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www.reactionsnet.com Reactions December 2012/January 2013 13 LEGAL ANALYSIS LEGAL ANALYSIS Macondo sets a worrying example Nigeria, Brazil, Ecuador and China. What do they have in common? In the last 12 months they have each sought to impose enormous liabilities on oil companies for pollution incidents that massively exceed, on a per barrel basis, the fines that have been or may be imposed upon BP by the US authorities for the Macondo/ Deepwater Horizon spill. Understandably, everyone has been focussing on Macondo/Deepwater Horizon because four million barrels of oil spilt into the Mexican Gulf. In addition to the $4.5bn criminal fine that has recently been accepted by BP pursuant to its deferred prosecution agreement with the US DoJ, it stands to be fined up to $4,000 per barrel of oil or a total of $20bn under the US Clean Water Act. That is a lot of money. However, consider this. The recent Nigerian fine of $5bn on Shell for the Bonga FPSO incident amounts to $125,000 per barrel of oil spilt. And the Chinese have imposed a fine on ConocoPhillips that is approaching nearly $1m per barrel of oil. The claim being brought by the Brazilian public prosecutor against Chevron amounts to a staggering $4.5m per barrel of oil spilt. So why does this matter? First, it is apparent that a very significant ‘new’ peril is emerging for oil companies and those that insure them. Until recently, the received wisdom was that an oil company’s liability for fines in respect of environmental damage was manageable. This is because in most jurisdictions the maximum amount that the authorities can fine a polluter is, in relative terms, fairly modest. For example, in Nigeria the maximum fine that can be imposed under existing law is only a few thousands dollars. There are very few jurisdictions in the world that have developed legislation that permits the imposition of a fine (in the genuine sense) of more than $100m. The US is the exception. However, the US Department of Justice tends to be fairly insistent that the wrongdoer ‘feels the punishment’ and does not pass the financial burden of a fine to its insurers. It has a track-record of making this a condition of any deferred prosecution agreement it may enter into. In other words, fines imposed by US authorities do not tend to represent a real exposure to the insurance/reinsurance market. However, other jurisdictions are not so concerned to preserve the integrity of the fine as an instrument of punishment and do not really care from where the ‘wrongdoer’ obtains the funds to meet its liability. Second, focusing on the concept of ‘fines’ alone does not disclose the full picture. Many liability insurance policies specifically exclude any liability in respect of fines. However, what is emerging in the environmental context is a lack of any clear distinction between fines on the one hand and civil law damages on the other. Fines are supposed to punish wrongdoing and deter bad behaviour. They are invariably imposed by a state authority. Damages, on the other hand, are generally meant to be compensatory and tend to be awarded to individual claimants for the loss to their property and economic interests. The exception is punitive damages which are available in certain US states. However, what these most recent cases demonstrate is that there is no consistency in the use of legal labels. The fine of $5bn imposed by the Nigerian authorities, NOSDRA, on Shell appears primarily to have been informed by the economic damage caused to fishing communities. Or at least that is what NOSDRA have said. The $20bn civil damages claim brought in Brazil against Chevron for the Frade spill is also explained in the court pleadings as being primarily informed by its environmental impact. However, the environmental impact appears to be negligible, not least because the spill happened 370km from shore. It looks more like a fine than a damages claim. However, Chevron have already been fined about $17m by the Brazilian authorities pursuant to some fairly sophisticated legislation. In short, an express exclusion for fines in a policy may not exclude liabilities imposed on insurers that are in substance fines but have been dressed up as damages. Third, it should not be assumed that these liabilities have no effect outside the jurisdictions which imposes them. There is a general principle that one state will not tend to facilitate the enforcement of another state’s fines or penalties. However, the Ecuadorian Government has recently made significant progress in enforcing its $19bn ‘damages’ claim against Chevron in the United States, Brazil and Canada for pollution caused to the Amazon during the 70s and 80s by Texaco (which Chevron acquired in 2001). The damages award was more than doubled by an Ecuadorian Court in July of this year from its previous level of $8.6bn because Chevron refused to apologise for the pollution. That must mean that in substance over half of the damages award is not a damages award at all but a fine. Further, as Transocean is discovering in Brazil, an entity may have not have much practical choice other than to pay up if it wants to continue doing business in that jurisdiction. The US authorities’ response to the Macondo blow-out appears to have triggered copy-cat behaviour by governmental bodies in jurisdictions around the world. As a consequence liability in respect of environmental damage is emerging as one of the biggest, if not the biggest single exposure for participants in energy exploration and production and their risk carriers. l Leigh Williams is a partner in Clyde & Co’s energy team specialising in offshore risks Many liability insurance policies specifically exclude any liability in respect of fines. However, what is emerging in the environmental context is a lack of any clear distinction between fines on the one hand and civil law damages on the other.
