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by Semoon Chang, Chief Economist Gulf Coast Center for Impact Studies

BP Oil Spill Part I “Status & Issues of Compensation and Penalty Dollars from the Deepwater Horizon Disaster” 63 rd Annual Spring Meeting of GSMFC. by Semoon Chang, Chief Economist Gulf Coast Center for Impact Studies March 19, 2013; Destin, Florida changsemoon@yahoo.com.

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by Semoon Chang, Chief Economist Gulf Coast Center for Impact Studies

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  1. BP Oil Spill Part I“Status & Issues of Compensation and Penalty Dollars from the Deepwater Horizon Disaster” 63rd Annual Spring Meeting of GSMFC by Semoon Chang, Chief Economist Gulf Coast Center for Impact Studies March 19, 2013; Destin, Florida changsemoon@yahoo.com

  2. June 13(Sun), 2010

  3. Table of Contents (Semoon’s draft paper) • I. BP Claims Process • II. Gulf Coast Claims Facility of Aug, 23, 2010 • II-1. GCCF Final Rules and Payment Methodology • II-2. ARPC Methodology • II-3. First Modification to the Final Rules • II-4. Second Modification to the Final Rules • II-5. GCCF One Year Later • II-6. Order and Reasons • III. Settlement of April 18, 2012 • III-1. Settlement Class • III-2. Settlement Categories • III-3. Causation Requirements for Business Economic loss Claims • III-4. Causation Requirements for Individual Economic loss Claims • III-5. Risk Transfer Premiums • III-6. Preliminary Approval of the Settlement • IV. RESTORE Act of July 16, 2012 • V. Idle Iron Notice of October 2010 • Vi. BP Criminal Claims Settlement of Nov. 15, 2012 • ViI. Conclusions • Selected References • Appendices:

  4. Key dates I 2008 • March BP purchases the rights to drill at Macondowell • April 6 US Dept of Interior exempts BP from detailed EIS after concluding massive oil spill unlikely 2010 • April 20 9:45 pm CDT DeepwaterHorizon explodes; killing 11, injuring 17, & 98 no serious injury • May 27 Obama announces six-month moratorium on new deep water oil drilling permits in 500 feet (150 m) of water or more • June 7 Complaint filed against the poratorium: Hornbeck Offshore Services v. Salazar

  5. Key dates II (continuing 2010) • June 22 U.S. District Court for the Eastern District of LA issues restraining order against the moratorium • July 8 U.S. Court of Appeals for the Fifth Circuit refuses to overturn moratorium • July 10 Salazar issues new moratorium effective until November 30 • August 23 GCCF assumes responsibility on claims • Oct. 12 Obama administration lifts the moratorium on deep water oil drilling in the Gulf, weeks before midterm elections • Dec. 15 U.S. DOJ files a lawsuit against BP and 8 other companies for cleanup expenses, ad environmental recovery including damages to natural resources; it also seeks civil penalties under the Clean Water Act.

  6. Key Dates III 2011 • Feb. 18 GCCF publishes Final Ruleson Payment Options, Eligibility, etc 2012 • April 18 MDL “Final Settlement” announced • July 6 The "Resources and Eco systems Sustainability, Tourist Opportunities, and Revived Economies of the Gulf Coast States Act of 2011" (RESTORE) • Nov. 15 $4.5B plea deal on criminal fines against BP announced 2013 • Jan. 3 $1.4B plea deal on criminal abd civil fines against Transocean (owner of the rig) announced • Jan. 29 U.S. District Judge Sarah Vance of New Orleans approves the $4.5 (4.0?) plea deal.

  7. Scope of Claims to GCCF as of May 1, 2012 • _________________________________________________ • State of Submitted Paid Claims Amount Paid • Residence Claims • _________ _________ __________ ________________ • Louisiana 377,608 123,123 $ 1,815,692,796.56 • Florida 370,361 167,821 $ 2,383,420,109.03 • Alabama 143,531 55,117 $ 949,268,603.71 • Mississippi 110,408 34,776 $ 566,460,181.70 • Texas 25,042 6,723 $ 246,750,695.60 • Others 49,839 22,259 $ 382,933,990.97 • ________ __________ ________________ • Total 1,076,789 409,819 $ 6,344,526,377.57 • _________________________________________________ • Source: Gulf Coast Claims Facility, May 1, 2012.

