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Why BP May Feel SoCal Got Off Lightly For LA Gas Leak

Why BP May Feel SoCal Got Off Lightly For LA Gas Leak

Imagine having to move out of your home and neighborhood because the air you're breathing is poisonous. That is what happened to thousands of Los Angeles residents forced to move away from the Porter Ranch area following a massive gas leak in October from a storage facility run by SoCal Gas.

Thankfully for the residents who had to flee their homes, at the company’s expense, they will soon be returning. On Thursday the blowout, which happened in a 60-year-old well below the Santa Susana Mountains that was previously used to pump oil, was capped. Residents will have about a week to come home after inspectors deem the area safe. The utility's announcement marks the first time the leak has been under control since it was first reported on Oct. 23. The well will be surveyed to find out what went wrong, before being permanently plugged with cement.

The incident has become a public relations and legal nightmare for SoCal Gas, which is owned by Sempra Energy, based in California. Unsurprisingly, environmental groups were quick to pounce on the amount of methane, a potent greenhouse gas, and mercaptans (used to detect the odour of natural gas) that have been spewing into the atmosphere. According to the Environmental Defense Fund (EDF), at its highest flow rate the well was releasing the equivalent amount of pollution as 7 million cars a day.

The release of over 77,000 metric tons of methane is a particularly bitter pill to swallow for California, which is a leader in U.S. efforts to curb global warming. State authorities and environmental groups say the leak is now California's largest contributor to climate change. Related:In Spite Of Its Vast Oil Reserves, Cuba Fails To Woo Investors

The danger to human health was enough for Governor Jerry Brown to declare a state of emergency. Around 2,000 children were assigned to outlying schools after they complained of symptoms including bloody noses and difficulty breathing.

As of the first week of January, SoCal Gas had spent around $50 million to combat the leak and accommodate displaced residents. The company may have to pay out millions, or billions, more in compensation. Litigious Californians have initiated over 25 lawsuits against SoCal Gas, including one by Erin Brockovich's law firm Weitz & Luxemberg. Brockovich (yes that Erin Brockovich) is known for her $333 million lawsuit against Pacific Gas & Electric Company (PG&E), which she successfully sued for contaminating the water supply of Hinkley, CA, depicted in a Hollywood movie. Brockovich only lives about half an hour from Porter Ranch.

But while Brockovich and others are calling the SoCal leak “the BP spill on land”, the reality is that the two situations are vastly different, and SoCal gas is unlikely to face the severe financial penalties that BP did for its 2010 Deepwater Horizon disaster.

While SoCal Gas could, if found guilty, face penalties up to $25,000 a day for every day it didn’t report the leak and $1,000 a day for each day it polluted, the damages are likely to be a drop in the ocean compared to the agreement the U.S. government and five states reached with BP last July. The largest corporate settlement in U.S. history has the oil giant paying $18.7 billion in penalties to settle nearly all the claims against it, bringing BP's total pre-tax charge for the 507-million-litre spill to $53.8 billion. Related: Computerized Trading Creating Oil Price Volatility

A measure of lost market cap between the two incidents doesn't really work either. While BP stock shed 55 percent in the first 60 days after the spill, Sempra Energy only declined by 6.7 percent during the same period, around the same loss as the S&P 500. Low natural gas prices have kept its losses from escaped product to a minimum, allowing Sempra to earn about $1.3 billion in the first nine months of 2015.

A more apt comparison is the Pacific Gas & Electric natural gas pipeline explosion in San Bruno, near San Francisco, also in 2010. That accident killed eight people and cost PG&E a record $1.6 billion fine. Still, it's a fraction of the BP settlement.

So why are natural gas leaks, whose environmental effects are surely as damaging to the atmosphere as oil spills are to oceans, given an easier ride by the courts? One answer is obvious, the other, not so much.

Natural gas is invisible, meaning its escape just doesn't carry the same emotional and political charge as spilt oil. “For politicians, TV coverage of middle-class families living at motels is a far cry from oil-covered baby seals,” San Diego Tribune columnist Dan McSwain observed wryly at the end of January. Related: Rig Count Plunges Yet Again, Down Another 30

Another reason to underestimate natural gas leaks is their prevalence in the United States. According to a Stanford University study quoted by PBS, methane emissions are around 50 percent higher than official projections from the EPA. PBS notes that methane seepage occurs at all stages of oil and gas production, including leaks from pipelines, flaring and fracking.

Finally, oil companies are an easier target than utility companies, which are typically regulated, and protected, by government. “Nearly bankrupting an oil company with fines hurts shareholders, but crippling a utility can make the lights go out,” McSwain writes.

Of course, none of the above excuses negligence on behalf of gas utilities or natural gas producers whose responsibility to the environment, especially in today's age of eco-awareness and activism, should come ahead of the balance sheet. But it does suggest that natural gas, while considered more environmentally palatable than oil or coal, also carries risks that need to be carefully managed.

Andrew Topf Of Oilprice.com

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