Recently, Dunford, et al. (2019) published a statistical model analyzing the variation in natural resource damage (NRD) settlement amounts for oil spills in the United States. One of the significant explanatory factors in the statistical model was the impact of the unprecedented magnitude of the NRD settlement in the Deepwater Horizon (DWH) oil spill. Specifically, while the settlement itself was excluded in the statistical analysis, NRD settlements for oil spills that were lodged after the DWH settlement were almost four times the amount of NRD settlements for oil spills that were lodged prior to DWH settlement, holding other factors equal. For simplicity, we refer to this phenomenon as the “DWH effect.”
In our paper we examine three potential causes of the DWH effect. Since there were only five settlements between the DWH settlement in 2015 and the end of 2017 (the last year in the database), one potential cause is a small-sample effect. Specifically, the five spills that settled may have had particularly severe natural resource injuries, resulting in much greater NRD. This cause seemed unlikely based on our review of the five spills. Adding NRD settlements in the last three years for five more spills to the Dunford et al. (2019) database and re-running their model lowered the DWH effect multiplier to 2.4 from about four. Thus, expanding the sample size with five recent settlements lowered the DWH effect, but it remains quite substantial.
A second cause of the DWH effect may be an anchoring effect. By its nature, measurement of NRD is imprecise, and in the absence of litigation, parties have been left to look to past settlements for benchmarks in settlement negotiations. The DWH settlement may have raised the expectations of natural resource Trustees in negotiating settlements in later NRD cases. At the same time, the magnitude of the DWH settlement may have made responsible parties more comfortable with higher settlement amounts. This cause seems likely.
A third potential contribution to the DWH effect may be associated with a shifting of other oil spill liabilities under the Oil Pollution Act (e.g., fines and penalties) into NRD liability. Supplemental Environmental Projects (SEPs), which are often used to reduce monetary fines for spills, may have played a smaller role in recent settlements, and are disfavored under the current U.S. Department of Justice. Both Trustees and parties responsible for oil spills may be willing to shift penalties or SEPs into NRD for different reasons, as discussed in our paper. However, we found little evidence to support this cause of the DWH effect.
A key question is whether the DWH effect is temporary or permanent. Our addition of five recent NRD settlements to the Dunford, et al. (2019) statistical analysis provides some support for a declining DWH effect over time. However, given the dynamics of the NRD negotiation process, we suspect that the DWH settlement has established a new plateau for future NRD settlements, leaving the DWH effect as the new normal.