  8. Will review Selected Issues

  9. “Final Rules” by GCCF 2-18-2011 • Three Payment Options: Final, Interim, & Emergency Payment • In principle, documented losses based on a comparison to income from prior years for the same months • Appearance more than substance(?) • Introduction of Future Recovery Factor: “a Future Recovery Factor of 1.0 (two times the actual documented losses) in 2010 is fair and reasonable.” for losses less than $500,000.

  10. ARPC Methodology in “Final Rules” • GCCF relied on ARPC (Analysis-Research-Planning)of Washington DC • Attachment A, dated August 16, 2011, titled “ARPC Methodology for Calculating Interim Payments for 2011 Losses Due to the Oil Spill”. • NAFE had no chance! • Required: “all claimants demonstrate a revenue and/or earnings growth rate of at least 5% from 2010. If the claimant demonstrates a growth rate of at least 5% from 2010, the losses would be presumed to be due to the Oil Spill.” • No evidence of growth rates being challenged.

  11. The Settlement: Multi-District Lawsuitsofficial citation • “Deepwater Horizon Economic and Property Damages Settlement” • U.S. District Court, Eastern District of Louisiana • MDL NO. 2179, SECTION J • Related to: • Bon Secour Fisheries, Inc., et al., individually and on behalf of themselves and all others similarly situated, Plaintiffs, v. BP Exploration & Production Inc; BP America Production Company; BP p.l.c., Defendants. • Civil Action No. 12-970, Section J • Document 6276-1 Filed 04/18/12

  12. Settlement Categories • (A) Seafood Compensation Program • (B) Economic Damage Compensation that applies to “businesses, or to self-employed individuals • (C) Subsistence Damage Compensation that applies to those “who fish or hunt to harvest, catch, barter, consume or trade Gulf of Mexico natural resources • (D) VoO Charter Payment • (E) Vessel Physical Damage Compensation • (F) Coastal Real Property Damage Compensation • (G) Wetlands Real Property Damage Compensation; and • (H) Real Property Sales Damage Compensation

  13. Spillionnaires (owners of several vessels) • Under the (D) VoO Charter Payment program, “WORKING VoOPARTICIPANTS are entitled to the following payments, based on boat size, representing pay for 26 days’ work: • Boat Size Amount of Compensation • Less than 30 feet $41,600 • 30 feet-45 feet $49,400 • 46 feet-65 feet $62,400 • Greater than 65 feet $88,400 • “NON-WORKING VoOPARTICIPANTS: • Boat Size Amount of Compensation • Less than 30 feet $4,800 • 30 feet-45 feet $5,700 • 46 feet-65 feet $7,200 • Greater than 65 feet $10,200

  14. “No Conscience” Compensation: (for lawyers?) evidence of causation not required • (a) businesses (and their employees) in Zone A • (b) “Landing Site,” or “Commercial Wholesale or Retail Dealer A,” or “Primary Seafood Processor” • (c) “Commercial or Wholesale or Retail Dealer B,” or a “Secondary Seafood Processor,” or a “Seafood Wholesaler or Distributor,” or a “Seafood Retailer” in Zone A, B or C • (d) businesses meeting the “Tourism Definition” in Zone A or Zone B; and • (e) businesses meeting “Charter Fishing Definition” in Zone A, B or C. • Businesses in Zones B, C and D not entitled to the presumption of no requirement of evidence must demonstrate “revenue patterns” stated in the Settlement.

  15. Risk Transfer Premium (RTP) • RTP means “the amount paid to a Claimant for any and all alleged damage, including potential future injuries, damages or losses not currently known..” • For example, “if the Compensation Amount is $1, and the RTP is 2.5, then $1 is multiplied by 2.5, which product is then added to the $1 to reach the total amount of compensation ($1 + $2.50 = $3.50 in total compensation)” • RTP figures are yet to be challenged.

  16. Selected RTPs Exhibit 15 of the Settlement

  17. The RESTORE Act of July 16, 2012 • The "Resources and Eco systems Sustainability, Tourist Opportunities, and Revived Economies of the Gulf Coast States Act of 2011“ • Establish the Gulf Coast Restoration Trust Fund; 80 percent of all administrative and civil penalties in accordance with section 311 of the Federal Water Pollution Control Act.

