practices
paragraphs: Our testing of the Coast Guard’s controls over Deepwater Horizon claims  processed as of April 30, 2011, and cost reimbursements processed as of  April 20, 2011, showed that adjudicated claims processed and costs  reimbursed were consistent with its procedures. The Coast Guard’s  operating practices in these areas have changed to reflect the largely  unprecedented size and evolving scope of the Deepwater Horizon  incident. It has updated its cost reimbursement procedures to incorporate  lessons learned from the initial response to this spill and although it has  not yet updated its procedures for processing claims from spills of  national significance to reflect lessons learned from its experiences  processing Deepwater Horizon claims, it has plans to do so.
subsections: section_title: Tests Show Coast Guard’s NPFC Has Established Effective Controls for Processing Deepwater Horizon Claims and Cost Reimbursements
paragraphs: We found that internal controls related to the documentation, review, and  adjudication of individual and business claims submitted following the  Deepwater Horizon oil spill were operating in accordance with established  policies and procedures. During the period September 1, 2010, through  May 31, 2011, NPFC received 901 Deepwater Horizon claims totaling  $238 million. Of these claims, NPFC has finalized 570, all of which  resulted in a denial or a withdrawal by the claimant.
Our testing of a statistical sample of 60 out of the 432 Deepwater Horizon  finalized claims through April 30, 2011 found that NPFC had followed its  policies and procedures. Specifically, all claims    were submitted in writing, for a sum certain amount, and included the  required claimant information (i.e., address, nature and extent of the  impact of the incident, etc.);  complied with OPA’s order of presentment (which requires that all  claims for removal costs or damages must be presented first to the  responsible party for payment), and verified that claimants had filed  with the responsible party first before submitting their claim to NPFC;  included evidence submitted by the claimant, or if needed, NPFC sent  a letter to the claimant requesting additional support;    were adjudicated within the time provided by regulation;    underwent legal review and were submitted within the required time  frame, if reconsideration was requested; and    when denied, were appropriately transmitted by sending a denial letter  to the claimant along with a Claim Summary/Determination Form  explaining the basis for denial.
However, because all finalized claims resulted in denials or withdrawals,  our testing could not assess the effectiveness of NPFC’s controls over  payments to individuals and business claimants.
Our statistical testing of 57 of 954 Deepwater Horizon cost  reimbursements for government oil spill response activities from the Fund  between April 20, 2010, and April 20, 2011, found that in all cases NPFC  had followed established policies and procedures. Specifically, NPFC    accepted only cost reimbursement packages from government  agencies with a signed PRFA or MIPR agreement in place for  Deepwater Horizon response costs;    determined that the Federal On-Scene Coordinator certified that all  services or goods were received;    ensured that supporting cost documentation submitted for  reimbursement complied with the PRFA statement of work or MIPR  agreement;    wrote a letter to FINCEN authorizing payment (signed by an NPFC  Case Officer for the amount disbursed from the Fund under the  appropriate PRFA or MIPR); and    obtained supporting documentation from the government agency  requesting reimbursement.
section_title: NPFC Updated Its Cost Reimbursement Procedures to Reflect Lessons Learned for Deepwater Horizon, and Plans to Similarly Update Its Claims Procedures
paragraphs: NPFC has strengthened its cost reimbursement guidance to reflect  lessons learned from experiences during the initial Deepwater Horizon oil  spill response, and officials told us they planned to take similar steps to  update its claims processing guidance. Updating NPFC’s claims  procedures to fully reflect Deepwater Horizon lessons learned will be  critical should another spill of national significance occur.
On April 14, 2011, NPFC issued an appendix for its cost reimbursement  procedures manual modifying the procedures the agency is to follow for  spills of national significance. This appendix is based on the lessons  learned from addressing the unprecedented challenges posed by the  Deepwater Horizon oil spill. It provides guidance, for example, targeting  some of the issues that arose related to the management of finances,  including cost documentation requirements for MIPRs with DOD.  Specifically, the modified procedures provide that MIPRs will be  reimbursed after the cost documentation is reviewed and work completion  verified.
NPFC officials told us that its current claims processing practices have  also evolved since April 2010 to reflect lessons learned from the  Deepwater Horizon oil spill. Over the past 10 years, NPFC typically  received, on average, fewer than 300 claims each year. However, in light  of the dramatic increase in the number of Deepwater Horizon oil spill  claims received, NPFC refined its practices to augment its claims  processing capacity. These practices included using contractors, Coast  Guard reservists and, as needed, reassigning other NPFC staff. NPFC’s  Standard Operating Procedures of the Claims Adjudication Division,  which have not been updated since April 2004, do not yet include specific  procedures required for processing claims for a spill of national  significance. In particular, the procedures do not include modified  practices to respond to the dramatic increase in claims filed as a result of  the Deepwater Horizon incident. For the Deepwater Horizon oil spill,  NPFC adopted practices involving newly developed performance  indicators, past experience and continuous updates on current GCCF  statistics as tools to identify the timing and extent of additional resources  needed to augment its claims processing capabilities. GAO’s Standards  of Internal Control in the Federal Government provide that internal  control should provide for specific activities needed to help ensure  management’s directives are carried out.
