The Five Factors That Decide How Much Compensation After A Major Oil Spill

After a series of major maritime incidents last week in the Port of Beirut, off the coast of Mauritius and brewing off the coast of Yemen potentially impacting the entire Red Sea, questions are being asked about what factors go into determining a payout, and who pays.

There are five major factors that usually go into a report.  This ultimately helps decide How Much and Who Pays.

1. Event

The first question is what was the cause of the incident and where did the source of the pollutant originate from.  In heavily polluted areas, it is hard to determine whether pollution comes from a particular vessel, as there is often several overlapping pollution streams.  It is much easier to assess in areas where the waters were already clear, and no other heavy industrial vessels are present.  It is then apparent where the source of the oil spill came from.

The US has a library of every chemical signature by vessel and fuel type.  Whenever an incident occurs, samples taken from across the extent of the spill are taken and compared against this library to forensically determine the source of the oil (whether from a particular vessel or other existing pre-existing polluting activities).

This is why scientifically cataloging, geo-locating, documenting and securely storing samples are vital in the early days following a spill.

2. Pathway

Incident investigators then have to determine the pathway that the polluting oil slick took.

In some cases, this evidence may come from satellite imagery, especially Synthetic Aperture Radar, that can often pick up the extent of the spill that may be missed by the naked eye.  Such satellite tracking can then follow the pathway of the pollution and become critical evidence during any arbitration.  

However, satellite tracking is not sufficient alone.  The most robust way to assess the pathway of pollution is through robust and comprehensive sampling, cataloging, securely storing samples (ideally in -80C conditions), particularly if areas are in hard to reach habitats like amid the root systems of coastal mangrove forests.

3. Exposure

Even if an oil spill occurs in one region, the impact of the incident is often much larger.  Fish and other creatures absorb harmful chemicals in their body and transport this to other regions.

Hence it is critical that sampling takes place across as wide an area as possible to capture the extent of the exposure to the polluting incident.

In the case of Heavy Fuel Oil in the tropics, the impact of ultra-violet (UV) light makes this a particularly toxic combination for fragile species and other translucent species that absorbs these chemicals.

4. Injury

The science to assess the extent of injury has advanced significantly in recent years.  Since the 1950s, a traditional test was to count the number of dead fish and seabirds - a bio-toxicology test known as LC50 that had been in use since the 1950s). However, science has moved on from this type of testing.  As scientists have better understood the impact of toxins like oil and other harmful chemicals (such as PAH from Heavy Fuel Oil) on marine life, more modern assessment tools have been developed to understand ‘sub-lethal impacts.’  This means that whilst the oil spill does not immediately kill species, it could cause a range of longer term, biological complications, such as impacting the ability of species to reproduce, causing new animal diseases such as cancer, impacting fragile nursing ground such as beaches where turtles lay their eggs.

These are some of the hardest parts to diagnose and require world class marine specialists in animal diseases.  This was why the case in the Deepwater Horizon case was so strong, leading to the $20 billion payout, much higher than was expected.  These experts will vary by species, so a multi-disciplinary team will need to be assembled that understand the biology of each species being impacted (a lot more varied in biodiversity hotspots).

This is where sampling of species and presence (e.g., changes in species population) becomes critical.  New technologies, such as San Francisco-based technology company, Saildrone, who works with the US Ocean Agency NOAA and can provide such assessments at a scale and fraction of the cost of traditional human-led methods.

5. Economic Valuation

Once the first four steps of the scientific baseline has been assessed, there is a discussion around what the economic cost is.

This often revolves around several factors:

