On April 20, 2010, an explosion tore apart the Deepwater Horizon drilling rig, which was digging an exploratory well in the Macondo oil and gas prospect in the Gulf of Mexico. The explosion killed 11 workers, injured 17 more and led to the largest oil spill in U.S. history.

The January report from the president’s National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling paints a troubling picture of the missteps, oversights and institutional flaws that led to the disaster–an overarching culture of lax safety measures in the oil and gas industry, and management and regulatory failures that led to cut corners and a lack of vigilance and preparedness.

“The immediate causes of the Macondo well blowout … reveal such systematic failures in risk management that they place in doubt the safety culture of the entire industry,” the commission said in its report.

By the time the well was capped on July 15, it had released more than 200 million gallons of oil, or more than 4 million barrels, into the Gulf of Mexico–”a rich, productive marine ecosystem,” the report says. The commission reports that 650 miles of Gulf coastal habitats have been “oiled.”

Today, there are inklings that the industry and its regulators, armed with lessons from the Deepwater Horizon spill, are ready to move on. On Feb. 28, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) announced it had issued its first permit for deepwater drilling since the Deepwater Horizon disaster and a subsequent moratorium on deepwater drilling, which was lifted in October.

While news of the spill no longer dominates headlines, its effects remain. Its legal legacy and the regulatory effects it inspired will be lasting. And the long-term environmental, economic and health effects probably won’t be understood for decades.

“The oil hasn’t gone away. It’s there killing and poisoning marine life, and we have no idea how much this is going to disrupt the ecosystem,” says Rebecca Bratspies, a professor at the City University of New York School of Law. “BP’s intensive use of dispersants drove oil from the surface and hid many effects of this … and we have no idea what it’s going to do. This whole thing was a giant chemistry experiment.”

Lengthy Litigation

The April 20 explosion also set off a protracted courtroom fight for the parties involved and a lengthy inquiry into what factors allowed the disaster to happen. On the civil litigation front, more than 300 federal lawsuits have been filed and consolidated into a multidistrict litigation before Judge Carl Barbier in the U.S. District Court for the Eastern District of Louisiana.

Plaintiffs in the private litigation seek compensation for harms and, in some cases, injunctive relief. They include survivors of the explosion, relatives of the deceased rig workers, environmentalists, landowners, commercial fishermen, resort and hotel operators, investors, and state and local governments. The federal government has also filed a civil suit, seeking penalties and damages for cleanup costs.

The scope of laws at play in these cases is broad and complex.

“No pun intended, but we’re in uncharted territory here,” says Richard Arsenault, whose Louisiana law firm Neblett, Beard & Arsenault is representing various claimants in spill-related litigation, including 900 coastal condo owners. “You’ve got a combination of general maritime law, the Oil Pollution Act, the Jones Act, seaworthiness claims, the Outer Continental Shelf Lands Act, ERISA, securities, derivatives, RICO, environmental claims–all of those, many of which interact and overlap in complex ways. To further complicate the landscape, we’re dealing with a variety of defendants facing different remedies and claims, and different rights in terms of how they can defend the claims.”

In addition, complex contractual agreements exist among the defendants, which include BP, lessee of the rig; Transocean Ltd., owner of the rig; Cameron International, manufacturer of the faulty-blowout preventer; Halliburton, which laid the well’s cement; and Anadarko Petroleum Co. and MOEX Offshore, part owners of the well.

The cases won’t be easy to prove. Plaintiffs will have to show the harms they experienced were directly related to the spill–and tracing a particular harm to a particular polluter and pollutant is difficult, says William Buzbee, a law professor at Emory University and director of the school’s Environmental and Natural Resources Law Program.

“If Exxon Valdez is any indication, the timeline will be long,” he says, referring to the litigation that has been ongoing since 1989. “Historically, defendants in high-visibility litigation will make initial public statements about addressing harms and making people whole, but in reality they’ll tenaciously defend themselves in litigation and try to weed out illegitimate claims. We’ll likely see many years of litigation.”

