Oil Spills: Cost of Major Spills May Impact Viability of Oil Spill Liability Trust Fund
Published: 2010-06-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: On April 20, 2010, an explosion at the mobile offshore drilling unit Deepwater Horizon resulted in a massive oil spill in the Gulf of Mexico. The spill's total cost is unknown, but may result in considerable costs to the private sector, as well as federal, state, and local governments. The Oil Pollution Act of 1990 (OPA) set up a system that places the liability--up to specified limits--on the responsible party. The Oil Spill Liability Trust Fund (Fund), administered by the Coast Guard, pays for costs not paid for by the responsible party. GAO previously reported on the Fund and factors driving the cost of oil spills and is beginning work on the April 2010 spill. This testimony focuses on (1) how oil spills are paid for, (2) the factors that affect major oil spill costs, and (3) implications of major oil spill costs for the Fund. It is largely based on GAO's 2007 report, for which GAO analyzed oil spill cost data and reviewed documentation on the Fund's balance and vessels' limits of liability. To update the report, GAO obtained information from and interviewed Coast Guard officials.
section_title: What GAO Found
paragraphs: OPA places the primary burden of liability for the costs of oil spills on the responsible party in return for financial limitations on that liability. Thus, the responsible party assumes the primary burden of paying for spill costs--which can include both removal costs (cleaning up the spill) and damage claims (restoring the environment and compensating parties that were economically harmed). To pay both the costs above this limit and costs incurred when a responsible party does not pay or cannot be identified, OPA authorized use of the Fund, up to a $1 billion per spill, which is financed primarily from a per-barrel tax on petroleum products. The Fund also may be used to pay for natural resource damage assessments and to monitor the recovery activities of the responsible party, among other things. While the responsible party is largely paying for the current spill's cleanup, Coast Guard officials said that they began using the Fund--which currently has a balance of $1.6 billion--in May 2010 to pay for certain removal activities in the Gulf of Mexico. Several factors, including location, time of year, and type of oil, affect the cleanup costs of noncatastrophic spills. Although these factors will certainly affect the cost of the Gulf spill--which is unknown at this time--in this spill, additional factors such as the magnitude of the oil spill will impact costs. These factors can affect the breadth and difficulty of recovery and the extent of damage in the following ways: (1) Location. A remote location can increase the cost of a spill because of the additional expense involved in mounting a remote response. A spill that occurs close to shore can also become costly if it involves the use of manual labor to remove oil from sensitive shoreline habitat. (2) Time of year. A spill occurring during fishing or tourist season might carry additional economic damage, or a spill occurring during a stormy season might prove more expensive because it is more difficult to clean up than one occurring during a season with generally calmer weather. (3) Type of oil. Lighter oils such as gasoline or diesel fuels dissipate and evaporate quickly--requiring minimal cleanup--but are highly toxic and create severe environmental impacts. Heavier oils such as crude oil do not evaporate and, therefore, may require intensive structural and shoreline cleanup. Since the Fund was authorized in 1990, it has been able to cover costs not covered by responsible parties, but risks and uncertainties exist regarding the Fund's viability. For instance, the Fund is at risk from claims resulting from spills that significantly exceed responsible parties' liability limits. Of the 51 major oil spills GAO reviewed in 2007, the cleanup costs for 10 exceeded the liability limits, resulting in claims of about $252 million. In 2006, Congress increased liability limits, but for certain vessel types, the limits may still be low compared with the historic costs of cleaning up spills from those vessels. The Fund faces other potential risks as well, including ongoing claims from existing spills, claims related to sunken vessels that may begin to leak oil, and the threat of a catastrophic spill--such as the recent Gulf spill.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss the costs of major  oil spills and the potential impacts on the Oil Spill Liability Trust Fund  (Fund). On April 20, 2010, an explosion from a well site at which the  mobile offshore drilling unit (MODU), Deepwater Horizon, had been  drilling resulted in a spill of national significance in the Gulf of Mexico,  which is, to date, only partially contained. Since the explosion occurred,  oil has been leaking into the Gulf of Mexico at an estimated rate of  between 12,000 and 19,000 barrels per day, according to the National  Incident Command’s Flow Rate Technical Group, making this one of the  largest, if not the largest spill in U.S. waters to date.  BP, which leased the  Deepwater Horizon at the time of the explosion, continues to try to  contain the leak. The total cost of cleaning up this massive and potentially  unprecedented spill, the untold damage to the environment, as well as the  potential impact to the livelihood and the economic status of the region,  will be undetermined for some time.  However, current estimates suggest  that spill cleanup and related damages claims will be in the tens of billions  of dollars—well beyond the costs of the Exxon Valdez. This spill and  future spills all have the potential to result in considerable costs to the  private sector, as well as federal, state, and local governments.
