Decommissioning In Australia – Is The Insurance Market Prepared?
Legal News & Analysis - Asia Pacific - Australia - Insurance & Reinsurance
5 March, 2020
Whilst decommissioning of offshore and onshore sites is a nascent industry in Australia, it is an industry that is set to become increasingly prominent in coming years. It has been estimated that the decommissioning liability of Australia's offshore petroleum alone will be US$21 billion over the next 50 years. This fledgling industry presents a significant opportunity for insurers to deliver highly innovative, carefully tailored cover to the various parties involved in the process. This article explores the various types of cover on offer, in the context of the changing regulatory landscape in Australia.
2 Overview of Australia's regulatory decommissioning framework
Decommissioning of offshore oil and gas sites is regulated by international, federal and state law.
The National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) is the independent expert regulator for health and safety, environmental management, structural and well integrity for offshore petroleum facilities and activities in Commonwealth (and in most cases, coastal) waters. NOPSEMA monitors and enforces compliance with the various regulatory requirements.
Notably, under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGS Act), a titleholder (usually the operator) must remove from their title area all structures, equipment and 'other property' that is no longer used for operations. Complete removal is therefore the "base case" requirement for decommissioning. This default position is consistent with Australia's international obligations to the United Nations.
The OPGGS Act also requires titleholders to maintain sufficient financial assurance to meet the costs, expenses and liabilities arising in connection with, or as a result, of, carrying out a petroleum activity and complying (or failing to comply) with a requirement under the Act. This includes the costs associated with complying with a NOPSEMA direction relating to remedial matters such as removal of property, plugging and abandonment of wells and rehabilitation of a title area.
Contrary to the federal and international regulation governing offshore decommissioning, the decommissioning of onshore mines and petroleum sites is regulated by the laws of the individual Australian states and territories.
Generally, the operators of onshore mines and petroleum sites are required to submit an operations plan to the relevant authority, which includes a description of their plans concerning decommissioning, abandonment and rehabilitation. It is also expected that operators will regularly update and revise their decommissioning plans during the course of operations.
Some jurisdictions, for example Western Australia, also provide operators with decommissioning guidelines.
As a high hazard industry, there are significant environmental risks associated with the decommissioning of offshore and onshore sites. In the event of a pollution or contamination incident, the "polluter pays" principle applies; a titleholder must contain and stop petroleum spills, clean up the spill, remediate the environment and carry out environmental monitoring of the consequences of the spill. If the titleholder fails to meet its statutory responsibility, the Commonwealth, State or Territory has a right of action against the titleholder/ operator in relation to costs it incurs for remediation. Additionally, the erring titleholder/ operator could face civil liability based on common law principles e.g. negligence, nuisance and trespass. Third parties may in addition seek damages for loss or injury alleging that a titleholder was negligent in its decommissioning operations (e.g. failure to properly mark property abandoned in the marine environment or to adequately plug a well).
It is also worth noting that operators which are public companies are facing increasing pressure to account for and disclose their environmental liabilities. In October 2019, New Standard Energy (NSE) became the first company to be suspended from trading by the Australian Stock Exchange after it failed to respond to a formal request to explain why its rehabilitation liabilities relating to four well sites had not been included in the company's financial reporting.
3 Decommissioning All Risks insurance
The insurance sector and project stakeholders must work together to effectively address the complex challenges posed by the decommissioning process. While no site is the same, a single market wording would provide clarity and certainty to all stakeholders, as long as necessary amendments are implemented to reflect the bespoke needs of each project. This market wording should reflect contribution from underwriters, insureds and lawyers alike.
Decommissioning risks and liabilities can usefully be conceptualised in three ways: financial provisioning for known future liabilities (i.e. the inevitability of decommissioning projects), risks associated with the act of decommissioning (pollution, property damage, third party injuries etc.) and post-closure liabilities (pollution etc.). It follows that the insurance market can play an important role in two ways: by providing an alternative form of long-term financial assurance to ensure that decommissioning funds are available when required; and by covering the conventional insurance risks associated with the process itself. It is likely that the third party property and liability exposures will be the greatest insurance risks.
