The Macondo blowout in the Gulf of Mexico in April 2010 caused billions of dollars in damage and forced regulators to assess their ability to respond quickly and robustly to mitigate the environmental consequences of offshore incidents.
In 2014, the Harper government passed the Energy Safety and Security Act (ESSA) as a response, in part, to the Macondo disaster and in an effort to increase the ability of Canada’s offshore area regulators to deal with such incidents. Prior to ESSA, the liability regimes governing Canada’s offshore areas had not been updated since the 1980s. ESSA will bring Canada’s regime more in line with those of other jurisdictions such as the United States and Norway.
The final changes implemented by ESSA became effective on February 26, 2016, including those empowering regulators to issue administrative monetary penalties and raising the cap on absolute, or no-fault, liability from $30 million ($40 million in the Arctic) to $1 billion. These changes, and others introduced by ESSA, are likely to increase costs for participants in Canada’s offshore oil and gas industry at a time when low commodity prices have left many participants struggling to stay afloat.
However, the change that may have the greatest immediate impact on participants is the increase in financial responsibility requirements (i.e., the amount of security that participants are required to provide to regulators in respect of operations authorizations for the drilling for or development or production of petroleum) to $100 million, and the requirement that security be provided in respect of each authorization. Prior to ESSA, the practice of the Canada-Newfoundland and Labrador Offshore Petroleum Board has been to require that each participant provide a certain amount of security rather than requiring that security be provided for each authorization. This change may significantly increase the amount of security that participants in activities or projects pursuant to multiple authorizations must provide.
Under ESSA, the only relief from these requirements lies in the creation of a pooled fund. Participants are able to satisfy their financial responsibility requirement by demonstrating participation in a pooled fund that is maintained at a minimum of $250 million. Furthermore, a participant need only demonstrate participation in one pooled fund to satisfy this requirement for any number of authorizations. Finally, where acceptable to more than one regulator, a single pooled fund may satisfy financial responsibility requirements in more than one jurisdiction.
Regulations [PDF] and guidelines issued pursuant to ESSA and the Accord Acts indicate that the formation of any pooled fund will be largely left to industry. Naturally ESSA and the new regulations require that a pooled fund have certain characteristics – such as being located and administered in Canada – as well as requirements that funds be payable to regulators on demand and that any withdrawal from a fund be repaid within seven days. However, provided that a pooled fund is acceptable to the applicable regulators, management and administration of the fund will be largely left to industry.
This presents industry with an opportunity to significantly reduce the aggregate amount of required security by cooperating on the formation of a pooled fund. In addition, participants have the opportunity to satisfy the $250 million requirement for a pooled fund by providing letters of credit from acceptable financial institutions rather than contributing $250 million in cash. Participants with multiple authorizations may also benefit from a reduced administrative burden by participation in one pooled fund rather than having to maintain multiple instruments.
However, establishing a pooled fund is likely easier said than done – we can foresee a number of commercial issues that would need to be resolved. For example, we anticipate that the mechanisms with respect to cost allocation (both for initial contributions and any required replenishment) will be a particularly thorny commercial issue. Likewise, a process to include additional operations authorizations under the coverage of a pooled fund will likely present interesting challenges for participants.
Notwithstanding such challenges, there appears to be a significant opportunity for industry to reduce its costs and the administrative burden of complying with the new financial responsibility requirements by cooperating and establishing a pooled fund. Participants in the Newfoundland and Labrador offshore area have recently shown that they are able to put aside their differences for the greater good. In June 2015, many of those participants entered into the Basin Wide Transportation and Transshipment System [PDF] (BWTTS) to coordinate and rationalize offshore oil transportation. Through the formation of BWTTS, participants aspire to increase efficiency and utilization of transportation assets over the 15-year term. BWTTS demonstrates that industry is capable of surmounting complicated commercial issues for the betterment of all, and it appears as if establishing a pooled fund may provide a similar opportunity.