NPFC has an opportunity to help ensure that expertise and effective  practices are not lost by incorporating the lessons learned from the  Deepwater Horizon incident in its guidance. Clearly documenting the  policies and procedures used for the Deepwater Horizon incident would  position NPFC for more effectively processing claims from any future  spills of national significance by incorporating guidance, for example, on  the use of performance indicators and statistics to address the size and  timing of claim submissions. NPFC officials told us they are in the process  of drafting an appendix for claims for spills of national significance for its  individual and business claims procedures manual to document such  procedures.
section_title: Federal Agencies’ Oversight Efforts Include Monitoring GCCF’s Claims Process and Participating in Natural Resource Assessments
paragraphs: The federal government has used a variety of approaches to oversee  BP’s and GCCF’s cost reimbursement and claims processing including  monitoring their activities. Soon after the Deepwater Horizon oil spill, the  Deepwater Integrated Services Team (IST) was established at the  direction of the National Incident Command, under the command of the  U.S. Coast Guard, and initially was responsible for monitoring BP’s claims  process. As Deepwater IST scaled back, its responsibilities were  transitioned to relevant agencies. The oversight effort for cost  reimbursement and claims activities transitioned to Justice, who  continues to lead the efforts. In addition, DOI and NOAA are serving as  the federal government representatives for the natural resource trustees  in evaluating the environmental impact of the Deepwater Horizon incident.
subsections: section_title: The Role of the Deepwater Integrated Services Team Evolved during the Response Effort and Concluded in February 2011
paragraphs: In order to coordinate federal agencies’ and departments’ efforts to  provide support services and initially monitor claims in response to the  Deepwater Horizon oil spill, the IST was established with the Federal  Emergency Management Agency (FEMA) leading this effort. Figure 4  shows the IST participants. IST coordinated intergovernmental efforts to  monitor BP and the GCCF claims processes to promote their efficiency  and effectiveness by raising awareness and ensuring accountability and  positive outcomes. It also helped raise awareness of concerns related to  payment policy clarity for claimants, data access and reporting, and  coordination of federal and state benefits and services to avoid duplicate  payments. In conjunction with the stand-down of the National Incident  Command on September 30, 2010, IST began scaling back its staffing  and functions and concluded the final transition of its functions to federal  agencies under the agencies existing authorities and responsibilities  effective February 1, 2011. For example, Justice continues to monitor the  effectiveness and efficiency of the BP and GCCF claims processes, and  also leads coordination efforts to connect government stakeholders with  BP and GCCF as needed.
Justice has been proactive in leading federal agencies in using a range of  approaches to establish practices to monitor the cost reimbursement and  claims activities of BP and the GCCF. Justice encouraged BP to establish  the Trust and the GCCF. Justice sent at least four letters to GCCF  highlighting key concerns with the claims process. For example, in a letter  dated February 4, 2011, Justice reiterated that OPA requires BP and  other responsible parties to pay for damages as a result of the oil spill and  to make the GCCF claims process more transparent so that claimants  clearly understand the status of their claims. According to a Justice  official, Justice’s involvement stems from a regulatory interest to ensure  that the administration of the Trust is consistent with OPA and that  claimants are treated fairly, as well as to help ensure transparency.
On another related front, in order to identify non-OPA-compensable costs  which the federal government incurred due to the duration, size, and  location of the Deepwater Horizon oil spill, OMB issued guidance  between July 2010 and January 2011 to federal agencies on identifying,  documenting and reporting costs associated with the Deepwater Horizon  oil spill. Specifically, OMB’s guidance directed federal agencies to  include in their summary cost reports federal employee time, travel, and  other related costs that were not being reimbursed through the Fund.  Justice has used the information submitted by the federal agencies to  identify and seek reimbursement from responsible parties for certain non- OPA-compensable costs. According to Justice officials, Justice reviewed  and analyzed the information submitted by the agencies through  December 31, 2010, to determine which agency costs reflected agency  activities directly related to the Deepwater Horizon oil spill. After compiling  this information, on May 13, 2011, Justice sent the responsible parties an  invoice requesting reimbursement to the federal government for         $81.6 million for the first two reporting quarters (through approximately  December 2010) for other federal agency non-OPA-compensable costs.  According to Justice officials, they will continue to analyze the Deepwater  Horizon oil spill costs that federal agencies submit on a quarterly basis  and plan to send additional requests for cost reimbursement to the  responsible parties, as appropriate.