The Oil Pollution Act of 1990 (OPA),  which was enacted after the Exxon  Valdez spill in 1989, established a “polluter pays” system that places the  primary burden of liability for the costs of spills up to a statutory  maximum, on the party responsible. OPA also established the Fund to pay  for oil spill costs when the responsible party cannot or does not pay. The  Fund is financed primarily from a per-barrel tax on petroleum products  either produced in the United States or imported from other countries and  administered by the National Pollution Funds Center (NPFC) within the  U.S. Coast Guard. While this system is well understood, the total costs  involved in responding to oil spills are less clear. Costs paid by the Fund  are required to be documented and reported, but the costs paid by the  party responsible for the spill are not required to be reported. The  resulting lack of information about the total cost of spills, the significant  claims made on the Fund to cover the costs beyond the established OPA  liability limits borne by the responsible party, and the potential impact of a  catastrophic spill of unprecedented costs, have all raised concerns about  the Fund’s long-term viability.
Mr. Chairman, in response to your request, we are just beginning work  related to the April 2010 spill and its implications for the Fund. However,  we have done considerable work looking at the cost of major spills in  recent years and the factors that contribute to making spills particularly  expensive to clean up and mitigate. While our previous work focused on  spills from vessels and not offshore facilities, it is likely that many of the  same factors that we identified that affect the cost of the oil spills will  apply to the current oil spill. Additionally, our previous work identified  several potential risks to the Fund and made recommendations to the  Commandant of the Coast Guard to address some of the risks.
My remarks today are intended to provide a context for looking at the  nation’s approach to paying the costs of such spills. Specifically, my  testimony focuses on (1) how oil spills are paid for, (2) the factors that  affect major oil spill costs, and (3) the implications of major oil spill costs  for the Oil Spill Liability Trust Fund. My comments are based primarily on  our September 2007 report on oil spill costs, which was issued to the  Senate Committee on Commerce, Science, and Transportation, and the  House Committee on Transportation and Infrastructure. In our 2007  report, we determined that there were 51 major oil spills— with removal  costs and damage claims totaling at least $1 million— that occurred in U.S.  waters from 1990 through 2006. Collectively, from public and nonpublic  sources, we estimated that responsible parties and the Fund have paid  between approximately $860 million and $1.1 billion to clean up these  spills and compensate affected parties. Responsible parties paid between  about 72 to 78 percent of these costs. The 51 major spills (exceeding $1  million in total costs) we identified, which constituted about 2 percent of  the 3,389 vessel spills that occurred from 1990 to 2006, varied greatly from  year to year in number and cost and showed no discernible trends in  frequency or size.
In preparing our September 2007 report we analyzed oil spill removal cost  and claims data from NPFC, the National Oceanic and Atmospheric  Administration’s (NOAA) Damage Assessment, Remediation, and  Restoration Program, and the Department of the Interior’s (DOI) Natural  Resource Damage Assessment and Restoration Program and U.S. Fish and  Wildlife Service. We also analyzed cost data obtained from vessel insurers  and through contract with Environmental Research Consulting. We also  interviewed NPFC, NOAA, and state officials responsible for oil spill  response, as well as industry experts and representatives from key  industry associations and a vessel owner. In addition, we reviewed  documentation from the NPFC regarding the Fund balance and vessels’  limits of liability. Earlier this month, we obtained updated information  from and interviewed NPFC officials to update our September 2007  report’s findings and to gather information on the recent oil spill in the  Gulf of Mexico. In addition, we have just started work on the Oil Spill  Liability Trust Fund at the request of the Chairman of this Subcommittee  and other congressional members.
