Gard News looks at the Offshore Petroleum and Greenhouse Gas Storage Amendment (Compliance Measures No. 2) Act 2013.
Australian public and political concern about the safety of offshore installations and their potential for causing significant environmental impact was heightened by the blowout at the Montara Wellhead Platform on 21st August 2009 off the northern coast of Western Australia.1 This provoked a public enquiry (the Montara Inquiry) which concluded its report (the Montara Report) in June 2010, shortly after the explosion of the DEEPWATER HORIZON on 20th April 2010 in the Gulf of Mexico. High profile casualties such as the RINA off New Zealand and the COSTA CONCORDIA off the coast of Italy had placed shipping and offshore operations under an intense spotlight. The combination of circumstances led to new Australian legislation regulating offshore operations.
The Offshore Petroleum and Greenhouse Gas Storage Amendment (Compliance Measures No. 2) Act 2013 (the 2013 Act) was passed by the Australian Parliament and received Royal Assent on 28th May 2013. It amends the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (the 2006 Act). Its stated aim is to further strengthen the already highly regulated Australian offshore petroleum exploration regime, and to implement recommendations contained in the June 2010 Montara Report. The Montara Report was completed prior to the conclusion of the complex wreck removal of the WEST ATLAS jack-up rig, but its contents remained sealed until November 2010. Accordingly, the Montara Report was not able to draw conclusions upon the regulatory framework in place for dealing with the consequences of an accident, nor difficulties encountered in carrying out such a complex wreck removal exercise within the regulatory framework. Subsequent conferences and discussions about the need for regulatory change have occurred.
The new Australian legislative measures are significant, but essentially focus upon loss or accident prevention; very limited consideration has been given to simplifying the approvals process necessary for the operator in dealing with the aftermath of an incident.
The changes are important for operators and insurers alike as they introduce an express polluter-pays obligation and strengthen financial assurance arrangements. The measures are also aimed at improving compliance by imposing fines or suspending permits or licences, imposing stricter environmental clean-up obligations on offshore petroleum titleholders (or permitting the state or regulator to take control of such exercise and recover its costs in full). Imposing civil and criminal penalties on the basis of strict liability and publicly holding operators to account is presumed to generate a more environmentally-secure and safety conscious approach in the minds of the corporations involved. The effective designation of certain actions as strict liability criminal offences may preclude insurance, as being contrary to public policy. The new requirement for providing additional financial securities is to guarantee operators can meet their increased financial obligations.
The new approach
As the Explanatory Memorandum states, the changes, in terms of fines and name and shame measures, are deliberately targeted, and will carry problematic business reputation risk issues. The political message underpinning the measures is clear cut:
“…. the majority of corporations operating within the offshore petroleum industry are international and publicly listed companies which highly value their business reputation and social licence to operate, the mere availability of adverse publicity orders can have a significant impact in terms of encouraging compliance and creating a deterrent effect…”
The amendments in the 2013 Act:
– Introduce alternative enforcement mechanisms (infringement notices, daily penalties, civil penalty provisions, injunctions and adverse publicity orders) into the offshore regulatory regime;
– Permit the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) inspectors to issue environmental improvement notices and environmental prohibition notices to petroleum titleholders to remove perceived threats to the environment from offshore petroleum operations;
– Introduce a statutory duty on petroleum titleholders to stop operations, control and clean up any spill, carry out appropriate monitoring and remedy the environmental impact of any such escape;
– Allow the state, territory or the regulator to take its own necessary environmental action and recover all such costs from the titleholder;
– Increase the financial assurance requirements in the 2006 Act to ensure that titleholders are in a financial position to comply with the new statutory polluter pays duty and any other extraordinary regulatory costs they might incur. This is to be achieved by a combination of financial securities and insurance.
Underlying the 2013 Act is an assumption that the offshore operator is determined to maximise profit at the expense of safety; scant regard appears to be given to the fact that offshore operators already face far higher safety regulation than a number of other industries.
The fines mechanism is similarly targeted:
“Given the high investment costs and potential profits associated with offshore petroleum operations, strong financial penalties are likely to be one of the most significant methods to deter non-compliance with the Act. Where daily penalties are applied to continuing offences or civil penalty provisions, the cumulative impact of those penalties will provide an additional incentive for companies to comply with those provisions, and to quickly remedy any non-compliance. This in turn will reduce the potential safety, environmental or resource risks that may be associated with the particular conduct.”
