Although the Total Federal Financial Risk Has Not Been Determined, Actions Are Needed to Reduce Known Risks

Both the individual circumstances of the Deepwater Horizon incident, as  well as the overall framework of how the federal government responds to  oil spills, present a mix of financial risks to the Fund and the federal  government. The extent of financial risks to the federal government from  the Deepwater Horizon is closely tied to BP and the other responsible  parties and guarantors. Federal agency  cleanup and restoration activities are underway and agencies continue to  incur costs and submit them for reimbursement. As a result, it is possible  that expenditures from the Fund for Federal removal costs and claims will  reach the $1 billion cap, as the cap balance was over $626 million on May  31, 2011. When the cap balance reaches the total expenditure cap of    $1 billion, no further payments to reimburse agencies’ costs (or to pay  individual or business claims if not paid by the responsible parties) can be  made from the Fund, so federal agencies would no longer be able to  obtain reimbursement for their costs. Finally, the federal government’s  longer-term ability to provide financial support in response to future oil  spills is also at risk because the Fund’s primary source of revenue, a tax  on petroleum products, is scheduled to expire in 2017. In November 2010, we suggested that  Congress may want to consider setting a Fund cap associated with an  incident, based upon net expenditures (expenditures less  reimbursements). As of May 31, 2011, government agencies continue to submit  documentation of their Deepwater Horizon oil spill recovery costs for  reimbursement from the Fund.   The per barrel tax revenue. The Coast Guard Has Effective Claims Processing and Cost Reimbursement Controls, However Could Benefit by Documenting Changes Made in Claims Practices

Our testing of the Coast Guard’s controls over Deepwater Horizon claims  processed as of April 30, 2011, and cost reimbursements processed as of  April 20, 2011, showed that adjudicated claims processed and costs  reimbursed were consistent with its procedures. It has updated its cost reimbursement procedures to incorporate  lessons learned from the initial response to this spill and although it has  not yet updated its procedures for processing claims from spills of  national significance to reflect lessons learned from its experiences  processing Deepwater Horizon claims, it has plans to do so. Federal Agencies’ Oversight Efforts Include Monitoring GCCF’s Claims Process and Participating in Natural Resource Assessments

The federal government has used a variety of approaches to oversee  BP’s and GCCF’s cost reimbursement and claims processing including  monitoring their activities. Soon after the Deepwater Horizon oil spill, the  Deepwater Integrated Services Team (IST) was established at the  direction of the National Incident Command, under the command of the  U.S. Coast Guard, and initially was responsible for monitoring BP’s claims  process. The oversight effort for cost  reimbursement and claims activities transitioned to Justice, who  continues to lead the efforts. In addition, DOI and NOAA are serving as  the federal government representatives for the natural resource trustees  in evaluating the environmental impact of the Deepwater Horizon incident. Appendix II: Objectives, Scope, and Methodology

This report is the third and final in a series of reports on the Deepwater  Horizon oil spill in response to this request. Shortly after the explosion  and subsequent sinking of BP’s leased Deepwater Horizon oil rig in the  Gulf of Mexico in April 2010, we were requested to (1) identify the  financial risks to the federal government and, more specifically, to the Oil  Spill Liability Trust Fund (Fund) resulting from oil spills, particularly  Deepwater Horizon, (2) assess NPFC’s internal controls for ensuring that  processes and payments for cost reimbursements and processes for  claims related to the Deepwater Horizon oil spill were appropriate, and   (3) describe the extent to which the federal government oversees the BP  and Gulf Coast Claims Facility (GCCF) Deepwater Horizon oil spill-related  claims processes. To determine the obligations  and costs incurred in relation to the Fund’s $1 billion per incident cap, we  obtained and analyzed daily financial summary data NPFC used related  to the Deepwater Horizon oil spill. To assess NPFC’s internal controls for ensuring that agencies’ requests  for cost reimbursements and claims from individuals and businesses are  appropriate, we reviewed relevant sections of OPA and compared the  sections to NPFC’s cost reimbursement and claims Standard Operating  Procedures and to GAO’s Standards for Internal Control in the Federal  Government. For claims, we tested a statistical sample of finalized Deepwater Horizon  claims presented to the Fund between September 2010 and April 2011.
Why GAO Did This Study

