How Safe Is BP From The Cap On Oil Spill Costs

BP plc (NYSE: BP) will benefit from a law passed after the Exxon Valdez incident which capped the liability for oil spills at $75 million. BP says it will still bear the costs of the clean-up which its says costs $6 million a day. But, the cap is its financial salvation. The Oil Pollution Act will save it from collateral damage and liability from the fallout of the “accident” beyond its direct costs.

The safety net of the Oil Pollution Act could be cut by Congress. Democratic Senator Robert Menendez of New Jersey wants to raise the cap to $10 billion. It is too early to say how much support he will have among his peers, but it will certainly be politically popular to attack BP and other parties such as Transocean (NYSE: RIG) which were involved in the disaster.

For BP, the big question about a cap is whether it will be retroactive. It may not seem fair to change the game after it has been played, but that is the dilemma facing the UK-based company. Congress could make sure that BP pays a full $10 billion for liabilities associated with the catastrophe.

But the issue of whether legislation should be retroactive is a problematic one. Most legislation affects future events and not those in the past. Members of Congress with energy companies in their districts are not likely to support legislation that could “claw back” on past acts. That would leave a host of accidents, most of them minor, open to review. Many of the accidents involving oil spills have been problems created by smaller drillers and refiners. A retroactive cap could put some of them out of business.

BP is probably safe on the cap issue. Legislation that seeks to cover past spills would jeopardize the futures of too many US companies.

Douglas A. McIntyre

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