Who Will Take the Hit for the Drilling Moratorium?

The six-month moratorium that the Obama administration has imposed on deepwater drilling may complicate its effort to compensate Gulf residents affected by the oil spill. Kenneth Feinberg, whom President Obama has appointed to administer the $20 billion claims fund BP has agreed to establish, has said that this fund will not distribute claims to people affected by the moratorium. The White House, on the other hand, has said that it will.

Confusion abounds in the Gulf as everyone from small businesses to big oil companies attempt to sort out the economic damages of a catastrophic spill with no end in sight. A New Orleans judge blocked the drilling moratorium last week, a decision the Obama administration is appealing to the Fifth Circuit. Drilling projects remain stalled, however, and more and more claims are piling up. A Louisiana State University economist told Bloomberg that if rigs are idle for a full six months, the payroll loss alone could hit $450 million.

BP has set aside a separate claims fund of $100 million for workers affected by the moratorium. As opposed to the $20 billion spill fund, which was the result of an explicit agreement with the White House that obligates BP to replenish the fund if necessary, BP has described the moratorium fund as a “goodwill gesture.” This framing is clearly designed to imply that, although the Deepwater Horizon spill was the impetus for imposing the drilling moratorium, BP is not liable for damages resulting from it. It is unlikely that BP would contribute more to the moratorium fund when the money inevitably runs out.

Unemployed rig workers who file claims with BP’s then-empty fund might consider suing the government for imposing the moratorium, or suing BP for causing the disaster that led to the moratorium. Oil companies, however, are hoping that the moratorium gets knocked down on appeal, since they’d have little grounds to sue the government for lost revenue while their rigs stand idle.

Hope Babcock, a professor at Georgetown Law, explains that since BP does not own its drilling sites in the Gulf and relies on the government to grant licenses to these sites, it could not likely sue for compensation under eminent domain:

The courts, including the Supremes, have been very clear about this. So BP should have zip chance of recovering its economic value in those drilling authorizations. They’re going to sue under the takings clause —hey, you took our permits to explore. And the courts will say no, it’s not an ownership license you have. And that would apply to everyone else out there—all the companies that are out there with authorizations to drill should not be able to succeed on a takings challenge.

That said, we’ve never seen a spill of this magnitude before. Enormous amounts of individual income and corporate revenue will be lost and innumerable lawsuits will be filed. The $20 billion claims fund and the $100 million moratorium fund may initially hold off the flood, but these payment structures are themselves novel ideas.

“What’s interesting about both of these funds is they’re not legally obligated funds,” said Jennifer Owen, an attorney with Van Ness Feldman in Washington, DC. “BP has somewhat voluntarily, somewhat under political pressure, set them up.” Legally, the funds add a new element to the mix. Who’s liable, and for what, and for how much, will soon become the center of debate.

“I think there will be a lot of very novel questions before the court in terms of liability and damages,” Owen said. “We are very much at the start of this.”

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