U.S. Firms Plan New Oil Spill Insurance Fund

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U.S. oil explorers are talking about forming a new insurance fund that would cover the costs of any future oil spill, to avoid a scenario where smaller companies are unable to drill offshore, an industry executive said.

BP’s oil spill costs are expected to rise above $30 billion for shutting the leak, cleaning up the oil and compensating those affected.

This has prompted concerns about what would have happened if a company without BP’s massive resources had been operating the blown-out well.

Jim Farnsworth, chief executive of Cobalt International, a small explorer focused on the deepwater of the Gulf of Mexico, said his company was in talks on a solution to avert such fears.

“It is likely and probably desirable for a combination of us to come together and insure against these types of accidents,” he told the Finding Petroleum conference in London.

Some analysts have predicted that the oil spill could cause a shakeout with smaller companies being forced to sell because new regulations require insurance cover that may be unobtainable or unaffordable.

In the wake of Exxon’s Valdez oil spill, companies formed a $1 billion fund to pay for future oil spills. Farnsworth, a former BP executive, said he expected the new fund to be bigger.

Cobalt’s market capitalization has dropped by $1.5 billion, or 30 percent, since the oil spill began, Farnsworth said.

The CEO added that he expected it would take a long time for drilling to resume in the Gulf of Mexico even if a drilling moratorium, installed in the wake of the oil spill, is lifted in November as expected.

Some analysts predict permitting may remain paralyzed until late 2011.