Source: http://www.lexology.com, July 2, 2013
By: Charmian Barton, Norton Rose Fulbright LLP
Introduction
Recent changes to offshore environment legislation include the introduction of an express ‘polluter pays’ obligation. Titleholders are under a duty to eliminate and control any petroleum escape, remediate damage and monitor the environmental impact of the escape. These changes came into effect on 29 May 2013 and were introduced by the Offshore Petroleum and Greenhouse Gas Storage Amendment (Compliance Measures No 2) Act 2013 (Cth) (Compliance Measures No 2).
NOPSEMA, the National Offshore Petroleum Safety and Environmental Management Authority, is given expanded powers to ensure compliance and environmental performance of titleholders, including heavier civil and criminal penalties, and a new requirement for financial assurance which is not yet in force. When it commences, titleholders will be required to maintain financial assurance to meet potential costs, expenses and liabilities arising from carrying out petroleum activities, including costs of complying with any requirement under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA) or regulations.
Compliance Measures No 2 imposes a number of regulatory requirements on the oil and gas industry operating in Commonwealth waters. It continues the implementation of the Government’s response to the Report of the Montara Commission of Inquiry which followed the Montara oil spill. This article identifies key changes that will affect the industry, as well as highlighting similar legislative changes in other jurisdictions.
Background to reform
Earlier this year, public submissions were sought on the Commonwealth’s review of the Offshore Petroleum and Greenhouse Gas Storage (Environment) Regulations 2009 (Cth) to ensure it meets leading practice for objective-based regulation of environmental management¹. Since then, the Commonwealth Government has passed the Offshore Petroleum and Greenhouse Gas Storage Amendment (Compliance Measures) Act 2013 (Cth) (Compliance Measures No 1) and Compliance Measures No 2 which amend the OPGGSA.
The review of marine environment legislation by the Australian Government to strengthen the compliance and enforcement regime for offshore petroleum activities is not isolated. Similar reviews are occurring internationally. The reviews reflect a heightened public demand for greater regulation of the petroleum industry from an environmental perspective, and its potentially high-hazard nature following the Montara and Gulf of Mexico oil spills².
Key changes and implications
Polluter pays
Compliance Measures No 2 introduces an express ‘polluter pays’ obligation as recommended in the Report of the Montara Commission of Inquiry³. Titleholders are obliged to eliminate and control petroleum that escapes, remediate damage and continue to monitor the impact on the environment. If the titleholder fails to do any of these things, NOPSEMA or the responsible Commonwealth Minister may do them instead. The titleholder must reimburse NOPSEMA or the Commonwealth for the costs and expenses incurred in carrying out such action. Similar provisions apply in respect of State and Northern Territory waters.
The express ‘polluter pays’ obligation came into effect on 29 May 2013 and is supported by a stronger civil penalty regime which is yet to commence⁴. Compliance Measures No 2 aims to provide a clearer and more appropriate and proportionate deterrent mechanism that reflects the potentially hazardous nature of the petroleum industry⁵. The amendment provides for alternative enforcement mechanisms in addition to the existing criminal and civil penalties. The proposed changes include the following:
Strict liability will apply to existing penalties. NOPSEMA will not have to prove that a titleholder intended to commit the act that resulted in the contravention. New daily civil penalties for certain offences and contraventions are at a rate of 10% of the maximum penalty for the relevant offence or civil penalty provision.
NOPSEMA will have power to issue adverse publicity orders. These will consist of the publication on the NOPSEMA website of the nature of the offence or civil penalty order, its consequences and the penalty imposed.
The amendment enables NOPSEMA inspectors to issue environmental prohibition and improvement notices. Titleholders may be ordered to cease a particular activity or operation of an offshore structure where it is determined by NOPSEMA to pose an immediate or significant threat to the environment. Merits review of NOPSEMA environmental notices is not available to offshore titleholders (this does not prevent a titleholder from initiating judicial review proceedings). Failure to comply with a notice may incur a maximum penalty of $510,000 plus daily civil penalties.
Financial assurance
Compliance Measures No 2 clarifies insurance requirements for the industry and requires titleholders to maintain financial assurance. The assurance must be sufficient to give the titleholder the capacity to meet costs, expenses and liabilities arising from carrying out a petroleum activity and complying with the requirements of the OPGGSA or regulations, for example, complying with a direction to remediate damage to the seabed or subsoil as a result of an escape of petroleum.
The form that financial assurance may take includes insurance, self-insurance, a bond, a security deposit, an indemnity or other surety, a letter of credit from a financial institution or a mortgage. The amount of assurance required is to be determined by NOPSEMA. Where financial assurance is insufficient, NOPSEMA may refuse or withdraw its approval for an environmental plan for a specific activity. The goal is to ensure that there are sufficient resources available for the ‘polluter pays’ principle to operate effectively. The requirement to maintain financial assurance is not yet in force⁶

