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John Hager

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John Hager

We Were Lucky It Was BP . . .

And Not PXP

Sunday, July 18, 2010
By John Hager

It’s hard to see anything positive in the Gulf oil disaster. We won’t know for quite a while how bad the damage really is. As one scientist put it, “It’s not what we see that worries me. It’s what we don’t see.” Damage at the microscopic bottom of the food chain is a frightening prospect.

BP’s safety practices proved inadequate, and their cleanup efforts have been notably impotent. So how can I see any good fortune here? The answer is economic: BP had a net worth of $100 billion and a net income of $20 billion last year alone. BP can afford to spend a lot to try to stop the bleeding and fix the damage. But other offshore wells are operated by much smaller companies. What if the failed well had belonged not to BP but to a company with a net worth of, say, only $5 billion?

If a company’s offshore well fails and it doesn’t have the money to stop the leak and pay for the damage, bankruptcy results. Who pays then? You and the rest of our taxpayers — as if we do not already have enough debt. Our government in Washington has failed to protect the public not just from the environmental risks, but also from the financial risks of offshore drilling. Many who support offshore drilling also oppose government subsidies, and other government spending, and worry about national debt. But our present offshore drilling laws subsidize oil companies, increase government spending by putting liability on taxpayers, and expose us to even more national debt if a major spill occurs.

First, Congress gave the oil industry a gift by putting a $75 million cap on their liability for damages due to offshore drilling. Other industries have no such protection. The limit causes harm in two ways. It subsidizes the drilling by allowing companies to drill without bearing the full cost of unlimited liability. Second, it reduces their incentive for safe practice. The lower a company’s damage exposure, the lower its incentive to be safe. Conversely, the more a company stands to lose from a failure, the more careful the company will be.

It’s true that President Obama was able to extract from BP an agreement to pay $20 billion despite Congress’s limit of $75 million. But what if instead of BP it was a company whose net worth was less than the cleanup cost? Again, bankruptcy followed by a big bill for taxpayers to pay.

This sheds new light on a controversy that played out recently here on the Central Coast. Oil company PXP wanted to do new drilling in the Tranquillon Ridge region west of Vandenberg Air Force base. PXP sought support from local environmental organizations with an enticing offer: If allowed to do new drilling, PXP would agree to shut down some existing wells several years from now. The Environmental Defense Center worked with PXP and signed an agreement to allow the drilling.

To allow new drilling in return for a future shut down of existing wells was an interesting but controversial approach. Contrary to her long opposition to offshore drilling, Congressmember Lois Capps supported the plan, as did Governor Arnold Schwarzenegger. Local environmentalist Susan Jordan and others opposed it. The plan was not approved by the State Lands Commission before the Gulf spill effectively killed it.

We are lucky this plan did not go through because the agreement said nothing about what would happen if a spill occurred. And instead of BP’s $100 billion, PXP has a net worth of $3 billion. If a major spill occurred, PXP might not have had the money to fix the failure and pay for the damage. The agreement simply did not account for that risk. Unlike almost every other commercial transaction, the Tranquillon Ridge contract does not mention insurance or responsibility for damage from a failure.

If new drilling was to be allowed, why not require that PXP accept unlimited liability for damages, beyond the $75 million limit? Or have insurance? If PXP were to refuse to accept full responsibility, why should the project be approved?

How could a respected environmental organization, our governor, and our congressmember all miss that financial risk to taxpayers? Were they all taken in by the good they saw? They seem never to have asked the questions those pesky lawyers ask: What happens if something goes wrong? Who will pay? Is there enough money? Should we require insurance?

Many of us feel that our coast is too beautiful and too important to our local economy to want to bear the risks of new offshore drilling. But if a compromise is to be considered, the company seeking to drill simply must agree to accept responsibility for a loss and prove that it will have the resources to pay for it.

So yes, we are lucky that the failed well a mile deep in the Gulf of Mexico belonged to BP, who has enough money to pay for the economic loss. If the owner had $3 billion in assets instead of $100 billion, who would be left holding the bag? We know the answer to the question, which is why it needs to be asked not just after a spill, but before they drill.

John Hager is a Santa Barbara attorney and an independent candidate for Congress in the 23rd District.

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