Senate panel votes to end oil spill liability cap

WASHINGTON (Reuters) - A Senate committee on Wednesday voted to eliminate a cap on liability that oil companies would face for damages from offshore spills, like the one devastating the U.S. Gulf coast.

The committee's vote would open the industry to unlimited claims by removing the current $75 million cap companies now enjoy on compensating local communities for economic losses and the impact of offshore spills on natural resources.

The change, if approved and made law, would apply retroactively to BP Plc's massive Gulf of Mexico spill, although the company has already said it would cover all costs, which will run into the billions of dollars.

While lawmakers in both the Senate and House of Representatives have made the liability legislation a top priority following the BP spill, a senior Democrat -- Senator Max Baucus, who chairs the influential Senate Finance Committee -- expressed reservations about imposing unlimited liability on the oil industry.

Before the committee approved the bill, Baucus said that a $10 billion cap that had been kicked around in May, "made some sense to me" and he questioned whether the removal of all caps would hurt some U.S. firms while helping foreign ones.

It was unclear whether Baucus would try to amend the bill later in the legislative process.

Meanwhile, the Senate Energy and Natural Resources Committee approved separate legislation that would tighten rules on offshore oil drilling projects.

The measure would increase civil and criminal penalties on the industry for illegal practices and would tie those penalties to inflation. It also would limit lease sales to companies with good track records -- a move that could hurt future operations for companies like BP.

The panel's legislation also ratchets up safety requirements, such as requiring redundant blow-out preventers for wells and additional permits for deepwater projects.

Both bills could be combined with other energy and environmental measures being queued up for passage as early as next month, or they could move through Congress individually. Both are expected to have President Barack Obama's backing.

But Whitney Stanco, an analyst at Concept Capital's Washington Research Group, predicted the full Senate would make some significant changes to the liability bill.

"We continue to believe the language will likely be moderated on the Senate floor to allow for some risk-adjusted liability limits for shallow-water facilities," Stanco said.

BP has agreed to establish a $20 billion compensation fund to pay claims from its spill in April, which continues to devastate communities and the environment along the Gulf coast. But total liabilities could eclipse that sum.

Kenneth Feinberg, the official overseeing the fund, said he expects to complete the first phase of work in setting up the claims facility within the next 30 days.

REPUBLICANS CALL IT COSTLY

BP's spill prompted Democrats to move quickly to eliminate the liability limits. Initially, they were pushing for a $10 billion cap but they became convinced that a more ambitious approach was necessary.

Senate Republicans blocked earlier efforts to pass this legislation in the full Senate using a fast-track procedure.

Republicans on Wednesday said lifting the cap would prevent smaller companies from offshore drilling projects in the Gulf of Mexico, which holds the most promising untapped crude oil reserves in the United States. It could open the door to more foreign operators, such as Chinese firms, they said.

"Drilling will be so costly that only a few will be able to afford it," said Senator James Inhofe, the senior Republican on the committee. "Who are those? Big Oil," he said.

Instead, he offered an alternative that would have given the president the discretion in setting liability limits, tied to the type of offshore projects.

Democrats criticized Inhofe's proposal, saying it was impossible to estimate the scope of future accidents. They also said the plan could give oil companies a free ride if a future president had close ties to the petroleum industry.

Deepwater drilling in the Gulf of Mexico has been the biggest hope for growth in U.S. domestic oil production over the last decade. A string of major discoveries over the past decade by companies including BP have rejuvenated investment in deeper and more difficult waters.

(Editing by Lisa Shumaker and Paul Simao)