05 April 2011

Fukushima vs. Deepwater Horizon

There are many parallels between the impacts of the nuclear power plant disaster at Fukushima Number One and the Deepwater Horizon oil spill disaster. But there are also significant differences based on
  • A nuclear facility on land compared to a hole in the bottom of the Gulf of Mexico
  • A monopoly supplier of electricity compared to a supplier of a oil, a fungible commodity
  • The much more substantial resources of BP compared to TEPCO, and its early assurance that it would cover all reasonable claims and costs.

The five million barrels of crude oil released from the Macondo blowout after the Deepwater Horizon rig failure disrupted fisheries and contaminated coastline, affecting many businesses. The radioactive contamination being released into coastal waters at Fukushima is causing economic losses to fisheries and other businesses in a similar fashion. How are the costs of these events similar, and how do they differ?

BP's Costs

BP, a "responsible party" for the Macondo blowout, early agreed with the U.S. government to establish a $20 billion "Spill Response Fund". So far BP has paid about $6 or $7 billion into that fund. The fund is intended to cover the liabilities of the responsible parties, and presumably BP will try to get the other responsible parties to contribute part of the fund or reimburse it for part of its contribution. Lawyers will be arguing about this for years.

Kenneth Feinberg was put in charge of managing the compensation payments from the fund. The fund is supposed to cover claims under "the claims process required under the Oil Pollution Act of 1990 . . . and certain other claims, including natural resource damages and state and local response costs." [Source BP press release]

According to this Bloomberg article, Feinberg estimates that only half of the $20 billion will be needed to cover such claims, and the rest will be returned to BP. So BP's cost for economic damages, some ecological damages and some cleanup will total around $10 billion.

BP also incurred substantial costs to contain and plug the blowout, and to carry out various cleanup activities during the spill. It took a $32.2 billion pretax charge against its second quarter 2010 earnings reported 27 July 2010. The charge was "to reflect the impact of the Gulf of Mexico oil spill, including costs to date of $2.9 billion for the response and a charge of $29.3 billion for future costs, including the funding of the $20 billion escrow fund." [Source BP press release]

Thus BP spent about $3 billion on the immediate response and plugging the blowout, and anticipated another $9.3 billion in future costs that would not be covered by the Spill Response Fund. These future costs will probably include various fines and penalties, damage claims (for instance from the families of the men killed), litigation costs and so on.

The U.S. Oil Pollution Act of 1990 created the Oil Spill Liability Trust Fund, funded by an five-cent-per-barrel tax on domestically produced and imported oil. (Thus the cost is borne by oil consumers.) The fund is allowed to grow to a maximum of $2.7 billion. The fund can pay for certain oil spill cleanup costs and damages, but only up to a limit of $1 billion per incident. Responsible parties are supposed to reimburse the fund, and presumably part of the $20 billion Spill Response Fund will go toward such reimbursements. According to this GAO analysis, because of the way the Liability Trust Fund was structured it may not be able to pay out, nor recover from the Spill Response Fund, more than $1 billion for this incident. Government expenditures beyond that will have to be recovered from the responsible parties by other means.

Summary of Macondo Blowout Costs

Response and containment$3-4 billion
Economic claims and state and local response costs (from Spill Response Fund)$10 billion
Fines, penalties, other damage claims and other anticipated costs$9 billion
Uncompensated economic losses and other damage borne by the public, corporations and individuals, and unreimbursed government costsunknown, but probably billions of dollars
Estimated totalAbout $25 billion

[Update 2012-08-01: According to this piece in The Guardian, BP's costs are now estimated at around $38 billion. "The $38bn already includes $14bn in costs to restore 4,375 miles of shoreline and $8.8bn in compensation payments, although it has been reduced by $4bn following settlements with partners in the ill-fated Macondo well."]

Compare these costs with the estimate of the costs of the Fukushima disaster.
  • The response costs are similar.
  • The nuclear accident has substantial clean-up and mothballing costs at the reactor--about $10-15 billion--that weren't seen at Macondo.
  • The environmental clean-up and remediation costs may be similar--several billion dollars.
  • The liability for economic loss and other compensation to individuals and businesses hurt by the event may be similar--around $10 billion.
  • The liability for harm to businesses caused by the blackouts resulting form the loss of generating capacity at Fukushima is potentially substantial--a rough guess is $10 billion.
Thus many of the costs of the two events are rather similar. The differences are related to the complexity of decontamination and mothballing a ruined nuclear plant and the economic damaged caused by blacking out utility customers.

1. Tokyo Electric Power Company, the owners of Fukushima Number One, is exposed to the huge costs of cleaning up radioactive contamination of the facility and entombing the damaged reactors, even after the initial response is over and the reactor are stabilized and cooled down. These are costs inherent in risks associated with nuclear power generation, and quite different from the clean-up costs of other kinds of industrial accidents.
2. Electricity is a monopoly, while oil is a fungible commodity. BP didn't need to disappoint any customers. The Macondo Prospect well hadn't started to produce yet, so there are no direct lost sales. And any contractual supply obligations BP had could be met by oil from other sources.

But TEPCO dominated electricity supply in Japan's eastern grid area (power can't be transferred from the western to the eastern grid areas in any substantial quantities). The loss of generating capacity due to the earthquake and tsunami has meant significant shortages and rolling blackouts. Eventually most of that capacity will come back on line. And customers may not have recourse for lost business due to blackouts that were due only to those "acts of God". If there was ever a force majeure, that was it.

However if customers suffer blackouts, and consequent harm to their businesses, just because of the failure at Fukujima Number One, which is arguably due to design and operational failures on the part of TEPCO, some liability may exist. This could be minimized if electricity users in eastern Japan can conserve a little. Less than 10% conservation would make such blackouts due just to the loss of Fukushima Number One capacity unnecessary. The Japanese government will have to get involved in encouraging such conservation, and thus saving TEPCO (or the taxpayers) many billions of dollars.

The effect of these costs and liabilities is vastly different between BP and TEPCO, mainly because BP is five times large. BP had the financial strength to take a $3.7 billion loss in 2010, sell some assets to cover the costs of the Macondo disaster, and continue as a going concern. TEPCO will require the Japanese government and taxpayers to accept a substantial share of its liabilities if it is to emerge as a going concern.

TEPCO is already in negotiations with the government. According to this Reuters story, "'We are still in discussion as to what extent we will pay on our own and to what extent we will have assistance from the government,' TEPCO executive vice-president Takashi Fujimotohe told a news conference." So far TEPCO has only made about $2 million in token payments to towns evacuated around the plant.

Less than four weeks after the Deepwater Horizon explosion BP and the U.S. government had already agreed on the $20 trust for the Spill Response Fund. [Source BP press release] The Japanese government doesn't appear to operate in the same way at all.

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