Potential claimants who cannot wait or don’t wish to wait have the option of making a claim to a $20 billion spill relief fund that BP announced in June after meeting with President Obama.

“It’s a rather unique dynamic where early on, a defendant puts up a substantial sum of money trying to aggressively resolve claims,” Arsenault says. “It’s a dynamic we don’t see often in complex litigation, and I don’t think we’ve ever seen something of this magnitude, where this amount of dollars has been put up to try to resolve claims in this way.”

BP has said the fund will honor “legitimate claims” for damages made to the Gulf Coast Claims Facility (GCCF). The fund is being administered by Kenneth Feinberg, who himself has come under fire–some plaintiffs have criticized the claims process and accused him of bias because BP is paying his salary, while BP has complained that Feinberg overestimated damages owed to claimants.

“The same things were said about Feinberg as he was administering the 9/11 funds,” says William Anaya, a partner in Arnstein & Lehr’s environmental and litigation practices. “It’s one of those thankless jobs where everybody can find criticism. The process seems only above board.”

In February, the AP reported that nearly 490,000 claims had been filed, and the fund had paid $3.4 billion to 169,000 claimants, either in emergency payments for short-term losses or one-time checks–final payments in exchange for the right to sue BP. According to the AP, about 188,000 people have opted to take the final payment option. There have been reports that a group of plaintiff lawyers were encouraging their clients to accept payouts from the fund. Arsenault is among the lawyers who at press time were negotiating with the fund to fully resolve claims, with fund recipients releasing future claims.

“Our experience is if you have the appropriate documents, they’ve been paying properly and fairly,” says Arsenault, whose clients have thus far received a variety of interim payments without giving any releases of future liability. A number of claimants, he says, are in a financial bind and need quick resolution to get back to business.

“The Ken Feinberg fund as an alternative to tort litigation is an interesting model,” Buzbee says. “We’re seeing a kind of real-life experiment going on as potential claimants and lawyers try to decide how best to proceed with likely certainty from the Feinberg-administered fund versus potential larger recoveries through litigation, which may be slower and more uncertain. There you see an actual legal change in motion that may change how future disasters are modeled.”

Criminal Component

There’s no question that the defendants in the civil litigation will also face criminal charges in connection to the explosion and spill, says David Uhlmann, director of the Environmental Law and Policy Program at University of Michigan Law School.

The Justice Department (DOJ) remains silent on its ongoing criminal investigation, but it could bring charges under a number of laws. The lead charges will likely be under the Clean Water Act, which makes it a crime to discharge oil into the exclusive economic zone of the U.S. in connection with drilling under the Outer Continental Lands Shelf Act without approval from the government. Uhlmann also expects charges under other laws, most likely the Migratory Bird Treaty Act and the Seaman’s
Manslaughter Statute.

While charges seem inevitable, there’s some question as to whether the DOJ will attempt to bring felony charges against BP and the other parties involved–the Clean Water Act is unique in that it provides both a misdemeanor negligence standard and a felony intentional standard.

“This seems to be the most egregious case we’ve known in our lifetimes,” Anaya says. “Are they going to prosecute here, or is the Clean Water Act more or less toothless? Based on past prosecutions, it’s impossible to prove a felony violation. But a misdemeanor would only result in a small fine and less than a year in jail. … If the government uncovers [proof that the defendants] knew for a long time it was really bad, you’ll see a really remarkable
criminal prosecution.”

Uhlmann says felony charges aren’t inconceivable, but he agrees they would be difficult to prove. The government would have to show an intentional discharge.

“There is certainly a lot of reason to be critical of BP and the other companies involved, but I don’t think there’s any argument they intended to have this tragedy occur, so charging them with a felony would be a reach,” he says.

Uhlmann expects the DOJ’s investigation to reach similar conclusions to the Presidential Spill Commission–easily enough to justify criminal negligence charges.

“In prosecuting this case, the government will be sending a message to all of the companies involved in offshore drilling: that they share responsibility for ensuring safe drilling and the protection of the environment that sustains us all,” Uhlmann says. “That responsibility was not met in the Gulf and has brought about the worst environmental disaster in U.S. history.”

