Background

Readers will be aware from our previous article1 that in 2013 the government passed an amendment to s 571(2) of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGSA) that imposed financial assurance obligations on titleholders, to ensure adequate funds are available to cover extraordinary costs and expenses arising in connection with the carrying on of a petroleum activity (including the costs of clean-up or remediation of an oil spill).

Since the article a new regulation 5G was promulgated into the Offshore Petroleum and Greenhouse Gas Storage (Environment) Regulations 2009 (Cth) (Environment Regulations) to provide that after 1 January 2015, NOPSEMA must not accept an environment plan (EP), or a revision to an EP, unless it is reasonably satisfied that:

  • the titleholder is compliant with the financial assurance obligations in s 571(2) of the OPGGSA, and
  • the titleholder’s compliance is in a form acceptable to NOPSEMA.

To assist titleholders to comply with this new obligation, NOPSEMA released a guideline outlining its process for determining compliance (NOPSEMA Guide).2 In conjunction with NOPSEMA’s release, APPEA released a costing methodology to assist titleholders to calculate the magnitude of financial assurance required in order to achieve compliance (APPEA Method).3

NOPSEMA’s approach to assessment of financial assurance

Steps to show compliance

NOPSEMA has indicated that the following steps should be taken by titleholders to ensure compliance with the OPGGSA and Environment Regulations:

  • Step one – calculate costs and expenses: Use a NOPSEMA validated method to calculate the single greatest credible amount of costs, expenses and liabilities that could arise in respect of a petroleum incident relating to the titleholder’s activities:
    • Generally, NOPSEMA expects titleholders will use the APPEA Method to calculate this amount, however, it is not mandatory.
    • If a titleholder wants to use an alternative method, then it must engage with NOPSEMA at an early stage to allow for the assessment and validation by NOPSEMA of its alternative. NOPSEMA suggests that this will take at least 2-3 months, and their costs will be borne by the titleholder.
  • Step two – determine the form or forms of financial assurance: Once the titleholder has determined the amount of financial assurance required, it will need to identify the form, or mix of forms, of financial assurance to cover the potential costs, expenses and liabilities. Section 571(4) of the OPGGSA provides that a wide range of instruments can be used to cover this liability (including insurance, self-insurance, bonds, the deposit of an amount as security with a financial institution, an indemnity, a letter of credit from a financial institution or a mortgage). Whatever form is used, it must be accessible when these extraordinary costs have the potential to arise.
  • Step three – make a declaration: Submit a Financial Assurance Declaration to NOPSEMA to the effect that the company has, and can maintain, sufficient financial assurance for costs arising over the life of the title (Declaration).4 A Declaration can be submitted at any time (before or after the EP is submitted), but it needs to be submitted before an EP is approved. In practice, NOPSEMA expects the major companies to submit one Declaration stating that they have sufficient financial assurance to cover the worst case scenario over all of their existing titles.
  • Step four – confirmation: At the time of submission of an EP or prior to the approval of an EP, the titleholder must submit a Financial Assurance Confirmation that Declarations have been provided to NOPSEMA in respect of the activities under all of the titles to which the EP relates (Confirmation).5

Light-handed approach

NOPSEMA plans to assess compliance with regulation 5G in a light-handed manner, but will have inspection powers to ensure compliance. For example, if a titleholder uses the APPEA Method, NOPSEMA will accept the Declaration or Confirmation on its face, but will reserve the right to confirm the basis of the Declaration or Confirmation.

Transition arrangements

For EPs that are already in force or were submitted prior to 1 January 2015 (but not yet approved) the new regulation does not apply and there is no requirement to give a Confirmation or Declaration. However, the general financial assurance obligations remain.

For EPs submitted after 1 January 2015, a Declaration and a Confirmation must be given by the titleholder as a pre-condition to acceptance of an EP.

Potential challenges

NOPSEMA identified the following potential challenges inherent in the new system:

  1. Joint venture considerations: Titleholders will need to ensure that joint venture arrangements do not limit the power of each titleholder to give a Declaration or Confirmation. While the exposure for financial assurance is limited to each titleholder’s interest in a title, there will need to be arrangements established by joint venturers to either coordinate separate Confirmations and Declarations (to ensure that the financial assurance is sufficient to cover the entire title) or facilitate one form of assurance via the operator of the joint venture. This approach may be inconsistent with and may not fit within the terms of traditional joint operating agreements. Consideration may also need to be given to interactions with joint venturers’ insurances.
  2. Limitations on accessibility of financial assurance: The limitations of any proposed form of financial assurance will need to be carefully considered. This will be a particular issue if insurance is used, as certain costs could be excluded from the policy. Titleholders may need to supply additional forms of financial assurance to cover any excluded costs.
  3. Underestimation of costs: Titleholders who underestimate the cost, expenses and liabilities that may arise will need to be cautious and ensure that their models are sufficiently flexible, because NOPSEMA has the right to challenge the basis of these estimates (and therefore the level of financial assurance required).
  4. Contractual arrangements: NOPSEMA has stated that it is not interested in contractual liability allocations between joint venturers and their contractors. While not stated expressly, this may mean that titleholders cannot rely on mechanisms such as knock-for-knock indemnities as part of their financial assurance package.

It is clearly desirable that the State not be left to pick up any 'clean-up' costs. The regulator’s initial attempts to establish a regime in late 2013 was not supported by industry and seemed to be quite impractical to administer. The New Regulation has attempted to address these initial concerns, by creating a system that appears to strike a good balance and a system that should be able to be administered efficiently.