Financial Assurance

The Offshore Petroleum and Greenhouse Gas Storage Amendment (Compliance Measures No. 2) Act 2013 received Royal Assent on 28 May 2013. To complement and support the 'polluter pays' amendments, the Act included amendments to clarify that it is compulsory for a titleholder to maintain sufficient financial assurance to ensure that it can meet all costs, including extraordinary costs, expenses or liabilities arising in connection with the carrying out of a petroleum activity undertaken under the title, including expenses relating to the clean-up or other remediation of the effects of an escape of petroleum. The amendments also provide the power to make regulations to require that a demonstration of compliance can be sought as a prior condition of acceptance of an environment plan.

These requirements came into effect on 29 November 2013 and reflect the commitment to implement Recommendation 96 of the Final Government Response to the Report of the Montara Commission of Inquiry.

The legislative amendments included a clarified and broadened financial assurance requirement, which replaced the former requirement in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGS Act) to maintain insurance. The legislated requirement was paired with a regulation-making power to require a demonstration of compliance with the financial assurance requirement to be made by the titleholder to the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA). This must be done in an acceptable form as a pre-condition to acceptance of an environment plan. The legislative amendments took effect on 29 November 2013. The making of appropriate regulations together with implementation approach and commencement allowing for transition has been the subject of ongoing consultation with stakeholders including NOPSEMA and industry.

Following consultation throughout the second half of 2013 on an initial set of detailed draft regulations, consideration of comments received from industry, and an intensive session with a select stakeholder group in February 2014, the Department of Industry revised the implementation approach to include the making and application of basic regulations made under s571(3) of the OPGGS Act together with the development and application of guidelines in relation to the decision by NOPSEMA.

The revised implementation approach is based roughly on that used in the UK offshore petroleum regime. A key feature of this approach is the development of a guideline by industry, to provide a costing methodology for the calculation of a sufficient level of financial assurance as driven by a range of variables, for appropriate use by NOPSEMA in the making of their decision is a key element of the proposed implementation.

The Department and NOPSEMA sought legal advice on the validity of various kinds of proposed regulations relating to the demonstration of compliance with subsection 571(2) – the financial assurance requirement in the OPGGS Act. The request for advice covered proposals by the Department and by industry members. The advice explored whether the various proposed provisions of the regulations would be within the regulation-making power in subsection 571(3) of the OPGGS Act and/or would otherwise be valid.

A summary of the advice is as follows:

  1. In order for compliance to be ‘demonstrated’ to NOPSEMA within the meaning of paragraph 571(3)(a), there must be more than the taking of certain steps by the titleholder; the regulations must also confer on NOPSEMA the function of finding (or not finding) that the requirement of sufficient financial assurance has been met.
  2. The conferring on NOPSEMA of a function in terms of being ‘reasonably satisfied’ that there has been compliance would probably be consistent with the regulation-making power. It is true that requiring NOPSEMA to apply a purely objective test, ie of actual compliance with the requirement of subsection 571(2), would correspond more closely to the wording of paragraph 571(3)(a). This would be an unworkably stringent standard to apply, however, given the inherently uncertain events for which financial assurance is to be provided. A requirement that NOPSEMA be ‘reasonably satisfied’ of compliance is probably therefore the most stringent standard that NOPSEMA can in practice apply.
  3. In performing this function, NOPSEMA must exercise a discretion. NOPSEMA cannot act at the behest of another person (such as the author of guidelines put forward by the industry), as this would be to act under dictation.
  4. In relation to the use by NOPSEMA of guidelines prepared by the industry, the advice continues:
    This does not preclude NOPSEMA from having regard to guidelines in performing its function under regulations made pursuant to s 571(3), including guidelines prepared by industry. Indeed, we think NOPSEMA could issue guidelines indicating the matters to which it will have regard in performing that function. Such guidelines could, for example, set out or endorse a process or methodology for the calculation of levels of financial assurance in relation to specific contingencies. NOPSEMA could then state that, as a general matter and subject to the circumstances of each case, it would be likely to consider that the requirements of s 571(2) had been met by a titleholder who can provide financial assurance calculated in accordance with the process or methodology contained in the guidelines.