  18. “Can be spent by state and local government officials” (on every thing?) • (I) Coastal restoration projects and activities. • (II) Mitigation of damage to, and restoration of, fish, wildlife, or natural resources. • (III) Implementation of comprehensive conservation management plan, including fisheries monitoring. • (IV) Programs to promote tourism in a Gulf Coast State. • (V) Programs to promote the consumption of Gulf seafood. • (VI) Programs to promote education regarding the natural resources. • (VII) Planning assistance. • (VIII) Workforce development and job creation. • (IX) Improvements to or upon State parks. • (X) Promotion of the long-term ecological or economic recovery. • (XI) Coastal flood protection and infrastructure. • (XII) Administrative costs.

  19. Politics • In Sept., 2012, the DOJ made a proposal that “would divert a greater portion of the fines toward a Natural Resource Damage Assessment (NRDA), reducing the amount paid in civil penalties for violating the Clean Water Act. … They’re also tax deductible – a major incentive for BP. Clean Water fines, by comparison, are not deductible and would flow primarily to the five Gulf Coast states through the Restore Act … In comparison to the Restore Act, Alabama, Mississippi and Texas are likely to lose, while Florida and Louisiana will gain.” (Press-Register October 3, 2012)

  20. BP Criminal Claims Settlement of 11-15-12 • $4.5B settlement between U.S. and “all criminal claims” against BP (no waiver); $150M against Exxon Valdez (1989) of which $125M waived. • (a) $2.4 billion to the National Fish and Wildlife Foundation • (b) $1.3 billion in criminal fines, which could go to the U.S. Coast Guard’s Oil Spill Liability Trust Fund • (c) $525 million to the Securities and Exchange Commission to settle criminal charges that BP misled investors; and • (d) $350 million to the National Academy of Sciences • “How that money gets divided among the states remains uncertain” (Press-Register, Nov. 18. 2012, 6A)

  21. Broad Progressions to summarize • Criminal lawsuits by US (against BP;others)$4.5+B • MDL civil lawsuits into the Settlement $7.8B • Civil lawsuits outside the MDL Settlement (states; private) $??? • Civil fines (Clean Water Act and Oil Pollution Act) through the RESTORE Act $5B to over $20B • Fines if BP is guilty of: • simple negligence – $1,000 per barrel • gross negligence - $4,300 per barrel • And then …

  22. Parting Word: Loss of Public Goods • Virtually, the entire compensation has been left to the litigation and negotiation by the U.S. Department of Justice with no mention of Future Recovery Factor or Risk Transfer Premiums. • When the amount of fines is determined before any valuation of public goods is made, and when the local distribution of fines and contributions is determined almost exclusively by local politicians and leaders of the tourism industry, it is interesting to see how much more useful the valuation based on stated preference methods is than no number, contrary to claims made by Kling, Phaneuf, and Zhao “From Exxon to BP: Has Some Number Become Better than No Number?” Journal of Economic Perspectives, Fall 2012, 3–26.

  23. BP Oil Spill Part II“New Idle Iron Notice Requirement That Leads to Decommissioning of Old Oil/Gas Platforms” 63rd Annual Spring Meeting of GSMFC by Semoon Chang, Chief Economist Gulf Coast Center for Impact Studies March 19, 2013; Destin, Florida changsemoon@yahoo.com

  24. MMS Study July 2007 • Operators also have a strong economic incentive to maintain structures offshore: • to defer the cost of removal • to increase the opportunity for resale • to reduce the risk and expense of storing platforms in a fabrication yard • to maintain a hedge against future development opportunities, and • to reduce the overall cost of decommissioning through economies of scale, scheduling, and shared mobilization. • Then, oil spill of April 20, 2010 and Announcement on September 15 by Buearu of Ocean Energy Management to be effective on October 15, 2010.

  25. terminologies • “idle iron” - wells, platforms and pipelines that are no longer producing or serving exploration or support functions related to the company’s lease. • “decommissioning” - a process that involves plugging wells and dismantling and removing platform structures and pipelines in a timely manner’ • Law until Sept. 15, 2010 announcement: Idle iron should be removed “no later than one year following the expiration of the lease.” The new NTL (notice to lessees) became effective Oct. 15, 2010.