Justice has also coordinated investigations of Deepwater Horizon  potential fraudulent claims from individuals and businesses under review  by its National Center for Disaster Fraud. As of July 28, 2011, over  3,000 referrals had been submitted for investigation from BP, GCCF and  NPFC.
The National Commission on BP Deepwater Horizon Oil Spill and  Offshore Drilling recommended that Justice’s Office of Dispute Resolution  conduct an evaluation of GCCF once all claims have been paid, in order  to inform claims processes in future spills of national significance. The  Commission said the evaluation should include a review of the process,  the guidelines used for compensation, and the success rate for avoiding  lawsuits.
NPFC has also participated in monitoring the individual and business  claim activities of BP and GCCF in order to determine and prepare for  any potential inflows of related claims that might be coming to NPFC  following any significant number of claim denials by BP or the other  responsible parties. Claimants who are denied payment by the GCCF or  whose claims are not settled within 90 days may pursue the following  options:    appeal GCCF’s decision, if the claim is in excess of $250,000 under  procedures established by the GCCF administrator;    begin litigation against the responsible parties in court; or   file a claim with NPFC.
Over 900 Deepwater Horizon claims (some of which were denied by BP  and GCCF) have been filed with NPFC between September 2010 and  May 2011. NPFC’s claims adjudication division regularly obtains  information from GCCF on GCCF claims paid and denied. This oversight  information allows NPFC to determine the extent to which cases should  be closed as the claimants were paid by GCCF, helps prevent claimants  being paid by both GCCF and NPFC for the same claim, and enables it to  better anticipate denied GCCF claims that could be resubmitted to NPFC  for adjudication.
section_title: DOI and NOAA Are Actively Participating As the Federal Natural Resource Trustees
paragraphs: The natural resource trustees for the Deepwater Horizon incident—  responsible for evaluating the oil spill’s impacts on natural resources—are  DOI, NOAA, DOD, and the five Gulf Coast states (Texas, Louisiana,  Mississippi, Alabama, and Florida). On September 27, 2010, NOAA sent  the eight responsible parties identified by DOI a Notice of Intent to  Conduct Restoration Planning for the Deepwater Horizon incident on  behalf of federal and state trustees. On April 21, 2011, the federal and  state trustees announced that BP had agreed to provide $1 billion from  the Trust for early restoration projects in the Gulf of Mexico to address  natural resource damage caused by the Deepwater Horizon oil spill.  Under the agreement, the $1 billion will be provided to fund projects such  as the rebuilding of coastal marshes, replenishment of damaged  beaches, conservation of sensitive areas for ocean habitat for injured  wildlife, and restoration of barrier islands and wetlands that provide  natural protection from storms.
The $1 billion in early restoration projects will be selected and  implemented as follows:    DOI will select and implement $100 million in projects;    NOAA will select and implement $100 million in projects;    each of the five states (Alabama, Florida, Louisiana, Mississippi, and  Texas) will select and implement $100 million in projects; and    DOI and NOAA will select projects submitted by the state trustees for  $300 million.
section_title: Conclusion
paragraphs: Several factors contribute to financial risks that the federal government  will continue to face for a number of years as a result of the Deepwater  Horizon oil spill. Future uncertainties include the total expenses of fully  addressing the impact of the Deepwater Horizon oil spill and the  responsible parties’ and guarantors’ willingness and ability to continue to  pay, possibly for the next several decades. Uncertainty over federal  financial risks also arise from the per barrel oil tax expiration in 2017—the  primary revenue source for the Fund—and the need for funding in  response to other potential significant spills. Given these risks, it will be  important for Congress to consider whether additional legislative action  would help ensure that OPA’s $1 billion per-incident cap does not hinder  NPFC’s ability to reimburse federal agencies’ costs, pay natural  resources damages, and pay valid claims submitted by individuals and  businesses. To this end, we are reiterating the Matter for Congressional  Consideration in our November 2010 report that Congress should  consider amending OPA, or enacting new legislation to take into account  reimbursements from responsible parties in calculating an incident’s  expenditures against the Fund’s $1 billion per-incident expenditure cap.  For its part, NPFC has an opportunity to document and incorporate the  lessons learned from its Deepwater Horizon oil spill experience in its  policies and procedures to help improve its management of any future  spills of national significance. Capturing lessons learned about processing  such claims will be essential should a significant spill occur in the future In  addition, NPFC took action to address recommendations made in our  November 2010 report to ensure and maintain cost reimbursement  policies and procedures and ensure responsible parties are properly  notified (see app. I for the recommendations and their current status).
section_title: Matter for Congressional Consideration
paragraphs: Congress should consider the options for funding the Oil Spill Liability  Trust Fund as well as the optimal level of funding to be maintained in the  Fund, in light of the expiration of the Fund’s per barrel tax funding source  in 2017.