subsections: section_title: The Primary Burden of Liability for the Costs of Oil Spills Is on the Responsible Party, up to Specified Limits
paragraphs: OPA establishes a “polluter pays” system that places the primary burden of  liability for the costs of spills on the party responsible for the spill in  return for financial limitations on that liability. Under this system, the  responsible party assumes, up to a specified limit, the burden of paying for  spill costs—which can include both removal costs (cleaning up the spill)  and damage claims (restoring the environment and payment of  compensation to parties that were economically harmed by the spill).  Above the specified limit, the responsible party generally is no longer  financially liable. Responsible parties are liable without limit, however, if  the oil discharge is the result of gross negligence or willful misconduct, or  a violation of federal operation, safety, and construction regulations.  OPA’s “polluter pays” system is intended to provide a deterrent for  responsible parties who could potentially spill oil by requiring that they  assume the burden of responding to the spill, restoring natural resources,  and compensating those damaged by the spill, up to the specified limit of  liability. (See table 1 for the limits of liability for vessels and offshore  facilities.)
In general, liability limits under the OPA depend on the kind of vessel or  facility from which a spill comes. For an offshore facility, liability is  limited to all removal costs plus $75 million. For tank vessels, liability  limits are based on the vessel’s tonnage and hull type. In both cases,  certain circumstances, such as gross negligence, eliminate the caps on  liability altogether. According to the Coast Guard, the leaking well in the  current spill is an offshore facility. As noted earlier, pursuant to OPA, the  liability limit for offshore facilities is all removal costs plus $75 million for  damage claims. The Coast Guard also notes that liability for any spill on or  above the surface of the water in this case would be between $65 million  and $75 million. The range derives from a statutory division of liability for  mobile offshore drilling units. For spills on or above the surface of the  water, mobile offshore drilling units are treated first as tank vessels up to  the limit of liability for tank vessels and then as offshore facilities.
For example, if an offshore facility’s limit of liability is $75 million (not  counting removal costs, for which there is unlimited liability for offshore  facilities) and a spill resulted in $100 million in costs, the responsible party  has to pay up to $75 million in damage claims—leaving $25 million in costs  beyond the limit of liability. Under OPA, the authorized limit on federal  expenditures for a response to a single spill is currently set at $1 billion,  and natural resource damage assessments and claims may not exceed $500  million. OPA requires that responsible parties must demonstrate their  ability to pay for oil spill response up to statutorily specified limits.  Specifically, by statute, with few exceptions, offshore facilities that are  used for exploring for, drilling for, producing, or transporting oil from  facilities engaged in oil exploration, drilling, or production are required to  have a certificate of financial responsibility that demonstrates their ability  to pay for oil spill response up to statutorily specified limits. If the  responsible party denies a claim or does not settle it within 90 days, a  claimant may commence action in court against the responsible party, or  present the claim to the NPFC.
OPA also provides that the Fund can be used to pay for oil spill removal  costs and damages when those responsible do not pay or cannot be  located. This may occur when the source of the spill and, therefore, the  responsible party is unknown, or when the responsible party does not  have the ability to pay. In other cases, since the cost recovery can take a  period of years, the responsible party may become bankrupt or dissolved.
NPFC manages the Fund by disbursing funds for federal cleanup,  monitoring the sources and uses of funds, adjudicating claims submitted  to the Fund for payment, and pursuing reimbursement from the  responsible party for costs and damages paid by the Fund. The Coast  Guard is responsible for adjusting vessels’ limits of liability for significant  increases in inflation and for making recommendations to Congress on  whether other adjustments are necessary to help protect the Fund.  DOI’s  Minerals Management Service is responsible for adjusting limits of liability  of offshore facilities.
Response to large oil spills is typically a cooperative effort between the  public and private sector, and there are numerous players who participate  in responding to and paying for oil spills. To manage the response effort,  the responsible party, the Coast Guard, EPA, and the pertinent state and  local agencies form the unified command, which implements and manages  the spill response.
