Technology Day 1993 - "Riding the Wave of Innovation: Oil Spill Issues"

[MUSIC PLAYING]

MARCUS: I'd like to welcome you to our afternoon panel entitled Oil Spill Issues. I'm Hank Marcus from the Ocean Engineering Department. And we're celebrating our 100th anniversary of having ocean engineering at MIT, and so we're delighted to have you here, and we're delighted to have maritime panels this afternoon.

Since the grounding of the Exxon Valdez in March, 1989, the maritime industry has been a very exciting industry. Lots of things going on here. Now I'm sure you've all heard of the Oil Pollution Act of 1990. That's been one of the major events over the past four years. Let me just bring up two more points that you may not be as familiar with.

If you start comparing some of the oil pollution data from the early 70s to the early 90s, you see some interesting things. I chaired a marine board panel, and we dug out the data. And you see that if you start with the year '73, '75 at one end and 1990 at the other end, you see that over this time span, the amount of oil that has gone into the ocean as a result of tanker accidents has decreased by 45%, and the amount of oil that's gone into the ocean from tankers as part of their operational discharges, such as pumping out ballast water, has decreased by 85%. Now we still feel that there's more to be done and what we're doing today is still not acceptable, but we've had quite an improvement over the past two decades.

The second point I want to make is that we face a rather unique situation with the US Congress relative to the design of tankers in this country. And that has to do with the way they passed the Oil Pollution Act of 1990. Basically, we could we could say we have Congress designing our tankers. And given the naval architecture experience and expertise of Congress, that scares me.

Now it's certainly an overstatement to put it that way, but when Congress passed the Oil Pollution Act of 1990, they didn't say. Well, gee, why don't we identify all the causes of environmental damage from oil pollution, and then we'll analyze each one and see what the best cost ratio is so we know where to put our money to get the maximum ratio between benefits and costs? That would have been one approach. They didn't do that.

And they didn't say, well, why don't we come up with-- how do we develop some performance standards here, like we do with cars? What we say is, under these kinds of circumstances, you drive the car into the wall or whatever, we want the car to perform in a certain way. We could do that with ships, and then that way you leave it up to the designers and the naval architects and engineers to come up with the best way of meeting those needs. They didn't do that either.

Basically, they sort of said, read my ships, no new tankers without double hulls. And that's sort of an odd approach. They do ask for advice from the Coast Guard, and they did that in the act. But if you look at Congress's role in the design, the structural design of any other vehicle of any other transportation mode in the United States, Congress has never taken such a strong stand. Whether we're talking about cars, or trucks, or buses, or planes, or trains, this is a rather unique role.

Now you might ask, why is that? What is the Congress-- or how does the Congress or the general public perceive the whole maritime industry, or the universities that train people in these industries, or the types of research programs we have? Now indeed, you might ask that, but you can't ask that till after you hear from four experts we have here.

And this afternoon, first we're going to hear from our regulator, Admiral Kime from the Coast Guard, who has the responsibility of implementing many of the provisions of the OPA, as well as a few other things the Coast Guard does in their spare time, myriad number. Next we're going to hear from Epaminondas Embiricos, representing independent tanker owners who have to deal with all the regulations in the world. Then we're going to hear from Richard Quagen representing the oil companies who must deal with the regulations, and the independent tanker owners, and their own fleets of company-owned vessels.

Finally, we're going to hear from Lissa Martinez. It says representing environmentalists, what it says in your booklet. Now I happen to think that all of us up here are environmentalists, but indeed, Lissa has spent a lot of time working on environmental research and integrating the disciplines of engineering with environmental science. And she's going to put some of this discussion in a broader perspective of oil pollution in general.

The format we're going to follow is as follows. Each speaker will have about 15 minutes to come up and present his or her views, and then at the end, after we've had our chance up here, we'll give you your chance out there, and we'll have a fun time of questions and answers from the audience, from each other on the panel here. And so I think you will have a great afternoon with that.

And the other thing I will tell you is because you have-- these four experts have some very impressive backgrounds, and those are all well-written up in the booklets you have, so I'm not going to take time to describe that. I'll spend our time on discussions and questions and answers. So with that, I'd like to turn over the podium to Admiral Bill Kime, Commandant of the Coast Guard and president of Society of Naval Architects and Marine Engineers.

