Dear Editor,
The recent court matter about the EPA’s treatment of the financial liability that would arise if there is an oil spill has many lessons for us as we learn to manage our emerging oil and gas sector. I address only three.
1. Agency matters – The EPA is the regulator, and as such, ought not to be uneasy about having interests that are not aligned with those of the regulated entity. In fact, it ought to be uneasy wherever there seems to be a perfect alignment of interests. Furthermore, the regulated entity always has private information that it will seek to guard, as against sharing with the regulator (or its competitors, but the issues in this case will be different). It is only in the most rudimentary of regulatory systems that there would ever be an expecta-tion that information shared by the regulated entity could be taken at face value. In more sophisticated regulatory systems which recognise that the regulated entity has no incentive to share private information that could be detrimental to its “bottom line,” much effort is expended in designing mechanisms that would elicit the “truthful revelation” of this private information.
In its press release after the ruling, the EPA noted that it had asked the operator to provide an estimate of the “cost of responding and cleaning up a worst-case spill,” and it noted that in other jurisdictions, operators were also asked to provide this estimate. This would seem to be at odds with what I have just said. So I shall just quote from a hearing by the US Govt.’s Committee on Transportation and Infrastructure (House of Repre-sentatives), available at https://www. govinfo.gov/content/pkg/CHRG-111hhrg56957/html/CHRG-111hhrg56957.htm: “… the Deep-water Horizon tragedy shows that deepwater drilling’s complete reliance on industry does not provide the safety margin nor the safety regime that we need. The Federal Government has allowed the drilling industry to self-police, self-certify, self-engineer and design, and it is time that we set new standards and exert authority over safety issues associated with deep sea oil drilling.” Guyana has an opportunity to set new standards, even if other countries still rely entirely on a regulated entity’s (private) information.
2. Liability concepts in regulations must be fit-for-purpose. Apparently the idea of a cap on financial liability in the event of an oil spill at sea originally related to accidents involving sea-going vessels, such as oil tankers. These vessels carried known amounts of crude oil, for example. The insurance industry was able to have a good estimate of the expected damage that might occur, and could write an insurance policy for such an event as the maritime industry had a sense of the likelihood and severity of accidents. But as the aforementioned report noted, it is difficult to estimate the damage from an oil spill offshore, in deep water operations, as both the quantity of oil (and associated gas) that could escape and the risk of an accident are unpredictable.
Because of this unpredictability, it is not possible to know if there could be transboundary damages with attendant liabilities.
Without exception, everyone – including industry representatives – affirmed that the taxpayer must not bear any of the costs associated with a spill. Everyone agreed that the cap in the US Oil Pollution Act of 1990 was inadequate; and that the oil spill Liability Trust Fund, which was funded by an 8-cent tax on each barrel of oil, could not cover the leftover costs. Admittedly, the API representative called for a ‘conversation’ on increasing the financial liability cap on account of the jobs that might be lost. But the point is these discussions were happening after the horrific Deepwater Horizon tragedy; our conversation (especially about the financial capability cap), which ought to include the operator, can happen now, as long as we keep the bargaining space open.
3. Risk and uncertainty – Guyana has not learnt to allocate risk efficiently, and we hardly understand uncertainty. Our institutions for managing risk are designed to shift risks to everyone else, usually the weaker parties. So our risk allocation mechanisms, such as they are, also happen to increase inequity. In reminding us of the importance of learning in my earlier comments, I was referring to the demand side of things. But there is a supply side too: Many of the foreign investors that are now operating here understand uncertainty well, and are much better equipped to manage risk. Meaningful technology transfer (local content) requires much more than the provision of equipment (and contracts). Know-how, even about risk and its management, must be transferred. We must embrace learning; and as we learn, our partners must not take advantage of our deficiencies, where those exist.
Sincerely,
Thomas B. Singh