OPA defines the costs for which responsible parties are liable and the  costs for which the Fund is made available for compensation in the event  that the responsible party does not pay or is not identified. These costs,  or “OPA compensable” costs, are of 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 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 and  travel and lodging costs for responders.
Damages caused by the oil spill: Damages that can be compensated  under OPA cover a wide range of both actual and potential adverse  effects from an oil spill, for which a claim may be made to either the  responsible party or the Fund. Claims include natural resource damage  claims filed by trustees, claims for uncompensated removal costs and  third-party damage claims for lost or damaged property and lost  profits, among other things.
The Fund has two major components—the Principal Fund and the  Emergency Fund. The Principal Fund provides the funds for third-party  and natural resource damage claims, limit of liability claims,  reimbursement of government agencies’ removal costs, and provides for  oil spill-related appropriations. A number of agencies—including the Coast  Guard, EPA, and DOI—receive an annual appropriation from the Principal  Fund to cover administrative, operational, personnel, and enforcement  costs. To ensure rapid response to oil spills, OPA created an Emergency  Fund that authorizes the President to spend $50 million each year to fund  spill response and the initiation of natural resource damage assessments,  which provide the basis for determining the natural resource restoration  needs that address the public’s loss and use of natural resources as a  result of a spill.
Emergency funds not used in a fiscal year are carried over to the  subsequent fiscal years and remain available until expended. To the extent  that $50 million is inadequate, authority under the Maritime  Transportation Security Act of 2002 grants authority to advance up to $100  million from the Fund to pay for removal activities. These emergency  funds may be used for containing and removing oil from water and  shorelines, preventing or minimizing a substantial threat of discharge, and  monitoring the removal activities of the responsible party. NPFC officials  told us in June 2010 that the emergency fund has received the advanced  authority of $100 million for the Federal On-Scene Coordinator to respond  to the spill and for federal trustees to initiate natural resource damage  assessments along with an additional $50 million that had not been  apportioned in 2006. Officials said they began using emergency funds at  the beginning of May to pay for removal activities in the Gulf of Mexico.
The Fund is financed primarily from a per-barrel tax on petroleum  products either produced in the United States or imported from other  countries. The balance of the Fund (including both the Principal and the  Emergency Fund) has varied over the years (see fig. 1). The Fund’s  balance generally declined from 1995 through 2006, and from fiscal year  2003 through 2007, its balance was less than the authorized limit on federal  expenditures for the response to a single spill, which is currently set at $1  billion. This was in part because the Fund’s main source of revenue—a  $0.05 per barrel tax on U.S. produced and imported oil—was not collected  for most of the time from 1995 through 2006. However, the Energy Policy  Act of 2005 reinstated the barrel tax beginning in April 2006.   Subsequently, the Emergency Economic Stabilization Act of 2008  increased the tax rate to $0.08 per barrel through 2016. The balance in  the Fund as of June 1, 2010, was about $1.6 billion. With the barrel tax  once again in place, NPFC anticipates that the Fund will be able to cover  potential noncatastrophic liabilities. In 2007 we reported several risks to  the Fund, including the threat of a catastrophic spill. Although the Fund’s  balance has increased, significant uncertainties remain regarding the  impact of a catastrophic spill—such as the Deepwater Horizon—or  —or  multiple catastrophic spills on the Fund’s viability.  multiple catastrophic spills on the Fund’s viability.
section_title: Several Factors, including Location, Time of Year, and Type of Oil, Combine in Unique Ways and Affect the Cost of Each Oil Spill
paragraphs: Location, time of year, and type of oil are key factors affecting oil spill  costs of noncatastrophic spills, according to industry experts, agency  officials, and our analysis of spills.  Given the magnitude of the current  spill, however, the size of this spill will also be a factor that affects the  costs. Officials also identified two other factors that may influence oil spill  costs to a lesser extent—the effectiveness of the spill response and the  level of public interest in a spill. In ways that are unique to each spill, these  factors can affect the breadth and difficulty of the response effort or the  extent of damage that requires mitigation.
subsections: section_title: Location Affects Costs in Different Ways
paragraphs: According to state officials with whom we spoke and industry experts,  there are three primary characteristics of location that affect costs:   Remoteness: For spills that occur in remote areas, spill response can  be particularly difficult in terms of mobilizing responders and  equipment, and they can complicate the logistics of removing oil from  the water—all of which can increase the costs of a spill.
