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The Offshore Safety Directive (6) – offshore operatorship

On 19 July 2015, a raft of legislative amendments and new regulations came into force implementing the Offshore Safety Directive (2013/30/EU) (OSD). The key regulations are the Offshore Installations (Offshore Safety Directive) (Safety Case etc.) Regulations 2015 and the Offshore Petroleum Licensing (Offshore Safety Directive) Regulations 2015. The application of the new regulations is phased in over a transitional period between 19 July 2015 and 19 July 2018.

The new regulations create new obligations, duties and liabilities for offshore licensees and the companies they appoint to carry out offshore operations. The changes do not represent a radical overhaul of the existing regime. However, the changes are important – especially in terms of the contractual relationships between oil companies, licence operators and appointed installation duty holders.

Exploration, production and services companiesOil rig and sheep would do well to scrutinise their existing arrangements in the light of the changes. They would also do well to ensure they carry out thorough contractual due diligence on proposed appointments in the light of the new regulations.

Here are some key points:

  • Consolidation of environmental and safety duties

One of the “structural” changes introduced by the new regulatory regime is to get rid of the old separation of environmental and safety duties.

Historically, environmental compliance on offshore platforms has been the responsibility of licensed operators, regulated by DECC; whereas safety has been the responsibility of “duty holders” appointed by the licensees under safety legislation, regulated by HSE. Accordingly, the appointed safety duty holders on offshore platforms were sometimes different companies from the licensed operators.

This is now changing. Under the new regime, a single appointed installation operator must be responsible for both environmental compliance and safety management at any one time.

  • New competent authority

There is a new consolidated competent authority regulating OSD matters, the Offshore Safety Directive Regulator (OSDR), made up of both HSE and DECC.

The Government decided against taking the opportunity to simplify the regulatory structure and create a single offshore regulator in charge of all aspects of both environmental and safety regulation for the industry. Rather, they have created OSDR as a joint HSE/DECC regulator to cover OSD issues; HSE and DECC will continue to exist as individual safety and environmental regulators, and will still have separate functions under individual permitting regimes.

  • New duties for offshore installation operators

In addition to the consolidation of safety and environmental duties, appointed installation operators will have a number of brand new duties which did not exist under the previous regime – at least as mandatory legal requirements. These new duties include the preparation and submission of a Corporate Major Accident Prevention Policy (CMAPP), and an obligation to produce a Safety and Environmental Management System (SEMS).

  • Financial provision and environmental liability

Licensees and operators have always been required to demonstrate adequate financial provision to deal with oil spills. However, the historic approach to financial provision for oil spills was arguably rather weak. (This is in contrast to the historic approach to decommissioning security – which has always been robust, and underpinned by a statutory liability regime under the Petroleum Act.)

For example, DECC had a power rather than a duty to check the financial resources of licensees and operators to cope with pollution incidents. Also, licensees and operators alike were required to demonstrate financial provision for pollution liability indirectly and at the regulator’s discretion, for example as a pre-requisite for obtaining operator approval or as a pre-requisite for approval for particular well operations. In other words, demonstrating financial resources to cope with major pollution incidents was not required by way of a direct legal obligation or pursuant to a standard licence condition – it was required by the regulator at its discretion.

By contrast, the system for ensuring that licensees have the resources to deal with any major pollution incidents has now been strengthened and formalised. The licensing authority (in practice the OGA, currently an executive agency of DECC which issues licences and supervises the activities of licensees) will have a specific duty as part of the licensing process to obtain details of and take into account a licensees’ financial capability; and there are new more robust requirements on licensees to demonstrate and maintain adequate financial provision to cover the costs associated with environmental incidents. There are also new (potentially problematic) rules requiring licensees, as distinct from their appointed operators, to be “financially liable” for remediating environmental damage.