KIME: Thanks, Hank. And I greatly appreciate the opportunity to come back up to MIT, where I spent three very happy years. And the further I get from graduation, the happier the years seem to be. I last had the chance to come up and give one of the Robert Bruce Wallace lectures in 1991, and I'm surprised you invited me back. Maybe all the people who were there have moved on.

Let me ask you a question, why are we here discussing oil spill issues? Why is this something that's on people's mind? I think one reason is the Exxon Valdez, obviously, that woke up this country to the concerns of oil spill. Certainly woke up the Congress to pass OPA 90 after a gestation period of about 15 years.

But let me give you some of the other reasons why we're concerned. We've got 5% of the population in this country, and we use over 20% of the energy. As a country, we're against offshore drilling.

We're against opening up the ANWR. We don't like nuclear power. We hate to carpool. We won't use or say we don't have mass transportation.

That means we're going to continue to import at an ever-increasing rate greater amounts of oil by ship. And about 95% of this is going to come on foreign-flagged tankers. And as a result of that, spills are going to continue to occur. So I think the issue is, what can we do to minimize their probability, and to maximize the effectiveness of our response when they do happen?

I think this is something that is going to require the major dedication and cooperation of many people, ship designers, shipbuilders, ship owners, ship charterers, ship brokers, ship's crews, classification societies, the insurance industry, the P&I clubs, flag states, port states, and certainly, the oil companies. How are we going to do this? I think we're going to do it by effectively addressing five areas of concern. One , and one of the most important, the prevention of a spill in the first place, our preparedness to respond to spills once they do occur, how we actually do respond, the question of liability for the spiller, and then finally, compensation for those people who are impacted by the spills and the restoration of the environment.

Now, ideally, we would do this internationally through the IMO, the International Maritime Organization, which is a specialized agency of the United Nations, under whose auspices safety and environmental treaties are negotiated. The IMO is located in London, and I believe they have a lot 140 member countries right now. However, some problems in the past have led to unilateral action by the United States. And as Hank Marcus said, the Oil Pollution Act of 1990.

Now Congress didn't just jump on the Oil Pollution Act of 1990. They'd been working on this for about 15 years. And there'd been a lot of discussions about doing many of the things that are contained in the Oil Pollution Act for many, many years.

While there are 535 members in the Congress, and as Hank pointed out, no naval architects, they do have a memory. And they do recognize that the industry itself did not respond in what they felt was a reasonable way to incidences that have occurred. Certainly, we've cut down the operational pollution from tankers. We've cut down the accidental pollution from tankers. But by the same token, I think we're faced with a society right now that is more demanding and less forgiving for incidences.

OPA 90 was unilateral action by the United States. And that same type of unilateral action is threatened right now, perhaps even imminently, by the European community, and by the UK in particular, due to the fact that IMO standards in the past take too long to be developed, take too long to come into force, or they are ambiguous, or they represent the least common denominator, and they're not enforced in many cases. So my belief is that IMO is still the vehicle to attack all aspects of oil spills. But if we don't through IMO eliminate substandard ships, substandard crews, substandard owners, substandard insurance companies, substandard regulations, substandard enforcement, which I think is the biggest problem, substandard flag states, and substandard port states, unilateral action led by the United States and the EC is going to become the rule.

Let's look in some detail at each important area concerning oil spills. First, prevention, second, preparedness, third, response, then liability and compensation, and follow it up with a question of enforcement. There are many international conventions that deal with these subject, the Safety of Life at Sea convention, or SOLAS, the treaty to prevent pollution from ships or MARPOL, OPRC 90, the Oil Pollution Preparedness, Response, and Cooperation Treaty. Protocols, so the civil liability convention and the fund convention, the Convention on Standards of Training, Certification, and Watch-Keeping, all of these done by the Maritime Safety Committee of the International Maritime Organization and the Environmental Protection Committee.

There's also a new subcommittee there called FSI, which is the Flag State Implementation subcommittee that has recently been put into place. And I've also refer to a new code, the International Safety Management Code that we hope to bring into force at the IMO assembly in October. Now going to prevention first, that's covered in many aspects by the STCW convention, by SOLAS, MARPOL, and the International Safety Management Code. Let's look at some of the specific areas that need a bit more attention.

We spent a lot of time in STCW talking about training of people aboard ship. If you were a chief engineer, if you were the cargo officer, if you were their master, this is what training you had to have. But it is totally silent. And the maritime community has yet to face up to the issue of things such as minimum level of manning, crew fatigue, the amount of time you can spend on the ship, team training.