    However, if NOPSEMA proposes to rely on guidelines in this way, it would need to ensure that the guidelines are suitable to the relevant function. This is because the guidelines themselves would form part of NOPSEMA’s decision-making process. If NOPSEMA were simply to adopt guidelines without turning its mind to the question of their suitability, it could be argued that, to the extent that it relies on those guidelines in making a decision, it would be acting under dictation or otherwise failing to properly perform its function.
    Accordingly, it would be risky for NOPSEMA to adopt guidelines prepared by industry without any independent evaluation of their suitability. To ensure that NOPSEMA can make a meaningful assessment of suitability, it would be prudent to ensure that any proposed guidelines are properly scrutinised by an independent and qualified third party. … … . NOPSEMA would then be in a position to assess, based on expert analysis, the merit of any proposed guidelines, and to reject them or make changes where appropriate.

    Moreover, having adopted particular guidelines, NOPSEMA could not simply apply the guidelines in a mechanical or inflexible manner; it would need to exercise its own judgment, albeit having regard to the guidelines. The cases of greatest practical risk would be those in which a titleholder proposes a level of financial assurance that it is not consistent with the guideline process or methodology, and those projects that depart significantly from the norm, despite the financial assurance proposed strictly complying with the guideline process or methodology.

    In the former case, while it would be open to NOPSEMA to conclude that the financial assurance proposed does not satisfy the requirements of s 571(2), it could not do so merely on the basis that it had been calculated on a basis that departs from the process or methodology set out in the guidelines. Conversely, in the latter case, NOPSEMA could not simply conclude that adequate financial assurance had been proposed because the process or methodology in the guidelines had been followed; it would need to consider whether a project that is significantly different to the norm warrants the application of a different process or methodology.

    In the present case, and assuming NOPSEMA properly exercises its own judgment in determining the suitability of the guidelines it adopts, we think it would be reasonable for NOPSEMA to proceed on the basis that a methodology contained in guidelines is the ‘default’ basis on which it will determine whether or not there has been compliance with s 571(2). However, NOPSEMA would need to ensure (and make clear) that it is prepared to depart from that methodology where, in its view, the circumstances warrant a different approach.
  5. At the reference group meeting, industry members made a number of specific suggestions as to provisions that might be included in the regulations to give the industry greater certainty about the manner in which NOPSEMA would exercise its discretion in deciding whether financial assurance was sufficient. These included proposals that the regulations would expressly authorise or require NOPSEMA to:
    a) apply an industry guideline;
    b) endorse or adopt an industry guideline;
    c) consult with the industry on changes to the guideline. The advice was that there is a high risk that any such regulation would be invalid. This is because it would be beyond the scope of the regulation-making power in subsection 571(3) and also because it would constitute an invalid sub-delegation of legislative power.

In conclusion, following consultation, consideration of comments received from industry, and legal advice on the validity of the proposed implementation approach, the Department of Industry pursued the development of basic regulations made under s571(3) of the OPGGS Act which will be applied in conjunction with guidelines in relation to the regulatory decision made by NOPSEMA.

Implementation due to end 2014

In support of finalising financial assurance oversight arrangements with a start date of 1 January 2015 please find attached:

  1. Revised ‘stripped back’ draft regulations |
  2. Draft explanatory statement of the regulations |

For comments or questions in relation to the draft regulations, please contact the Department of Industry. The regulations will be progressed to the Executive Council by the end of 2014.

NOPSEMA is finalising development of a guideline outlining their approach to the regulatory decision as it relates to other aspects of compliance with the legislative requirements. Industry, through the Australian Petroleum Production & Exploration Association (APPEA), is currently finalising the costing methodology underpinning the matter of sufficiency of the financial assurance held in relation to an activity. NOPSEMA and APPEA should be contacted separately for queries relating to these workstreams.

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