The risks of Exxon-Mobil in New Zealand waters

By Gordon Campbell

Exxon-Mobil are the elephant in the room that the Government refuses to confront, as it throws open the ecologically vulnerable Great South Basin region to oil exploration and exploitation. Currently, New Zealand does not have an oceans policy, despite years of talking about it. There is no RMA equivalent that is empowered to manage economic activity within our Exclusive Economic Zone, and no mechanism for weighing the environmental and economic risks/opportunities involved. This morning’s RNZ story about ongoing impacts of the Tui field oil spill off the Taranaki coast – and the paltry levels of compensation available – should be setting off warning signals in Wellington. Do the Government seriously think Exxon-Mobil would be unduly fazed if an oil spill from their operations happened to wipe out the Bluff fishing industry, and our bureaucrats came looking for compensation, armed only with a copy of the Maritime Transport Act?

It hasn’t been fazed in the past. Six months after the Tui field spill, blobs of the oil are still evident on the Taranaki coast. Nineteen years later, oil seepage is still visible on the Alaska coastline. Courtesy of the drunken captain of the Exxon-Valdez oil tanker who, on one dark night in 1989, managed to spill his tanker’s cargo into the pristine Alaska environment, thus ruining the local marine environment and fishing industry that depended on it for its livelihood.

This year, Alaskans have taken their battle with Exxon-Mobil to the US Supreme Court. Sometime in June, the Court will hand down its verdict on whether Exxon-Mobil should cough up $2.5 billion in punitive damages. New Zealanders should be watching in alarm at how Exxon-Mobil has mounted its defence – if only to learn more about what sort of creature we have invited into one of our most ecologically valuable and vulnerable regions.

In the wake of the Alaskan oil spill, Exxon-Mobil has reportedly paid about $500 million in compensatory damages. This is quite seperate from the original $5 billion punitive damages penalty that it originally faced, and which has been bouncing around the US court system for 14 years ever since. Lower courts reduced the punitive award to $2.5 billion, a figure that currently represents about four weeks of Exxon-Mobil’s current annual profits. Exxon-Mobil are refusing to pay anything at all in punitive damages. Its bottom line offer was meeting the cost of a clean-up, and then moving on.

Communities have been left to bear the enduring cost. In the days after the spill, as Bloomberg news reported, some 3,000 otters and 250,000 seabirds died, as did unknown numbers of harbour seals, killer whales and other wildlife. The herring industry of the town of Cordova was destroyed. So far the Cordova fishers have received compensation equivalent to about one year’s salary, for the lifelong loss of their previous source of income.

Those Exxon- Mobil’s defence arguments are keenly interesting. For starters, the company argued ( via a case dating from 1818 ) the special nature of maritime law – with ships operating far away from home, in an intrinsically difficult environment – meant that owners should not be held responsible for the actions of their faraway sea captains and crew, and thus should not be subject to punitive awards. Moreover, the Exxon-Mobil lawyers argued, such employees are so minor in the company hierarchy that heads of corporations could not be held responsible for them – especially when their employees did things that were clearly at variance from best company policy.

You can see how such arguments might be recycled if Exxon-Mobil staff ever did stuff in the stormy seas in faraway New Zealand, against the stern company instructions to, you know, mind that hose. While the Supreme Court judges seemed skeptical, the Wall Street Journal noted their concern at the size of the award being sought, and the constitutional implications if punitive damages for maritime accidents could be allowed to have no upper limit. Generally, punitive damages are assessed on top of compensatory awards in order to punish the careless, and to deter lax practices in future. Yet Justice Souter, one of the more liberal Supreme Court judges, proposed during the Exxon-Valdez hearings in February that punitive damages should be capped, at a level that was only double the amount of any compensatory damages.

Hardly fair. Even if Exxon-Mobil had to pay the full $2.5 billion punitive award, this would mean only a $75,000 payout per claimant. Meaning : in the very hostile weather conditions that routinely exist in our Great South Basin region, Exxon-Mobil could expect to be treated quite sympathetically when it came to the size of any damages for a spillage in such foreign waters – given the kindly outcome now likely in this current test case where it was clearly at fault, where it had shelved several prior warnings about its captain’s drinking problem, and when US citizens were on the receiving end.

The Government doesn’t seem much interested in playing safe. In the House on 19th July 2007, Associate Minister of Energy Harry Duynhoeven refused to consider a bond being required to cover any damage done oil companies active in the Great South Basin. “In terms of a bond, that is not an issue because the Maritime Safety Act controls activities in our regions. It very clearly sets out the damages requirements and the remedial requirements if there is an oil spill.”