International context

After the Gulf Oil Spill, the United States Congress considered amending the Oil Pollution Act of 1990 (OPA) to raise liability limits and increase insurance requirements for operators. Recommendations were made to Congress by the Oil Spill Commission in January 2011⁷ but are yet to be implemented⁸. Nevertheless, the federal agencies have been extremely active in promulgating new regulations focused on safety and the environment, including the comprehensive Safety and Environmental Management Systems (SEMS) regulations that have made significant changes in how operators and their contractors manage environmental issues. The SEMS program must follow the elements set forth in API Recommended Practice 75, and include 13 elements, ranging from conducting hazard analyses to requiring third party audits. At this time, it appears unlikely that OPA will be amended further given that it appears to be largely adequate to cover the types of claims that have been asserted by third parties in connection with the Gulf Oil Spill.
In response to the Gulf Oil Spill, the National Energy Board of Canada (NEB) initiated a review of the safety and environmental requirements for offshore drilling in Canada’s Arctic environment (Review). At the time the Review was published in December 2011, there was no offshore drilling in Canada’s Arctic. The NEB will use the results of the Review to inform its decisions on future applications for offshore drilling in the Arctic under the new ‘Filing Requirements’ which set out the technical information required from the oil and gas industry. The Review draws attention to lessons learnt from previous incidents, including both the Montara blowout and the Gulf of Mexico oil spill. During the course of the Review, stakeholders requested that NEB provide additional clarity on the ‘Financial Responsibility’⁹ requirements for all NEB-authorized activities in regions where NEB has jurisdiction. The NEB is currently seeking comments on the Draft Financial Viability and Financial Responsibility Guidelines from all interested persons by 31 October 2013.
A similar debate has been occurring in Europe among EU member states. In response to the Gulf Oil Spill, near-misses in European waters and the general need to reduce risks in the industry,¹⁰ the European Commission reviewed the regulatory safety regimes of its member states in relation to offshore oil and gas operations. The European Parliament and the European Council reached an agreement for regulatory action. Proposed legislation is in the form of a directive that will be incorporated into national legislation and guarantee high standards across the EU. This is expected to be formally approved in the coming months¹¹.
Like the new regime in Australia, the expected changes in the EU are aimed at ensuring a safer petroleum industry and emphasise prevention, rectification and the ‘polluter pays’ principle¹². While some details are analogous, there is more emphasis in the EU on a hands-on approach to the management of offshore operations in preference to stronger compliance and enforcement mechanisms.
The directive outlines stringent licensing requirements that ensure that all oil and gas operators in EU waters have the necessary capacity to ensure the safety of their activities. The safety provisions of companies operating in this field will be verified by independent national authorities and a report on major hazards will be analysed by independent verifiers. Licensing authorities will be required to consider all potential liabilities and ensure that potential licensees have sufficient capacity to meet their obligations. Member states can take strong enforcement action or impose penalties to ensure drilling is performed safely.
Under the directive, oil and gas companies will be liable for all environmental damage caused by their operations within the European exclusive economic zone and the outer jurisdictional limit of member states. This is similar to the expanded ‘polluter pays’ principle adopted by Australia in Compliance Measures No 2. For companies with an international platform, the European Commission expects companies operating in the EU to demonstrate that policies they apply internationally are at the same standard as those applied in their EU operations¹³.

Conclusion

A clear trend has been set by policy and lawmakers to reflect the public concern over hazards posed by the offshore oil and gas industry and the need for greater regulatory oversight. Further reform can be expected in Australia in line with the Government’s response to the Report of the Montara Commission of Inquiry. For companies operating internationally, differences in domestic regimes will present unique compliance challenges.