Commentary: Oil Spill Mitigation Failure and the Impact on the Insurance Industry

By David Prior | September 4, 2013

Governments and the oil spill industry cannot effectively and ethically mitigate oil spills on the ocean, and this fact has a strong negative impact on the insurance industry. Significant oil spills are still common in the U.S. even though they occur less frequently than they did twenty years ago. Double-hull vessels are part of the solution, but offer only limited protection from oil spills: Barring a few exceptions, single-hull vessels over 5,000 gross tons may not operate in U.S. waters after January 1, 2010. This new regulation helped reduce the incidence of oil spills. Nevertheless, on April 20, 2010 the Deepwater Horizon (DWH) exploded. The cleanup operation cost more than $10 billion and recovered only 3 percent of the spilled oil. Based on new finds of oil and tar balls on Gulf of Mexico beaches more than 3 years after the initial event, the clean-up is likely not yet complete.

Also, large, modern ships do not entirely eliminate the danger of oil spills. On June 17, 2013 the recently built container ship MOL Comfort at 980 feet long, split in two for no apparent reason and sank. This is not the first time huge vessels have snapped in two, and it won’t be the last.

Oil spills that occur in very sheltered waters are usually cleaned up effectively and economically using current mitigation techniques, but even San Francisco Bay is not sheltered enough for today’s oil spill technology to function in a satisfactory manner. In 2007 the container ship, Cosco Busan, hit the Bay Bridge and spilled fuel oil. The United States Coast Guard and oil spill industry could not operate in the currents and choppy water so they lost 60 percent of the spilled oil. $75 million in damages were the result.

It is well established that there have been no significant innovations in oil spill mitigation in the last 40 years. What other industry can make that claim and still be in business? After the Deepwater Horizon incident in 2010 the oil industry issued a report that stated: “Spill prevention remains a primary focus of the industry. Nonetheless, the current surface oil spill response system – as exhibited in the DWH incident – continues to be effective”. How can they come to that conclusion, having failed to prevent the blowout. Even more troubling is that they consider a 3 percent success rate to be “effective”.

The reason is that nobody cares, not even the insurance industry who often end up paying the bill. When is the last time the insurance industry demanded acceptable oil spill mitigation performance? The insurance companies demand strict adherence to building codes, smoke detectors and other regulations before they will insure a building for $50,000 and yet they demand nothing of the oil companies regarding oil spill mitigation success when insuring them for $500 million and more.

The insurance industry may want to look at how the oil companies compensate the people who clean up oil spills. The oil companies, by and large, do not clean up oil spills themselves. This has a negative impact on the insurance industry because of the way they subcontract this work. BP was paying the contractors by the hour, not by the barrel of oil brought ashore, so the contractors had revenues of approximately $100 million per day for months even though they only got 3 percent of the oil. All they had to do was show up for work with a rake.

Furthermore, the contractors do not have technology that works effectively on the open water so they need the oil to hit the shore in order to make money. This unusual compensation plan has a negative impact on insurance companies. BP spent over $10 billion trying to clean it up, and failing, whereas new and effective technology that could clean up the oil at sea before it hit the beach would have cost only 2 percent of that amount. Recovering the oil at sea also avoids almost all the damage and lawsuits from a spill. Further, untreated oil swiftly collected offshore can be recovered and refined, and not just turned into colossal amounts of toxic waste. The new technology has a working life of 40-50 years so can be amortized over many spills. This better technology is available now but the existing suppliers have locked the door. Only the insurance industry has a financial reason to pry it open.

Things have gotten worse since the BP spill. Not only has there been no improvement in actual oil spill cleanup ability but, ethically, things have taken a turn for the worse. It appears that the damage that most concerns government and the oil industry is public relations damage. Because the highly toxic dispersant “Corexit” made the oil disappear, a great deal was used. Now there is a 10,000-person lawsuit taking place in Louisiana related entirely to Corexit poisoning. Will the insurance companies have to pay for this new liability, or future versions of it?

The oil industry intends to greatly expand the use of Corexit. Environment Canada has just approved its use. A new oil well-capping system has been developed that injects dispersants deep undersea: The expanded containment system will include a 15k psi subsea containment assembly, dedicated capture vessels and a dispersant injection system. Lawsuits are bound to follow. Will the insurance industry willingly pay again and again or will it demand high levels of performance from an oil industry that considers a success rate of 3 percent to be satisfactory. Clearly, an intervention is required if huge financial losses are to be avoided.

After events like DWH and Lac-Mégantic, governments are realizing that they have to act to ensure that compensation and response funds are in place to cover the failings of the oil industry, even for a worst case scenario. As they come to understand the size of the amounts to be underwritten to provide for additional tragic events of this nature with loss of life, eventually they will turn their gaze onto the role of the insurance industry related to these industrial disasters.

David Prior is CEO of an environmental technology company in NB, Canada and has 35 years experience in developing, patenting and manufacturing new technology. The National Research Council of Canada and Dalhousie University in Halifax, Canada have assisted.

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