In 1995, the Secretary General of IMO, Mr. Bill O'Neil, has set this as a date for a significant revision of STCW. Hopefully, we will finally come to grips with these issues. If you asked me the reason we haven't, it's easy to talk about training. It doesn't cost a whole lot to talk about it. When you start setting manning standards and hours that people can work and fatigue standards, that starts to cost a great deal of money.

For prevention, we need vessel traffic systems. We've just looked at 23 ports in the United States, and are going to be phasing in vessel traffic systems very similar to the type of air control that you see in the nation's airways. We'll be using things such as dependent surveillance, where a ship will pick up a global positioning system signal from a satellite, it'll be corrected by differential mechanism to give it an accuracy of about 8 meters, and transmit that back to a Coast Guard control facility.

We're going to be requiring tug escorts in certain areas, like already in Prince William Sound, Puget Sound, and San Francisco Bay. We're going to see coming this summer a requirement that went in, the US navigable waters, which means anything from three miles in, two deck officers on the bridge, an engineer in the engine room no matter how automated the ship is, and automatic pilot ships will not be able to operate in these navigable waters except under certain circumstances. There can be tanker exclusion zones where tankers will not be allowed at all.

We're going to talk about ship construction. And Hank said that double bottoms, double hulls may not be the answer to a maiden's prayer. But certainly, they are going to go a long way towards preventing a lot of the pollution we have. Some people say things like the mid-deck design or vacuum designs are things that we ought to move toward, but we haven't seen any real ships being built that way, even any large scale models.

And we talk about Congress using performance standards for cars, and we see on TV pictures of Volvos and BMWs being driven into brick walls. We can't do that with a heavy industry. You've got to be a bit more prescriptive sometime. Or the industry, if they want to get out from under specific regulations, the Congress is going to have to come forward with more in the area of research and development.

One thing that's very encouraging to me is the damage resistant hull study that's being done by MIT. There's 11 contributors to this project, one of which is the Coast Guard. It's paying about 15% of the funding. This is the kind of thing I think we need more of if we want to keep the Congress from acting.

Shift to preparedness, and there it's the OPRC convention. Its parallel in the United States, again, is OPA 90, because OPA 90 kind of covers all of the areas of concern of these international treaties. Requires a national response plan for pollution. That's being revised right now to be published shortly. Area response plans.

The Coast Guard has established a national strike force coordination center and three strike teams that will be able to respond to a spill, and also to provide for training. Not only for Coast Guard people, but for others. And there's a simulation going on right now as we speak here in the Boston area.

There's going to be a requirement for prepositioned equipment. The Coast Guard has established prepositioned equipment in 19 sites around the country that we selected on the basis of need, past experience, type of cargo moved through the ports. And finally, shipping terminals are going to have to have response plans approved by the Coast Guard. They had to be submitted by the 18th of February, and you have to operate under these plans by the 18th of August or you can't operate a ship or a terminal in US waters.

And this is going to require that there be designated individuals to be in charge 24 hours a day should a spill occur, and that you identify and have under contract pollution response equipment. Leading us into response, again, internationally is the OPRC. And there, we're going to utilize the items I just mentioned, the equipment and the planning.

We also have other things that we need to do a better job in though in utilization and in response. One is dispersants. As a country, we have never been able to come to grips with the use of dispersants.

The Torrey Canyon was a major oil spill incident off the coast of England, and the British response to it was to soap up the entire Atlantic Ocean using an exorbitant amount of dispersants, doing probably more damage with the dispersants than was done by the oil. That caused in the United States a great reluctance to use dispersants. We've never brought this back to an even keel.

There are many cases where dispersants can be used, but we can't get beyond the political stigma of them. The scientific community can't come to grips with it. Local elected officials who have a veto in this cannot face up to the political realities. There are cases where dispersants could be used and aren't. We need to come to grips with this.

Bioremediation, another area where you provide nitrogen to existing microorganisms in the oil that will accelerate the degradation of the oil by the microorganisms. We certainly used this in Alaska. I spent three weeks in Alaska as the federal on-scene coordinator responding to the Exxon Valdez spill. There we saw bioremediation being used very well, very safely. But again, the same political concerns about it so we can't get the maximum use out of it.

In situ burning. We can't get a permit from the EPA, even though funding is available, to do testing to see if burning the oil on-site once it's in the water, and then measuring the effects in the water column, in the air to see if this isn't more beneficial than letting the oil come ashore. We can't get a permit to do that.