Proximity to shore: There are also significant costs associated with  spills that occur close to shore. Contamination of shoreline areas has a  considerable bearing on the costs of spills as such spills can require  manual labor to remove oil from the shoreline and sensitive habitats.  The extent of damage is also affected by the specific shoreline location.
Proximity to economic centers: Spills that occur in the proximity of  economic centers can cost more when local services are disrupted. For  example, a spill near a port can interrupt the flow of goods,  necessitating an expeditious response in order to resume business  activities, which could increase removal costs. Additionally, spills that  disrupt economic activities can result in expensive third-party damage  claims.
section_title: Time of Year Affects Local Economies and Response Efforts
paragraphs: The time of year in which a spill occurs can also affect spill costs—in  particular, affecting local economies and response efforts. According to  several state and private-sector officials with whom we spoke, spills that  disrupt seasonal events that are critical for local economies can result in  considerable expenses. For example, spills in the spring months in areas  of the country that rely on revenue from tourism may incur additional  removal costs in order to expedite spill cleanup, or because there are  stricter standards for clean up, which increase the costs. The time of year  in which a spill occurs also affects response efforts because of possible  inclement weather conditions such as harsh winter storms and even  hurricanes that can result in higher removal costs because of the increased  difficulty in mobilizing equipment and personnel to respond to a spill in  adverse conditions.
section_title: Type of Oil Spilled Affects the Extent of the Response Effort and the Amount of Damage
paragraphs: The different types of oil can be grouped into four categories, each with its  own set of effects on spill response and the environment. Lighter oils such  as jet fuels, gasoline, and diesel fuel dissipate and evaporate quickly, and  as such, often require minimal cleanup. However, these oils are highly  toxic and can severely affect the environment if conditions for evaporation  are unfavorable. For instance, in 1996, a tank barge that was carrying  home-heating oil grounded in the middle of a storm near Point Judith,  Rhode Island, spilling approximately 828,000 gallons of heating oil (light  oil). Although this oil might dissipate quickly under normal circumstances,  heavy wave conditions caused an estimated 80 percent of the release to  mix with water, with only about 12 percent evaporating and 10 percent  staying on the surface of the water . Natural resource damages alone  were estimated at $18 million, due to the death of approximately 9 million  lobsters, 27 million clams and crabs, and over 4 million fish.
Heavier oils, such as crude oils and other heavy petroleum products, are  less toxic than lighter oils but can also have severe environmental impacts.  Medium and heavy oils do not evaporate much, even during favorable  weather conditions, and can blanket structures they come in contact  with—boats and fishing gear, for example—as well as the shoreline,  creating severe environmental impacts to these areas, and harming  waterfowl and fur-bearing mammals through coating and ingestion.  Additionally, heavy oils can sink, creating prolonged contamination of the  sea bed and tar balls that sink to the ocean floor and scatter along  beaches. These spills can require intensive shoreline and structural clean  up, which is time-consuming and expensive. For example, in 1995, a tanker  spilled approximately 38,000 gallons of heavy fuel oil into the Gulf of  Mexico when it collided with another tanker as it prepared to lighter its oil  to another ship. Less than 1 percent (210 gallons) of the oil was  recovered from the sea, and, as a result, recovery efforts on the beaches of  Matagorda and South Padre Islands were labor intensive, as hundreds of  workers had to manually pick up tar balls with shovels. The total removal  costs for the spill were estimated at $7 million.
section_title: Other Factors also Affect Spill Costs
paragraphs: In our 2007 report, we also reported that industry experts cited two other  factors that also affect the costs incurred during a spill.
