ConocoPhillips Avoids Major Liability for Spill 康菲对渤海漏油事件赔偿额较低

By newsdoug on May 1, 2012

From a liability standpoint, there’s just no beating China. That’s my key takeaway following reports that US oil company ConocoPhillips (NYSE: COP) has reached a new settlement for damages from a major spill off the northeast China coast last year that are far below anything it would have paid for a similar accident in the west. According to the reports, ConocoPhillips has agreed to pay an additional $191 million to clean up and settle other damage claims related to last year’s spill in the Bohai Bay at the Penglai oil field that it operates under a joint venture with CNOOC (HKEx: 883; NYSE: CEO), one of China’s top 3 state-owned oil firms. (English article) ConocoPhillips previously agreed to pay $160 million to clean up the spill that dragged on for months last summer due to persist leaks that polluted an area of about 2,400 square miles, resulting in big damages to fishermen and operators of coastal tourism sites that rely on the area for their livelihood. Under the settlement, CNOOC will also pay $73 million into a fund for environmental initiatives in the Bohai Bay. It’s hard to know how bad the spill really was, since Chinese media were largely banned from any original reporting on it and instead had to rely mostly on information supplied by ConocoPhillips and CNOOC as well as China’s environmental regulator. But any way you look at it, ConocoPhillips got quite a bargain in terms of its liability due to the spill. The most obvious recent comparison would be the Gulf of Mexico spill of 2010 off the southern US that began after an explosion at a drilling operation owned by BP (London: BP). That disaster, the worst of its kind in history, has cost the British oil giant more than $20 billion to date in cleanup and other liability costs, and could end up costing around $30 billion. The disaster was also a public relations nightmare for BP, as global media continually flashed pictures of areas damaged by the leaking oil as well as oil spewing into the sea from the underground well. By comparison, ConocoPhillips hasn’t been subjected to nearly as many negative images in the media, and its liability costs, totaling around $350 million, are only around 1-2 percent those of the Gulf of Mexico spill. Clearly the big factor limiting liability in the Penglai case is the fact that CNOOC, which owns 51 percent of the project where the disaster occurred, is a major state-owned company. That means that not only is the company well connected politically, but also that Beijing would be reluctant to penalize it too heavily, since it would only ultimately be penalizing itself. That knowledge must be reassuring for investors, who bid down CNOOC’s Hong Kong shares by nearly half last year at the height of the accident but have since then flocked back to the company, in large part after realizing that the disaster would have only a modest impact on its bottom line. By comparison, BP shares also lost about half their value after the Gulf of Mexico disaster, and 2 years later are still 20 percent below their pre-disaster levels. In fact, China’s relatively light liability system applies not only to its major oil giants, but to other industries as well for similar reasons. Many of the country’s liability laws were created when most companies were still state-owned, meaning penalties were often set very low to avoid harming these government-owned enties too much. In the current era where private business is thriving, these relatively low penalties have made the law a relatively toothless force, with the result that many newer, more entrepreneurial companies often also behave irresponsibly because they know the cost of getting caught is quite low. From the perspective of foreign companies like ConocoPhillips, the knowledge that their liability will be relatively limited in the case of disasters or other accidents must be reassuring when they calculate the cost of doing business in China, as reflected by the Penglai settlement, which is actually quite large by Chinese standards. As long as such penalties remain relatively low, look for both domestic and foreign companies to disregard the liability issue as a major risk when doing business in China — something that’s good for the bottom line but less positive for responsible business practice.

Bottom line: ConocoPhillips’ modest settlement related to a major oil spill once again underscores the low risk of liability stemming from accidents and other legal claims in China.

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