The cost and consequences of the Louisiana oil spill

It has been four weeks now since the explosion that sunk the Deepwater Horizon oil rig in the Gulf of Mexico.

Here’s a look at the latest efforts with the leak, the potential costs and who’s going to pay for it.

The latest

The oil has now reached the shore in three states – Louisiana, Mississippi and Alabama.

BP is currently trying to manoeuvre a 15cm tube with a stopper into the 53cm leaking pipe. From here it will siphon the oil up to a tanker on the surface.

If this doesn’t work, it will go back to its original idea of placing a smaller dome over the leak and again siphoning it up to the surface.

They are also drilling a relief well and about to start another, which can block the leaking well at great depth. Experts say these would probably work but will take months to drill.

The US government maintains an estimate of 5,000 barrels (800,000 litres) of oil leaking each day.

However, after looking at video footage and pictures of the leak source, an oil flow expert has estimated that the leak is more likely to be around 70,000 barrels (11 million litres) per day – an Exxon Valdez every four days.

The costs

The costs of this accident can be split into two main areas.

The first is economic loss – lost revenue for businesses as a result of the spill.

It’s expected to affect fishermen, shrimpers, crabbers, oystermen and boat charter companies – for many of whom this is their busiest season.

There are also the hotels and restaurants suffering from lost tourism (though benefiting from all the reporters), and the local and state governments that are losing tax revenue while paying out more benefits.

The second area is accident costs – so far over $450 million. This covers the clean-up involving workers, boats and chemicals costing $7 million a day plus the failed attempts at sealing the well.

Then there is the cost of the two relief wells – each expected to be $150 million – and the fines, environmental repair and compensation for the rig workers.

The legal realities

Regardless of the spiralling damages, there is a limit of $75 million that any company has to pay out in economic costs.

President Obama is currently proposing a bill to change this limit to $10 billion and to apply it to this crisis.

However, on Thursday the bill was blocked in the Senate by politicians from oil producing states (including Louisiana and Alaska).

They say the financial burden of such a high limit will restrict production to only the largest companies and exclude the smaller independents, many of whom currently work in the Gulf.

Other politicians say it doesn’t matter – what’s important is that whoever causes the damage pays for it.

In this case, BP has promised it will cover “all legitimate claims” despite the $75 million limit.

Obama is currently trying to get this clarified in writing, but still wants the law changed as a back-up, and for future spills.

Who pays?

BP won’t be the only company forking out. America’s Anadarko Petroleum and Japan’s Matsui Oil Exploration together own 35% of the exploration lease and must pay that share of the expenses.

BP’s contractors could also have to pay up.

This includes Switzerland’s Transocean, the rig owner and operator; Halliburton, the American company who cemented the well (that possibly caused the explosion); and Cameron, the American company who made the faulty blowout preventer that didn’t stop the leak.

Insurance companies will also have claims from the companies involved (although BP insures itself) and from local businesses – especially as some policies trigger once the oil reaches shore.

Finally, there’s a $1.6 billion fund called the Oil Spill Liability Trust Fund which was set up in 1990 after the Exxon Valdez spill. Oil companies pay 8 cents a barrel into this fund and $1 billion of it can be used to pay for this spill.

Consequences

Aside from the direct costs, there are likely to be some serious consequences for the industry as a whole.

Governor Arnold Schwarzenegger has reversed a law allowing drilling of the coast off California, and President Obama, who only just opened up offshore drilling again, is putting new licenses on hold.

There could also be higher compliance costs from stricter safety requirements. And as mentioned, the limit of liability for an incident could go up to $10 billion, making things difficult for smaller operators.

Indeed, the battle in this crisis doesn’t just lie in the Gulf of Mexico, but in the region’s court rooms and halls of Washington as well.

By The Casual Truth