Whilst still a relatively emerging insurance industry in Australia, the London Market has for several years been offering insurance products to cover decommissioning risks related to offshore oil and gas sites in the North Sea. For example, various Decommissioning All Risks (DAR) products have been developed to cover both operators and their contractors during the life of the decommissioning project. The DAR project policy has been designed to sit alongside the operator's property and liability policies as well as the contractors' employer's liability, hull and protection and indemnity cover. It is designed to be a project policy which covers all parties for the work they perform, in the acknowledgement that liabilities between the contractors and their operators will usually be clear under the knock-for-knock regime that tends to govern the underlying contracts.
In relation to post-closure liabilities, various providers also offer operational coverage and dedicated long-term policies for any risks and liabilities associated with pollution from the plug and abandonment of wells.
There has been some suggestion that DAR policies may not be necessary, and that the parties should instead closely consider their pre-existing cover before deciding whether they need to purchase any additional cover e.g. removal of wreck/debris, charterers' liability. Indeed, some insurers and insureds are of the opinion that traditional package covers for first party loss, third party liability and Operator's Extra Expense ("OEE") cover, liability and removal of wreck cover offer adequate protection for the full spectrum of decommissioning activities. However, this approach may be problematic in the decommissioning context.
For example, insurance limits for the removal of wreck and debris are typically 25% of the declared value of a structure yet during the decommissioning phase the value of the structure will likely be written down to zero or of nominal value. That is, as there are no 'insured works' (where the end goal is to leave the site in the condition that it was in before construction started), the limits arguably become meaningless. A further issue is that package coverages usually exclude construction works and decommissioning would likely be treated as construction for these purposes; the coverage afforded would therefore be sub-limited under the Minor Works clause.
In addition, if wells have been plugged and abandoned, where the insured requires long-term coverage for any of those wells, they will need to continue to be scheduled (and premium will continue to fall due).
There is an additional risk to operators that they will be required to bear all liability (including third party liability) associated with any property left in the environment post-completion. This potentially means that an operator (or, in some jurisdictions such as Queensland, a "related person") could be held liable for costs associated with clean-up long after operations have concluded. Gradual pollution which for example results in groundwater contamination could give rise to tortious actions. The rate of scientific and technological developments will arguably also make it easier for third parties (e.g. landowners) to identify the polluter and prove causation in the future.
In terms of cover, companies including the operator will need to take out appropriate environmental liability insurance. Typical policies provide first and third party cover - the first party cover being triggered by the insured discovering the pollution and the third party cover being triggered by the insured receiving a third party claim, which can also include a "clean-up" order from a regulator. The policy may provide cover for any fines or penalties imposed on the insured as well as the associated defence costs.
In the past and in an onshore decommissioning context, regulators and third parties have struggled to successfully bring claims against a culpable company, often leaving the taxpayer to foot the bill for any remediation costs. However, this is set to change in coming years with the growing support for legislative reform which shifts responsibility back onto the resources industry.
One often insurmountable obstacle to holding operators liable has been the insolvency regime in Australia. For example, in 2018 Linc Energy was convicted of causing serious environmental harm by mismanaging the underground burning of coal seams at the plant, causing the release of contaminants into the soil, air and water. However, and despite the fact that the company was "persistent and in clear breach" of its environmental obligations over a period of seven years and fined AUD4.5million, Linc Energy was in liquidation with debts of AUD320million. As such, it was able to divest itself of the future cost of the clean-up by disclaiming the land.
1 Directors & Officers insurance
While this sets a dangerous precedent which allows insolvent companies to escape liability, there have been recent reforms (e.g. in Queensland) to expand liability to "related persons" of companies. This means that holding companies, associated entities, land owners and directors and officers could be deemed liable.
These recent reforms accompany a general trend towards stricter compliance and enforcement by regulators across all domestic industries.
In 2016, the regulator issued an Environmental Protection Order to the former Chairman and Managing Director of Linc Energy, requiring him to personally bear the costs of remediation and rehabilitation of the damaged site and to provide a bank guarantee worth $5.5million. Five of Linc's directors including the former Chairman were criminally charged with failing to ensure Linc's compliance with its environmental obligations.
