Australia: Offshore net tightens for Australian oil and gas

Compliance Measures and Financial Assurance

Introduction

With an absence of any fanfare or fuss, the first day of October 2014 heralded important changes to the compliance and enforcement regime for the offshore petroleum industry in Australia under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA). These changes are significant, elevating the risk of substantial criminal and civil penalties for breaches by organisations and individuals within the energy sector, and materially altering the scope of the powers for compliance monitoring and investigation possessed by the National Offshore Petroleum Safety and Environment Management Authority (NOPSEMA).

This update provides a comprehensive list of the changes to the OPGGSA to ensure organisations are well prepared.

Background

The commencement by proclamation on 1 October 2014 of Parts 2 to 7 of the Regulatory Powers (Standard Provisions) Act (Cth) (Regulatory Powers Act) finally gave legislative life to previously dormant provisions comprising the majority of:

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

The Compliance Measures Act itself commenced almost 18 months ago on 14 March 2013, with the Compliance Measures No 2 Act following shortly after that on 28 May 2013. The majority of their content¹ was made subject to the commencement of parts of the Regulatory Powers Act, a more general piece of legislation intended to provide a consistent framework of regulatory powers across Commonwealth agencies. The first attempt to enact the Regulatory Powers Act in 2013 lapsed, as it had only progressed through the House of Representatives when Parliament was prorogued before the Federal election in September 2013.

Over 12 months passed before the relevant parts of the Regulatory Powers Act could be enacted at a second attempt, triggering the commencement of these reforms which significantly strengthen the compliance and enforcement provisions of the OPGGSA, and form a key (albeit rather delayed) progression in the Commonwealth government's implementation of the recommendations of the June 2010 Report of the Montara Commission of Inquiry, and legislative review of the OPGGSA.

A further significant milestone appears to be approaching for regulation of the industry, with the Commonwealth Department of Industry's release on Monday 27 October 2014 of draft regulations to support the titleholder financial assurance obligations introduced into the OPGGSA by the Compliance Measures No 2 Act.

Financial assurance – New draft regulations released

The Commonwealth Department of Industry has released draft regulations to support the new financial assurance obligations under the OPGGSA, with a proposed commencement date of 1 January 2015.

Section 571 of the OPGGSA requires a petroleum titleholder to maintain sufficient financial assurance to ensure that it can meet all costs, including extraordinary costs, expenses or liabilities, arising in connection with carrying out a petroleum activity under the title, including clean-up or other remediation costs related to an escape of petroleum. The amount of financial assurance will be set by reference to the most potentially 'costly' unplanned incident and the worst realistically predictable consequence of that incident. Introduced on 28 November 2013 to support the 'polluter pays' amendments to the OPGGSA, the financial assurance obligations replaced the previous requirement in section 571 to maintain insurance.

Since late 2013, the offshore industry has been awaiting the release of supporting regulations foreshadowed by the earlier amendments, to clarify how the obligation would work in practice, including:

• How compliance with the financial assurance obligation can be demonstrated;
• What impact non-compliance might have on NOPSEMA's acceptance of a titleholder's environment plan; and
• How the industry will transition to the new requirements.

Following a period of consultation with the Australian Petroleum Production and Exploration Association (APPEA) and other industry stakeholders, on Monday 27 October 2014 the Department of Industry released the Offshore Petroleum and Greenhouse Gas Storage (Environment) Amendment (Financial Assurance) Regulation 2014 Cth) (Draft Financial Assurance Regulations) on its website for public consultation.

Once the changes commence, NOPSEMA must not accept a new or revised environment plan unless it is 'reasonably satisfied' that the titleholder is compliant with its financial assurance obligations in a form acceptable to NOPSEMA. The Draft Financial Assurance Regulations will be supported by a costing methodology (currently being developed by APPEA), and new NOPSEMA guidelines released on 3 November 2014 containing more detailed information on how NOPSEMA will assess compliance.

The methodology for assessing the monetary value of sufficient financial assurance is intended to provide flexibility to titleholders to put forward other values if the titleholder or regulator considers that the circumstances warrant it. This approach is broadly based on that used in the UK offshore petroleum regime, a key feature of which is the development by industry of a costing methodology for use by the regulator in assessing the sufficiency of financial arrangements. The Department of Industry and NOPSEMA have raised concerns that relying on a methodology derived from industry, without any independent evaluation of its suitability, may interfere with the proper and independent exercise of discretion under the OPGGSA.

The changes will not apply to an environment plan, or a proposed revision of an environment plan submitted before 1 January 2015.