The new financial assurance requirements are also to ensure the operator has the ability to meet the fines which may be imposed.
The key changes
Alternative enforcement mechanisms
It was concluded the existing enforcement mechanisms, sanctions and penalties available under the 2006 Act were insufficient to provide an effective and meaningful deterrent against non-compliance. There was recognition the complexity of the legislation had operated both as impediment to understanding compliance and to effective enforcement. The 2013 Act contains mechanisms for:
– Infringement notices
– Adverse publicity orders
– Cumulative penalties for continuing offences
The stated purpose of the changes is to apply a range of enforcement tools to ensure a “more targeted enforcement response, which can also be directed at achieving future behavioural change, rather than serving a purely punitive function”. The introduction of infringement notices, daily penalties for continuing offences and civil penalty provisions, injunctions and adverse publicity orders aspires to give the regulator and the courts the capacity to apply “an appropriate and proportionate response to incidents of non-compliance […] in order to encourage improved compliance outcomes”. A separate piece of legislation also introduces a civil penalty regime into the 2006 Act.
Some measures introduced may be considered potentially extreme: a number of measures appear to alter the nature of the evidence required to bring successful prosecutions and the criminal standard of proof applicable to court proceedings.
Environmental improvement notices and environmental prohibition notices
NOPSEMA inspectors have the ability to issue occupational health and safety prohibition notices and improvement notices in order to remove or minimise risks to any person. The 2013 Act:
– Enables a NOPSEMA inspector to issue environmental prohibition notices and environmental improvement notices to a petroleum titleholder in order to require action to remove threats to the environment from petroleum operations;
– Requires NOPSEMA to publish on its website occupational health and safety and environmental prohibition notices and improvement notices that have been issued to a person by a NOPSEMA inspector.
The power will enable NOPSEMA inspectors to issue environmental prohibition notices; such may require that a particular activity not be conducted, or not be conducted in a specified manner, or that an offshore vessel or structure not be operated, if as a matter of his discretion he concludes there is an immediate and significant threat to the environment. An environmental improvement notice may be issued by a NOPSEMA inspector where there is a contravention or risk of repetition of a breach of an environmental management law and, as a result, there is a threat to the environment. Failure to comply with an environmental prohibition notice will be an offence; a civil penalty may apply for a failure to comply with an environmental improvement notice.
Maximum daily fines for failure to comply with a notice are AUD 51,000 and, although the maximum penalty for a corporation is capped at AUD 510,000, for every day that non-compliance occurs a separate offence is incurred, so the fine may continue in excess of the cap, continuing to accrue for every day that the notice is not complied with.
Application of the “polluter pays” principle
Although the “polluter pays” principle is already present in the 2006 Act, its application has been clarified, particularly to ensure the social, environmental and economic impacts of a significant offshore petroleum incident are covered. The 2013 Act:
– Imposes a statutory duty requiring titleholders, in the event of an escape of petroleum occurring, to stop, contain, control and clean up the spill, take remedial actions to protect the environment and carry out appropriate environmental monitoring; and
– Provides that the regulator (NOPSEMA or Minister) can recover from the titleholder all costs incurred by them in cleaning up the spill, carrying out remedial action for the environment and carrying out appropriate environmental monitoring, if the titleholder fails to comply with the statutory duty.
There is no fault element to this right of action. It is simply a right to recover costs and expenses as a debt due to the state or territory. The right of action does not extend to other economic costs, which remain regulated under separate legislation.
The Montara Report was completed prior to the conclusion
of the complex wreck removal of the WEST ATLAS.
The 2013 Act also amends the insurance provisions in the 2006 Act to clarify the operation of those provisions, in order to support the application of the polluter pays principle in the offshore petroleum regulatory regime by reinforcing that the obligation for managing operational risks rests with the titleholder. The amendments ensure that it is compulsory for a titleholder to maintain sufficient financial assurance to ensure that it can meet the costs of any expenses or liabilities arising in connection with work done under the title, including expenses relating to the clean-up or other remediation of the effects of an escape of petroleum. This measure is a broader term than “insurance” and extends to various other types of financial instrument and to self-insurance.
