Deepwater Horizon Oil Spill: Preliminary Assessment of Federal Financial Risks and Cost Reimbursement and Notification Policies and Procedures

On April 20, 2010, an oil spill of national significance in the Gulf of Mexico followed an explosion on the mobile offshore drilling unit Deepwater Horizon (the Deepwater Horizon oil spill). The Deepwater Horizon was leased by BP America Production Company (BP) as part of the Macondo project. 152 days later, on September 19, 2010, BP confirmed the completion of cementing operations to prevent further oil from spilling from the Macondo Prospect well to which the Deepwater Horizon was attached when it exploded. In order to coordinate the federal response to the Deepwater Horizon oil spill, the National Incident Commander established the Deepwater Integrated Services Team (IST) consisting of 18 federal agencies, including the U.S. Coast Guard and the Department of Justice (DOJ). The U.S. Coast Guard's National Pollution Funds Center (NPFC) designated two BP subsidiaries--BP Exploration and Production and its guarantor, BP Corporation North America, Inc.--and five other companies as "Responsible Parties" for Deepwater Horizon oil spill related claims. Shortly after the spill, at the direction of NPFC, BP established a facility to receive and process all claims against Responsible Parties. In June 2010, as part of an oral agreement between the administration and BP, BP established a new claims processing facility--the Gulf Coast Claims Facility (GCCF). GCCF began operations on August 23, 2010, and is responsible for handling claims from individuals and businesses for damages resulting from the Deepwater Horizon oil spill. BP also established an irrevocable trust (Trust), to which BP is to provide a total of $20 billion by 2014, primarily for the purpose of paying GCCF and other claims related to the Deepwater Horizon oil spill. The total cost to clean up this massive and potentially unprecedented spill, the damage to the environment, as well as the potential impact to the livelihood and economic status of businesses and individuals in the region will undoubtedly be significant, with current estimates from BP and Oxford Economics in the tens of billions of dollars. However, the full extent of such costs and the extent to which they will ultimately be paid by the Responsible Parties or federal, state, and local governments is unknown at this time and depends on a variety of factors. The complex legal framework in place for oil spill liability and response funding will play an integral role in determining who is responsible and will ultimately pay the costs associated with the Deepwater Horizon oil spill. In this regard, the Oil Pollution Act of 1990, as amended (OPA), which Congress enacted after the Exxon Valdez spill in 1989, authorized use of the Oil Spill Liability Trust Fund (Fund), which is administered by NPFC and is subject to certain caps on the amount of its expenditures. The Fund was established to pay for certain oil spill cleanup costs and damages using federal tax revenues for immediate response costs and when the Responsible Parties cannot be identified or do not pay. OPA also provided that the federal government may subsequently seek reimbursement for these costs from Responsible Parties. Since the Deepwater Horizon oil spill, a number of related legislative proposals have been introduced. The objectives of this study were to provide a preliminary assessment of (1) financial risks and exposures to the Fund and the federal government as a result of the Deepwater Horizon oil spill, and (2) Coast Guard's NPFC cost reimbursement policies and procedures for Deepwater Horizon oil spill costs.

Because the total costs of the Deepwater Horizon oil spill are still unknown, the federal government's financial exposure as a result of the oil spill is also unknown. BP has voluntarily established a Trust to be funded incrementally up to $20 billion, has paid other costs outside of the Trust, and has stated that it will continue to pay additional costs. BP's financial condition and its continuing resolve to stand behind its public commitments will be key factors if additional costs need to be paid. Certain statutory limits on the amount of federal funds available for response costs and damages are intended to mitigate the exposure. For example, OPA establishes caps on the amount of funds that can be expended on each oil spill. NPFC has billed the Responsible Parties for the Deepwater Horizon oil spill $581 million for response activities performed by nine federal government agencies and various state government agencies. After NPFC authorizes reimbursement, the government agencies are paid from the Fund for actual expenditures. BP has paid NPFC $518.4 million as of October 12, 2010. The Fund is at risk of reaching the OPA-established $1 billion per incident cap on total expenditures in the relatively near future. Consequently, unless the statute is amended to exclude amounts reimbursed by Responsible Parties from the cap, the Fund may be unable to pay any OPA compensable claims or other Deepwater Horizon oil spill-related costs above that limit. Our preliminary assessment of the design of Coast Guard's NPFC's policies and procedures for obtaining reimbursement for Deepwater Horizon oil spill costs found they did not always reflect current practices and were not sufficiently detailed to ensure they could be followed consistently. For example, NPFC's procedures for identifying and notifying Responsible Parties are dated 1996, when the Coast Guard was part of Department of Transportation, and are marked "draft." The federal government has been involved in overseeing Responsible Parties' claims processing resulting from the Deepwater Horizon oil spill. Following the spill, DOJ, the Department of Homeland Security (DHS) and various other federal agencies have been overseeing the establishment of a claims process and monitoring claims processing activities by BP on behalf of the designated Responsible Parties. Congress may wish to consider amending OPA or enacting new legislation that eliminates the Fund's $1 billion per incident expenditure cap to the extent that it does not take into account reimbursements from Responsible Parties. In this regard, Congress may want to consider setting a Fund cap associated with an incident based upon net expenditures (expenditures less reimbursements). In order to help establish and maintain effective cost reimbursement policies and procedures for the Fund, we recommend that the Secretary of Homeland Security direct the Director of the U.S. Coast Guard's NPFC to update NPFC's policies and procedures to include (1) current Fund reimbursement billing practices that reflect both a percentage of federal agencies' obligations as well as expenditures, and (2) specific procedural guidance on processing DOD requests for reimbursement using Military Interdepartmental Purchase Requests (MIPRs). In order to ensure that all Responsible Parties are properly notified of their responsibilities for an oil spill, we recommend that the Secretary of Homeland Security direct the Director of NPFC to (1) update NPFC's current policies to reflect current organization and structure and managements' directives, and (2) update NPFC's current procedures to provide detailed guidance and procedures for identifying and documenting all Responsible Party notifications.