section_title: Recommendation for Executive Action
paragraphs: In order to provide guidance for responding to a spill of national  significance and build on lessons learned, we recommend that the  Secretary of Homeland Security direct the Director of the Coast Guard’s  NPFC to finalize the revisions the Coast Guard is drafting to its Claims  Adjudication Division’s Standard Operating Procedures to include specific  required steps for processing claims received in the event of a spill of  national significance.
section_title: Agency Comments
paragraphs: We provided copies of the draft report to the Departments of Homeland  Security, Justice, Interior, Defense, and Commerce; Office of  Management and Budget; and Environmental Protection Agency for  comment prior to finalizing the report. In its written comments, reproduced  in appendix VIII, the Department of Homeland Security concurred with our  recommendation and stated it plans to finalize changes to operating  procedures by October 31, 2011. The Departments of Homeland  Security, Justice, and Interior and Environmental Protection Agency also  provided technical comments that were incorporated, as appropriate.
We are sending copies of this report to the appropriate congressional  committees. We are also sending copies to the Secretary of Homeland  Security; Director of NPFC; Attorney General of the United States;  Secretary of the Interior; Secretary of Defense; Secretary of Commerce;  Director of Office of Management and Budget; Administrator of the  Environmental Protection Agency; and to other interested parties. This  report will also be available at no charge on our website at  http://www.gao.gov.
Should you or your staff have any questions concerning this report,  please contact Susan Ragland at (202) 512-8486 or raglands@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report. GAO staff who made  key contributions to this report are listed in appendix IX.
section_title: Appendix I: Status of Prior Recommendations
paragraphs: The National Pollution Fund Center (NPFC) took actions as of September  2011 to address the four recommendations we made in our November  2010 report.
section_title: Appendix II: Objectives, Scope, and Methodology
paragraphs: This report is the third and final in a series of reports on the Deepwater  Horizon oil spill in response to this request. Shortly after the explosion  and subsequent sinking of BP’s leased Deepwater Horizon oil rig in the  Gulf of Mexico in April 2010, we were requested to (1) identify the  financial risks to the federal government and, more specifically, to the Oil  Spill Liability Trust Fund (Fund) resulting from oil spills, particularly  Deepwater Horizon, (2) assess NPFC’s internal controls for ensuring that  processes and payments for cost reimbursements and processes for  claims related to the Deepwater Horizon oil spill were appropriate, and   (3) describe the extent to which the federal government oversees the BP  and Gulf Coast Claims Facility (GCCF) Deepwater Horizon oil spill-related  claims processes.
Concerning our analysis of the financial risks and exposures to the  federal government and Fund, we identified and analyzed applicable laws  and regulations in order to determine statutory and regulatory limitations  on the liability of responsible parties that may pose financial risks to the  Fund and federal government. We also considered GAO reports on the  use of the Fund, reviewed publicly available quarterly financial information  of responsible parties through June 2011 to gain an understanding of the  extent to which contingent liabilities are reported by these companies,  and reviewed reports issued by the Congressional Research Service on  responsible party liabilities under OPA.  To determine the obligations  and costs incurred in relation to the Fund’s $1 billion per incident cap, we  obtained and analyzed daily financial summary data NPFC used related  to the Deepwater Horizon oil spill. We also reviewed NPFC’s daily  financial summary data to compare the amounts federal and state  agencies had submitted for reimbursement from the Fund to the amounts  NPFC had authorized for payment from the Fund to these government  agencies through May 2011. We obtained invoices NPFC sent to the  responsible parties to reimburse the Fund, analyzed the requests for  reimbursements submitted by federal and state agencies, and compared  the invoiced amounts to the amounts federal and state agencies had  submitted for payment from the Fund.
To assess NPFC’s internal controls for ensuring that agencies’ requests  for cost reimbursements and claims from individuals and businesses are  appropriate, we reviewed relevant sections of OPA and compared the  sections to NPFC’s cost reimbursement and claims Standard Operating  Procedures and to GAO’s Standards for Internal Control in the Federal  Government. We interviewed cognizant NPFC officials about its cost  reimbursement and claims processes, Deepwater Horizon oil spill  response efforts, specific cost recovery actions under way or completed,  and the NPFC division(s) responsible for those actions. We also  conducted walkthroughs of the cost reimbursement and claims  processes, observed NPFC’s process for generating an invoice to the  responsible parties for Deepwater Horizon response costs, and  conducted a site visit to the Gulf area in October 2010.
For agency cost reimbursements, we tested a statistical sample of  payments to federal and state agencies for their Deepwater Horizon  removal and response activities paid from the Fund between April 2010  and April 2011. We interviewed NPFC’s Case Management Officer for  Deepwater Horizon and other NPFC officials to gain a thorough  understanding of NPFC’s cost reimbursement process. In addition, we  performed walk-throughs of NPFC’s cost reimbursement and billing  processes and reviewed NPFC’s Case Management’s standard operating  procedures and other guidance documents. We also obtained updated  information from NPFC officials about the status of the response to  recommendations made in our November 2010 report.