Mechanical cleanup, skimmers, booms, things of that nature. We're in the T model Ford stage in that particular area. OPA 90 wanted research in these areas, authorized a significant amount of money. US Coast Guard is the only federal agency that has sought and received money from the Congress to do research in this area. This is an area that we need a tremendous amount of cooperative effort, both nationally and internationally.

Now finally, we can talk about liability and compensation. And there are two international conventions that provide for this, the CLC and Fund Convention. It's a two-tiered approach.

The CLC Convention, the Civil Liability Convention provides that the ship owner has the first tier. He's the one that can keep the oil from spelling. He has liability up to a certain level. And then for spills that are in excess of that, country's, based on the amount of oil they produce or import, contribute a certain amount to an international fund that would take care of the very, very large case.

The United States did not sign this convention because these limits of liability from a practical basis were much too low. In 1984, the protocols were developed internationally that raised these levels significantly. But the United States did not ratify these protocols.

We didn't because ship owners and the oil companies torpedoed the US efforts to ratify. They hoped that they could use existing voluntary funds, called TOVALOP and CRISTAL instead. Well, they were fooled. Instead they got OPA 90, which had many features they don't like.

Now there is unlimited liability, no preemption of states. It's easier to break what limits of liability you have. Again, we got to where we are by the reluctance of responsible people to take responsible action.

Now OPA 90 has as its premise in this area that the spiller pays. The spiller, meaning the ship owner, pays first. They pay quickly, and they pay with certainty for cleanup, compensation, and restoration of the environment.

As a result of this, the Coast Guard has set up the National Pollution Fund Center, which manages a $1 billion trust fund. Money accrue to this-- money is accrued to this from $0.05 a barrel, $0.05 for every 42 gallons of oil either produced or imported into the United States. We're almost at the $1 billion level right now. That takes the place of the International Fund Convention.

There is a liability for a ship owner of $1,200 per ton as the first level. This is about $150 million in liability for the owner of a very large crude carrier. The ship owner also has to prove that he does have the assets to meet this liability.

And because of the nature of OPA 90 and the fact that we did not ratify the CLC and fund protocols of 1984, it has been very difficult to get this insurance, something we're working on. I think internationally, this is probably the major problem facing shipping and insurance right now. We're hopeful with some meetings coming up in Washington with the insurance and shipping industries in early July we can get around this. But again, we're where we are because we didn't take responsible action in the past.

Now finally, to talk about enforcement. The Flag State Implementation Subcommittee met for the first time about a month ago in London and came up with some requirements, we are seeing a proliferation of flag states now, states that have no infrastructure, but are flagging ships under their flag claiming they're meeting international conventions. They have no knowledge in their government to say that, in fact, these ships meet these standards.

They then delegate this to a classification society. We have a very great proliferation of classification societies now. Not the Norske Veritases, the American Bureau of Shippings, and the Lloyd's Registers of the world that we're used to, but ones, again, that have no real infrastructure, nothing behind it, no surveyors dedicated just to them.

So we're seeing the parts of a safety net. We're seeing more owners that are banks, that are management companies, not the old time ship owners that we have seen in the past. So what we are seeing is ships falling through a series of safety nets, the owner not being responsible. Hopefully, the new International Safety Management Code will help a great deal in that.

Next is the flag state not being responsible. IMO has passed a resolution that we'll vote on in London in October to provide standards of what you should be to be a flag state. Some countries, developing countries say it's their God-given right to have a commercial fleet of their own, and the shipping industry is willing to go to that, because the control is less, taxes are less, and they can hire just about anybody they want to as a crew.

Well, that's fine as long as they stay in their own waters. But when they come into other waters, there's certain requirements they have to meet. The IMO is going to pass a resolution to say what they are.

Classification societies. Up until now, there's been nothing to define what IMO and treaties call a recognized classification society. That is going to change with a resolution saying what it is.

Let me say, I'm very pleased that the classification societies under their International Association I Acts are putting together a self-auditing mechanism under ISO 9000 to see what their level of quality is. The IMO is participating in this. Unfortunately, the insurance companies who have complained about the work of the classification societies have not seen fit to join in, although it's been requested, and the classification societies have offered to pay the money.

