Gulf Spill Settlement Good, But Needs Fine-Tuning

A sign for a BP petrol station is seen in London, Tuesday, April, 27, 2010.Europe's second-largest oil company, said Tuesday
A sign for a BP petrol station is seen in London, Tuesday, April, 27, 2010.Europe's second-largest oil company, said Tuesday that first-quarter profit more than doubled from a year earlier to $6.1 billion due to higher crude prices and lower production costs and taxes. (AP Photo/Alastair Grant)

Given the broad contours of the historic $18.7 billion "agreement in principle" announced this month between the U.S. Department of Justice, Gulf states and BP to resolve government claims from the 2010 Deepwater Horizon spill disaster, there is cause for optimism.

The proposed deal, which would be the largest environmental settlement in history, includes $7.1 billion for natural resource damages to the federal and state governments; $5.5 billion Clean Water Act penalties, most of which would go to Gulf restoration; $4.9 billion for economic damages to states; $1 billion to 400 local governments; and $232 million for future environmental damages unknown at this time.

Most importantly, the deal would fund an unprecedented environmental recovery program for the Gulf, and help bring closure to one of the nation's worst environmental disasters.

One lesson of the 1989 Exxon Valdez oil spill in Alaska is that a sure settlement can be better than a risky trial. In the Alaska spill, the government settled claims with Exxon in 1991 for $1 billion and began a restoration program. The private case went to trial, and although plaintiffs were awarded a $5 billion punitive judgment in 1994, Exxon appealed this for 14 years. In 2008, the U.S. Supreme Court reduced the amount to only 10 percent of the original award -- 19 years after the spill. Thousands of Alaska plaintiffs passed away without seeing a dime of this money, and the rest were tragically short-changed.

Given that BP would almost certainly appeal any Gulf trial judgment it doesn't like, a good settlement now will clearly be a win for the government, the public, and the injured environment.

But there are several issues the public should consider before the proposed settlement is presented and approved by the U.S. District Court.

The first is whether the total dollar amount is enough. Any settlement agreement is a compromise. The $18.7 billion is more than BP wants to pay, and less than the public and governments may want to be paid. In fact, the $5.5 billion Clean Water Act penalty is less than half the maximum $13.7 billion allowable under the law. But this is what compromise looks like. Most importantly, the settlement will provide a revenue stream now to attend to the injured environment, instead of waiting years for an uncertain litigation result. It provides certainty for restoration planners.

When added to the $42 billion BP has already paid or committed, the total cost to BP for the spill seems adequate to punish BP's reckless behavior, and to deter future reckless behavior by BP and other oil companies operating offshore. And while much of the $18.7 settlement payment will be tax-deductible to BP, this is good, as otherwise the total amount BP agrees to pay to would be significantly less, with less then available for Gulf restoration.

The larger question regarding the proposed amount is what this money will actually buy -- that is, how it will be used to aid the recovery of the injured environment and coastal communities. Appropriately, most of the money will go to environmental restoration. The focus of restoration must be to do everything possible to assist the full recovery of the injured marine and coastal environment.

The environmental damage has been severe -- dolphin, sea turtle, seabird deaths; developmental abnormalities in fish; reproductive failures; deepwater coral damage; oil in sediments; and general ecological degradation. This damage will be long-lasting.

Money cannot fix what was broken in the Gulf spill. "All the king's horse's and all the king's men" can't put the Gulf of Mexico back together again. But it can aid recovery.

While we can't directly restore such oil spill injuries, restoration must then include a comprehensive program to reduce or eliminate other environmental stressors in the Gulf -- restoring the hydrology and sediment deposition in the Mississippi River delta, reducing nutrient outflow and hypoxic dead zones, curtailing overfishing, eliminating other sources of pollution, establishing protected areas, and so on.

The agreement appears to provide sufficient funds to begin working toward many of these goals, but it will be critical for officials managing this money to keep their "eyes on the prize" -- and that is, the full recovery of the Gulf of Mexico ecosystem and coastal communities.

Still, there are improvements needed in the proposed settlement agreement.

The proposed payout period of 18 years is too long, as it allows BP, rather than the governments, to hold and earn interest on the money. This reduces the actual present day cost to BP by about half. If the Gulf payout period was restructured to only 10 years (as with Exxon Valdez), governments would be able to put the restoration funds to work more quickly.

Regarding the "set aside" for unknown future damages in the Gulf settlement, the proposed $232 million is simply too small. The agreement apparently requires BP to pay the $232 million (plus interest) after its final payment in 2033 -- that is, the payment would be guaranteed. That's good, as it would avoid the mistake made with Exxon Valdez "Reopener for Unknown Injury," in which Exxon retained a say in the final payment. To date, Exxon has refused to make the final $92 million payment demanded by governments in 2006, and the case drags on after 26 years -- the longest-running environmental litigation in history. In the Gulf, even with interest, the amount available would only be roughly $500 million, which is still not enough.

Given the significant scientific uncertainties today regarding future environmental damage in the Gulf, at least 10 percent of the total proposed amount (as in Exxon Valdez), or $1.87 billion in the Gulf, should be set aside today in a government trust. This amount would grow over 10 years to $3 billion available to address unanticipated environmental damages. The parties negotiating the settlement in the Gulf should recall that the first proposed Exxon settlement in Alaska in 1991 was rejected by the court due to insufficient attention to the future damage issue. The Gulf parties need to get this right before presenting the settlement for court approval.

Finally, the Gulf settlement should include an endowment to fund and establish a Gulf of Mexico Regional Citizens' Advisory Council. This one-time endowment would support the Gulf citizens council collaborating with industry and government to ensure that all offshore industrial activities in the Gulf are conducted as safely as possible, and that the very real risks of another Deepwater Horizon tragedy are minimized.

The governments and BP should be commended for working together toward this historic resolution, and now they need to get back to the table, roll up their sleeves, and fine-tune the agreement to make it acceptable to the public and Court.