Such financial assurance need be sufficient to give the titleholder the capacity to meet the costs, expenses and liabilities arising in connection with carrying out of a “petroleum activity”, and complying (or failing to comply) with a requirement under the regulations in relation to a petroleum activity, including the daily fines regime. The scope for fines, operating liabilities and clean-up costs means new financial assurances required from operators will be significant.
Entry into force
The polluter pays provisions and the provisions regarding the power of NOPSEMA to give particular directions came into force on 29th May 2013. The provisions relating to financial assurance will come into force after proclamation, but there is no indication at present of when this might be. The other amendments have not come into force and will not do so until certain Regulatory Powers Bills receive Royal Assent.
1 See articles “WEST ATLAS – The ill-fated drilling rig”, “The WEST ATLAS wreck removal – A regulatory and statutory approvals management triumph” and “WEST ATLAS – The legal framework of a complex but successful wreck removal project” in Gard News issue No. 206.
Offshore Energy safety timeline: 2009-2012
Three articles which appeared in Gard News issue 2061 reported on the August 2009 incident involving the Gard-insured jack-up drilling rig WEST ATLAS, which experienced an uncontrolled blowout whilst operating at the Montara wellhead platform (WHP) and was abandoned as the authorities imposed a 2 km safety exclusion zone around the WEST ATLAS/ Montara WHP.
A sister rig, WEST TRITON, was contracted to drill an intersecting relief well and, in November 2009, commenced pumping kill fluid in an attempt to control the escaping gas. Suddenly the gas ignited and both WEST ATLAS and Montara WHP were alight and on fire. Eventually further pumping of heavier mud prevented further gas escape, and the relief well was capped, and a plug installed by January 2010.
The Australian authorities had commissioned an inquiry into the incident, which reported in June 2010 (the Montara Report) and identified numerous errors primarily of the field operator, but also attributed fault to the regulatory bodies. The Montara Report listed various recommendations and envisaged enhanced statutory controls being put in place.
The WEST ATLAS was declared a constructive total loss. The rig was entered with Gard for P&I and CGL risks, and a wreck removal operation was initiated. This featured the combined input and skills from the salvage and offshore industries, operating under tight regulatory restrictions. In October 2011, the rig was safely removed, towed to Singapore and later sold.
In April 2010 the DEEPWATER HORIZON incident occurred in the US Gulf. Prompted by such high profile offshore drilling accidents, G20 Leaders took the initiative in 2010 to create the Global Marine Environment Protection (GMEP) Working Group, comprised of G20 countries and international organisations. Its mandate is to “share best practices to protect the marine environment, to prevent accidents related to offshore exploration and development, as well as marine transportation, and to deal with their consequences”.
On 14th April 2011 the Department of Interior of the United States of America hosted the inaugural Ministerial Forum on Offshore Energy Safety. The Forum, Offshore Drilling and Containment, focused specifically on the lessons learned from the Montara and Macondo incidents and global developments in well containment technologies. The Australian delegation gave presentations on the Montara incident and Australia’s Policy Response.
On 10th-11th August 2011, the International Offshore Petroleum Regulators and Operators Summit (the Summit) organised by the Australian government, was held in Perth, Western Australia. The Summit provided a global platform for governments, industry and regulators to review the collective lessons arising from the 2009 Montara and 2010 Gulf of Mexico incidents. It provided an opportunity for international collaboration to identify best practice arrangements to strengthen existing offshore petroleum regulatory frameworks.
On 24th August 2011, the Australian government released its response to the report of the independent Review of the Environment Protection and Biodiversity Conservation Act 1999 (the Hawke Review). In the response the Australian government agreed to streamline the environmental approvals systems and processes administered by NOPSEMA.2,3
The 2012 Ministerial Forum on Offshore Energy Safety was held in Norway in June 2012. The Forum focused on offshore safety priorities, current and emerging, that are identified by governments, regulators and the offshore petroleum industry, supporting continued action to improve the safety of offshore petroleum operations, through best practice legislation, regulatory approach and industry operations.
Any comments on this article can be e-mailed to the Gard News Editorial Team.