Then finally, we have the insurance companies, who in the past, I think, have not taken a responsible look at insurance of ships. If you drive a car today, you pay on the basis of whether you're male, female, how old you are, whether you're married, what route you drive, what zip code you house your car in. Much insurance for ships in the past was just based on it being a ship.

To their credit, insurance companies are now starting to take a much closer look at this. But I think the thing boils down to the first safety net that we're talking about if we want to keep OPA 90 from happening. And that is response the responsibility of the owner and the crew of the vessel, because if they do what they're supposed to do, none of these other safety nets come into play. What I've tried to do is give you an overview of what I see the issues are, how we got to where we are now, and some of the things that I think we need to do in the future to improve it so we keep our 535 members of the US Congress from, again, writing the types of law that Hank indicated perhaps they shouldn't. Thank you very much.

[APPLAUSE]

MARCUS: Thank you, Admiral, for getting us off to a great start. Our next speaker is Epaminondas Embiricos, chairman of Embirico Ship Brokers Limited. And I'm delighted he could come here from London to be with us, and we're looking forward to your comments.

EMBIRICOS: Professor Marcus, ladies and gentlemen. A key goal of the Oil Pollution Act of 1990 was to reduce oil pollution to the maximum extent possible. It is ironic, therefore, that certain provisions of the act inadvertently tend to have the very opposite effect. These same provisions are also harmful to US interests in other respects.

I shall seek to explain why this is so, and I shall outline a possible remedy which would address some of the defects of the act, and thereby render its goal more attainable. It may help if at this juncture I made some comment about some of the relevant provisions of the act for those who are not familiar with them.

Under prior law, ship owners had the right to limit their liability for pollution damages pursuant to the Limitation of Liability Act of 1851. OPA 90 eliminated that right for all claims arising out of oil spill incidents. Liability for an oil spill under the act is on a strict liability, no fault basis.

In other words, a ship owner is liable if oil spills from his vessel, even though he and his servants were in no way at fault. The ship owner is liable, for example, even though the fault may have been that of a US pilot. OPA 90 furthermore expressly eliminated preemption of state law by federal law for oil spill incidents, thereby permitting states to adopt their own oil spill liability regimes, many of which now provide for unlimited liability.

Although in theory OPA 90 still gives the ship owner the right to limit his liability under federal law, albeit at higher levels, this right is in fact, illusionary since limits under the act are very easy to break, thereby leading to what is in effect unlimited liability. Thus, since OPA 90 came into force, a ship owner trading to the USA is faced with the prospect of unlimited liability in the case of an oil spill. This fact must be seen in the context of the potential costs of oil spills in the United States.

The Exxon Valdez oil spill cost Exxon well in excess of $2 billion. And this, of course, was before OPA 90 and the broader definition of environmental damage which pertains today. We now come to the nub of the matter. Unlimited liability is uninsurable. In fact, the maximum insurance that is available to a ship owner today for oil pollution liabilities is $700 million.

Any ship owner who chooses to trade to the States the day does so on a seriously underinsured basis. The under insurance is so severe when compared to the potential multi-billion dollar liabilities that in the case of a serious oil spill, a ship owner is, to all intents and purposes, trading uninsured. Furthermore, the uninsured liabilities are of a magnitude that dwarfs the net worth of even a large ship owner.

Not only is the owner uninsured, however, but he is in a jurisdiction where the courts have a propensity to seek to pierce the corporate veil. Thus, in effect, the United States is inviting those shipowners whose service her needs to come and play Russian roulette. Tanker owners are, of course, most at risk, but all ship owners are exposed. For example, any vessel can be in collision with a tanker, thereby exposing her owner to unlimited liability under state law. The collision between a bulk carrier and the British Trent is but a recent example of the potential danger.

I put it to you that these are not desirable consequences that one would expect to flow from a responsible, well thought out law. This state of affairs should be contrasted with today's international regime, where limitation of liability is fully recognized at levels well within the bounds of available insurance cover. Bear in mind that US trade today depends on foreign vessels. 80% of US petroleum imports are carried by foreign ship owners.

The consequences of OPA 90 are predictable. Responsible owners will either be driven from US trades, or alternatively, they will be encouraged to behave irresponsibly. I know that some say that OPA 90 has succeeded in as much as the world shipping community has continued trading to the US, that, however, is a shortsighted view.