To determine our population for sampling cost reimbursements for the  Deepwater Horizon oil spill, we obtained a disbursement file from U.S.  Coast Guard’s Finance Center (FINCEN) which consisted of 173,458  disbursements from the Fund between April 2010 and April 2011. We  reviewed the information in the file to determine whether we could rely on  the data in order to select a sample and test internal controls associated  with the cost reimbursement process. We assessed the reliability of the  data in the file and determined it could be used to select a statistical  sample for testing. From the population of 173,458 disbursements from  the Fund between April 2010 and April 2011, we identified 954  disbursements for Deepwater Horizon. We then selected a random  statistical sample of 57 disbursements for testing. We tested the 57 Fund  disbursements for adherence to NPFC’s case management standard  operating procedures. Our test included reviewing the request for  reimbursement submission to    determine if a signed Pollution Removal Funding Authorization  (PRFA) or Military Interdepartmental Purchase Request (MIPR) was  in place between the performing federal or state agency and the  Federal On-Scene Coordinator;    assess that the services or goods provided were in accordance with  the terms of the PRFA statement of work or MIPR agreement;  confirm evidence of supporting documentation;  confirm the Federal On-Scene Coordinator’s approval of the amount  requested for reimbursement by the performing federal or state  agency; and  confirm an NPFC Case Manager signed an Authorization to Pay or  Authority to Allow Intra-Governmental Payment and Collection  memorandum addressed to FINCEN authorizing payment from the  Fund.
For claims, we tested a statistical sample of finalized Deepwater Horizon  claims presented to the Fund between September 2010 and April 2011.  First, we interviewed NPFC’s Claims Division Chief, Senior Claims  Manager, and other cognizant NPFC officials to gain an understanding of  NPFC’s claims adjudication process. On the basis of information provided  by NPFC, we identified 432 finalized claims from NPFC’s Claims  Processing System submitted for the Deepwater Horizon spill between  September 2010 and April 2011. From the population of 432 finalized  claims, we selected a random sample of 60 claims to test. We tested the  sample for adherence to OPA’s and NPFC’s claims policies and  procedures. We tested NPFC’s adherence to its procedures for claim  receipt, initial review, adjudication review, determination, and  reconsideration. In conducting our work, we reviewed documents from  individual claim files, and also used NPFC’s Claims Processing System to  review the responsible party’s communication on the claims presented to  the NPFC for payment. We tested to ensure that NPFC had a process for  complying with OPA’s prioritization requirement that all claims be  presented to the responsible party before they can be presented to the  Fund. We tested to confirm that the claims were signed and submitted in  writing, for a sum certain amount, and were processed by NPFC within  the required statutory time frame. Because there were no payments made  for claims submitted for Deepwater Horizon for our scope period, we were  unable to test the payment process.
Because we selected a sample of claims and cost disbursements, our  results are estimates of the population and thus are subject to sample  errors that are associated with samples of this size and type. Our  confidence in the precision of the results from these samples is  expressed in 95-percent confidence intervals. A 95-percent confidence  interval is the interval that would contain the true population value in 95  percent of samples of this type and size. The results of our tests on both  the sample of claims and the sample cost disbursements did not find any  exceptions. On the basis of these results, we estimated that the             95-percent confidence intervals range from zero to 5 percent for both  sample results and concluded with 95-percent confidence that the error  rate in each population does not exceed 5 percent.
We reviewed NPFC’s policies and procedures for processing and  adjudicating oil spill claims and obtained information on NPFC’s claims  contingency planning for handling potential surges in claims submitted  related to the Deepwater Horizon oil spill.
We obtained claims information from the GCCF and NPFC through May  2011 to describe the number and types of claims filed by individuals and  businesses against the GCCF and the Fund, and the number and dollar  amounts submitted, reviewed, and paid. We also obtained the Notices of  Designation NPFC sent to responsible parties and interviewed NPFC  officials about their methodology for identifying responsible parties and  their procedures for notifying them.
We interviewed officials at the Departments of Commerce, Defense,  Interior, and Homeland Security, and the Environmental Protection  Agency to obtain an understanding of these agencies’ response activities  for the Deepwater Horizon oil spill and its process for billing on costs  incurred. We also obtained invoices NPFC sent to the responsible parties  and analyzed these billed amounts and summarized the amounts by  federal and state agencies. We compared the amounts submitted for  reimbursement from the Fund by the performing federal and state  agencies, to the amounts billed to the responsible parties on their behalf  to identify which agencies have begun their cost recovery efforts. We  compared the amounts requested for reimbursement from the Fund by  the performing federal and state agencies, to the amounts reimbursed  from the Fund to determine the status of agency’s cost recovery efforts.