Effectiveness of Spill Response: Some private-sector experts stated  that the effectiveness of spill response can affect the cost of cleanup.  The longer it takes to assemble and conduct the spill response, the  more likely it is that the oil will move with changing tides and currents  and affect a greater area, which can increase costs. Some experts said  the level of experience of those involved in the incident command is  critical to the effectiveness of spill response. For example, they said  poor decision making during a spill response could lead to the  deployment of unnecessary response equipment, or worse, not enough  equipment to respond to a spill. Several experts expressed concern  that Coast Guard officials are increasingly inexperienced in handling  spill response, in part because the Coast Guard’s mission has been  increased to include homeland security initiatives.
Public interest: Several experts with whom we spoke stated that the  level of public attention placed on a spill creates pressure on parties to  take action and can increase costs. They also noted that the level of  public interest can increase the standards of cleanliness expected,  which may increase removal costs.
section_title: Key Factors Will Likely Influence Cost of Gulf Coast Spill
paragraphs: The total costs of the Deepwater Horizon spill in the Gulf of Mexico are  currently undetermined and will be unknown for some time even after the  spill is fully contained. According to a press release from BP, as of June 7,   2010, the cost of the response amounted to about $1.25 billion, which  includes the spill response, containment, relief well drilling, grants to the  Gulf states, damage claims paid and federal costs. Of the $1.25 billion,  approximately $122 million (as of June 1, 2010) has been paid from the  Fund for the response operation, according to NPFC officials. The total  costs will not likely be known for a while, as it can take many months or  years to determine the full effect of a spill on natural resources and to  determine the costs and extent of the natural resource damage. However,  the spill has been described as the biggest U.S. offshore platform spill in 40  years, and possibly the most costly.
Our work for this testimony did not include a thorough evaluation of the  factors affecting the current spill. However, some of the same key factors  that have influenced the cost of 51 major oil spills we reviewed in 2007 will  likely have an effect on the costs in the Gulf Coast spill. For example, the  spill occurred in the spring in an area of the country—the Gulf Coast—that  relies heavily on revenue from tourism and the commercial fishing  industry. Spills that occur in proximity of tourist destinations like beaches  can result in additional removal costs in order to expedite spill cleanup, or  because there are stricter standards for cleanup, which increase the costs.  In addition, according to an expert, the loss in revenue from suspended  commercial and recreational fishing in the Gulf Coast states is currently  estimated at $144 million per year. Another factor affecting spills’ costs is  the type of oil. The oil that continues to spill into the Gulf of Mexico is a  light oil—specifically “light sweet crude” oil—that is toxic and can create  long-term contamination of shorelines, and harm waterfowl and fur- bearing mammals. According to the U.S. Fish and Wildlife Service, many  species of wildlife face grave risk from the spill, as well as 36 national  wildlife refuges that may be affected. In recent testimony, the EPA Deputy  Administrator described the Deepwater Horizon spill as a “massive and  potentially unprecedented environmental disaster.”
section_title: The Fund Has Been Able to Cover Costs Not Paid by Responsible Parties, but Risks and Uncertainties Remain
paragraphs: To date, the Fund has been able to cover costs from major spills that  responsible parties have not paid, but risks and uncertainties remain. We  reported in 2007 that the current liability limits for certain vessel types,  notably tank barges, may have been disproportionately low relative to  costs associated with such spills. In addition, the Fund faced other  potential risks to its viability, including ongoing claims from existing spills  and the potential for a catastrophic oil spill. The current spill in the Gulf of  Mexico could result in a significant strain on the Fund, which currently  has a balance of about $1.6 billion.
subsections: section_title: Further Attention to Limits of Liability Is Needed
paragraphs: The Fund has been able to cover costs from major spills that responsible  parties have not paid, but additional focus on limits of liability is  warranted. Limits of liability are the amount, under certain circumstances,  above which responsible parties are no longer financially liable for spill  removal costs and damage claims, in the absence of gross negligence or  willful misconduct, or the violation of an applicable federal safety,  construction, or operating regulation. If the responsible party’s costs  exceed the limit of liability, the responsible party can make a claim against  the Fund for the amount above the limit. Major oil spills that exceed a  vessel’s limit of liability are infrequent, but their effect on the Fund can be  significant. In our 2007 report, we reported that 10 of the 51 major oil spills  that occurred from 1990 through 2006 resulted in limit-of-liability claims  on the Fund. These limit-of-liability claims totaled more than $252 million  and ranged from less than $1 million to more than $100 million. Limit-of- liability claims will continue to have a pronounced effect on the Fund.  NPFC estimates that 74 percent of claims under adjudication that were  outstanding as of January 2007 were for spills in which the limit of liability  had been exceeded. The amount of these claims under adjudication was  $217 million.
