Senate panel votes to end oil spill liability cap

WASHINGTON (Reuters) - Congress on Wednesday took major steps to rein in Big Oil's offshore drilling practices, as one Senate panel voted to lift all caps on liability in oil spills and another moved to deny offshore leases to companies with poor track records.

The action on Capitol Hill comes 72 days after an explosion involving a BP oil rig, which has left millions of gallons of oil pouring into the Gulf of Mexico from a ruptured deep-water well.

Action kicked off on Wednesday in the Senate Environment and Public Works Committee, where Democrats pushed through a bill eliminating the $75 million cap on liability that oil companies currently enjoy for damages from offshore spills, like the one devastating the U.S. Gulf coast.

The committee's vote would open the oil industry to potentially unlimited compensation for economic losses suffered by local businesses and communities and for damages to 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.

As the environment panel worked on its legislation, the Senate Energy and Natural Resources Committee approved a separate bill to tighten rules on offshore oil drilling projects.

It would increase civil and criminal penalties on the industry for illegal practices and would tie those penalties to inflation. Notably, 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 mandating redundant blow-out preventers for wells and additional permits for deepwater projects.

On the other side of Capitol Hill, Democratic Representative George Miller said he will offer legislation in the House to deny BP new offshore oil and gas drilling leases for up to seven years because of its "extensive record" of worker safety and environmental violations.

Miller is a close confidant of House Speaker Nancy Pelosi and chairs the House Education and Labor Committee. Drew Hammill, a spokesman for Pelosi, said she has not yet reviewed the details of Miller's bill "but shares his concerns about BP's poor record."

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, expressed reservations about imposing unlimited liability on the oil industry.

Before the Senate Environment and Public Works Committee approved its 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.

The liability and offshore drilling safety 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.

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

Republicans said lifting the liability 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, which was blocked by Democrats, that would have given the president the discretion in setting liability limits, tied to the type of offshore projects.

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 Cynthia Osterman)