Compliance Measures - changes that commenced on 1 October 2014

The further changes to the OPGGSA introduced by the Compliance Measures reform package are:

• A civil penalty regime is now in place. It is intended to extend available enforcement options by enabling NOPSEMA to allege breaches of the OPGGSA and seek penalties by way of court proceedings which only require proof on the balance of probabilities, rather than the criminal standard (proof beyond reasonable doubt). Existing OHS offences provide an exception in that they remain solely criminal in nature in recognition of community expectations for such offences. However, a number of the new civil penalties for environmental offences are significantly higher than previous criminal penalties. For example, a breach of a NOPSEMA general direction, significant incident direction or remedial direction attracts a maximum civil penalty of over $1.9M compared with a maximum of $85,000 for the criminal strict liability offence.
• Graduated criminal penalties apply, adding serious new 'fault-based' offences to existing strict liability offences (which require no element of intention, negligence or recklessness). For example, the new 'fault-based' environmental offence of intentionally breaching a NOPSEMA direction attracts a maximum penalty of $1.7M for a body corporate, or $340,000 or five years imprisonment or both for an individual, as opposed to a maximum for the strict liability offence of $85,000 and $17,000 for bodies corporate and individuals, respectively.
• Significantly increased OHS penalties are harmonised with those under the Work Health and Safety Act 2011 (Cth). The general duty of an employer now carries maximum corporate penalties of almost $3M for a reckless breach of duty, and $1.5M for a negligent breach, with the penalty for all the other main duties under schedule 3, including those relating to titleholders, manufacturers and suppliers, raised to the same level.
• A new class of 'NOPSEMA inspectors' replaces the existing division between 'OHS inspectors' and 'petroleum project inspectors', with consistent powers in respect of both safety and environmental matters, conducting 'petroleum environmental inspections' as well as 'OHS inspections'. In a significant change, NOPSEMA inspectors now have all the standard investigation and monitoring powers provided in the Regulatory Powers Act, including powers, exercisable only under warrant, of entry, access, compliance monitoring, investigation and search and seizure of evidence. NOPSEMA inspectors will also retain equivalent powers that previously enabled them to enter facilities and onshore regulated business premises without a warrant for the purpose of compliance monitoring, as distinct from evidence gathering.
• Alternative enforcement mechanisms, such as infringement notices, court imposed adverse publicity orders, injunctions and continuing penalties are now available. Adverse publicity orders require a body corporate found liable for a criminal offence or civil penalty provision to take specified actions to publicise, or otherwise notify persons of, the offence or contravention, its consequences, the penalty and any other related matter. NOPSEMA may apply to the court for such orders up to 6 years after the commission of the offence or contravention. Continuing penalties may be up to 10% of the maximum civil or criminal penalty per day, creating scope for very significant penalties in the event of extended non-compliance. For example, a continuing breach of a NOPSEMA direction may attract a continuing penalty of $190,000 per day.
• Environmental prohibition, improvement and do-not-disturb notices may require petroleum titleholders to take or refrain from action where required to remove significant threats to the environment, or to permit inspection, testing and examination of the site to occur.
• Publication of prohibition and improvement notices on the NOPSEMA website is now mandatory (for both OHS notices and the new environmental notices), within 21 days of the issue of the notice, unless subject to appeal. Publication is intended to give increased prominence to important hazards and required controls within the industry. Adverse publicity may also serve as a deterrent to casual non-compliance.

Compliance Measures - summary of 2013 changes

Other changes to the OPGGSA that commenced in 2013 include:

• Sharing of information was enabled between the regulatory agencies responsible for administering the OPGGSA and equivalent State and Territory legislation in appropriate circumstances, including joint investigations or prosecutions and sharing of lessons learned from compliance monitoring about operational risks in the industry (commenced 14 March 2013);
• A joint regulatory authority for Tasmania was created (commenced 14 March 2013);
• 'Polluter pays' obligations were introduced in the OPGGSA, including third party cost recovery mechanisms to provide the Commonwealth, State and Territory governments with a statutory mechanism to recover clean-up costs from titleholders (commenced 28 May 2013);
• Service requirements for documents under the OPGGSA may now be dealt with by regulation, opening up potential for electronic service and receipt of documents (commenced 28 November 2013);
• Facilitation of voluntary actions by titleholders nominated to act on behalf of multiple-titleholder arrangements has been achieved through extending administrative arrangements to voluntary actions that are permitted under regulations as well as the OPGGSA (commenced 28 November 2013).

Next steps

NOPSEMA is currently progressing the development of a guideline to support the Draft Financial Assurance Regulations, which is likely to be promulgated in advance of the transition to the new financial assurance requirements on 1 January 2015. Meanwhile industry, through APPEA, is working on the costing methodology for assessing the sufficiency of financial assurance that may ultimately form part of NOPSEMA's decision-making processes.

Comments or questions on the Draft Financial Assurance Regulations may be directed to the Department of Industry at the email address offshoreregulations@industry.gov.au.

To adjust to the changes to compliance and enforcement under the OPGGSA, industry participants should:

• Assess the increased regulatory risk arising from the elevated penalties and new enforcement mechanisms;
• Review procedures to ensure recognition of the significant changes to NOPSEMA's compliance monitoring and investigative processes and powers; and
• Provide training to personnel who regularly interact with NOPSEMA to ensure they are aware of relevant legal rights, powers and obligations.

Footnote

¹Schedules 1 and 2 of the Offshore Petroleum and Greenhouse Gas Storage Amendment (Compliance Measures) Act 2013 and the Offshore Petroleum and Greenhouse Gas Storage Amendment (Compliance Measures No. 2) Act 2013