In 2007, we identified two key areas in which further attention to these  liability limits appeared warranted and made recommendations to the  Commandant of the Coast Guard regarding both—the need to adjust limits  periodically in the future to account for significant increases in inflation  and the appropriateness of some current liability limits. Regarding the  need to adjust liability limits to account for increases in inflation, we  reported that the Fund was exposed to about $39 million in liability claims  for the 51 major spills from 1990 through 2006 that could have been saved  if the limits of liability had been adjusted for inflation as required by law,  and recommended adjusting limits of liability for vessels every 3 years to  reflect significant changes in inflation, as appropriate. Per requirements  in OPA as amended by the Delaware River Protection Act, the Coast Guard  published an interim rule in July 2009—made final in January 2010—that  adjusted vessels’ limits of liability to reflect significant increases in the  Consumer Price Index, noting that the inflation adjustments to the limits  of liability are required by OPA to preserve the deterrent effect and  polluter-pays principle embodied in the OPA liability provisions. DOI has  been delegated responsibility by the President to adjust the liability limits  for offshore facilities and this responsibility has been redelegated by DOI  to the Minerals Management Service. To date, these liability limits have  not been adjusted for inflation.
The Coast Guard and Maritime Transportation Act of 2006 significantly  increased the limits of liability. Both laws base the liability on a specified  amount per gross ton of vessel volume, with different amounts for vessels  that transport oil commodities (tankers and tank barges) than for vessels  that carry oil as a fuel (such as cargo vessels, fishing vessels, and  passenger ships). The 2006 act raised both the per-ton and the required  minimum amounts, differentiating between vessels with a double hull, that  helps prevent oil spills resulting from collision or grounding, and vessels  without a double hull. For example, the liability limit for single-hull  vessels larger than 3,000 gross tons was increased from the greater of  $1,200 per gross ton or $10 million to the greater of $3,000 per gross ton or  $22 million.
However, our analysis of the 51 major spills showed that the average spill  cost for some types of vessels, particularly tank barges, was higher than  the limit of liability, including the new limits established in 2006. Thus,  we recommended that the Commandant of the Coast Guard determine  whether and how liability limits should be changed by vessel type, and  make specific recommendations about these changes to Congress. In its  August 2009 Annual Report to Congress on OPA liability limits, the Coast  Guard had similar findings on the adequacy of some of the new limits.  The Coast Guard found that 51 spills or substantial threats of a spill have  resulted or are likely to result in removal costs and damages that exceed  the liability limits amended in 2006. Specifically, the Coast Guard reported  that liability limits for tank barges and cargo vessels with substantial fuel  oil may not sufficiently account for the historic costs incurred by spills  from these vessel types. The Coast Guard concluded that increasing  liability limits for tank barges and non tank vessels—cargo, freight, and  fishing vessels—over 300 gross tons would increase the Fund balance.  With regard to making specific adjustments, the Coast Guard said dividing  costs equally between the responsible parties and the Fund was a  reasonable standard to apply in determining the adequacy of liability  limits. However, the Coast Guard did not recommend explicit changes to  achieve either that 50/50 standard or any other division of responsibility.
section_title: Other Challenges Could also Affect the Fund’s Condition
paragraphs: The Fund also faces several other potential challenges that could affect its  financial condition:    Additional claims could be made on spills that have already been  cleaned up: Natural resource damage claims can be made on the Fund  for years after a spill has been cleaned up. The official natural resource  damage assessment conducted by trustees can take years to complete,  and once it is completed, claims can be submitted to the NPFC for up  to 3 years thereafter.
