Jurisdiction - Australia
Reports and Analysis
Australia – Demonstrating Financial Assurance For Offshore Petroleum Activities.

2 December, 2013

WHAT YOU NEED TO KNOW

 

  • From today, changes to the Offshore Petroleum Act require titleholders to maintain financial assurance sufficient to give the titleholder the capacity to meet costs, expenses and liabilities associated with a petroleum activity.
  • Last month, the Department of Industry (Department) released draft regulations to amend the Environment Regulations, and a supporting policy statement, outlining how to demonstrate compliance with the financial assurance duty.
  • The draft amendments would require titleholders to demonstrate sufficient financial assurance to the satisfaction of the National Offshore Petroleum Safety and Environment Management Authority (NOPSEMA) before NOPSEMA could accept a new or revised environment plan.
  • The Department originally proposed that the draft amendments would be implemented from March 2014. We understand that timeframe has been pushed back to allow further consultation with industry and to clarify the significant uncertainties created by proposed changes.
 

WHAT YOU NEED TO DO

 

  • Understand what the new financial assurance obligation under the Offshore Petroleum Act means for you in the context of existing or proposed petroleum activities and your interest in any joint venture.
  • Determine how compliance with the changes will be achieved within your joint venture and how joint venturers will satisfy each other that they have individually complied with their obligations.
 

Overview

 

The Offshore Petroleum and Greenhouse Gas Storage Amendment (Compliance Measures No.2) Act 2013 (Cth) (Compliance Measures No. 2 Act) received Royal Assent in May 2013. 


The Compliance Measures No. 2 Act strengthened the “polluter pays” principles in the Offshore Petroleum Act, as recommended by the Montara Report. Since 29 May 2013, the Offshore Petroleum Act has included a duty on petroleum titleholders to contain, control and clean up a spill, remediate the environment and carry out appropriate environmental monitoring.


The Compliance Measures No.2 Act also introduced a duty on petroleum titleholders to maintain sufficient financial assurance to meet the costs, expenses and liabilities arising in connection with carrying out a petroleum activity or complying with the requirements under the Offshore Petroleum Act in relation to the petroleum activity. These provisions start on 29 November 2013.


Although the Australian Government indicated that the compulsory financial assurance obligations were to complement and support the polluter pays principles, the new provisions have far broader application and implications for titleholders.


On 9 October 2013, the Department released draft amendments to the Environment Regulations, and a supporting policy statement (Policy Statement), to clarify the requirements to demonstrate compliance with the financial assurance obligation. Under proposed changes to the Environment Regulations, NOPSEMA must not accept an environment plan until it is satisfied that the financial assurance obligations have been met by the titleholder.


The Department and NOPSEMA are yet to clarify the practical application of the new financial assurance regime for petroleum titleholders.

 

Scope Of Duty

 

The Offshore Petroleum Act now requires a titleholder, at all times while the title is in force, to maintain financial assurance sufficient to give the titleholder the capacity to meet costs, expenses and liabilities arising in connection with, or as a result of:

 

  • the carrying out of or the doing of any other thing for the purposes of the petroleum activity; or
  • complying or failing to comply with a requirement under the Offshore Petroleum Act or its regulations in relation to the petroleum activity.
 

This replaces the previous requirement under the Offshore Petroleum Act for a titleholder to maintain insurance as directed by the responsible Commonwealth Minister against certain expenses or liabilities including against expenses of complying with directions relating to the clean-up or other remediation of the effects of the escape of petroleum.


A key difference is that the new duty lacks certainty for the titleholder, which was previously directed by the Minister as to its obligations to maintain insurance.
The Australian Government indicated that the new duty reflects its commitment to implement recommendation 96 of the Government response to the Montara Report. Recommendation 96 related to the capacity of companies involved in an incident to meet the full costs of monitoring and remediation. In the Policy Statement, the Department also discussed calculating the level of financial assurance required in terms of the environmental consequences of a credible worst case scenario.


However, the scope of costs, expenses and liabilities covered by the new duty is broader than an environment focus would suggest. The new duty is also broader than the previous insurance requirements. Titleholders should consider the extent to which the new duty requires financial assurance to respond to:

 

  • the liabilities of failing to comply with regulatory requirements, as well as the costs of complying with obligations;
  • liabilities to compensate third parties who have suffered loss or damage;
  • contractual and other commercial costs and expenses to third parties;
  • costs of complying with all duties under the Offshore Petroleum Act and its regulations, including safety and other duties under the regulatory regime, as well as the new polluter pays principles and other environmental duties.
 

When The Requirements Start

 

Although the new duty commences today, full implementation of the new regime requires changes to the Environment Regulations.

 

Ongoing Petroleum Activities


The Policy Statement states that the financial assurance provisions are an environmental management law, which NOPSEMA is empowered to regulate, and that NOPSEMA may withdraw its acceptance of environment plans if it is not satisfied that titleholders have sufficient financial assurance during ordinary inspections.


