The Australian Government has released draft regulations relating to the financial assurance requirements for offshore petroleum activities which are intended to commence from 1 January 2015.

The draft regulations will prohibit the National Offshore Petroleum Safety and Environment Management Authority (NOPSEMA) from accepting any new or revised environment plan unless it is ‘reasonably satisfied’ that the titleholder has complied with its obligation to maintain sufficient financial assurance for the petroleum activity.

In practice, the draft regulations will not impose a new legal obligation on titleholders, however it will add an additional regulatory step for NOPSEMA which has the potential to give rise to cost, time delays (and possibly grounds for judicial review challenge) in respect of the environmental plan approval pathway. It will also give NOPSEMA a discretionary power to withdraw its acceptance of an environmental in certain circumstances if the titleholder fails to comply with its ongoing financial assurance obligation.

As anticipated, the draft regulations are a ‘stripped back’ approach and provide no detail or guidance to titleholders on how to calculate a ‘sufficient’ level of financial assurance for the petroleum activity. To address this uncertainty, NOPSEMA released guidelines on 3 November 2014 which provide guidance to titleholders on complying with the duty to maintain sufficient financial assurance. In short, titleholders will need to calculate the single greatest credible costs, expenses and liabilities that may arise from an escape of petroleum.

Importantly the financial assurance mechanism does not ‘cap’ a titleholder’s liability nor does not it override the titleholder’s duties to comply with general law and the “polluter pays” principle in the event of an incident.

NOPSEMA hosted industry information sessions on the guidelines on 12 and 13 November in Perth and will host a session on 18 November in Melbourne.

Draft Regulation – Financial Assurance Obligations

In October 2014, the Australian Government (Department of Industry, Resources Division) released the Draft Offshore Petroleum and Greenhouse Gas Storage (Environment) Amendment (Financial Assurance) Regulation 2014 (Cth) (Draft Regulation).¹ The Draft Regulation supports the financial assurance mechanism that was inserted into the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGS Act) on 29 November 2013.

The Australian Government intends for the Draft Regulation to commence on 1 January 2015. The key changes for the offshore petroleum industry following the commencement of the Draft Regulation are as follows:

• Regulation 5G will prohibit NOPSEMA from accepting an environment plan or proposed revision of the environment plan unless NOPSEMA is ‘reasonably satisfied’ that:

1. the titleholder is compliant with subsection 571(2) of the OPGGS Act in relation to the petroleum activity; and
2. the compliance is in a form that is acceptable to NOPSEMA.

The ‘explanatory memorandum’ provides that the expression ‘reasonably satisfied’ does not require the application of any particular ‘burden of proof’ or standard of evidence. However, NOPSEMA must be able to point to some evidence on the basis of which it could rationally have reached its conclusions. In addition, we note that regulation 5G will operate as an override to existing regulation 10, which provides that NOPSEMA must accept an environment plan or proposed revision of an environment plan if NOPSEMA is reasonably satisfied that the plan or proposed revision meets the criteria set out in regulation 10A.

• Regulation 5G of the Draft Regulation will only apply in respect of NOPSEMA’s decision whether to accept a new or revised environment plan after 1 January 2015.
• Regulation 23(2) of the Draft Regulation will allow NOPSEMA to withdraw acceptance of an environment plan in relation to a petroleum activity if the titleholder fails to maintain compliance with subsection 571(2) of the OPGGS Act.

We note that, prior to withdrawing acceptance of an environment plan, NOPSEMA is required to give 30 days’ notice of an intention to withdraw the acceptance to the titleholder and an opportunity for the titleholder to make written submissions, and to consider the titleholder’s submissions: regulation 24 of the Principal Regulations.

• NOPSEMA will be entitled to recover its expenses for assessing the proposed financial assurance arrangements under regulation 33 of the Draft Regulation.

In light of the above, the Draft Regulation is a ‘stripped back’ approach to the financial assurance regulations as compared to the detailed draft regulations previously released by the Government. However, NOPSEMA and the Australian Petroleum Production & Exploration Association (APPEA) are in the process of preparing a methodology to support the regulations and to assist NOPSEMA in its assessment of the adequacy of financial assurance proposed by a titleholder, and a guideline outlining acceptable forms of financial assurance (see discussion below).

In practice, titleholders are already required to hold sufficient financial assurance in accordance with the requirements of section 571 of the OPGGS Act. Therefore, the Draft Regulation will not impose any new legal obligation on titleholders, however it will add an additional step in the regulatory approval process for NOPSEMA which has the potential to give rise to cost, time delays (and possibly grounds for judicial review challenge).

Importantly for the offshore petroleum industry, the financial assurance obligation does not operate as a cap for a titleholder’s liability in respect of a pollution incident, and a titleholder will be liable for all the costs and expenses of its duties in sections 572C, 572D, 572E and 572F of the OPGGS Act, regardless of the level of financial assurance that NOPSEMA required the titleholder to hold. 