The very large volume of US imports and exports makes it impossible for ship owners to withdraw from US trades in the short run. After all, they have acquired vessels on the basis of the existing volume of world trade, and they have no alternative today but to employ those vessels. I shall tell you, however, what is currently happening, and how matters will evolve. Ship owners are avoiding ordering the types of vessel which would need to trade to US destinations, such as, for example, Suezmax tankers. Future US trade will be affected accordingly.

The problem is further compounded by OPA 90's provisions, which require that new building tankers must have double hulls. Double hulls are a good pollution preventing design in the case of low impact groundings or collisions. They increase the likelihood of a catastrophic oil spill, however, in the case of a high impact grounding or collision. This is because the empty, uninverted tanks make capsizing and explosion more likely.

Exxon carried out a study after the Exxon Valdez grounding and concluded that had the vessel been of double hull design, she would have capsized and lost all her cargo. The double bottomed Aegean Sea exploded shortly after grounding with the loss of all her cargo. The Maersk Navigator was involved in a collision and was struck in way of a segregated ballast tank.

She was, in effect, double hulled in that area. She promptly exploded. The empty tank resulted in greater instead of less pollution.

These accidents should be contrasted with the grounding of the Braer in the Shetlands. The Braer was of conventional single hull design, and even though after grounding she was buffeted and pounded for days by hurricane and gale force winds, she did not explode. Of course, she finally broke up, but had a salvage operation been possible earlier, most of her cargo would have been saved.

The reality of the situation is that ship owners are required by OPA 90 to build double hulled vessels for the US trades in the full knowledge that in the case of an accident, this type of vessel is more likely to lead to a catastrophic oil spill for which the owner will be liable, and for which he will be uninsured, thus resulting in his ruin. It is not surprising, therefore, that ship owners are not queuing up to build $100 million dollar VLCCs when they know that not only can they lose their investment, but be bankrupted to boot if an oil spill occurs.

All this does not augur well for the future servicing of US trade. There is developing a trend of long-term disinvestment in the types of vessel required for US trade. Even assuming, however, which I do not, that serious ship owners will continue in the future to trade to and from the US, OPA 90 does not serve American interests well in as much as some of its provisions are inimical to its key aim, the reduction of oil pollution.

It is axiomatic that the businessman involved in a high risk business will be acting irresponsibly if he operates substantially uninsured. To create a situation where he is bound to do so cannot but breed irresponsibility. If ship owners are forced to act irresponsibly in this way, it is unrealistic to expect them to act responsibly in every other way.

Yet to avoid oil pollution, responsible behavior needs to be encouraged, not discouraged. It is never wise to demand the performance of the impossible. Ship owners trading to the states will be either discouraged and despondent, or they will have an indifferent, fatalistic, could not care less attitude. In either case, the likelihood of oil spills is increased.

Perhaps more importantly, however, it seems to me that where the potential uninsured losses are not only vast, but are also third party liabilities, the government has a duty as a matter of public policy to ensure that insurance is not only available, but is also compulsory. One would not expect the government to condone motorists driving their cars without insurance, yet those liabilities are minute compared to potential oil pollution liabilities. The United States should, as a matter of public policy, not permit a situation to exist in which all her petroleum imports are carried by substantially underinsured vessels, let alone to create such a situation.

This brings me to the remedy. The US government should require that all tankers trading to the states carry insurance to a very high level, say, $2 billion. Compulsory insurance to such a level is necessary to avoid a situation in which those ship owners who take out such insurance become uncompetitive and are driven from the US trades by other less responsible owners who are willing to take a chance and trade on a substantially underinsured basis.

Understanding that the market may not be able to provide capacity up to say, $2 billion in short order, the higher mandatory amount may need to be phased in over a period of time from the currently available $700 million, the mandatory nature of the insurance creating a sufficient premium base to allow higher levels of insurance to become commercially available in due course. Alternatively, the federal government should mandate a supplemental insurance regime similar to that currently under consideration for the aviation industry in the proposed legislation implementing the Montreal Protocols. The premiums should be charged on a per voyage basis, enabling the ship owner to pass them on down the chain, and thus ensuring that a proper level of premium can be paid for the necessary cover to be made available.

In this way, the main defect of OPA 90, that of the uninsurable liabilities it created, would be largely addressed, and the act would be strengthened significantly. There would be another benefit as well. Currently to the extent that ship owners are underinsured, all uninsured cleanup costs or claims associated with an oil spill will be paid by the federal government from the $1 billion federal oil spill liability trust fund created pursuant to OPA, thus the federal government has a direct and immediate interest in all shipowners having adequate insurance cover.