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The new regulations are significant. They are also unlikely to spell the end of what is a wider process of legislative reform in this area – driven by the Macondo incident. Tucked away near the end of the OSD (article 39) is a requirement on the EU Commission to report on the adequacy of existing legal liability regimes in Europe to cover compensation and liability for major offshore accidents. This is likely, in our view, to result in proposals for significant changes to the civil and criminal liability regimes applicable to offshore incidents. But that’s a subject for another blog post!

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The Offshore Safety Directive (6) – offshore operatorship

The Offshore Safety Directive (5) – Government consultations

On 28 July 2014, the Government launched two consultations in parallel on the implementation of the Offshore Safety Directive (the OSD). One of the consultations is led by DECC and the HSE (the DECC/HSE Consultation) and the other is led by Defra and the Welsh Government (the Defra Consultation). Both consultations run from 28 July 2014 to 21 September 2014.

The DECC/HSE Consultation concerns the transposition of the OSD and the establishment of an offshore competent authority.  It also seeks comments on HSE’s proposals to update onshore oil and gas health and safety legislation to take account of emerging energy technologies and the review of two Approved Codes of Practice. The DECC/HSE Consultation annexes a suite of draft regulations for comment.

The Defra Consultation is narrower. It concerns the transposition of Article 38 OSD, which extends the scope of environmental liability under the Environmental Liability Directive to Marine Waters. Separate consultation exercises will be taking place later in the year in relation to marine waters off Scotland and Northern Ireland.

The safety and environmental regime which OSD required the UK Government to implement closely resembles the existing offshore regulatory regime in the UK.  Therefore this consultation does not involve proposals to completely dismantle and then reassemble the offshore regime.

However  there are some important issues that this consultation opens up for public comment and debate.  Oil and gas companies would be well advised to give careful consideration to the issues raised.  Key points of interest include:

  • Consolidation of legal duties under one appointed operator.  DECC take the view that as a result of the OSD the same entity must be appointed as both safety duty holder and operator under the Petroleum Act.  This is not consistent with the approach taken by many operators in the North Sea. The OSD requirements on this point need to be considered carefully.
  • Proposed new Competent Authority.  The OSD requires a single authority to be responsible for safety and environmental regulation.  The consultation proposes, as expected, a “competent authority” made up of both HSE and DECC to deliver this – similar to the Competent Authority under the onshore COMAH regime.  However, arguably this complicates rather than simplifies the current regulatory structure.  The new “hybrid” authority will be responsible just for the documentation required under the OSD, whereas operational environmental licences will still be issued by the existing offshore division within DECC.
  • Operator / Licensee Liability for Environmental Damage.  The OSD extends “environmental damage” under the Environmental Liability Directive to include marine waters.  This will have the effect of increasing the potential liability of operators to remediate environmental damage  in the event of a major spill from an offshore installation.  Article 7 of the OSD requires licensees under the Petroleum Act to be “financially liable” for such remediation work.  Defra are consulting on whether any changes need to be made to existing Environmental Damage Regulations to achieve this.

We will be reporting further on these and other points of interest in due course.

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The Offshore Safety Directive (5) – Government consultations

The Offshore Safety Directive (4) – the bigger picture

Our previous posts on the Offshore Safety Directive (“OSD”) discussed some of the anticipated new regulatory requirements as well as what companies and the UK Government need to be considering to get ready for the OSD’s implementation. We will be looking further into some of the tricky issues once the HSE and DECC’s hotly anticipated consultation paper and draft statutory instruments have been published, hopefully this month.

The forward thinking amongst you will already be asking “what’s next?”. “Quite a lot” is the answer. With further reforms on the horizon in both the civil and criminal liability spheres, the OSD appears to be only the EU’s first step in reforming our offshore environmental and safety regimes in response to the Macondo disaster.

The offshore oil and gas industry will be subject to common rules governing a range of safety and environmental management issues (the OSD), together with a common liability regime to govern marine remediation in the event of a major spill (the Environmental Liability Directive). There are, however, two other important areas of legal liability that the OSD does not cover and that remain a matter of national law within the EU:

  1. criminal liability (e.g. punitive fines imposed by courts or custodial sentences for senior managers); and
  2. liability to pay damages (e.g. compensation to fishermen for economic losses caused by an oil spillage, or to coastal businesses for losses caused by coastal pollution).