The Guideline

The explanatory memorandum supporting the Draft Regulation provides that ordinary operating costs (for example operational costs associated with production platforms, drilling wells or meeting work program commitments) or commercial commitments (for example liabilities under contracts for supply) do not require financial assurance cover under section 571 of the OPGGS Act. That said, the Draft Regulations do not provide any detail or guidance for titleholders to calculate ‘sufficient’ financial assurance for the purposes of complying with this statutory obligation.

To address this issue, NOPSEMA released on 3 November 2014 the ‘Financial Assurance for Petroleum Titles Guideline’ (Guideline) which provides an interpretation of the duty to maintain sufficient financial assurance.  In order to comply with the duty, titleholders must consider the following two steps:

• calculate the costs, expenses and liabilities; and
• determine the forms of financial assurance.

Although financial assurance must be maintained for the life of the title, it only needs to be accessible when the potential for costs, expenses and liabilities arise rather than at the time of submission or acceptance of the EP.  

The obligation to maintain sufficient financial assurance rests with the titleholder and cannot be discharged by affiliates, related companies or other entities.  If there are multiple titleholders, any one of the titleholders may discharge the obligation.

Importantly, compliance with the financial assurance requirements does not limit the titleholder’s liability to the amount of financial assurance nor does not it override the titleholder’s duties to comply with general law and the “polluter pays” principle in the event of an incident. 

We have summarised below the key components of the Guideline, however we note that NOPSEMA has hosted industry information sessions on the guidelines on 12 and 13 November in Perth and will host a session on 18 November in Melbourne.

Step 1: Costs, expenses and liabilities

Titleholders must select methodologies for calculating costs, expenses and liabilities that are appropriate for the relevant petroleum activities.  In NOPSEMA’s view, the financial assurance calculations need to focus on calculating the single greatest credible costs, expenses and liabilities that may arise from an escape of petroleum during the carrying out of a petroleum activity including:

• The greatest reasonably credible costs and expenses of:

1. termination or control of the incident;
2. operational response measures required for containment, clean up and remediation of the environment; and
3. carrying out environmental monitoring of the impact of the incident in accordance with the EP for the activity.

• The reasonably identifiable and estimable third party liabilities that may arise from the incident. Unidentifiable or inestimable costs which may be associated with compensation for loss and ongoing damage to third parties are not required to be included as they are recoverable through other legal processes.

Depending on the duration of the relevant activity, it may be necessary to review the cost calculation method to ensure that it remains relevant and sufficient.

Step 2: Forms of financial assurance

The forms of financial assurance that may be maintained for the purpose of complying with the duty are set out in section 571(4) of the OPGGS Act and it is open to the titleholder to select a variety of forms of financial assurance that aggregate to equal the calculated level of financial assurance.

In practice, most of the forms of financial assurance (e.g. a bond, letter of credit, or security deposit) will require titleholders to lock-up funds at a bank as collateral for the credit support provided by the financial institution.  The other forms of financial assurance (e.g. mortgage) would likely be encumbrances that may require the prior consent of the co-venturers under the joint operating agreement.  While any such consent may be forthcoming, titleholders will need to consider these issues when entering into joint ventures.

In order to reasonably satisfy NOPSEMA that the titleholder is compliant with the duty to maintain financial assurance, the titleholder must provide NOPSEMA will a declaration stating that sufficient financial assurance:

• is or will be in place at the time of undertaking activities; and
• will be maintained for the life of the title.

At the time of submission of an environmental or revision to an environmental plan, the titleholder must also submit a confirmation of financial assurance that attests that a valid declaration has been provided to NOPSEMA for the relevant activity the subject of the environmental plan.

Multiple titles

Where an environmental plan relates to multiple titles, the titleholder may submit a declaration of financial assurance covering multiple activities.  If this approach is taken, the financial assurance held must cover the maximum credible amount of costs, expenses and liabilities that may arise from any of the activities across all of the titles.  This will ensure that the titleholder has sufficient financial assurance to cover lower order costs, expenses and liabilities that may arise from those activities. 

Transitional arrangements

If an environmental or revision to an environmental plan is submitted and/or accepted prior to 1 January 2015, the titleholder will not be required to provide declarations and confirmations of financial assurance.  However, the duty to hold sufficient financial assurance applies to all petroleum activities and NOPSEMA may seek confirmation of compliance with the duty through its compliance monitoring program.

Next Steps

The Draft Regulation and Guideline will also be supported by a calculation method for assessing the monetary value of sufficient financial assurance currently being developed by APPEA. The APPEA calculation method will set a series of cost bands based on the characteristics and potential impacts of a petroleum incident that may arise from the activity outlined in the EP.  It is anticipated that the APPEA calculation method will be released over the coming weeks following validation by NOPSEMA.

It will be at the titleholder’s discretion whether to apply the APPEA calculation method or a different methodology. If NOPSEMA considers that the APPEA calculation method has been applied inappropriately or the titleholder applies a different methodology, NOPSEMA may require further information to satisfy itself that there is compliance with the duty to maintain sufficient financial assurance prior to acceptance of the EP. 

Alternatively, if the potential environmental consequences of an incident are considered to be unusually high, NOPSEMA may require a titleholder to fully calculate costs, expenses and liabilities for that incident rather than applying the APPEA calculation method.