The thought that Exxon-Mobil, whose national turnover exceeds that of all but a relative handful of countries, could be brought to heel by an Indiana Jones from the Maritime Transport division is exciting, but rather unlikely. As the Tui field case has just confirmed, the compensation available under section 244 of the Maritime Transport Act tops out at $200,000. A ridiculously low amount, in the modern era.

While the Government is believed to be drafting a Cabinet paper on an oceans policy, this has not yet been completed. In any case, such a process seems highly unlikely to see any such legislation passed before the election – and even if this could happen, logic suggests the consent process would be unlikely to give much, if any, weight to environmental factors. Safe to say, the Government has little appetite for adopting anything like the RMA’s precautionary principles, which would necessitate a prior assessment being carried out on the environmental risks and benefits – no, that wouldn’t do, not when it comes to speeding up the search for black gold in the Great South Basin, or anywhere else in New Zealand waters.

Giving away our oil and gas
Point of fact, New Zealand is bending over backwards to attract oil exploration. Back in November 2005, the industry Gas and Pipeline Journal reported on what a great deal New Zealand was offering.Dave Cadenhead of Canada’s TAG Oil and Gas company told Journal readers that sure, like most countries, New Zealand wanted a fair return on its assets. Even so, Cadenhead pointed out, we had “substantially” reduced our demand for royalties.

Cadenhead gave up the numbers : “Through December 2009, wellhead royalties have been reduced to 1 % for natural gas, and 5 % for oil. Accounting profits have been reduced to 15% on the first $750 million of gross profits and 15% on the first $250 million of gross profits for onshore discoveries.” Furthermore, companies could deduct all their exploration and development costs, before totting up the gross amounts on which the percentages of New Zealand’s return were to be calculated.

The good times didn’t stop there. Compliance wasn’t much of an issue in good old New Zealand, Cadenhead explained. “Historically, Crown Minerals have not tightly enforced full compliance with the work programs outlined in various PEP conditions.” Moreover, we were willing to give away, as an inducement to oil and gas exploration companies, the valuable and high quality seismic data that had been amassed by Government after spending considerable amounts of taxpayer money.

In short, Journal readers were told : “New Zealand has a superior fiscal regime with royalties substantially below other possible investment locations with similar (very low) political risk profiles..” That all served to boost up the bottom line. Thanks to our “low operational costs and existing infrastructure access,” Cadenhead concluded, “there was high profit potential, at least twice what would be normally expected in North America.”

So,it seems we are hellbent on cutting our returns from the energy transnationals here to explore and exploit one of our most vulnerable and valuable regions. The Great South Basin happens to be home to several highly valuable commercial fishing fleets, and to endangered species such as southern right whales, beaked whales, Hector’s dolphins, four species of endangered albatross and many other migratory seabirds and mammals.

We are also lowering such demands just as the rest of the world is doing the opposite. On May 1, 2007, the US General Accounting Office surveyed the oil and gas royalty regimes that governments have put in place within, and outside, the United States. Why such a royalties survey ? In order to make a case for lifting them. As the GAO explains in its intro, oil companies can afford it. “Amid rising oil prices and reports of record oil industry profits, ” governments around the world “have taken steps to re-evaluate and in some cases increase their revenues they get from the rights to develop oil and gas on their lands and waters.”

How did New Zealand fare ? Even based on the GAO’s use of 2002 figures that pre-date the subsequent royalty reduction ( not to mention the seismic data sweeteners we have given away) New Zealand’s overall government ‘ take “ ( comprising royalties, rentals and taxes ) was at 37.51 %, already below most other countries listed by the GAO, and markedly below a large number of them. No wonder Duynhoeven was able to tell the Otago Daily Times last year that New Zealand was offering a royalty regime that was one of the cheapest in the world.

To combat the risks involved, New Zealand clearly needs an oceans policy. It needs legislation with teeth sufficient to protect, and properly value, our marine environment. We cannot shoulder the bulk of the risks involved in exploring and exploiting our offshore oil and gas resources, and simultaneously allow the likes of Exxon-Mobil to abscond with the bulk of the profits. With oil prices going through the roof and existing global fields flatlining or in decline, oil companies are now so hungry for fresh production they will come – and on our terms.

That news has not yet sunk in with the current Government and National is hardly likely to be more demanding. For now, the Government seems in awe of the attention it is getting from the big boys. In his 19th July 2007 Parliamentary response for instance, Duynhoeven bragged about Exxon –Mobil being in New Zealand waters. Its very presence, he argued, was clear proof that the Government had got the trade-off between the royalties and the value of the resources exactly right. “The proof of the pudding is in the eating. We have the largest oil exploration company in the world, which has never been in New Zealand before, here looking.”

Wonderful. We may have cause to regret in future, if Exxon-Mobil ever find what they’re looking for.