This may change. The European Commission is required to:

  • report to the Parliament and Council by 31 December 2014 on the availability of financial security instruments, and on the handling of compensation claims;
  • examine the appropriateness of bringing certain conduct that leads to a major offshore accident within the scope of Directive 2008/99/EC on the protection of the environment through criminal law and report on its findings by 31 December 2014; and
  • report by 19 July 2015 on its assessment of the effectiveness of liability regimes in the EU in respect of damage caused by offshore oil and gas operations.

The Commission commissioned initial research on these areas whilst the OSD was still being negotiated, with Maastricht University completing its report on civil liability and financial security for offshore oil and gas activities on 28 October 2013.

The reports the Commission is preparing will be accompanied by legislative proposals where appropriate. Offshore oil and gas companies in the EU would be well advised to keep a close eye on these developments. It may be through this route that we see the establishment of a more US-style regime for levying fines and imposing liability following offshore spills.

The Offshore Safety Directive (4) – the bigger picture

The Offshore Safety Directive (3) – competent authority

The Offshore Safety Directive (“OSD”) provides for a single competent authority to deal with both environmental and safety issues. The OSD also requires the joint environmental and safety regulator to be independent of the body dealing with economic development of offshore resources and licensing.

The current UK regulatory structure does not comply with the OSD. Separate entities regulate environmental issues (DECC) and safety issues (HSE); and the same entity (DECC) performs the role of both environmental and economic regulator. Some non-structural changes have already been made as a result of recommendations in the Maitland review, with the HSE and DECC working together to improve effectiveness under a new Memorandum of Understanding. However, further changes will be needed as the OSD contains legal requirements, not just recommendations.

Rather than overhaul the existing machinery of Government to establish a “new” competent authority, the HSE and DECC have made clear in stakeholder meetings that they propose to create an “umbrella” competent authority, consisting of the relevant parts of DECC and HSE. This would be similar to the onshore COMAH regime where the Environment Agency and HSE work together as the competent authority for major hazard sites. The proposed competent authority has been described by one optimistic commentator as a swan gliding gracefully over the waters of offshore environmental and safety regulation, with the HSE and DECC paddling diligently underneath. We will have to wait and see how the swan fares on the choppy waters of the North Sea.

SwanJoking aside, the idea of a joint HSE/DECC competent authority does seem to be a sensible and practical solution to the OSD requirements. To overhaul the machinery of Government to produce a new separate health, safety and environmental regulator for offshore activities would be difficult given the existing regulatory structure. There is a question mark, however, over whether the proposed competent authority will be strictly compliant with the terms of the OSD.

 

 

The Offshore Safety Directive (3) – competent authority

The Offshore Safety Directive (2) – reporting requirements

Oil and gas companies will need to ensure that their existing contractual arrangements relating to information sharing and reporting enable them to comply with the enhanced reporting requirements of the Offshore Safety Directive (“OSD”). We take a quick look below at the new reporting requirements that will be introduced into UK law by the transposition of the OSD.

Reporting accidents outside the EU UK registered companies conducting offshore oil and gas operations outside the EU as licence holders or operators will be required to submit reports, on request, to the UK Government in respect of any major accident in which they have been involved outside the EU. These reports will then be exchanged with competent authorities of other Member States. Wide ranging and onerous information requests may follow. Companies will also need to be mindful of the potential liability implications of disclosing such information.

Corporate major accident prevention policy Operators of EU production installations and owners of EU non-production installations will have to produce corporate major accident prevention policies covering their installations within the EU. This is a new requirement. The policies will need to specify the extent to which equivalent policies are in place for operations outside the EU.

