After a blowout at the Montara Wellhead Platform in August 2009 off the northern coast of Western Australia, which resulted in the destruction by fire of the platform and the uncontrolled release of hydrocarbons into the sea for 74 days, the Australian Government reviewed the adequacy of the regulatory regime under its offshore legislation to deal with such incidents. One of its concerns was the ability of petroleum titleholders to meet the costs and any liabilities which might arise out of a similar environmental incident. Following that review, it introduced amendments to the financial assurance provisions of the relevant legislation.

Australia’s offshore petroleum and gas industry is primarily regulated by the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA) and the regulations made under it, including the Offshore Petroleum and Greenhouse Gas Storage (Environment) Regulations 2009 (Cth) (Environment Regulations). The National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) is the Australian regulator for health and safety, well integrity and environmental management for offshore petroleum and gas activities.

The amendments to the financial assurance provisions of the OPGGSA commenced in November 2013. A titleholder is required to maintain financial assurance sufficient to give it the capacity to meet the costs, expenses and liabilities arising in connection with the carrying out of a petroleum activity or complying (or failing to comply) with any requirement under the legislation in relation to a petroleum activity (Assured Costs). In essence, the financial assurance provisions are intended to ensure that a titleholder has access in advance to sufficient financial resources to enable it to pay for any damage caused by an incident connected with its petroleum activities.

New regulations under the Environment Regulations relating to the financial assurance provisions of the OPGGSA commenced on January 1 2015. These regulations have the effect that NOPSEMA must not accept an environment plan (EP), or a proposed revision of an EP, submitted to NOPSEMA from that date unless it is satisfied that the titleholder is compliant with the financial assurance provisions of the OPGGSA and that compliance is in a form that is acceptable to NOPSEMA.

NOPSEMA has released a revised guideline ‘Financial assurance for petroleum titles’ (NOPSEMA Guideline) to give titleholders guidance in relation to their financial assurance obligations. NOPSEMA has also confirmed that the document ‘Method to assist titleholders in estimating appropriate levels of financial assurance for pollution incidents arising from petroleum activities’ (APPEA Method) is appropriate for use by titleholders in calculating the appropriate level of financial assurance to meet the OPGGSA requirements. The APPEA Method was developed by the Australian Petroleum Production and Exploration Association, the peak national body representing Australia’s oil and gas exploration and production industry.

The NOPSEMA Guideline notes the following key points:

  • The financial assurance provisions of the OPGGSA require a titleholder to calculate the sum of all credible extraordinary costs, expenses and liabilities that may arise from a petroleum incident in order to determine the requisite level of financial assurance. Such costs, expenses and liabilities may include the capital necessary to:
    • undertake the greatest reasonable credible operational response measures required to manage, terminate or control a petroleum incident and its consequences and clean up and remediate the damage that may result from the incident;
    • carry out environmental monitoring of the impact of the incident in accordance with the EP for the relevant activity; and
    • satisfy reasonable and identifiable third party liabilities that may arise from the petroleum incident. 
  • While the APPEA Method is generally suitable for use by a titleholder to calculate the maximum financial assurance needed under the OPGGSA, NOPSEMA retains the discretion to require a titleholder to calculate financial assurance in greater detail, based on case-specific risks and responses outlined in the relevant EP. A titleholder may use cost calculation methods other than the APPEA Method to determine the level of financial assurance. However, validation and endorsement of that method by NOPSEMA may be required.
  • Maintaining accessibility to financial assurance during the life of a petroleum title is essential for compliance with the OPGGSA requirements. NOPSEMA must be satisfied that the titleholder is able to call on its financial assurance at the time any Assured Costs arise.A title holder may use its discretion in determining the form, or combination of forms, of financial assurance used to meet its obligations, 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 and/or a mortgage.
  • The level of financial assurance provided by the titleholder does not limit its liability. In the event of a pollution incident, the titleholder will be liable for all the costs and liabilities, regardless of the level of financial assurance it holds.

The commencement of these financial assurance obligations brings Australia in line with similar requirements which apply in the United States, the United Kingdom and other jurisdictions which have adopted the “polluter pays” principles.