  26. Actual Document Title • UNITED STATES DEPARTMENT OF THE INTERIOR BUREAU OF OCEAN ENERGY MANAGEMENT, REGULATION AND ENFORCEMENT GULF OF MEXICO OCS REGION • NTL No. 2010-G05 Issue Date: September 15, 2010 Effective Date: October 15, 2010 Expiration Date: October 14, 2013 • NOTICE TO LESSEES AND OPERATORS OF FEDERAL OIL AND GAS LEASES AND PIPELINE RIGHT-OF-WAY HOLDERS IN THE OUTER CONTINENTAL SHELF, GULF OF MEXICO OCS REGION • Decommissioning Guidance for Wells and Platforms

  27. The Idle Iron Notice To Lessees (NTL 2010 G05) of October 2010. • “Under the 2010 rules, wells that hadn't been used for five years were to be abandoned or “zonally isolated” within three years after Oct. 15, 2010. If wells were zonally isolated, operators had two additional years to abandon them. Platforms and supporting infrastructure that were idle for five years or more were to be removed within five years from mid-October 2010.” • (Susan Buchanan, “Push Is On To Declutter Gulf of Idle Iron,” MarineNews, August 1, 2012)

  28. Mark J Kaiser of LSU “Decommissioning activity forecast high for Gulf of Mexico Social Media Tools” in Oil & Gas Journal, Nov. 7, 2011; www.ogj.com.

  29. Offshore Statistics by BSEE • These statistics reflect data through 02-04-2013 09:44:48 AM (CST) • Water Depth Active Approved Activein Meters Leases Applications Platforms to Drill • 0 to 200 1,756 34,773 2,745 • 201 to 400 117 1,113 20 • 401 to 800 290 855 10 • 801 to 1000 387 569 9 • 1000 and Above 3,410 1,808 25

  30. Widely-Varying Cost Estimates • $1.8 to $3.6 billion to remove structures in the Gulf of Mexico. (Mark J Kaiser of Center for Energy Studies, Louisiana State University, Lillehammer Energy Claims Conference, March 2-4, 2011 - powerpoint) • $5 billion in the Gulf of Mexico, $12 to $15 billion in North Sea, and $5 to $40 billion worldwide. (“Proceedings: Public Workshop Decommissioning and Removal of Oil and Gas Facilities Offshore California: Recnt Experience and Future Deepwater Challenges”, Vetura, California, September 23-25, 1997, p. 20) • $4 million to $10 million to decommission individual oil and gas installations “in the shallow water Gulf of Mexico.” (http://www.rigzone.com, accessed December 22, 2012)

  31. News Release Sept. 14, 2013 by Secretary of the Interior Ken Salazar and Bureau of Ocean Energy Management, Regulation and Enforcement Director Michael R. Bromwich • “will require oil and gas companies operating in the Gulf of Mexico to set permanent plugs in nearly 3,500 nonproducing wells that are currently completed with a subsurface safety valve in place and dismantle about 650 oil and gas production platforms if they are no longer being used for exploration or production.”

  32. Selected GOM firms capable of doing Decommissioning work • Bisso Marine of Houston and New Orleans • Versabarof Houston and New Orleans • Resolve Marine Group of Fort Lauderdale • Manson Gulf of Houma • Marine Salvage Firms • TITAN Salvage of Florida • D&L Salvage & Marine Services of the Port of West St. Mary in Franklin (LA)

  33. Possible Impact & issues relating to GSMFC(Only questions, no answers – Need Joint Study among MFC partners?) • Basics • How many active rigs by age by state • How many idle rigs by age from the date of capping by state • How many, and which, capped rigs are used as artificial fishing reefs by commercial and recreational fishermen? • Review of old laws of decommissioning within 12 months of expiration the the lease • Develop removal timeline of capped rigs by state • Determine impact of the removal on the fishing industry • Commercial fishing • recreational fishing • If the old platforms were used mainly by recreational fishermen, will their removal lead recreational fishermen to commercial stock and make the conflict between commercial and recreational fishermen worse?

  34. Possible impact on the business community in the Gulf Coast • Determine the potential dollar amount from decommissioning business • Can the information be related to coastal businesses for possible preparation and participation in the decommissioning business • Project long-term year by year business volumes for coastal businesses • Key question: Are these ideas, i.e., is the impact of the new regulation, worth the efforts of GSMFC or coastal Sea Grant Consortiums?

  35. Chapter 2 Thank You!

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