Nevertheless, there is, I understand, some reluctance to tinker with OPA. If that is a legitimate concern, the remedy which I have suggested could equally well be achieved by freestanding legislation. Proposals along these lines have been made by the international shipping community as long ago as January, 1992. But surprisingly, a response from the US government is still awaited.

There is yet a further aspect of OPA which is relevant and is worth mentioning. The scope of OPA includes all damage claims, both public and private, arising from an oil spill, and permits all claimants to pursue direct action against the ship owner's liability insurance. OPA 90 was intended, in addition to minimizing oil pollution, to provide an effective response and compensation system in cases of oil spills.

Financial responsibility is a central component of the act. Tanker owners trading to the US must have certificates of financial responsibility to cover an amount up to their theoretical limit of liability, which certificates must be subject to the direct action provisions of the act. The marine insurers that cover a shipowner's third party liabilities, known as protection and indemnity clause, when faced with the expanded scope of liability under OPA, both with respect to limits and claimants, have not surprisingly refused to provide the necessary certificates.

Interestingly enough, no US insurer, and certainly, no other foreign insurer, is willing to provide these certificates either. Without the backing of their insurers, practically no shipowners have access to financial resources sufficient to obtain certificates of financial responsibility. Without these certificates, ships cannot enter US ports. OPA 90, therefore, created the real risk that US trade would grind to a halt.

Faced with this dilemma, the Coast Guard understandably has delayed promulgating the regulations implementing OPA 90 in this respect while it searches for a solution. A solution has been put forward by the international shipping community, which has proposed that the government mandated supplemental insurance facility, which I referred to before, be subject to direct action and provide the backing necessary for the issuance of certificates of financial responsibility. Yet the problem is still with us. A solution to the question of certificates of financial responsibility will have to be found.

In seeking such a solution, the Coast Guard has the opportunity also to solve the much larger but related problem of inadequate insurance, which places both ship owners and the US government in serious financial jeopardy and leaves the environment at risk. We must hope, therefore, that this issue will be addressed in the near future, both by the administration, and by the Congress. Thank you.

[APPLAUSE]

MARCUS: Thank you very much for that shipowner's perspective. I think it's safe to say we'll have an interesting question and answer period. Stay tuned. Next, we have Richard Quagen, general manager, marine department Texaco to give us an oil company's perspective.

QUAGEN: Good afternoon. It's a pleasure being here. Not being an alumnus of MIT, I think I'm one of the only people walking around with a badge with no number. And somebody asked me why there wasn't a number, I said I was still working on my degree after 35 years. But I'm here to talk about the oil spill issues of the day. And if you can turn the slides on, please.

As of where we stand in June, 1993. I'm going to talk from an oil company perspective, both as the cargo owner, and as a tanker owner ourselves. We, like most major oil companies, operate our own fleet. We do a considerable amount of chartering with independent owners. And I'll briefly bring you through a little history to tell you how we got where we are today, what we see as some of the problems, and some of the things we're going to have to do.

I will refer to OPA 90, but I won't dwell on it since it's been covered so extensively by our previous two speakers. The tanker industry, and specifically, the oil company segment of that industry is, in fact, an industry in transition. The changes in the oil industry itself in terms of ownership of the oil, location of refineries, location of production, increasing regulation and whatnot, have changed the role of the green departments, the tanker departments of the various companies.

One of the things that brought us to the situation we're in today is the history of oil movements in the world by tanker in the past 20 or so years, 30 years. As you see, the oil movements peaked in the early 70s at a time where everybody was afraid there wouldn't be enough oil to last through the end of the century, and where prices were creeping up towards $35 to $40 a barrel, with projections that oil would cost as much as $100 a barrel by the 90s. The conservation methods that kicked in as a result of that high price brought a drastic reduction, particularly in the Middle East, the blue segment of the chart, which is the long haul segment of our oil industry, resulting in the early 80s of a depression in tankers, principally, because the industry reacted to that projected increase of oil movements by undertaking a tremendous building program, particularly in the very large crude carrier. The independent, seeing the need by the oil companies to move that oil, joined the oil companies in this building orgy.

