Smaller oil companies favor higher tax over liability cap increase

Some oil industry executives are planning an unusual defense against bills that would raise the liability cap on companies responsible for offshore disasters: raise our taxes instead.

Lee Fuller, the vice president of government relations for the Independent Petroleum Association of America, said oil companies may back an 18 to 25-cent per barrel tax that would support a government fund to reimburse business, local communities and other interests damaged by oil spills.

An 8-cent per barrel tax is now collected. That has left $1 billion to cover economic damages, but some experts believe even that amount is unlikely to cover the effects of the massive Gulf spill.  

Fuller said a tax is preferable to legislation raising the liability cap. Bills that have the support of Democratic leaders would raise the cap from $75 million to $10 billion, a potentially huge bill for some companies.

Raising the potential damages by such an extent will make it more difficult for companies to get insurance to cover drilling operations, Fuller said.

In arguing against the measure, the industry is also employing a more familiar strategy, arguing that raising the cap could shut down some domestic oil production. Smaller, so-called independents could be forced to stop offshore drilling if they can’t get insurance, Fuller said. He said 90 percent of the drilling rigs operating in the Gulf of Mexico are operated by independent producers, not deep-pocketed behemoths like BP or Exxon Mobil.

Fuller acknowledged that anger at BP in Congress has made it difficult to argue against the legislation. BP leased the Deepwater Horizon drilling rig that exploded and sank last month, leading to the ruptured oil well that is now spilling around 5,000 barrels of oil a day into the Gulf.

“The problem is that it has been so emotional that it is very hard to get people to think about consequences on people other than BP and Transocean,” Fuller said. Transocean owned the drilling rig.

Independents are oil companies that explore and produce oil, but don’t refine or market petroleum products, unlike the integrated “majors,” like BP, Exxon Mobil and ConocoPhillips. A spokeswoman for the American Petroleum Institute, whose members include large oil companies, said the trade group had yet to take a position on the liability legislation.

Although smaller, independents are often publicly traded companies with significant financial resources. But Fuller said not all the companies IPAA represents have the financial wherewithal to “self-insure” their drilling operations and some may be forced down if they face liability as high as $10 billion.

He said the legislation could be “devastating” to independent producers “for something we had no involvement with.”

But Dan McLaughlin, a spokesman for Sen. Bill Nelson (D-Fla.), a strong supporter of raising the cap, said oil companies should pay for the damages their accidents cause. 

“I’m not sure that what the industry says it prefers would necessarily turn out to be good for the public,” McLaughlin said in an email response to a question. “After all, it was the industry that said the Deepwater Horizon rig was so safe that it should be exempt from environmental impact reviews.”

After the 1989 Exxon Valdez spill in Alaska, Congress passed the Oil Pollution Act, which requires companies responsible for oil spills like the one threatening the Gulf coast to pay all clean-up costs.

But it caps the damages companies may have to pay out to third parties to replace lost business or tax revenues.

A hotel operator or a shrimper along the Louisiana Gulf coast could use the Oil Pollution Act to seek reimbursement from BP in this instance, but only until the $75 million cap is reached.

At that point, harmed parties could apply for payment from the government oil spill account, which is funded by the 8-cent tax.

The $75 million cap can also be exceeded if the responsible party is found to be grossly negligent, operated with willful misconduct or violated federal regulations.

Government payments from the fund, meanwhile, are capped at $1 billion, even though there is around $1.6 billion in the fund now, Fuller said.