To describe how the federal government oversees the BP and GCCF  claims processes, we interviewed Department of Justice (Justice) officials  about their oversight of BP’s claims process, the establishment of BP’s  $20 billion Trust, and the setup of the GCCF. We reviewed Justice’s  comments on the draft GCCF Emergency Advanced Payment and GCCF  Final Payment protocols, and we obtained and reviewed the Trust  agreement. We obtained and reviewed letters sent by Justice to the  responsible parties discussing their financial responsibilities in connection  with the Deepwater Horizon oil spill, which requested that the responsible  parties provide advance notice of any significant corporate actions related  to organization, structure, and financial position. We obtained and  reviewed letters sent by Justice to the GCCF highlighting concerns about  its pace for processing claims, need for transparency, and compliance  with OPA standards. In addition, we interviewed Deepwater Integrated  Services Team (IST) officials about their coordination activities regarding  the BP and GCCF claims process and social services coordination  efforts. The IST which was established in June 2010 and stood down in  September 2010, took steps to raise awareness of concerns related to  claim payment policy clarity, data access and reporting of overall claims  information, and the coordination of federal/state benefits and services to  avoid duplicate payments. We reviewed documentation from the  Deepwater IST including its coordination plan, team updates, and  transition plan. We did not evaluate the effectiveness of the monitoring  and oversight efforts by Justice and the Deepwater IST. Furthermore, we  reviewed publicly available claim reports from BP and GCCF for claim  amounts paid, but we did not test the claims data or amounts reported by  BP or GCCF. We also interviewed Office of Management and Budget and  Justice officials about their role and planned actions in collecting and  reviewing agency quarterly cost submissions to bill the responsible  parties on behalf of the federal government.
We conducted this performance audit from July 2010 to October 2011 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix III: National Pollution Fund Center’s Individual and Business Claims Process
subsections: section_title: Overview
paragraphs: OPA provides for the payment of claims for uncompensated removal  costs and certain damages caused by the discharge, or substantial threat  of discharge, of oil into or upon the navigable waters of the U.S., its  adjoining shorelines, or the Exclusive Economic Zone of the U.S.  Adjudication and payment of claims for certain uncompensated removal  costs and damages are paid out of the Principal Fund of the Fund.
Order of Presentment and Time Limitation for Submitting Claims to  NPFC. Claims for removal or damages may be presented first to the Fund  only in the following situations: NPFC has advertised or notified claimants  in writing; by a responsible party who may assert a claim; by a governor  of a state for removal costs incurred by the state; and by a U.S. claimant  in a case where a foreign offshore unit has discharged oil causing  damage for which the Fund is liable.
In all other cases where the source of the discharge can be identified, the  claimant must first present their OPA claim to the responsible party for  payment. If the responsible party denies the claim the claimant may  submit the claim to NPFC for adjudication. Regardless of specific action  to deny the claim, if the responsible party is unable or unwilling to pay the  claim within 90 days of the claimant’s submission, the claimant may then  submit the claim to NPFC for adjudication. If the responsible party denies  a claim that is subsequently processed and payment is made from the  Fund, NPFC will seek to recover these costs from the responsible party.  Damage claims must be made within 3 years of when the damage and its  connection to the spill were reasonably discoverable with the exercise of  due care. Claims for removal costs must be made within 6 years after the  date of completion of all removal actions for the incident.
Designation of the Source of the Incident, Responsible Party Notification,  and Advertisement. The process of designating the source of an oil  discharge and notifying the responsible party frequently advances  concurrently with the Federal On-Scene Coordinator’s attempt to identify  the responsible party during the initial stages of spill response. In addition  to the Federal On-Scene Coordinator issuing a letter of Federal Interest,  the Federal On-Scene Coordinator and NPFC’s Case Management and  Claims Division may decide that the potential for claims exists. Once  decided, the Claim Manager is normally responsible for executing the  Notice of Designation. Designation of a responsible party may also occur  immediately following an on-site visit or more incrementally as information  on the identity of the responsible party becomes available.
Claimant Requirements. While NPFC has a form which claimants may  use to submit their claim, there is no required format for submitting a  claim to NPFC. However, OPA through its implementing regulations,  requires that the claim be (1) submitted in writing, (2) for a sum certain  amount of compensation for each category of uncompensated damages  or removal, and (3) signed by the claimant. The claimant bears the  burden of providing all evidence, information, and documentation deemed  necessary by NPFC to support the claim. While the claim is pending  against the Fund, if the claimant receives any compensation for the  claimed amounts, the claimant is required to immediately amend the  claim submitted to NPFC.
section_title: Appendix IV: National Pollution Fund Center’s Cost Reimbursement Process
subsections: section_title: Overview
paragraphs: Among other duties, the U.S. Coast Guard’s NPFC administers the Fund  by disbursing funds to federal, state, local, or tribal agencies for their  removal activities under the Oil Pollution Act of 1990, as amended  (OPA). When an oil spill occurs, relevant federal agencies are notified by  the National Response Center including the U.S. Coast Guard and the  Environmental Protection Agency (EPA). The Coast Guard has  responsibility and serves as the Federal On-Scene Coordinator for spills  occurring in the coastal zones, while EPA has responsibility for spills that  occur on land.
