Loopholes endanger ConocoPhillips' obligations for spill damages

Facing huge pressure from the Chinese public in response to this year's Bohai Bay oil spill, American energy giant ConocoPhillips established a "Bohai Bay Fund" to begin compensating local authorities a few days ago. However, due to gaps in the Chinese legal system, ConocoPhillips may not be as punishable in China as it would be if a similar incident had happened in the U.S., experts say.

After China's State Ocean Administration told ConocoPhillips on Sep 2 to stop drilling, to stop water flooding and to stop production at the Penglai 19-3 oil field in Bohai Bay, ConocoPhillips declared on its official website that it would set up fund to cover its responsibilities under Chinese law to benefit the general environment in Bohai Bay. The company said it would work with the authorities and China National Offshore Oil Corporation (CNOOC) on the details of setting up and operating the fund.

Despite pledges to work with Chinese authorities, ConocoPhillips has not yet publically discussed the administration of the Bohai Bay Fund, arising speculation that the company may be trying to avoid paying compensation for the damage to the marine environment resulting from the spill. As of press time, ConocoPhillips and CNOOC have not provided any details of the amount of the fund, usage and their shared proportions of compensation. CNOOC owns a 51 percent stake in the Bohai Bay oil fields while ConocoPhillips owns 49 percent.

According to a legal expert involved in the case, the 1992 International Convention on Civil Liability for Oil Pollution Damage primarily covers oil spills from tankers, and doesn't include any regulation on offshore oil drilling. The convention does not establish ConocoPhillips' legal responsibility to set up a compensatory fund, the expert said.

In contrast to the ambiguities in Chinese law, U.S. regulations for incidents occurring on American soil impose much harsher penalties on oil companies. The 1990 Oil Pollution Act made required damages for spills eight times what they were in 1951. An expert said if the U.S. law had been applied to China, ConocoPhillips' obligations would be astronomical compared to the current penalty. In the wake of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the firm at fault, BP, agreed to set up a $20 billion USD compensation fund, as mandated by the 1990 Act.

ConocoPhillips, the largest oil refiner in the U.S., has been engrossed in environmental lawsuits in Louisiana, Washington State, Florida and Texas in last ten years. Economic Information Daily reported that ConocoPhillips has been involved in at least five environmental disputes or lawsuits in last 10 years in the U.S. The company has paid over $6.8 billion USD (4.3 billion yuan) in damages to date due to litigation, the publication said.

Liu Huirong, standing vice president of the Law & Politics School of the Ocean University of China, said the ConocoPhillips fund could potentially be used for two purposes: first, in the short term, to clean up the bay's oil pollution and compensate fisherman for their losses; and second, in the long term, to rehabilitate the Bohai Bay marine environment. Liu argued that more immediate attention should be directed to the former goal.

Despite ConocoPhillips' short-term concessions, China cannot depend on the American firm's long term commitment to revive the Bohai Bay ecosystem, Liu said, due to gaps in the law that negate its legal responsibility for the damage.

In hopes of eliminating legal gaps in regards to liability, Economic Information Daily learned that Chinese officials have completed a draft of new policy regarding compensation for oil spills, entitled "State Compensation on Marine Ecological Damage." The policy strives to close loopholes in Chinese law by clarifying responsible parties and benefactors in the event of a spill, the report said.