The European Commission, the Council and the European Parliament have reached political agreement on a new Directive seeking to address the risk of major accidents from offshore oil and gas operations in EU waters.
This follows an intense period of negotiation since a draft Regulation on the subject was first published by the Commission in October 2011. That draft Regulation was subsequently amended to the form of a Directive by the EU parliamentary committees involved in September 2012, and the agreement confirms that the legislation will take the form of a Directive, which must be incorporated into national legislation.
The difference in format is particularly significant in jurisdictions such as the UK, which already has a sophisticated safety regime in place in respect of offshore operations.
Whilst the agreed text remains subject to finalisation as it proceeds to formal approval in the coming months, the current draft contains a number of measures with material impact. These include:
- the extension of EU environmental liability legislation to cover significant impacts to marine water quality in all EU offshore waters (not just to damage within the 12 mile zone);
- a requirement for operators to prepare major hazard reports addressing both environmental and safety considerations;
- the requirement that the oversight of environment and safety compliance is independent of decisions on licence awards; and
- the strengthened requirement for licensing authorities to take account of all potential liabilities that might be expected to flow from a major accident when deciding whether potential licensees have sufficient financial capacity to meet their obligations in the event of a disaster.
We set out preliminary comments on these and other aspects of the draft Directive below.
The Commission published its original proposal for a Regulation on the safety of offshore oil and gas activities in October 2011 following a review of the EU's regulatory framework carried out in response to the 2010 Deepwater Horizon incident. Oil & Gas UK and the UK government objected to the use of a Regulation on the basis that it would impose an unnecessary and confusing additional layer of regulation for the UK Continental Shelf where existing regulations are considered to be robust. The change to a Directive should somewhat reduce the need for amendments to the UK regime.
2. Key issues
The draft Directive is intended to achieve a consistent minimum standard of regulation across the relevant Member States. Günther Oettinger, the EU Commissioner for Energy, noted that:
“these rules will make sure that the highest safety standards already mostly in place in some Member States will be followed at every oil and gas platform across Europe”.
The draft Directive will (somewhat unusually) take account of Member States' differing situations with regard to the search for and exploitation of offshore oil and gas reserves: (i) the bulk of the provisions will not apply to those which are landlocked, and (ii) only very limited implementation of the regime will be required in those which have offshore waters but no current offshore industry. The latter will have to put in place the Directive's regime as and when they plan to permit offshore oil and gas operations.
Where sufficient measures already exist in the national regime, the Directive should not materially alter these. For instance, the mechanisms in the Directive for notification and verification of well design and construction, and the requirement to develop internal emergency plans, draw heavily on the existing UK regulations and are largely uncontroversial. However, based on the agreed draft text, the Directive is likely to contain a number of provisions which may have a material impact on the UK regulation of offshore oil and gas activities, including the following:
- Extension of Environmental Liability
Financial liability for environmental damage under the Environmental Liability Directive will be placed on licence holders (rather than the operator) and, in respect of environmental damage to water, will be extended to the entire UK continental shelf area (currently liability is limited to territorial waters - ie, up to 12 nautical miles from the coastline). The extension to EU waters is not limited to damage caused by oil and gas operations but is generally applicable.
- Financial Responsibility
Hydrocarbons licensing authorities will be required to consider whether potential licensees have demonstrated that they will have in place, from the start of operations, adequate provision for liabilities potentially deriving from those operations. This has to include ensuring that the potential licensee has sufficient financial resources for the immediate launch and uninterrupted continuation of all measures necessary for effective response and subsequent remediation. The applicant's capacity for covering economic loss claimed by third parties such as fishermen and coastal businesses also needs to be taken into account, to the extent such losses are recoverable under national law. Member State licensing authorities will retain some discretion in how these requirements are applied and it is expected that in the UK the financial responsibility guidelines for offshore operators that DECC recently agreed with Oil & Gas UK (available here) will continue to be relevant but may need to be supplemented.
The Directive stops short of requiring mandatory financial security to be provided (as was strongly requested by the European Parliament). However, it obliges the Commission to report by 31st December 2014 on the availability of such instruments as well as on the handling of claims for third party compensation for damage caused by oil and gas operations. A separate report on effectiveness of existing liability regimes, assessing whether it would be appropriate to broaden them, is to be submitted by the Commission within 2 years of the Directive's entry into force. Studies led by an academic from the University of Maastricht are underway to inform those reports.
- Reporting of Major Hazards
Operators will be required to submit a major hazards report prior to commencement of offshore operations and to update this over the course of time to reflect any material changes. The report must consider risks to both safety and the environment (and thus extends existing safety cases). This will be a requirement for both new and existing installations.
- Oil Spill Response Effectiveness
The concept of "oil spill response effectiveness" was one of the last changes agreed to the text of the draft Directive as a concession to the European Parliament, having been introduced primarily with Arctic exploration in mind and inaccessibility for oil spill response due to pack ice and heavy seas in the Arctic winter. As used in the Directive for EU waters, this will require operators to include a statement in their emergency plans as to the percentage of the year in which operations are possible without the need for operational limitations as a consequence of adverse environmental (ie, climatic/weather) conditions that may interfere with the operator's ability to effect a clean-up operation in the event of an oil spill. It remains unclear how this percentage will be derived in practice.
- Regulatory Oversight
Member States must ensure that regulatory functions under the Directive (encompassing both safety and the environment) are carried out by an authority which is independent of regulatory functions relating to the economic development of offshore natural resources (including licensing and revenues management), in order to avoid perceived conflicts of interest. In the UK, this may necessitate a restructuring of the offshore oil and gas unit of DECC since it currently acts as the environmental regulator for the offshore industry (with safety aspects being the responsibility of the separate Health and Safety Executive). Separation of safety regulation from licensing awards was a key recommendation following the UK Piper Alpha disaster, and the lack of separation was one of the factors identified in relation to the role of the US authorities with regard to the Deepwater Horizon incident. Separation in the UK, however, has not previously extended to environmental regulation.
Certain of the more controversial measures from the original Regulation have been amended during negotiations. In particular, it was initially proposed that operators would be required to endeavour to conduct offshore oil and gas activities outside the EU in accordance with the principles of the new legislation. This will now be a requirement that operators include their non-EU installations in their major accident prevention policies. It is acknowledged in the introductory text of the Directive that Member States will not be expected to seek to enforce the operator's policies over their operations in areas beyond Member State jurisdiction.
Much will depend on the precise way in which Member States interpret and implement certain aspects of the Directive. For instance, there are various references in the text to "best practices", and it will be for national legislatures and regulators to determine how this will be expressed in domestic legislation and the accompanying guidance materials.
3. Initial reaction and next steps
The EU institutions regard the agreement as a significant development in offshore safety in the EU. The EU Commissioner for Energy, Günther Oettinger, acclaimed it as a "a major step enhancing the safety of offshore oil and gas production in the EU" and the Irish Presidency of the EU Council stated that it would "ensure a consistent use of best practices for major hazards control by oil and gas industry offshore operations potentially affecting Union waters or shores". The UK oil and gas industry welcomed the confirmation of the change to a Directive, with Oil & Gas UK stating that "the Commission’s decision today to establish a Directive on offshore safety is the best way to achieve the objective of raising standards across the EU to the high levels already present in the North Sea". Reaction from environmental groups has been mixed.
The draft Directive must now be formally confirmed by the European Council and the European Parliament, with a plenary vote of the Parliament scheduled for 21 May 2013. Given that the draft Directive currently envisages that Member States will be required to implement its provisions within 2 years of it being approved, it should therefore take effect in early 2015, with full implementation due two years thereafter.
- The full EU press release can be accessed here.