A lot of the tankers that were built by the independents were in fact taken on charter, term charter as long as 20 years by the oil companies. In 1978, '79, the major oil companies therefore controlled about 60% of the tankers, either through ownership, or long-term charter, that were plying the oceans route. Again, as the demand fell off, a rather severe depression that lasted through the 1980s developed in the tanker industry because there were just too many bottoms chasing too few cargoes.

That lasted right through the end of the '80s, when briefly a somewhat healthy resurgence took place as the supply and demand of tankers became more imbalanced. That unfortunately resulted in another wave of new buildings, thereby increasing the number of [INAUDIBLE] and resulting in 1992 being a very depressed year.

As you can see, the construction of tankers peaked in the mid to late '70s. With the depression, the order book literally dried up. A good part of the world's shipbuilding capacity virtually disappeared. In Japan, about 30% to 35% of the shipbuilding capacity was actually destroyed. In Europe, many of the major shipbuilding companies are no longer in the business.

As the depression went through the '80s, the number of scrappings increased dramatically. We, in fact, Texaco scrapped VLCCs that were less than 10 years old that we had built for $25 to $30 million, and just turned them into razor blades for about $4 to $5 million. But we had to do it because they were all sitting in mothballs rusting away.

As we got into this little healthy period in the late '80s, again, there was a minor resurgence, but a significant enough resurgence in new buildings, and, equally importantly, an almost disappearance of the scrapping, resulting in a current continued oversupply of tankers. This is reflected in recent years in the freight rates that are paid to the tanker owner, either the oil company owner or by the oil company to the independent.

In 1990, we're fairly healthy. The blue line represents a VLCC going from the Persian Gulf west, either to Europe or to the US Gulf. The red line is a Caribbean to the US, a 30,000 ton product carrier. And you can see the effect on Operation Desert Storm. In 1990 and nearly '91, there was a very great surge in rates. It didn't last, and '92 became a disastrous year for not only the independents, but the marine functions of the major oil companies.

And today, the major oil companies control directly about 20% of the tankers, compared to the 60% I referred to in 1973. They charter in on a voyage basis, a single-voyage basis, perhaps another 15%. So as we go through this brief chat, keep in mind that the influence the oil companies have on the tanker industry has diminished significantly over the past 20 years, with greater influence going to oil-producing countries, who tend to move their own oil, and oil traders.

Unfortunately, over my lifetime in the industry, which is over 30 years now, there have been a series of accidents that have dramatically caught the public's attention, and starting with the Torrey Canyon is probably the first one, off the south coast of the UK. That was the first big spill. That was the first tanker that broke up that was of a size that really could spill a great deal of oil.

The Amoco Cadiz and, locally, the Argo Merchant in the late '70s again caught the public's attention as to the risk that was entailed with tankers carrying oil into the United States or into Europe. And most dramatically, the Exxon Valdez in 1989 has changed our lives in the industry forever.

Given that, and referred to I think by Hank before, tanker accidents cause a very small portion of the oil that makes its way into the environment on an annual basis. The greatest single source of oil is the industrial sewage type of disposal. An environmentalist told me at one point that there was the equivalent of approximately 20 Exxon Valdez going into the environment every year by people dumping lube oil into the sewer, into the ground.

Tanker operations, the bunker spills, less than scrupulous owners discharging oil over the side at night type of thing again represents a fairly small part, but a significant part. Of those tanker accidents, the statistics have shown continually that over 80% of the accidents are caused by human failure.

And I suspect that some of the other categories, such as equipment and structural, is indirectly a result of human failure, which tells us that this is where we have to look. One of the unfortunate aspects of the OPA in terms of the financial cost is that it is extremely expensive in terms of reacting to a spill. And I don't think nearly enough directed towards the prevention of a spill, through training and certification of mariners.

The Oil Pollution Act, as, again, previously stated, attacks-- addresses-- that was a Freudian slip, I think-- addresses several aspects of tanker operations. Certainly the construction through double hulls, tanker safety through licensing, the pollution liability, which has been talked about, contingency plans. And I'll refer back to this later because this is one of the positive areas, I think, that has come out of the act. And financial responsibility, which has been said is certainly currently the nuttiest problem we have on trying to resolve this issue.

Texaco and the oil industry, the tanker industry within the oil industry likes to talk in terms of the four Ps that we have to adopt in order to address the current situation. One of the things we have to realize, and we do realize, it's not the same game that it was five years ago, 10 years ago, or 20 years ago. The world, as far as we are concerned, has changed, and we have to recognize it and change with it. Prevention, protection, participation, and perception.