Australia: Polluter Pays In Australia Through Compulsory Financial Assurance For Petroleum Title

Last Updated: 16 July 2013
Article by Jenny Thornton, Nigel Chapman and Suzannah Moss-Wright

Liability for environmental damage is emerging as one of the biggest exposures for participants and risk carriers in Australia's offshore energy industry. Operators now have financial responsibility and must prove they have funds available to pay for environmental damage; including clean-up, remediation and monitoring, prior to obtaining a petroleum title.


Hydrocarbon exploration and production companies in Australia must now demonstrate they have sufficient financial resources to meet the cost of environmental remediation prior to being granted a petroleum title.

The Montara and Deepwater Horizon oil spills have motivated jurisdictions around the world to establish a reliable source of funds to compensate for oil pollution damage arising from offshore hydrocarbon facilities. Australia has not been immune to this trend.

Australia's offshore petroleum regime

Australia's offshore petroleum activities (beyond three nautical miles from the territorial sea baseline) are regulated by the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA), which governs offshore oil and gas exploration and production.

Prior to a petroleum title being issued an environmental plan and an oil spill contingency plan must be submitted for review and acceptance by the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA).

Acceptance of an environmental plan, which in itself is a pre-requisite for commencing a petroleum activity, requires the petroleum title holder to demonstrate they have sufficient financial resources to remediate the effects of an uncontrolled release of hydrocarbons. Where an environmental plan has been accepted and a title-holder ceases to comply with their financial assurance obligations, NOPSEMA may withdraw acceptance of the environmental plan, thereby vitiating the petroleum title.

A petroleum title includes a petroleum exploration permit, petroleum retention lease, production license, infrastructure license, pipeline license, petroleum special prospecting authority and petroleum access authority.

Previous law

Shortcomings in regulation and operational practice in Australia's offshore petroleum industry were highlighted by the Montara incident, a review of which found that in order to properly implement the polluter-pays principle robust financial assurance requirements should be introduced on a strict liability basis.

Section 571 of the OPGGSA has always required that petroleum title-holders maintain adequate insurance against expenses and liabilities arising from activities in the title, including remedying the effects of escape of petroleum. Whilst erstwhile in intent, implementation of this requirement was sporadic because the amount and terms required for any such insurance was prescribed by the regulator on an ad-hoc basis.

The nature of any regulatory direction in the event of an escape of petroleum was unclear and allocation of responsibility to pay for such an eventuality was ambiguous. Inherent in this uncertainty were difficulties in assessing, managing and pricing risk.

Offshore Petroleum Greenhouse Gas Storage Act Amendment (Compliance Measures No. 2) Act 2013 (Cth)

The importance of effective offshore petroleum industry regulation is highlighted by the blowout at the Montara Wellhead Platform on 21 August 2009 off the northern coast of Western Australia; the explosion of the Deepwater Horizon on 20 April 2010 in the Gulf of Mexico; and the death of two drill workers on the Stena Clyde rig located in the Otway Basin off the Victorian coast in October 2012.

The recent amendments to the OPGGSA set out a suite of requirements designed to improve the safety of offshore oil and gas production, processing and transportation facilities by rendering the operators liable for three broad classes of costs:

  • response and cleanup costs;
  • damage to private property; and
  • damage to natural resources.

The Offshore Petroleum Greenhouse Gas Storage Act Amendment (Compliance Measures No. 2) Act 2013 (Cth) received Royal Assent on 28 May 2013. Section 572C came into effect on 29 May 2013. Section 571 (as amended) will come into effect on a day to be fixed by proclamation, and no later than six months from the date of assent.

Financial assurance - section 571 amendments

Amendments to section 571 impose an obligation on all petroleum title-holders to maintain financial assurance sufficient to demonstrate they have capacity to respond to, and clean up after, any pollution incident; before a licence to undertake a petroleum activity will be granted. This financial assurance must be sufficient to meet the costs, expenses and liabilities arising in connection with, or as a result of, their activity.

The operator must establish and maintain its financial capability to meet claims that might arise under the OPGGSA by producing evidence of financial assurance. Notably, the term 'insurance' has been replaced with 'financial assurance'. This broader term allows entities to demonstrate the existence of coverage in the form of insurance, surety bond, self-insurance or various forms of financial guarantee.

We anticipate amendments to the Offshore Petroleum and Greenhouse Gas Storage (Environment) Regulations 2009 to be forthcoming.

Polluter to pay – new section 572C duty

Since the Montara incident the OPGGSA has been dramatically revamped such that it now imposes a strict liability regime for hydrocarbon pollution. It further directs liability by specifying the responsible party.

In the case of offshore facilities, the responsible entity is the holder of the petroleum title. If there is an escape of petroleum in connection with a petroleum activity, it is the title-holder's duty to eliminate, control, clean up and remediate the environmental impact.

Remediation has three components: first is that the title holder is responsible for the cost of resource restoration to baseline conditions; second is compensation for interim losses such as the lost value of injured resources pending full restoration, and third is the payment for reasonable cost of the damage assessment and monitoring.

NOPSEMA and the Commonwealth/State must be reimbursed by the title-holder for costs and expenses incurred in clean up, remediation and monitoring of an escape of petroleum.

Enforcement mechanisms

Included in the recent amendments to the OPGGSA are provisions intended to clarify and enhance NOPSEMA's regulatory powers.

This is achieved through the introduction of alternative enforcement mechanisms, such as infringement notices, adverse publicity orders and continuing penalties. NOPSEMA inspectors now have the authority to issue environmental prohibition and improvement notices requiring title-holders to remove significant threats to the environment. Civil and criminal penalties apply for non-compliance with a notice issued by NOPSEMA.

Who ultimately pays for pollution

The question of who ultimately pays for offshore pollution incidents needs to carefully examined by operators in Australian territorial waters. The following questions should be separately considered:

  • Who is primarily liable to pay clean up costs, damages and fines to the Commonwealth and to private parties?
  • Having paid out clean-up costs, damages and/or fines to the Commonwealth and/or to private parties, can an operator or contractor pass that liability onto another party through a contractual indemnity or a civil liability contribution claim?
  • Can the operator or contractor recover its remaining liability (indemnities and contribution claims having been exhausted) from its insurers?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jenny Thornton
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