The explosion of the Deepwater Horizon oil rig in the Gulf of Mexico on April 20 left 13 dead and 17 injured, leading to a massive oil spill and environmental disaster. The event caused scrutiny of the risk management practices of energy giant British Petroleum and ultimately led to the removal of its chief executive officer.

More recently, it prompted the U.S. Department of Justice to file a lawsuit against BP and other companies involved in the Deepwater Horizon joint venture, including rig owner Transocean and QBE Underwriting Ltd., Lloyd's Syndicate 1036, one of Transocean's insurers. BP leased the semi-submersible rig Deepwater Horizon from Transocean and held majority ownership in the drilling project.

The spill, which wasn't capped until July 15, released nearly five million barrels of crude oil. Many residents along the Louisiana and Florida coasts were left jobless as a result.

BP claimed responsibility for the cleanup and set up the Gulf Coast Claims Facility, effective Aug. 23, to be the only authorized organization managing business and individual claims related to the Deepwater Horizon Incident.

In June, at the urging of President Obama, BP agreed to put $20 billion into a fund to pay Gulf oil disaster claims. The fund is being administered by Ken Feinberg, who was special master of the federal compensation fund for Sept. 11, 2001.

BP said its payments to claimants in the first few months–$134 million in July, $93 million in June and $39 million in May–made this one of the largest claim payment programs conducted in a three-and-a-half-month period.

Speaking to the motive behind the fund's creation, Robert Hartwig, president of the Insurance Information Institute, said it was done “so that BP can continue to operate, because quite frankly, BP is worth a lot more alive than it is dead.” He pointed out that BP “historically has nearly minted money,” making $64 billion after taxes between 2007 and first-quarter 2010. BP's “prodigious earnings capacity” was its primary means of insurance, he said.

The fund, he said, was also designed to pay quickly and eliminate trial lawyers' settlement cuts, he said, adding that it would have few implications on the insurance industry since BP is largely self-insured.

Beyond BP, however, other project participants, such as Anadarko Petroleum, Halliburton, a service provider, and Transocean were covered by commercial insurance. With European and Bermuda insurers and reinsurers announcing estimates ranging from tens of millions to a high of $600 million (for Lloyd's), early insured loss guesses came in at $1.5 billion.

In June, Moody's Investors Service tallied some of the numbers, estimating an insured loss range of $1.4 billion to $3.5 billion and noting that claims could come in a host of lines–marine, general liability, environmental, directors and officers liability, control of well, business interruption, and workers' compensation.

In the immediate aftermath of the event, participants in the offshore energy insurance market reported pricing spikes ranging for 15 percent for shallow rigs to as high as 50 percent for deepwater operations in the Gulf, but there has been no market-wide pricing shift. In October, a group of experts attending an Aon energy conference said that even the harder energy insurance market was short-lived, predicting that those prices will flatten over the next 12 months.

Over at BP, in response to questions about ineffective risk management practices, the company announced in September that it had come up with a plan to form a new risk management and safety unit. The unit reports directly to Bob Dudley, the new CEO who replaced Tony Hayward.

The Safety & Operational Risk function is authorized to intervene in all aspects of BP's technical activities, and its own staff of experts will be embedded in BP's operating units–including exploration projects and refineries, BP said. The company also said the unit would be responsible for ensuring that “all operations are carried out to common standards and for auditing compliance with those standards,” BP said.

Over the summer, a group of global investors called for tighter risk control measures, asking energy companies for their oil spill prevention measures. They also queried insurers, suggesting a more active loss control role in response to the BP disaster, according to CERES, a network of investors and environmental groups.

Andrew Logan, director of oil and gas industry programs for CERES in Boston, told NU that BP's announcement said more about BP than the industry. “The fact that they are essentially creating almost a nanny-state throughout the company to oversee safety says a lot about how broken the safety culture is at BP,” he said.

In October, the federal government lifted a ban on deepwater drilling, issuing new rules and setting standards that must be met before drilling can resume. The new regulations, issued by the Department of the Interior, tightened standards for well design, blowout preventers, safety certification, emergency response and worker training in the industry.

Special Reports /

#5: BP Oil Disaster Breaks Records, Puts Spotlight On Risk Management Failure

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