In the US, plaintiffs are seeking to link environmental disasters to prior statements by the board or regulator that no such event was foreseeable. For example, in October 2019, a shareholder of the Chemcours Company filed a class action complaint alleging that Chemcours (and its CEO and COO) made misrepresentations to investors and concealed the true extent of the massive environmental liabilities the company incurred from decades of releasing a variety of chemicals that have been linked to cancer and other serious health consequences. Commentators have stated that lawsuits such as this one arising from a company's' liability exposures may be of interest to D&O underwriters seeking to develop appropriate standards.
In Canada and similar to Linc Energy, there are examples of cases where directors of bankrupt companies were held personally liable for environmental contraventions. For example, the Ontario Ministry of the Environment issued a CAD15million pollution clean-up order against thirteen former directors of Northstar Aerospace Canada, after the company had filed for bankruptcy. As Northstar's D&O policy excluded pollution, the former directors were held personally liable, and were obliged to pay a CAD4.75 million settlement.
D&O policies have generally contained pollution exclusion clauses or carved out costs for environmental remediation from the definition of covered loss. However, given that the regulatory landscape is evolving to extend liability and exposure for pollution and contamination to directors and officers, more insureds will be demanding pollution-inclusive D&O covers.
Some Insurers have as a result removed their pollution exclusions or alternatively are providing exceptions to the pollution exclusion for third party injury/damage and/or derivative claims associated with the incident. Some insurers are also already offering products to cover defence costs for environmental prosecutions.
Given the serious environmental risks and rapid expansion of liabilities associated with decommissioning, directors and officers will undoubtedly seek out D&O cover to protect themselves from their individual liabilities, and Insurers covering Australian projects should be alive to this demand, and consider the extent to which they want to provide cover.
2 Professional indemnity insurance
As decommissioning an offshore or onshore site is a highly technical and dangerous process, each project will require a range of contractors and specialist consultants. Like owners and operators, contractors may be exposed to environmental liabilities during the decommissioning process.
In a recent Australian Land and Environment Court decision, a construction company (CPB) was held to have contravened environmental legislation by causing an offensive odour to be omitted from a former waste landfill. CPB accepted that it had relied on inadequate leachate management systems that had been designed by its consultants when it should have engaged a suitably qualified expert. Ultimately, the company was ordered to pay $295,000 in lieu of a fine and $150,000 in investigation and legal costs.
Where contractors do not have access as an "other insured" to a DAR policy, they can take out environmental liability insurance to cover them for their work, in the form of Contractors Pollution Liability (CPL) coverage. CPL covers a contractor for third party liabilities and property damage, as well as clean-up costs associated with the release of pollution in connection with insured operations. Some insurers also provide specialist support services to assist with incident response. For example, AIG offers its Pollution Incident and Environmental Response (PIER) network to its environmental policyholders, providing access to a range of specialists including crisis communication and public relations professionals.
Additionally, the Australian insurance market also offers tailored professional indemnity insurance for environmental consultants against potential losses arising out of acts, errors and omissions relating to a range of professional services including advice on pollution, waste control and land management. It can be anticipated that more and more consultants will now opt to purchase this form of cover given that many of the technologies and risks associated with decommissioning may be innovative and therefore susceptible to error.
As the regulatory framework surrounding the decommissioning industry in Australia continues to evolve, insureds are looking for more and more ways to adequately protect themselves against the associated risks. The insurance industry therefore needs to adapt to changing demands, in the acknowledgement that the exposures are likely to be liability-led rather than related to first party property risks.
The recent Australian Court decisions referred to above may create exposure for operators, which will need to be factored in at the product placement level. Insurers must acknowledge the potential for "associated companies" to be held liable, where for example a parent company disclaims the project due to insolvency. Understanding the corporate structure of any insured is therefore paramount to informed risk assessment by Insurers.
As an international firm, Clyde & Co is well placed to assist Insurers at the underwriting or claims stage of decommissioning cover, with the benefit of varied experience across our global network with decommissioning wordings in other jurisdictions.
For further information, please contact:
Gareth Horne, Partner, Clyde & Co
 ABC – Oil and gas exploration company NSE suspended by stock exchange over rehabilitation liabilities (15 October 2019).