05/29/2011 09:15 EDT | Updated 07/29/2011 05:12 EDT

Gushing Oil Spills Drill Taxpayer Pockets

"Blowouts are very rare for the entire industry as well as for Imperial... the probability of a blowout is low -- one in 285,000." -- Imperial SSRW submission, March 2010.

Prior to April 20, 2010, the oil industry treated blowouts like rare events with a predictable level of risk.

Then the improbable -- a wellhead blowout on the Deepwater Horizon drilling rig -- killed 11 men and spilled 4.9 million barrels of crude oil into the Gulf of Mexico. The oil gushed for three months, wrecking havoc on the environment, wildlife and the economy.

A year after the largest marine oil spill in history, we must remember that the improbable remains not only possible, but beyond our ability to predict and control. Offshore oil spills are Black Swan Events -- extremely hard-to-predict events that carry the risk of major impact. And they come with significant costs.

British Petroleum has estimated that its damages, including penalties and clean-up, from the Deepwater Horizon oil spill will cost US$40-billion. Resources for the Future, a non-profit group of ecological economists peg the damages to private parties at anywhere between US$105- and US$239-billion.

Exactly how much would it cost to clean up an Arctic offshore oil spill in Canada? Who pays?

Under Canadian laws, an oil company responsible for a massive offshore spill could find itself liable for a mere $40-million and, in some cases, even less. Governments -- and therefore taxpayers -- will foot the remainder of the staggering clean-up costs, unless negligence can be proven.

This is unacceptable. Exposure to the financial risks of ecological catastrophe demands a comprehensive and independent review of these industry-friendly rules.

Offshore oil activities in the Arctic are governed by the Canada Oil and Gas Operations Act (COGOA). When unauthorized spills occur, those laws and regulations require that the party authorized to drill (the oil company) must shoulder any clean-up costs.

However, these regulations impose strict limits on an oil company's spill liability. For spills occurring under the National Energy Board's jurisdiction in Arctic waters, liability is capped at $40-million.

These limits apply only if the spill is not attributable to the authorized party's fault or negligence. In other words, an offshore oil company may invoke a "due diligence" defence to shelter itself from liability above the cap. Conversely, for any party (including third parties contracted to work on the offshore rigs) whose fault or negligence is established in relation to the spill, liability is unlimited.

In the wake of the massive BP spill in the Gulf of Mexico, issues of environmental cost internalization and appropriate environmental risk-balancing have been brought to the fore. When offshore oil companies are given statutory guarantees that their spill liability cannot exceed $40-million for operations in Canada, it arguably increases the risk of environmental damage. Liability caps encourage industry to take risks to increase profit.

This is not to suggest that offshore oil companies have an incentive to act irresponsibly. Rather, federal and provincial governments have, through these statutory limitations on liability, removed a disincentive to engage in an economic activity that can cause irreparable environmental and economic damage.

Such liability limits amount to a taxpayer subsidy of the offshore oil industry.

Companies drilling in the Arctic may be subject to "financial responsibility" requirements, but, given the magnitude of costs and liabilities facing BP, the existing requirements are insufficient.

The current design of Canada's Arctic offshore liability rules leaves governments, taxpayers, communities and the environmental vulnerable. These rules are important not only because of how they shape and limit any claims for compensation (post-spill), but also because of how they create incentives for industry to avoid spills and to ensure funds are available for full response, clean-up, restoration and compensation should a spill occur.

As such, the existing $40-million liability cap in Arctic should be abolished and responsibility requirements significantly increased, commensurate with the entire potential costs of a worst-case spill.

Will Amos is Director of the University of Ottawa-Ecojustice Environmental Law Clinic and counsel to WWF-Canada in the National Energy Board Arctic offshore review.

Editor's note: An earlier version of this post read "A wellhead blowout on the Deepwater Horizon drilling rig killed 11 men and spilled 4.9 trillion barrels of crude oil into the Gulf of Mexico." The correct information is 4.9 million barrels.