Costs and claims may occur on spills from previously sunken vessels  that discharge oil in the future: Previously sunken vessels that are  submerged and in threat of discharging oil represent an ongoing  liability to the Fund. There are over 1000 sunken vessels that pose a  threat of oil discharge. These potential spills are particularly  problematic because in many cases there is no viable responsible party  that would be liable for removal costs. Therefore, the full cost burden  of oil spilled from these vessels would likely be paid by the Fund.
Spills may occur without an identifiable source and, therefore, no  responsible party: Mystery spills also have a sustained effect on the  Fund, because costs for spills without an identifiable source—and  therefore no responsible party—may be paid out of the Fund. Although  mystery spills are a concern, the total cost to the Fund from mystery  spills was lower than the costs of known vessel spills in 2001 through  2004. Additionally, none of the 51 major oil spills was the result of  discharge from an unknown source.
A catastrophic spill could strain the Fund’s resources: In 2007, we  reported that since the 1989 Exxon Valdez spill, which was the  impetus for authorizing the Fund’s usage, no oil spill has come close to  matching its costs—estimated at $2.2 billion for cleanup costs alone,  according to the vessel’s owner.  However, as of early June, the  response for the Deepwater Horizon spill had already totaled over $1  billion, according to BP, and to date, the spill has not been fully  contained. As a result, the Gulf of Mexico spill could easily eclipse the  Exxon Valdez, becoming the most costly offshore spill in U.S. history.
The Fund is currently authorized to pay out a maximum of $1 billion  on a single spill for response costs, with up to $500 million for natural  resource damage claims. Although the Fund has been successful thus  far in covering costs that responsible parties did not pay, it may not be  sufficient to pay such costs for a spill—such as the Deepwater  Horizon—that are likely to have catastrophic consequences. While BP  has said it will pay all legitimate claims associated with the spill,  should the company decide it will not or cannot pay for the costs  exceeding their limit of liability, the Fund may have to bear these  costs. Given the magnitude of the Deepwater Horizon spill, the costs  could result in a significant strain on the Fund.
section_title: Options for Addressing the Fund’s Vulnerabilities
paragraphs: Recently, several options have been identified to address the Fund’s  vulnerabilities. In particular, the Congressional Research Service (CRS)   has identified options to address the vulnerabilities, and Members of  Congress have also introduced legislation that would address the risks to  the Fund. These options include:  Increasing liability limits. CRS proposes raising the liability caps for  vessels so that the responsible party would be required to pay a greater  share of the costs before the Fund is used. In addition, S. 3305  proposes raising the liability limit for damage claims related to  offshore facilities from $75 million to $10 billion.
Increasing the per-barrel tax. CRS and congressional options  include increasing the current per-barrel tax used to generate revenue  for the Fund in order to raise the Fund’s balance—H.R. 4213 proposes  raising the tax from the current $0.08 per barrel to $0.34. According to  CRS, this option would increase the likelihood that there is sufficient  money available in the Fund if costs exceed the responsible party’s  liability limits.
Including oil owners as liable parties. CRS suggests expanding the  definition of liable parties to include the owner of the oil being  transported by a vessel.
In addition, the Administration announced a proposal on May 12, 2010,  that addresses several aspects of the response to the Deepwater Horizon  spill, primarily by changing the way the Fund operates. It includes, among  other things, proposals to increase the statutory limitation on  expenditures from the Fund for a single oil spill response from $1 billion  to $1.5 billion for spill response and from $500 million to $750 million per  spill for natural resource damage assessments and claims. In addition,  similar to the CRS and congressional proposals, the Administration is  proposing an increase on the per-barrel tax to $0.09 this year, 7 years  earlier than the current law requires.
Mr. Chairman, this concludes my statement. I would be pleased to respond  to any questions you or other Members of the Subcommittee may have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For questions about this statement, contact Susan Fleming at (202) 512- 2834 or flemings@gao.gov. Individuals making key contributions to this  testimony include Jeanette Franzel, Heather Halliwell, David Hooper,  Hannah Laufe, Stephanie Purcell, Susan Ragland, Amy Rosewarne, Doris  Yanger, and Susan Zimmerman.
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