NPFC’s Case Management Division is responsible for providing access to  the Emergency Fund when a spill occurs and for working with the Federal  On-Scene Coordinator and agencies to ensure accurate cost  documentation to support cost recovery. NPFC’s Case Management  Division operates through a matrix organization comprised of four  regional case teams. Each regional case team consists of a manager and  multiple case officers. When a spill occurs, NPFC assigns responsibility to  the regional case team representing the geographic area in which the spill  occurs.
NPFC uses a three-level system to help determine the complexity of an  oil spill case and its required documentation for cost reimbursement.  Level I (Routine) represents about 85 percent of all oil spill incidents, in  which total removal costs to the government are not expected to exceed  $50,000, removal activities are localized, and removal activities can be  completed within 2 weeks. For a Level I incident, agencies submit  documentation to the Federal On-Scene Coordinator at the completion of  removal activities. Level II (Moderately Complex) represents about 10 to  15 percent of all oil spill incidents, in which total removal costs to the  government are not expected to exceed $200,000. Level II removal  activities take place in multiple locations, require the involvement of  several external resources (i.e., state agencies and other government  units), and removal activities take longer than 2 weeks to complete. Level  III (Significantly Complex) represents less than 5 percent of all oil spill  incidents with total removal costs greater than $200,000. Level III removal  activities take place in multiple locations, require the involvement of  numerous contractors, and similar to Level II, the assistance of several  external resources is needed. For both Level II and III incidents,  documentation is submitted to the Federal On-Scene Coordinator as  often as practical (daily if possible) until final removal activities are  completed. Because the Federal On-Scene Coordinator is considered the  best judge of factors regarding the oil spill, he or she is expected to select  the level of documentation appropriate for the situation.
The Federal On-Scene Coordinator is responsible for issuing PRFAs or  MIPRs to obtain removal and logistical services from other government  agencies.
The PRFA commits the Fund to payment, by reimbursement, of costs  incurred for agreed-upon pollution response activities undertaken by a  federal agency assisting the Federal On-Scene Coordinator. The terms of  a PRFA may include (1) salary costs, (2) travel and per diem expenses,  (3) charges for the utilization of agency-owned equipment or facilities, and  (4) expenses for contractor- or vendor-supplied goods or services  obtained by the agency for removal assistance. Similarly, the Federal On- Scene Coordinator may issue a MIPR for agreed-upon activities of the  DOD or its related components. In contrast to PRFAs, MIPRs (used  primarily by DOD and its components) commit the Fund to reimburse  costs based on valid obligations incurred for oil spill response activities  prior to being incurred. For the Deepwater Horizon oil spill, NPFC’s cost  reimbursement documentation requirements are the same for both MIPRs  and PRFAs. Differences between PRFAs and MIPRs include that PRFAs  are a reimbursement agreement and require the agency to submit  documentation demonstrating services and have the Federal On-Scene  Coordinator certify completion of work, prior to NPFC disbursing funds to  the agency. For other than Deepwater Horizon, MIPRs allow DOD to  receive the funds from NPFC prior to submitting documentation or  obtaining certification of completion of work.
The following are the six major steps for NPFC’s cost reimbursement  process for federal, state, and local government agencies requesting  payment from the Fund.  1.  Federal On-Scene Coordinator issues PRFA or MIPR to government  agency.  2.  Government agency performs oil spill removal and response activities  and submits reimbursement request to the Federal On-Scene  Coordinator.  3.  Federal On-Scene Coordinator reviews and certifies that services  were provided by the government agency.  4.  Federal On-Scene Coordinator forwards agency’s reimbursement  request to NPFC for review and approval.  5.  NPFC reviews agency’s reimbursement documentation and sends  Authorization-to-Pay memorandum to FINCEN approving payment  from the Fund.  6.  FINCEN reimburses government agency for its oil spill removal costs.
section_title: Appendix V: Types of Oil Pollution Act- Compensable Removal Costs and Damages
paragraphs: Costs for the containment and removal of oil from water and  shorelines including contract services (such as cleanup  contractors and incident management support) and the  equipment used for removal.
Costs for the proper disposal of recovered oil and oily debris.
Costs for government personnel and temporary government  employees hired for the duration of the spill response, including  costs for monitoring the activities of the responsible parties.
Costs for the prevention or minimization of a substantial threat of  an oil spill.