Although the Environment Regulations provide that NOPSEMA can withdraw acceptance of an environment plan if a titleholder has not complied with a provision of the Offshore Petroleum Act relating to environmental requirements, it is less clear whether the new financial assurance duty relates to environmental requirements. It is also unclear how NOPSEMA would determine from its routine inspections whether titleholders have maintained sufficient financial assurance.


New Or Revised Environment Plans


The draft changes to the Environment Regulations propose that NOPSEMA must not accept an environment plan unless it is satisfied that the titleholder has demonstrated compliance with the financial assurance obligations under the Offshore Petroleum Act. This would mean that a petroleum activity cannot commence until NOPSEMA has approved the titleholder’s financial assurance, which is likely to add further delays to the already lengthy process to obtain NOPSEMA’s acceptance of environment plans.


Petroleum activities with existing accepted environment plans, would be required to demonstrate sufficient financial assurance when submitting a revision of the environment plan. Revisions are required before new or different activities commence, when titleholders or operators change, when new environmental impacts or risks occur, if requested by NOPSEMA, and, otherwise, every 5 years from the date that the environment plan was previously accepted. Previously accepted environment plans continue until revised plans are accepted. However, new activities cannot commence until an environment plan is accepted, and if the revision is not accepted, NOPSEMA may withdraw its acceptance of the environment plan.


During industry consultation sessions, NOPSEMA has indicated that it would not require titleholders to demonstrate sufficient financial assurance for environment plans submitted for acceptance before the changes to the Environment Regulations commence.

 

How To Demonstrate Financial Assurance

 

The draft regulations outline that to demonstrate compliance to NOPSEMA, the titleholder must:

 

  • identify the potential incident that would result in the highest costs, expenses and liabilities arising from a petroleum activity (worst case scenario);
  • identify the reasonably probably consequences that may eventuate from the worst case scenario;
  • quantify the costs, expenses and liabilities of addressing the consequences; and
  • describe the proposed form of financial assurance and demonstrate that it will be accessible if an incident arises from the petroleum activity.
 

NOPSEMA may request additional information from the titleholder, including a written report from an appropriately qualified person that the proposed financial assurance arrangements are sufficient.


The proposed changes have been compared to the system in the United Kingdom for operators to demonstrate financial responsibility to The Offshore Pollution Liability Association Limited under the Offshore Pollution Liability Agreement dated 4 September 1974 (OPOL). However, OPOL is an industry agreement under which the participants have determined the level of financial assurance required according to specified factors and the form of evidence required. The proposed changes lack the certainty of requirements for industry and participation by the petroleum and insurance industries.


NOPSEMA has indicated that it is willing to consider a financial assurance proposal before it needs to be formally submitted to advise whether it is likely to be acceptable. Titleholders may consider this option where they are likely to submit a new or revised environment plan soon after the new regime commences.

 

Issues For Titleholders

 

Determining The Level Of Financial Assurance

 

Titleholders need to:

 

  • prioritise the petroleum activities for which they are likely to need to submit a new or revised environment plan in the next year;
  • understand the requirements under the Offshore Petroleum Act and proposed changes to Environment Regulations and implications for existing insurance arrangements;
  • consider whether to work with industry to identify agreed levels of acceptable assurance depending on risks associated with the nature of the petroleum activity and proximity to classes of stakeholders and sensitive environment (similar to OPOL).
 

Demonstrating Sufficient Financial Assurance


Titleholders need to seek further clarity from NOPSEMA on:

 

  • the form of financial assurance that is likely to be acceptable to NOPSEMA;
  • how titleholders are expected to demonstrate that the financial assurance will be accessible if an incident arises, which will ultimately depend on the terms of the relevant instrument;
  • the basis on which NOPSEMA will expect a third party opinion on whether financial assurance is sufficient.
 

Multiple Titleholders


Many petroleum activities in Australia are conducted under a joint operating agreement by multiple titleholders. Where those operations are conducted under project insurance, the enquiries of the titleholders may be limited to identifying the worst case scenario and determining whether the insurance is sufficient to meet the potential costs, expenses and liabilities.


In most cases, each titleholder maintains individual financial assurance (insurance or otherwise). Joint ventures will need to consider the liability of each of the participants and how each participant will be required to satisfy both the other participants and ultimately NOPSEMA that it has sufficient financial capacity to meet its financial assurance obligations.

 

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For further information, please contact:

 

Katie Winterbourne, Partner, Ashurst
katie.winterbourne@ashurst.com


Shane Bosma, Ashurst
shane.bosma@ashurst.com


Claire Woodland, Ashurst
claire.woodland@ashurst.com


Cheyne Jansen, Ashurst
cheyne.jansen@ashurst.com

 

Ashurst Energy & Project Finance Practice Profile in Australia

 

Homegrown Energy & Project Finance Law Firms in Australia

 

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