Energy Bills Appear Manageable for Small Deepwater Operators Like ATP Oil and Gas

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Jul 28, 2010
There has been a lot of speculation that the any legislation passed will drive the smaller companies out of the Deepwater Gulf of Mexico. After reviewing the bill proposed by Harry Reid yesterday it doesn’t appear that will be the case.


I’ve followed independent Deepwater operator ATP Oil and Gas closely over the past couple of years and have a sizable position in the company stock. With all of the news about an unlimited liability cap being proposed for offshore operators I’ve had a lot of questions from readers. And the one thing that they don’t seem to understand is that any increase in the liability cap is really a non-issue. The important thing to watch is the “Evidence of Financial Responsibility” that is required of offshore operators.


Liability Caps: Headline Risk, Not Actual Risk. Congress is contemplating legislation to address liability caps under the Oil Pollution Act, but what does it really matter? As the BP blowout has demonstrated, the existing $75 million cap is essentially meaningless in terms of ultimate liability. Although payments are accelerated under OPA, operators have always had unlimited liability in terms of cleanup costs and damages at the state level. While the BP spill has changed the perception of liability and is likely to increase insurance premiums across the board, the reality that oil spill liability has, and always will be unlimited, regardless of what happens with the cap. So nothing really changes operationally no matter what happens to the liability cap.


Financial Responsibility is the Real Issue. The ignored but important issue regarding liability that is of significant concern is the financial responsibility component under OPA. Section 1016 of the Oil Pollution Act requires operators to provide evidence of financial responsibility in the amount of up to $150 million. This is what an operator must prove it has the resources to cover (insurance coverage for) before being allowed to drill. And this is what the market should be interested in.


Now Some Clarity – Yesterday Harry Reid produced his proposed legislation. In it is the proposal to make the liability cap unlimited, which we know does not matter. Also in it is a proposed increase in the minimum required level of financial responsibility from $150mil to $300mil. This is an amount that will be manageable for operators such as ATP Oil and Gas.


I think very few people understand the importance of the distinction between the liability cap and evidence of financial responsibility. In fact, it seems like most market participants actually think that the unimportant portion (the liability cap) is what to focus on.


Below are links to Harry Reid’s proposal as well as my past articles on this issue and ATP.


http://www.rules.house.gov/111/LegText/111_hr3534_amnd.pdf


http://www.gurufocus.com/news.php?id=100222


http://www.gurufocus.com/news.php?id=100148 http://www.gurufocus.com/news.php?id=100057