• Loss of livelihoods.  Has income to local fishermen, tourism, aquaculture and any supporting businesses such as restaurants, food supply firms, taxi services been impacted.
• Industries impacted.  Oil spills can often have macroeconomic impacts affecting the entire economy. These effects must be understood.
• Human Health. Oil spills are notoriously toxic on human health and can lead to many medical complications for years to come.  The estimated costs of supporting any community who become ill, must be calculated.
• Impact on Cultural and Historic Heritage.  Given that the Wakashio crashed in the midst of one of the most iconic and historic sites of Mauritius is significant, especially as this battle is so famous it is featured in the Arc de Triomphe.  The Battle of Grand Port was the most important and defining battle for Mauritius when the country changed hands from French to British control in 1810, and the area is rich with Napoleonic-era wrecks that have laid untouched for over two centuries.  Documenting and understand the cultural importance and impact of the spill and wreck on this protected site is important, including any accelerated declines in historic monuments and structures caused by the spill and vessel.
• Uniqueness of the nature impacted.  It is not just the amount of wildlife impacted, but how unique this nature is.  Again, it is not just the initial mortality from the first wave of the event, but understanding any secondary or long term impacts that can only be shown with genetic bio-markers. 
• Commercial value of the nature impacted. Given that some of this unique nature have important commercial properties useful for future medicines from ocean genomics and industrial processes in the bioeconomy, there is a clear economic loss having had an oil spill over commercially valuable and unique biology.
• Functions of the structures impacted (e.g., Coastal Protection). In the case of the great barrier reef of Mauritius around Pointe d’Esny, this provides coastal protection coverage from storm surges, soil erosion and other impacts from the climate change. Any changes or loss of the great barrier reef could have catastrophic impacts on fishing areas, how currents flow within the lagoon and even protection for the Eastern Coast of Mauritius itself. This is significant.
• Effectiveness of the cleanup.  Where the cleanup operations have not succeeded in removing all traces of the spill, damages and consideration for long term clean up costs must be given.
• Other factors.  These are just some of several other factors that are taken into account when making a settlement.

It is important to invest the time in such an assessment properly as this could make the difference in the compensation by an order of magnitude (10x).  The lessons from how the Cosco Busan Heavy Fuel Oil Spill Impact Assessment was conducted is important.  In that incident where 191 metric tons (just under 54,000 gallons) of Heavy Fuel Oil was spilled into the already industrially contaminated San Francisco Bay, the damages awarded was $44m.

Who pays

It is not the shipping line who pays, so the solvency of the shipping line should not matter to any compensation.  All major shipping lines pay into a collective insurance coverage that covers catastrophic losses.  This used to be run under ITOPF, who were set up in 1967 following the largest oil spill at the time (the Torrey Canyon off the coast of England).  The negative publicity following this incident was a catalyst for oil tanker owners to create a voluntary scheme to ensure the compensation was available to those affected by oil pollution.  This scheme was set in an agreement known as the Tanker Owners Voluntary Agreement concerning Liability for Oil Pollution (TOVALOP), with  ITOPF was originally established to administer this scheme.

A whole constellation of insurers, crash investigators and scientists acting on behalf of the insurance firms may descend onto the scene for the next few weeks, months and years.  Sometimes, these organizations may have different incentives than ensuring the best outcome for an impacted country.  There have been examples in the past where this has led to the creation of ‘counter-narratives’ to prolong legal action and add confusion to what the true extent of the damage was due to the spill itself.

Lessons from Chagos

In the week when the US sent stealth bombers to its military base on the Indian Ocean island of Diego Garcia for the first time since 2016, amid rising tensions with China, there may be some important lessons from history.

A hastily signed agreement in 1982 by several of the displaced islanders for what appeared to be significant compensation at the time, led to complications in legal cases three decades later.

It is important that other small island states who may be impacted by industrial accidents caused by large and sophisticated maritime sector companies, learn from the chapters of history, and engage the right expertise early to guide decisionmaking.

Creation of an Independent Environmental Remediation Trust Fund

Whilst the process for compensation may extend for several years in complex situations where the full extent of the environmental impact is not fully understood, it is prudent to start preparing how to receive and administer any funding.

A clear strategic plan and independent governance structure is needed to ensure priorities are set out to restore habitats, safeguard lives and build resilience. Given that the windfall is to restore the livelihoods and environment of a region, the funds essentially have to act as a separate Sovereign Wealth Fund for future generations and not part of the operating budget of the Government of the day. Such a fund may need to be in existence for several decades to come.

Creating such an Environmental Rehabilitation Trust Fund, with clear parameters, transparency, performance metrics, and governance, should ensure that other small islands that fall victim to large scale industrial accidents, can become global icons in how to build back better.