Federal, state, foreign, or Indian tribe trustees can claim damages  for injury to, or destruction of, and loss of, or loss of use of,  natural resources, including the reasonable costs of assessing  the damage.
Damages for injury to, or economic loses resulting from  destruction of, real or personal property.
Damages for loss of subsistence use of natural resources,  without regard to the ownership or management of the resources.
The federal, state, or local government can claim damages for the  loss of taxes, royalties, rents, fees, or profits. Companies can  claim damages for loss of profits or impairment of earning  capacity.
States and local governments can recover costs for providing  increased public services during or after an oil spill response,  including protection from fire, safety, or heath hazards.
section_title: Appendix VI: Inspectors General Are Reviewing Agencies’ Deepwater Horizon Oil Spill Costs
paragraphs: DHS, EPA, and the Department of Commerce inspectors general (IG)  performed or are performing work related to their agency’s costs to  respond to the Deepwater Horizon oil spill. The DHS IG is performing an  audit to determine whether the Coast Guard has adequate policies,  procedures, and controls in place to capture all direct and indirect costs  associated with the Deepwater Horizon oil spill. The EPA IG is conducting  work to determine if EPA has adequate controls in place to recover its  Gulf Coast oil spill response costs.
The Department of Commerce IG has published a review of the National  Oceanic and Atmospheric Administration’s (NOAA) tracking of oil spill  costs. In December 2010, the Department of Commerce IG found that  while NOAA had developed processes to track the costs associated with  its Deepwater Horizon oil spill activities, improvements are needed to  ensure that all costs charged to oil spill projects—whether funded by  appropriations or reimbursements—are properly recorded in the financial  system and supported by sufficient, appropriate documentation. NOAA’s  official comments emphasized the unprecedented mobilization as a result  of the scope of the Deepwater Horizon oil spill, and stated that as NOAA’s  participation has become more routine, its documentation of the oil spill  activities has become more consistent. In addition, as NOAA evaluates its  own execution of the response process, NOAA stated it will examine the  observations provided by the IG.
section_title: Appendix VII: Agencies Authorized and Reimbursed Costs for Deepwater Horizon Oil Spill Response Efforts
paragraphs: To determine the extent to which government agencies have been  reimbursed from the Fund for their Deepwater Horizon response efforts,  we obtained and analyzed reimbursement information from NPFC from  April 2010 through May 2011. We found that the total maximum amount  authorized through intergovernmental agency agreements for federal  agencies’ and states’ Deepwater Horizon oil spill response costs is over  $477.7 million. However, only seven federal agencies have submitted  and received payment from the Fund totaling $189.4 million for their  response costs; and six federal agencies that have an agreement in  place authorizing them to perform work and receive reimbursement from  the Fund for their response efforts, have either not yet submitted a  request for reimbursement or have not provided sufficient supporting  documentation for their request. (See table 4.)
section_title: Appendix VIII: Comments from the Department of Homeland Security
section_title: Appendix IX: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Kim McGatlin (Assistant  Director); F. Abe Dymond (Assistant Director); James Ratzenberger  (Assistant Director); Hannah Laufe (Assistant General Counsel);  Katherine Lenane (Assistant General Counsel); Jacquelyn Hamilton  (Acting Assistant General Counsel); Jehan Abdel-Gawad; James Ashley;  Mark Cheung; Patrick Frey; Wilfred Holloway; Donald Holzinger; David  Hooper; Mark Kaufman; Jason Kelly; Matthew Latour; Chari Nash- Cannaday; Donell Ries; and Doris Yanger made significant contributions  to this report.
section_title: Related GAO Products
paragraphs: Deepwater Horizon Oil Spill: Update on Federal Financial Risks and  Claims Processing. GAO-11-397R. Washington D.C.: April 18, 2011.
Deepwater Horizon Oil Spill: Preliminary Assessment of Federal Financial  Risks and Cost Reimbursement and Notification Policies and Procedures.  GAO-11-90R. Washington D.C.: November 12, 2010.
Oil Spills: Cost of Major Spills May Impact Viability of Oil Spill Liability  Trust Fund. GAO-10-795T. Washington D.C.: June 16, 2010.
Maritime Transportation: Major Oil Spills Occur Infrequently, but Risks  Remain. GAO-08-357T. Washington D.C.: December 18, 2007.
Maritime Transportation: Major Oil Spills Occur Infrequently, but Risks to  the Federal Oil Spill Fund Remain. GAO-07-1085. Washington D.C.:  September 7, 2007.
U.S. Coast Guard National Pollution Funds Center: Improvements Are  Needed in Internal Control Over Disbursements. GAO-04-340R.  Washington D.C.: January 13, 2004.
U.S. Coast Guard National Pollution Funds Center: Claims Payment  Process Was Functioning Effectively, but Additional Controls Are Needed  to Reduce the Risk of Improper Payments. GAO-04-114R. Washington  D.C.: October 3, 2003.