On April 20, 2010, an explosion of the Deepwater Horizon oil rig leased by BP America Production Company (BP) resulted in a significant oil spill. GAO was requested to (1) identify the financial risks to the federal government resulting from oil spills, particularly Deepwater Horizon, (2) assess the Coast Guard's internal controls for ensuring that processes and payments for spill-related cost reimbursements and claims related to the spill are appropriate, and (3) describe the extent to which the federal government oversees the BP and Gulf Coast Claims Facility cost reimbursement and claims processes. We issued status reports in November 2010 and April 2011. This is the third and final report related to these objectives. We obtained and analyzed data on costs incurred from April 2010 through May 2011 and claims submitted and processed from September 2010 through May 2011. We reviewed relevant policies and procedures, interviewed officials and staff at key federal departments and agencies, and tested a sample of claims processed and cost reimbursements paid for compliance with internal controls..

What GAO Found

Both the individual circumstances of the Deepwater Horizon incident, as well as the overall framework for how the federal government responds to oil spills, present a mix of evolving, but as yet uncertain, financial risks to the federal government and its Oil Spill Liability Trust Fund (Fund). The extent of financial risks to the federal government from the Deepwater Horizon is closely tied to BP and the other responsible parties. BP established a $20 billion Trust to pay for individual and business claims and other expenses. As of May 31, 2011, BP has paid over $700 million of federal and state government costs for oil spill cleanup. Federal agency cleanup and restoration activities are under way and agencies continue to incur costs and submit them for reimbursement. However, the full extent of these costs, particularly those related to environmental cleanup, may not be fully realized for some time. As cleanup costs continue to mount, it is possible that expenditures from the Fund will reach the $1 billion total expenditure per incident cap. Expenditures were over $626 million on May 31, 2011. If these amounts reach the total expenditure cap of $1 billion, the Fund can no longer be used to make payments to reimburse agencies' costs (or to pay valid individual or business claims if not paid by the responsible parties). At that point, government agencies would no longer be able to obtain reimbursement for their costs. In November 2010, GAO suggested that Congress may want to consider setting a Fund per incident cap based on net expenditures (expenditures less reimbursement), rather than total expenditures. Finally, GAO found the federal government's longer-term ability to provide financial support in response to future oil spills is also at risk because the Fund's primary source of revenue, a tax on petroleum products, is scheduled to expire in 2017. GAO's testing of the Coast Guard's internal controls over Deepwater Horizon claims processed and cost reimbursements processed and paid showed that adjudicated claims processed and costs reimbursed were appropriate and properly documented. In November 2010, GAO made four recommendations regarding establishing and maintaining effective cost reimbursement policies and procedures for the Fund. The Coast Guard changed its operating practices to reflect lessons learned from the initial response to the Deepwater Horizon incident, and it has updated its cost reimbursement procedures accordingly. However, the Coast Guard has not yet updated its procedures for processing significant claims, so lessons learned from its experiences processing Deepwater Horizon claims could be lost. The federal government has used a variety of approaches to oversee BP's and GCCF's cost reimbursement and claims processing. Soon after the Deepwater Horizon oil spill, the federal government established a Deepwater Integrated Services Team (IST), which was initially responsible for monitoring BP's claims process, among other things. Subsequently, the oversight of cost reimbursement and claims activities transitioned to the Department of Justice, which continues to lead this and other efforts. In addition, the Department of the Interior and the National Oceanic and Atmospheric Administration are serving as the federal government's representatives for the natural resource trustees in evaluating the environmental impact of the Deepwater Horizon spill and selecting and implementing restoration projects to be funded by BP. GAO is (1) reiterating that Congress may want to consider setting a Fund cap per incident based upon net expenditures, (2) presenting a new matter concerning extending the barrel tax used to finance federal oil spill responses to sustain program funding, and (3) making a recommendation to improve procedures for future significant spills. In responding, the Department of Homeland Security concurred with the recommendation.