Deepwater Horizon Oil Spill:

Update on Federal Financial Risks and Claims Processing

GAO-11-397R: Published: Apr 18, 2011. Publicly Released: Apr 18, 2011.

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On April 20, 2010, an explosion occurred on BP America Production Company's (BP) leased mobile offshore drilling unit Deepwater Horizon. The total cost to clean up the massive and unprecedented oil spill in the Gulf of Mexico following the Deepwater Horizon explosion (including costs to help pay for the spill's adverse impact on businesses and individuals in the region) are yet unknown, but have been estimated in the tens of billions of dollars. The extent to which the federal government will ultimately be required to pay costs associated with the Deepwater Horizon oil spill remains unclear. The complex legal framework in place for oil spill liability and response funding will play an integral role in determining who is responsible and will ultimately pay the costs associated with the Deepwater Horizon oil spill. In this regard, the Oil Pollution Act of 1990, as amended (OPA), which Congress enacted after the Exxon Valdez spill in 1989, authorized use of the Oil Spill Liability Trust Fund (Fund) to pay for certain oil spill cleanup costs and damages using federal tax revenues for immediate response costs and when the responsible parties cannot be identified or do not pay. OPA also provided that the federal government may subsequently seek reimbursement for these costs from responsible parties. The Fund, which is administered by Coast Guard's National Pollution Funds Center (NPFC), is subject to a $1-billion cap on the total amount of expenditures per incident. NPFC designated two BP subsidiaries--BP Exploration and Production and its guarantor, BP Corporation North America, Inc.--and five other companies as responsible parties for Deepwater Horizon oil spill related claims. Shortly after the spill, at the direction of NPFC, BP began to receive and process all claims against responsible parties. In June 2010, at the urging of the White House and Department of Justice, BP established a new claims processing facility--the Gulf Coast Claims Facility (GCCF). GCCF began operations on August 23, 2010, and is responsible for handling claims from individuals and businesses for damages resulting from the Deepwater Horizon oil spill. For those claims submitted to the GCCF that are rejected or not paid within 90 days, claimants may file OPA-compensable claims with NPFC to request reimbursement from the Fund. BP also established an irrevocable trust (Trust), to which BP is to provide a total of $20 billion by 2014, primarily for the purpose of paying GCCF and other claims related to the Deepwater Horizon oil spill. The Trust is to pay some OPA-compensable claims and some other. claims for personal injuries that are not OPA-compensable, but for which BP would be liable under other federal or state laws, such as the Jones Act or state oil pollution acts. In November 2010, we reported on our preliminary assessment of the potential financial risks to the federal government associated with the Deepwater Horizon oil spill cleanup costs. The attached briefing provides information updated since our preliminary assessment. For this briefing our objectives are to provide updated information on (1) the financial risks to the federal government associated with the cap on expenditures from the Fund and (2) claims submitted to and reviewed NPFC and GCCF, and those paid by GCCF. We also provide an update of the status of agency actions to respond to the recommendations made in our November 2010 report. This is the second in a planned series of three reports on our work in this area. Our third report, planned for the summer of 2011, is intended to be a capping report with an updated assessment of: (1) the financial risks to the federal government associated with the Fund; (2) NPFC Fund cost reimbursements and claims and related processes; and (3) the federal framework for monitoring and oversight of responsible parties' actions to pay costs associated with the Deepwater Horizon oil spill..

With reported Fund costs of about $629.5 million as of March 31, 2011, NPFC had obligated or incurred costs that could result in over 60 percent of the amount available under the Fund's statutory $1-billion-per-incident-expenditure-cap. If, regardless of any reimbursements from responsible parties, total Fund expenditures exceed the $1-billion cap, agencies may be required to rely on reallocating their appropriated funding to cover costs they incur or obtain supplemental funding. In addition, agencies may be unable to cover some of their costs and NPFC would be unable to pay any additional claims to individuals and businesses related to the Deepwater Horizon oil spill. We are reiterating our prior matter that Congress should consider changing the calculation of expenditures made against the Fund's $1-billion- per-incident-expenditure-cap to take into account reimbursements from responsible parties. Ultimately, the federal government's financial risk will continue to be closely linked with actions taken by the responsible parties to pay such costs. To date, BP has continued to fund the Trust established in August 2010 to pay for Deepwater Horizon oil spill claims as agreed. With respect to claims processing, NPFC has taken a number of steps to monitor the GCCF's claims processing in planning for contingencies to help ensure it can effectively process any future surges in the number of claims it receives as a result of rejected GCCF claims that NPFC may receive for adjudication related to the Deepwater Horizon oil spill. These actions helped NPFC to process a sharp increase in the number of claims that individuals and businesses submitted to NPFC in December 2010. NPFC officials told us they monitor ongoing GCCF activities in order to forecast and take actions to mitigate potential surges in the number of claims that may come to NPFC for adjudication. As of March 2011, GCCF had established four types of claims payments--Emergency Advanced Payments, Quick Payments (Final), Interim Payments, and Full Review Payments (Final). As of March 31, 2011, GCCF had paid approximately $3.7 billion on 281,308 claims and denied over 4,000 claims. In response to our previous recommendations, NPFC reported that it plans to update its policies and procedures in August and October 2011 to address three of the four recommendations made in our November 2010 report. These recommendations were directed at helping NPFC establish and maintain effective cost reimbursement policies and procedures for the Fund and update NPFC's current policies to reflect current organization, structure and management's directives. For the other recommendation, NPFC contends that its current procedures, which allow for invoices sent to responsible parties to serve as notification for cost recovery, provide adequate documentation of responsible party designation. However, NPFC intends to review, clarify, and update its designation procedures by October 31, 2011. We believe that clarification of this process is necessary. As stated in our November 2010 report, we found that NPFC's existing procedures for notifying responsible parties, including the use of an invoice as notification of "responsible party" designation, were not clear. For example, NPFC sent an invoice for reimbursement to one of the Deepwater Horizon oil spill responsible parties that it considered as formal notification of the entity's financial responsibilities. However, a representative of the entity later publicly stated it had not received notification of a "responsible party" designation.

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