Regulatory Reforms

Although disastrous choices led to the Deepwater Horizon spill, the regulatory context in which those choices were made set the stage for such a disaster. Much of the regulatory blame has been directed at the former Minerals Management Service (MMS), the federal agency responsible for overseeing offshore drilling and production. About 60 agency inspectors are responsible for the country’s 3,500 offshore rigs.

The Commission report points to lagging safety standards and the lack of federal regulations “covering some of the most critical decisions made on the Deepwater Horizon that affected the safety of the Macondo well.” It cites, for example, the lack of requirements for cementing a well, testing the cement used and negative-pressure testing a well’s integrity. The report questions the dominant role of the American Petroleum Institute (API)–the industry’s lead lobbyist and public policy advocate–in developing safety standards for the oil and gas industry.

“The relationship between the American Petroleum Institute and the former MMS is an extremely troubling one. At least 100 API standards were adopted verbatim as the regulator’s standards,” says Bratspies, who co-wrote a white paper for the Center for Progressive Reform on regulatory failures leading to the blowout and spill.

Some of the effects of that influence are impossible to ignore in the face of Deepwater Horizon. For instance, Bratspies says, the API persuaded MMS not to take action on requiring acoustic triggers to remotely activate blowout preventers or ensuring that the shearing rams on blowout preventers would be effective on pipes that are growing increasingly thicker to withstand deep-sea conditions.

More broadly, API led the effort to kill a new, mandatory regulatory approach at MMS to replace largely voluntary safety practices. It also opposed revisions to the incident reporting rule to identify safety risks.

“API’s job is to promote the interests of the petroleum industry, and the standards reflect the job they were paid to do,” Bratspies says. “You don’t even get the best practices that the industry is already using, because API is a consensus organization and you get what people can agree on–basically, the lowest common denominator.”

In response to the Commission report, the API issued a statement that it was taking significant action to improve safety in offshore operations. It also cautioned against judging the industry from one incident.

In May 2010, as oil continued gushing into the Gulf of Mexico, the Department of the Interior Inspector General released a report on ethical lapses at MMS, including staffers accepting gifts from oil and gas production companies. Interior Secretary Ken Salazar called the report “further evidence of the cozy relationship between some elements of the MMS and the oil and gas industry.”

The director of MMS resigned, and Salazar announced a restructuring of the agency, now named BOEMRE, to split its “conflicting missions” of energy development, enforcement and revenue collection–the MMS collected nearly $10 billion from the energy and mining industries in 2009.

“Separating the royalty/licensing from the oversight part is critical,” says Bratspies, “but I’m reserving judgment. There are many of the same people, there’s the same lack of resources. I hope their institutional culture is changing, but I haven’t seen much to suggest it actually is. Real change is going to take both an infusion of new personnel and an infusion of money, and I’m not confident we’ll get either given the political rhetoric right now.”

The Commission report suggests that government oversight of oil industry operations needs supplementation by a self-policing safety organization similar to the nuclear power industry’s non-profit Institute of Nuclear Power Operations (INPO), designed to complement the Nuclear Regulatory Commission. The INPO was launched after the meltdown at Three Mile Island prompted a transformation of the industry’s safety culture.

In September 2010, BOEMRE adopted two new rules aimed at improving drilling safety, including one that makes mandatory a formerly voluntary program to identify, address and maintain safety hazards and environmental impacts–one of the rules API had fought against. New offshore projects will also require deeper environmental assessments to be submitted to BOEMRE as required under the National Environmental Policy Act–Deepwater Horizon and many other offshore rigs were exempted from the requirement through categorical exclusions.

“Because there wasn’t a full environmental analysis of risk, there wasn’t as much anticipation of risk or preparation to address risk,” Buzbee says. “Future rigs will be required to undertake more substantive analysis. And at this point it’s certainly going to be difficult for operators of offshore rigs to claim there were no risks or that they’re easily handled.”