In brief

  • The recommendations and findings from the Montara Report are likely to have far-reaching implications for offshore oil and gas activities, impacting on health, safety and environmental liability, corporate governance and reporting and the contractual risk allocation between operators and offshore contractors.
  • The government:
  • is committed to establishing a single national offshore petroleum regulator, and
  • supports the ‘polluter pays’ principle and will seek to introduce legislation to that effect.
  • The Montara Report reinforces findings arising out of the Texas City Refinery Explosion and is consistent with preliminary findings arising out of the Deepwater Horizon event in the Gulf of Mexico that senior management need to have a clear line of sight to the critical safety and health risks in the business and meaningful assurance that those risks are being effectively controlled.
  • There is a three-month industry consultation period before the government finalises its response.

Montara Report and government Draft Response

Following the uncontrolled oil and gas blowout from the ‘H1’ well in the Montara oil field on 21 August 2009, the Minister for Resources and Energy (the Hon. Martin Ferguson AM MP) moved amendments to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA) which allowed for the establishment of an inquiry into the incident. In the inquiry Freehills acted for a number of parties.

The Report of the Montara Commission of Inquiry (Report) was provided to Minister Ferguson on 18 June 2010 and released to the public on 24 November 2010 along with the government’s draft response (Draft Response). In the Draft Response, the government proposes to accept 92 of the 105 recommendations, noting 10 and rejecting 3.

This article considers the regulatory and contractual consequences for Australian offshore oil and gas titleholders and operators that are likely to flow from the Report and the Draft Response.

Montara Report recommendations

The Report addresses a range of issues relating to the regulation and management of the offshore petroleum industry. These issues are addressed in further detail below.

Single national safety regulator

The Report recommends that the government establish a single, national, independent regulatory body to oversee safety, well integrity and environmental approvals. The government has committed to the establishment of such a regulator, noting in the Draft Response that it intends to expand the functions of the existing National Offshore Petroleum Safety Authority (NOPSA).

The new body (to be renamed the National Offshore Petroleum Safety and Environmental Management Authority) will regulate occupational health and safety, well integrity, environmental plans and daily operations in relation to petroleum, mineral extraction and greenhouse gas storage activities in Commonwealth waters. The expansion of the existing regulator’s role is intended to be complete by 1 January 2012.

While most states and territories back this approach, the Western Australian Government has noted on several occasions that it will resist the establishment of a single, national regulator.

Increased HSE standards

This year, the government has already strengthened NOPSA’s role in relation to investigating structural integrity, improved its inspection powers in relation to suspected breaches and imposed a duty of care on offshore petroleum titleholders in relation to wells and well-related equipment.

The Report recommend that there should be a review to determine whether it is appropriate to introduce a rigorous civil penalty regime or substantially increase penalties for breaches of legislation for well integrity and safety.

Contractors

The Report recommends that contractors performing works in relation to barrier installation be engaged on terms which clearly require the provision of expert advisory services with respect to barrier integrity. While the Draft Response notes that this issue is primarily one for industry, the government considered that the recommendation should be carefully considered and adopted appropriately by operators and title holders.

The Report also recommends the government consider ways of ensuring contractors involved in barrier installation have a direct interest in the performance of the relevant works to the proper standard, particularly that:

  • contractors are prevented from avoiding the economic consequences of negligent installation of barriers, and/or
  • specific legislative standards of workmanship are imposed on contractors (similar to those imposed on licensees) with respect to well control.

In the Draft Response the government acknowledges that the progression of this recommendation has the potential to have significant commercial and contractual impacts for operators in the offshore petroleum industry and has invited stakeholders to present their views on this recommendation.

Petroleum titleholders

The Draft Response also recommends that:

  • petroleum titles be administered separately by the Department of Resources, Energy and Tourism through a new body called the National Offshore Petroleum Titles Administrator, to be established by 1 January 2012, and
  • the OPGGSA be amended to:
  • allow the Minister to direct a titleholder to obtain independent advice as to the cause of a blowout (overriding any requirements of legal professional privilege)
  • expand the definition of ‘good oilfield practice’, and
  • include a power to suspend a production licence—power only currently exists to cancel or suspend conditions.

What the recommendations mean for operators and titleholders

The Report recommendations and the Draft Response will have consequences for offshore operators and titleholders in relation to:

  • health and safety
  • environment, and
  • contractual risk allocation between operators and offshore contractors.

Health and safety

At an operational level, the findings and recommendations of the Report reinforce the need for organisations to ensure that they are managing safety in accordance with their stated systems, policies and procedures.

Strategically, organisations need to ensure that they are properly structured to oversee the management of critical health and safety risks, and that effective reporting and verification processes are in place to ensure that senior management, up to and including the CEO and the board, understand the critical safety and health risks in the business and have meaningful assurance that those risks are being effectively controlled.

Environment

Environmental related implications of the Draft Response include likelihood of:

  • strict requirements to remediate damage
  • an increase in time to obtain approvals
  • the imposition of securities and/or the requirement to provide money to an emergency response/ decommissioning fund
  • strict liability (at least civilly, potentially criminally) for incidents, and
  • full government cost recovery for incident work (‘pollute pays’ principle).

Some benefits associated with the implications may include:

  • approvals efficiencies, through a centralised, single decision making authority, thereby reducing duplication
  • a continuing emphasis on objective based regulation rather than prescriptive minimum standards, and
  • if objectives are achieved, a reduction in risk of incidents occurring and an increase in response capability.

Offshore contracting implications

The Report is likely to have implications for oilfield services agreements, drilling agreements and other agreements for offshore activities. Notably, the Report refers to ‘licensees’ not ‘operators’. It is likely that increased liability for titleholders will also have implications for operator indemnity regimes, particularly in relation to exclusions for gross negligence and wilful misconduct of the operator. This an aspect of the Deepwater Horizon incident, where reportedly, joint venture participants alleged gross negligence in relation to the well control event.

In terms of contracts with third party contractors providing well and drilling services, the Report is likely to lead to:

  • formal contractual requirements for exchange of information between rig owners and senior representatives of licensees for well control arrangements
  • increased attention on the adequacy of personnel and management systems and documentation of these within the contracts, and
  • clearer definition of roles under contracts, including the extent to which the contractor is providing ‘expert’ advisory roles, rather than an ‘instructed’ role.

Since the Montara incident there has been an increased trend in operators and joint venture participants revisiting corporate standard form offshore contracts to address risks associated with a ‘Montara’ or ‘Macondo’ event and ensure that appropriate reporting lines and governance regimes are in place to deal with a blowout or other well control event.

Further, we have also noted that agreements that were often considered ‘standard form’ that were very rarely negotiated, can be the subject of protracted negotiation as contractor’s seek to limit liability and responsibility for providing advisory services.

Where to from here?

Before finalising its response, the Australian Government will undertake a three-month comprehensive stakeholder and community consultation period which will include calls for public submissions.

Some of the additional actions being considered by the Australian Government include:

  • increased civil penalties in relation to breaches by operators and titleholders being included in the OPGGSA during the first half of 2011
  • whether minimum standards are capable in some cases of being adopted under the OPGGSA while maintaining the current objective based regulatory system, and
  • the inclusion of a rigorous civil penalty regime in the OPGGSA or substantially increasing some or all of the penalties that can currently be imposed for breaches of the legislative requirements relating to well integrity and safety.