The Good Oil: Offshore Pollution Focus

Newly updated regulations administered by the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) require offshore petroleum titleholders to maintain sufficient financial assurance to enable them to meet the costs, expenses and liabilities that may result from carrying out petroleum activity in Australian coastal and territorial waters, such as an oil spill.

The updated regulations came into effect on 1 January this year. To review the impact these updated regulations had on the industry over the last nine months, AMPLA The Resources and Energy Law Association, the largest body of lawyers working in the Australian resources and energy sectors, facilitated a seminar last month to bring together a number of industry experts to share insights and experiences on how the new regulations and obligations are working in practice.

The panel consisted of the following industry representatives:

• Ryan Hartfield (Chair) – Managing Counsel at PTTEP Australasia
• Alan Murray – Partner at King & Wood Mallesons
• Andrew Woodhams – Director of Operational Performance, Australian Petroleum Producers and Explorers Association (APPEA)
• Richard Foxall – Principal, Power & Energy Practice at Marsh

The audience consisted of over 60 in-house legal representatives from large Australian and global oil companies represented in Perth, regulators, plus a number of independents and a host of oil-patch lawyers.

Discussions among the panel centred around the APPEA Method, which was developed as a prescribed standard method for estimating the appropriate level of financial assurance necessary to meet these updated requirements under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (“the Act”). For more details, please visit the NOPSEMA website.

The panel also explored the various means by which the financial assurance obligations can be satisfied, which included insurance, bonds, indemnities, letters of credit and deposits made with financial institutions, and combinations that in aggregate meet the required level of financial assurance.

From an insurance standpoint, panel member Richard Foxall from Marsh advised: “A lot of the exclusions under Exploration and Production (E&P) insurance policies such as war, terrorism, cyber-attack and nuclear still remain. As such, insurance alone may never provide the complex financial guarantee the oil companies have to give under the requirements of the new regulations.”

Richard also shared his experience on how the industry in general is dealing with the new requirements, how they work in a joint venture context, the potential issues that need to be considered pertaining to the new regulations and how the insurance industry can help mitigate their pollution exposures, which since the April 2010 Deepwater Horizon incident in the Gulf of Mexico, has taken on an increasingly higher media profile.

The following is a summary of Richard Foxall’s Q&A session addressing some of the insurance aspects of the impact of the new regulations.

Question: To what extent have you found that the APPEA Guideline reflects the traditional levels of insurance coverage maintained by oil companies?

Since the new regulations became apparent, we have had a number of discussions with both clients and prospects on this subject and on at least three occasions have been asked to advise what limits should be purchased for Control of Well (COW) cover, and the amount of Third Party Liability (TPL) cover for specific operations that required new environmental plans.

After providing our suitably caveated recommended minimum limits for COW and TPL, all three companies advised that the APPEA Method calculation had come to almost the same as what we proposed. This just goes to show that the APPEA calculation (not surprisingly seeing as it was devised by the industry itself) is pretty much in line with our traditional recommendations. Whilst it depends on the circumstances, we generally recommend 5 times the anticipated financial expenditure (AFE) as an offshore well control limit, plus benchmark TPL limits.

Question: In the context of practical applications, what have your clients been doing? Has there been a consistent approach to maintaining financial assurance?

For major oil companies, it’s pretty much business as usual from an insurance perspective other than making a few coverage tweaks to their TPL cover so that Seepage & Pollution (S&P) cover is provided for wells excess of their COW cover, removal of the ‘Governmental Authority’ exclusion, and then provide their balance sheets to NOPSEMA for any remaining uninsurable exposures as before.

For the small independents though, it will potentially be tough as they don’t have balance sheets to back up their insurance exclusions. Due to the size of the companies and the size of their insurance programs, they don’t necessarily have the market leverage to obtain the coverage tweaks like the larger oil companies can. One option can be for the independents to take up big oil operator’s insurances so far as they can, notwithstanding the likely higher deductibles they will need to carry.

In a world that does not stand still, emerging and altering regulatory environments are some of the largest risks facing clients today. The need to plan ahead and start the dialogue early in order to cater for the requirements under the updated regulations is apparent. Companies are learning from their industry peers as well as their professional advisors in this developing space. From an insurance perspective, companies are encouraged to work closely with their brokers and insurers to develop coverage amendments and work towards a reasonable solution in addressing these requirements.