	The Primary Burden of Liability for the Costs of Oil Spills Is on the Responsible Party, up to Specified Limits

OPA establishes a “polluter pays” system that places the primary burden of  liability for the costs of spills on the party responsible for the spill in  return for financial limitations on that liability. Under this system, the  responsible party assumes, up to a specified limit, the burden of paying for  spill costs—which can include both removal costs (cleaning up the spill)  and damage claims (restoring the environment and payment of  compensation to parties that were economically harmed by the spill). The range derives from a statutory division of liability for  mobile offshore drilling units. OPA also provides that the Fund can be used to pay for oil spill removal  costs and damages when those responsible do not pay or cannot be  located. OPA defines the costs for which responsible parties are liable and the  costs for which the Fund is made available for compensation in the event  that the responsible party does not pay or is not identified. These emergency  funds may be used for containing and removing oil from water and  shorelines, preventing or minimizing a substantial threat of discharge, and  monitoring the removal activities of the responsible party. Officials said they began using emergency funds at  the beginning of May to pay for removal activities in the Gulf of Mexico. 1). Several Factors, including Location, Time of Year, and Type of Oil, Combine in Unique Ways and Affect the Cost of Each Oil Spill

Location, time of year, and type of oil are key factors affecting oil spill  costs of noncatastrophic spills, according to industry experts, agency  officials, and our analysis of spills. Given the magnitude of the current  spill, however, the size of this spill will also be a factor that affects the  costs. In ways that are unique to each spill, these  factors can affect the breadth and difficulty of the response effort or the  extent of damage that requires mitigation. Lighter oils such  as jet fuels, gasoline, and diesel fuel dissipate and evaporate quickly, and  as such, often require minimal cleanup. Heavier oils, such as crude oils and other heavy petroleum products, are  less toxic than lighter oils but can also have severe environmental impacts. These spills can require intensive shoreline and structural clean  up, which is time-consuming and expensive. Another factor affecting spills’ costs is  the type of oil. In recent testimony, the EPA Deputy  Administrator described the Deepwater Horizon spill as a “massive and  potentially unprecedented environmental disaster.”

	The Fund Has Been Able to Cover Costs Not Paid by Responsible Parties, but Risks and Uncertainties Remain

To date, the Fund has been able to cover costs from major spills that  responsible parties have not paid, but risks and uncertainties remain. In addition, the Fund faced other  potential risks to its viability, including ongoing claims from existing spills  and the potential for a catastrophic oil spill. The current spill in the Gulf of  Mexico could result in a significant strain on the Fund, which currently  has a balance of about $1.6 billion. If the responsible party’s costs  exceed the limit of liability, the responsible party can make a claim against  the Fund for the amount above the limit. In our 2007 report, we reported that 10 of the 51 major oil spills  that occurred from 1990 through 2006 resulted in limit-of-liability claims  on the Fund. Specifically, the Coast Guard reported  that liability limits for tank barges and cargo vessels with substantial fuel  oil may not sufficiently account for the historic costs incurred by spills  from these vessel types. A catastrophic spill could strain the Fund’s resources: In 2007, we  reported that since the 1989 Exxon Valdez spill, which was the  impetus for authorizing the Fund’s usage, no oil spill has come close to  matching its costs—estimated at $2.2 billion for cleanup costs alone,  according to the vessel’s owner. Increasing the per-barrel tax. It includes, among  other things, proposals to increase the statutory limitation on  expenditures from the Fund for a single oil spill response from $1 billion  to $1.5 billion for spill response and from $500 million to $750 million per  spill for natural resource damage assessments and claims.
Why GAO Did This Study

On April 20, 2010, an explosion at the mobile offshore drilling unit Deepwater Horizon resulted in a massive oil spill in the Gulf of Mexico. The spill's total cost is unknown, but may result in considerable costs to the private sector, as well as federal, state, and local governments. The Oil Pollution Act of 1990 (OPA) set up a system that places the liability--up to specified limits--on the responsible party. The Oil Spill Liability Trust Fund (Fund), administered by the Coast Guard, pays for costs not paid for by the responsible party. GAO previously reported on the Fund and factors driving the cost of oil spills and is beginning work on the April 2010 spill. This testimony focuses on (1) how oil spills are paid for, (2) the factors that affect major oil spill costs, and (3) implications of major oil spill costs for the Fund. It is largely based on GAO's 2007 report, for which GAO analyzed oil spill cost data and reviewed documentation on the Fund's balance and vessels' limits of liability. To update the report, GAO obtained information from and interviewed Coast Guard officials.

What GAO Found

OPA places the primary burden of liability for the costs of oil spills on the responsible party in return for financial limitations on that liability. Thus, the responsible party assumes the primary burden of paying for spill costs--which can include both removal costs (cleaning up the spill) and damage claims (restoring the environment and compensating parties that were economically harmed). To pay both the costs above this limit and costs incurred when a responsible party does not pay or cannot be identified, OPA authorized use of the Fund, up to a $1 billion per spill, which is financed primarily from a per-barrel tax on petroleum products. The Fund also may be used to pay for natural resource damage assessments and to monitor the recovery activities of the responsible party, among other things. While the responsible party is largely paying for the current spill's cleanup, Coast Guard officials said that they began using the Fund--which currently has a balance of $1.6 billion--in May 2010 to pay for certain removal activities in the Gulf of Mexico. Several factors, including location, time of year, and type of oil, affect the cleanup costs of noncatastrophic spills. Although these factors will certainly affect the cost of the Gulf spill--which is unknown at this time--in this spill, additional factors such as the magnitude of the oil spill will impact costs. These factors can affect the breadth and difficulty of recovery and the extent of damage in the following ways: (1) Location. A remote location can increase the cost of a spill because of the additional expense involved in mounting a remote response. A spill that occurs close to shore can also become costly if it involves the use of manual labor to remove oil from sensitive shoreline habitat. (2) Time of year. A spill occurring during fishing or tourist season might carry additional economic damage, or a spill occurring during a stormy season might prove more expensive because it is more difficult to clean up than one occurring during a season with generally calmer weather. (3) Type of oil. Lighter oils such as gasoline or diesel fuels dissipate and evaporate quickly--requiring minimal cleanup--but are highly toxic and create severe environmental impacts. Heavier oils such as crude oil do not evaporate and, therefore, may require intensive structural and shoreline cleanup. Since the Fund was authorized in 1990, it has been able to cover costs not covered by responsible parties, but risks and uncertainties exist regarding the Fund's viability. For instance, the Fund is at risk from claims resulting from spills that significantly exceed responsible parties' liability limits. Of the 51 major oil spills GAO reviewed in 2007, the cleanup costs for 10 exceeded the liability limits, resulting in claims of about $252 million. In 2006, Congress increased liability limits, but for certain vessel types, the limits may still be low compared with the historic costs of cleaning up spills from those vessels. The Fund faces other potential risks as well, including ongoing claims from existing spills, claims related to sunken vessels that may begin to leak oil, and the threat of a catastrophic spill--such as the recent Gulf spill.