Gulf of Mexico Oil Spill Blog Oil Spill Liability Insurance

Oil Spill Liability Insurance

Oil Spill Liability Insurance

Oil Companies May Start Insurance Pool to Plug Liability Gap

HOUSTON (Dow Jones)

Oil and gas producers are contemplating creating an insurance pool to back companies that could never absorb the financial consequences of a spill like BP PLC’s (BP, BP.LN) in the Gulf of Mexico.

The discussion comes as U.S. lawmakers debate changing the liability cap for offshore crude spills in the wake of the deadly Macondo well explosion, which destroyed the Deepwater Horizon rig and spewed oil for three months.

Liability is currently capped at $75 million by a federal law written in response to 1989’s Exxon Valdez spill in Alaska, but the Gulf of Mexico disaster has shown that limit means little. The British oil giant is expected to pay out more than $30 billion in fines, cleanup expenses and loss-of-income claims tied to the nation’s largest ever marine oil spill.

Operators off U.S. shores have generally been able to cobble together up to $1.5 billion in insurance coverage for different aspects of their drilling endeavors. In the past that kind of coverage was more than enough but it would only cover perhaps 5% of BP’s spill tab, and few companies are large enough to foot the difference.

That’s why companies are talking about creating a mutual insurance company, said Marathon Oil Corp. (MRO) Chief Financial Officer Janet Clark. “There just isn’t the commercial capability, the capacity for the kinds of insurance you need to get,” Clark said at a recent conference.

A Deloitte LLP study found only ten of the roughly 300 companies operating in the Gulf have a market capitalization over $30 billion while about 40% are worth less than $5 billion. Essentially, managers of the Gulf’s hundreds of smaller players are “betting the entire company on every well,” wrote the report’s author, Gary Adams.

Some companies have already decided to leave the Gulf; others halted spending there until future liability limits and drilling regulations are known. Plains Exploration & Production Co. (PXP) Chief Executive James Flores cited “exposure to deepwater that we may not need or can stand” in the Houston company’s decision to sell its Gulf assets. Meanwhile, Newfield Exploration Co. (NFX) announced last month it would suspend its Gulf exploratory drilling program in 2011.

There are proposals by industry and legislators to help keep smaller companies in the Gulf where they share risk with bigger companies and explore prospects ignored by the majors.

Hess Corp. (HES) Chief Executive John Hess has said his company, which has a market capitalization of about $25 billion, favors raising the liability cap to $1 billion and creating an industry-funded cooperative to handle exposure beyond that.

A federal bill sponsored by Sen. Mary Landrieu (D., La.), would require companies to pay the first $250 million for a spill, with an industry-funded mutual insurer picking up the tab for anything beyond that up to $10 billion. Exposure above $10.25 billion would fall back on the company, with the government’s Oil Spill Liability Trust Fund as a last resort if the offending company goes bankrupt.

With the current Congress ending, aides say Landrieu’s bill will likely be tweaked and reintroduced after the presidential oil spill commission offers recommendations as part of its report on the Deepwater Horizon disaster on Jan. 12.

Energy companies have already pooled resources in response to oil spills. This summer Exxon Mobil Corp., (XOM), Chevron Corp. (CVX), Royal Dutch Shell PLC (RDSA, RDSA.LN) and ConocoPhillips (COP) said they would each invest $250 million to design, build and operate a spill response system.

Also, in 1971, more than a dozen companies formed Oil Insurance Ltd. in response to the 1969 spill in California’s Santa Barbara Channel and a 1970 Lake Charles, La., refinery fire. They later created another insurer, Oil Casualty Insurance Ltd. However, combined the most those Bermuda-based insurers typically offer members is $350 million, said Robert Stauffer, who heads those insurers’ parent organization, The OIL Group of Companies.

Munich Re AG (MUV2.XE), meanwhile, has proposed a fund that would facilitate as much as $20 billion in coverage. The world’s largest reinsurer said last month it expected to pay out over $100 million for the Deepwater Horizon accident, including property damage claims around $80 million related to the sunken drilling rig. Munich said it was willing to put $2 billion into its own proposed catastrophe insurer if other insurance companies joined.

Even if that plan comes to fruition, there would still be room for an industry pool. “If Macondo is a $40 billion event and the most the industry can come up with is $20 billion, you have a huge gap,” OIL Group’s Stauffer said.

source: RIGZONE – Oil Companies May Start Insurance Pool to Plug Liability Gap

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