Gulf Oil Spill: Putting an End to the Big Oil Bailout

Last Updated May 5, 2010 12:38 PM EDT

The Gulf of Mexico oil spill has left more than BP's reputation and bottom line in tatters. It's also created an interesting trickle-down effect for the rest of the oil industry that may change how companies approach future offshore Gulf of Mexico exploration projects.

BP is already on the hook for cleanup costs, which may cost the company, and its partners in the well, upwards of $12.5 billion. But what about the indirect costs, like the damage to fisheries, wildlife habitats and local economies when the Smiths decide to skip their annual Gulf of Mexico vacation?

BP is liable, under federal law, for up $75 million in damages. The estimated damages to businesses and habitats will certainly head into the billions of dollars, not millions, if the spill reaches shore. In short, that $75 million is the equivalent of trying to buy an Alfa Romeo from the coins sitting in your change jar.

That leaves the Oil Spill Liability Trust fund -- a rainy day reserve generated by an 8-cent-per-barrel tax on oil produced or imported into the U.S. -- to save the day. But there's a problem. The fund only has about $1.6 billion, and of that amount, about $1 billion can be used to compensate for losses.

There are two possible outcomes. The government dips into Treasury funds to pay for damages and then goes after the responsible parties to recoup the taxpayer funds. Or, we could raise the liability cap. And that's exactly what Sens. Frank Lautenberg, Robert Menendez and Bill Nelson are doing. The senators introduced Monday the Big Oil Bailout Prevention Act, which would raise the liability for spill damages from $75 million to $10 billion.

Yes, the proposed legislation would certainly encourage companies to invest in safety measures, as TNR notes. But this would also change, forever, how oil companies approach offshore oil projects in the Gulf of Mexico and Alaska.

The days of easy-to-access oil are gone. Now, companies like BP, Exxon (XOM) Chevron (CVX) are faced with oil and gas exploration projects that require operating in politically unstable regions or working in technologically complex areas like the deep waters of the Gulf or offshore Brazil and Asia. BP, and Transocean had pushed the bounds of offshore oil and gas exploration in the Gulf of Mexico. So far, in fact that BP may have compromised its ability to manage the business safely and with integrity, as BNET's Margaret Heffernan noted.

The proposed and aptly named Big Oil Bailout Act would add some much-needed protection to local businesses and wildlife habitats. But the law also will force oil companies to weigh the cost and benefits of offshore drilling projects in the U.S. Management could very well decide to invest more in the deep waters off Brazil and even politically tenuous areas like Venezuela.

That doesn't discredit the proposed bailout oil act. In fact, many folks would welcome a pullback in oil exploration in the Gulf of Mexico. The legislation, if passed, will create one more item for management to consider before bidding on oil and gas leases in the Gulf.

Deep water oil exploration isn't going anywhere. Some 70 percent of the world's oil discoveries in the past two years have been offshore. It's whether the Gulf of Mexico will be continue to drum up the same level of interest among companies as it has in the past.

See additional BNET Energy coverage of the Gulf of Mexico oil spill: