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Australia – Proposed Financial Assurance Amendments To The OPGGSA Regulations.

14 November, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Environment 

 

Executive Summary

 

On 29 November the Offshore Petroleum Greenhouse Gas Storage Amendment (Compliance Measures No. 2) Act 2013 (Cth) will come into force (Compliance Measures Act). It is another chapter in the Government’s response to findings taken from the Montara enquiry.1

 

Readers will be aware that significant reforms of Australia’s offshore administrative scheme have occurred since that enquiry with the establishment of two new bodies, NOPSEMA,2 to oversee environmental and safety aspects of the industry and NOPTA, to administer title issues and advise government on resource management. In addition other regulatory revisions and enhancements have been made.

 

This article looks at the aspects of these measures that focus on the assurance given to ensure that a titleholder can meet the costs and expenses associated with the remediation of the environment and associated clean-up costs. The Compliance Measures Act supports the ‘polluter pays’ principle and reinforces that the management of operational risks lie with the titleholder.3

 

The Compliance Measures Act also provides that regulations can be made to deal with three specific aspects:

 

  • an obligation to demonstrate that a titleholder has maintained sufficient financial assurance,
  • that the form of the compliance is to be acceptable to NOPSEMA, and
  • consequences where there has been a failure to maintain.4
 

On its face, the Compliance Measures Act outlines sensible and required reforms which allow the broadening of the forms of assurance beyond the current existing insurance regime contained in section 571 of the OPGGSA5 and places an onus on the titleholder to maintain and demonstrate that the assurance is sufficient to give the titleholder capacity to meet the costs, expenses and liabilities flowing from the petroleum activity. Undoubtedly, this is a worthy and proper objective for any regulatory scheme as the State does not wish to foot the bill for the clean-up and remediation of events, such as those that result from an oil spill.

 

Last month, draft regulations (Regulations) were published by the Department of Industry (the Department) accompanied by a policy statement. The policy statement is an ambitious document that outlines the Department’s interpretation of the objectives of financial assurance. While the policy statement indicates that the objectives of the Compliance Measures Act are to provide certainty, the Regulations have the opposite effect by making NOPSEMA the sole arbiter of compliance. The practical effect of this is that as the Regulations are unclear on what will actually satisfy the requirements for a NOPSEMA decision, there is a real lack of certainty facing titleholders who submit their financial assurance arrangements to NOPSEMA.

 

The processes envisage a close analysis of first, the potential incidents, and secondly, the financial mechanisms and measures that customarily have been put in place between joint venturers and their contractors and joint venturers and their insurers to manage the commercial risks associated with the carrying out of petroleum activities including those risks associated from an oil spill.

 

We are not persuaded that these measures will be easy to apply in practice. NOPSEMA have indicated that it has no personnel currently available who have the skills or expertise to fulfil this function and it will be necessary for them to advertise to have these positions filled.

 

This article overviews the proposed reforms and highlights some of the issues of concern to industry. As at the time of writing, there is a transitional period in place whereby the Regulations are expected to come into effect in March 2014.

 

Compliance Measures Act

 

The Compliance Measures Act introduces a new concept of financial assurance. The new financial assurance regime applies in relation to any petroleum activity and a titleholder is required to maintain financial assurance sufficient to give it the capacity to meet costs, expenses and liabilities arising in connection with, or as a result of:

 
  • the carrying out of the petroleum activity, or
  • complying (or failing to comply) with a requirement under the OPGGSA in relation to the petroleum activity.
 

The old section 571 only contemplated insurance as the measure to protect the State’s interests, however the new section 571 lists a number of forms of financial assurance that may be used by a titleholder, including:

 

  • insurance,
  • self-insurance,
  • a bond,
  • the deposit of an amount as security with a financial institution,
  • an indemnity or other surety,
  • a letter of credit from a financial institution, or
  • a mortgage.
 

The second reading speech of the Compliance Measures Act by the Minister for Resources stated that in relation to the new financial assurance provisions that the amendments would clarify “insurance requirements to ensure that maintenance of sufficient financial assurance is compulsory without a direction being given, and to clarify the compliance role of the regulator”.

 

Draft Regulations

 

The current draft Regulations were released on 9 October along with the Department’s policy statement. Key features of the Regulations are outlined below.

 

Interaction Between Financial Assurance And Environment Plan

 

NOPSEMA must not accept an environment plan, or a revision of an environment plan, unless the titleholder has demonstrated compliance with the financial assurance provisions.6 What this means is that no activity can be undertaken until NOPSEMA have approved the titleholder’s financial assurance.

 

Demonstrating Compliance

 

Compliance with the financial assurance requirements is demonstrated if:7

 
  • the prescribed information is provided,8
  • NOPSEMA decides that it is satisfied that the proposed arrangements will be sufficient to give the titleholder the capacity to meet costs, expenses and liabilities associated with the petroleum activity,
  • the proposed financial assurance arrangements are in a form acceptable to NOPSEMA, and
  • the titleholder gives NOPSEMA evidence that the financial assurance arrangements as proposed are in effect and will be accessible in the event of an incident arising from the activity.
 

Required Information

 

In addition to the information contained in the titleholder’s environment plan, additional information must be provided to NOPSEMA9. This information must: 

 
  • identify the petroleum activity to which the financial assurance relates,
  • identify the potential incident that has the potential to result in the highest costs, expenses and liabilities of all potential incidents arising from the activity (ie the worst case scenario),
  • identify the reasonably probably consequences that may eventuate from the worst case scenario,10
  • quantify the costs, expenses and liabilities of addressing the consequences of the worst case scenario;
  • describe the methods used for quantifying costs, expenses and liabilities of the worst case scenario,11
  • describe the form of the financial assurance, and
  • demonstrate that the proposed financial assurance will be accessible in the event of an incident occurring.
 

The Regulations contemplate that the listed information must be provided to NOPSEMA at the same time as the environment plan. NOPSEMA can also commission a third party report as to the adequacy of the proposed financial assurance arrangements.

 

Assessment Of Financial Assurance

 

Within 30 days of receiving the information listed in section 3.3 above NOPSEMA must either:

 
  • assess the information and decide whether it is satisfied as to its adequacy, or
  • inform the titleholder that it is unable to meet timeline and inform them of a proposed timetable for assessment.12
 

A titleholder can modify the proposed financial assurance arrangements or the environment plan if NOPSEMA notifies that it does not accept the information provided.

 

Issues

 

Specific issues with the new laws that may require more consideration include:

 
  • timing generally, the content of the environmental plan, oil spill contingency planning, content of the financial assurance required and then its procurement,
  • NOPSEMA must not accept an environmental plan until the titleholder has provided its financial assurance, however until an environment plan is finalised, a titleholder often does not know the exact extent of the activities for which it needs financial assurance,
  • a titleholder having to identify the worst-case scenario in relation to each activity the subject of the financial assurance and then NOPSEMA having to agree with that scenario,
  • NOPSEMA’s decision making processes for it to be ‘satisfied’ that the financial assurance arrangements will be sufficient,
  • what standard of proof NOPSEMA will require,
  • subjectivity of the tests: ‘potential’, ‘highest’, ‘worst case scenario’ etc,
  • uncertainty in relation to the position of how the financial assurance process applies to multiple titleholders,
  • the application of the requirements to all petroleum activities,
  • the commercially implausible outcome that assurance must ‘guarantee’ or assure recovery, which misconceives the nature of instruments such as insurance,
  • does the assurance only apply to statutory obligations (which seems clear from the examples given in the OPGGSA) or does it need to be sufficient to respond to third party claims,
  • the provision for a standing form of assurance that meets the legislative standard to avoid companies going through the processes for every petroleum operation, and
  • the current timeline (March 2014) seems too short a period for NOPSEMA to effectively implement an entirely new financial regulatory system.
 

Conclusion

 

At present there are a number of concerns in relation to the draft Regulations. These are:

 
  • a general level of uncertainty in relation to how a titleholder might comply with the Regulations;
  • impracticality of implementation,
  • finalising the current financial assurance regime may impact operations,
  • the task set for NOPSEMA would challenge industry experts as well as placing substantial responsibility on a statutory body, and
  • difficulties associated with NOPSEMA implementing the new regulatory regime due to the current timeline.

 

While the policy statement assumes that the objective of the legislation is environmental management we see its principal focus differently. The purpose of the financial assurance provisions is not environmental protection; it is essentially financial protection for the State so that if an environmental incident occurs, the State can rely upon the financial assurance provided by the titleholder and the taxpayer does not have to pay for the remediation and clean up. Somewhat curiously we understand that there has been little or no consultation with the financial or insurance sectors in relation to the drafting of the Regulations.

 

By comparison the system used in the North Sea in the United Kingdom relies heavily upon industry developed guidelines. The mining sector in Western Australia has recently implemented the Mining Rehabilitation Fund which involved a substantial amount of industry participation.

 

While the amendments have changed the insurance regime to one of financial assurance, no examples are given of what would constitute financial assurance for a given event. It is left entirely to the judgement of NOPSEMA.

 

Due to the nature of financial assurances in relation to petroleum activities, the regulations that govern financial assurance must be practically workable. However at present the proposed Regulations are highly impractical and operate as an administrative burden both on a titleholder and on NOPSEMA themselves. 

 

Endnotes

 

  1. Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage Amendment (Compliance Measures No. 2) Bill 2013.
  2. National Offshore Petroleum Safety and Environmental Management Authority.
  3. It is worth nothing that this obligation is imposed on the titleholder.
  4. Section 571(3) of the OPGGSA as amended by schedule 3 of the Compliance Measures Act.
  5. Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth).
  6. Regulation 5A.
  7. Regulation 5B.
  8. See regulation 5C.
  9. Regulation 5C.
  10. In our view this is completely open-ended.
  11. It is not readily apparent how these requirements can reasonably be seen than from the Compliance Measures Act.
  12. Regulation 5D.

 

herbert smith Freehills

 

For further information, please contact:

 

Stuart Barrymore, Partner, Herbert Smith Freehills
stuart.barrymore@hsf.com
Herbert Smith Freehills Environment Practice Profile in Australia

 

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