Safety cases Operators and owners will need to prepare major hazard reports for their installations. These will need to be approved by the competent authority before any operations can start or be continued. These reports will be similar to the current UK safety case but will need to consider environmental as well as safety matters.

The Offshore Safety Directive (2) – reporting requirements

The Offshore Safety Directive (1) – environmental liability

Renewable Energy ZoneHSE and DECC have been busy drafting and amending legislation to transpose the Offshore Safety Directive (“OSD”) into UK law. As the grand reveal of these draft regulations and a formal consultation paper is imminent, it is worth reminding ourselves of the anticipated new and modified regulatory requirements that both Government and industry are, and will be, grappling with.

First, we look at liability for environmental damage.

The OSD extends the meaning of “water damage” under the Environmental Liability Directive (“ELD”) to include damage to “marine waters”, which includes the waters of the renewable energy zone and continental shelf. This change increases the range of remediation actions that companies can be required to carry out in the event of a spill outside national territorial waters.

Article 7 of the OSD requires Member States to ensure that petroleum licence holders are financially liable for the prevention and remediation of environmental damage as defined in the ELD. On the face of it, this appears to reflect the prevailing position under UK law whereby licensees are jointly and severally liable under the petroleum licence and then typically agree in a Joint Operating Agreement (“JOA”) to apportion liability amongst themselves pro-rata to their interest share. However, the liability apportionment in the standard North Sea JOA may not be consistent in every detail with the article 7 requirement.

The UK Government will have to decide whether it needs to take steUK Continental Shelfps to address the standard liability apportionment in North Sea JOAs which it is asked to approve. The Government will also need to consider whether the OPOL regime, under which operators (as distinct from licensees) assume liability for pollution damage, is compliant with article 7.

Finally, the OSD requires Member States to ensure that licences are not granted until satisfactory evidence has been provided that the applicant has or will make adequate financial provision for potential liabilities. This is not a new concept in the UK offshore world, however the Government, oil and gas industry, and insurers will need to tackle the question of how to factor extended ELD damages into financial provision calculations.

The Offshore Safety Directive (1) – environmental liability

Round 14 for onshore oil and gas licensing: are fault lines emerging between DECC and environmental groups?

In December 2013 DECC published, and submitted for consultation, a Strategic Environmental Assessment (SEA) for further onshore oil and gas licensing. The SEA environmental report is required to identify the likely significant effects of proposed licensing on the environment, and identify the reasonable alternatives to DECC’s proposal. The consultation period closes on 28 March.  DECC will consider responses to the consultation before issuing a post-adoption statement that will summarise government policy on further onshore licensing.

Just as the consultation period was drawing to a close, six countryside and wildlife organisations, including the National Trust and RSPB, released a report entitled Are we fit to frack?”.  Referring to analysis in the SEA environmental report prepared by AMEC, the Are we fit to frack? report sets out concerns about the potential impact of unconventional onshore oil and gas developments on protected species and habitats in the UK.

Analysis in the report indicates that a significant proportion of land currently “under licence” comprises designated protected areas of one kind or another (e.g. 5.1% being sites of special scientific interest; 5% being national parks; and 9.8% being Areas of National Outstanding Beauty).  The analysis also indicates that a greater proportion of the land being considered in the 14th licensing round is similarly protected.  Despite this, the National Trust, RSPB, Wildlife Trust and Wildfowl and Wetlands Trust between them own only a very small proportion of these areas.  Perhaps as a result, the first of 10 recommendations made by the report is the creation of “shale gas extraction exclusion zones” to avoid sensitive areas for wildlife and water resources.

The SEA environmental report concludes that the existing regulatory framework will identify, assess and mitigate to an acceptable level any environmental effects. It states that construction and operational best practices can minimise effects to a level that is acceptable to both regulators and communities. By contrast, Are we fit to frack? describes the current regime as not fit for purpose. The report considers the current safeguards are too reliant on self-inspection and the HSE ,which “does not have the necessary specialist knowledge”.

The UK Onshore Operator’s Group (UKOOG), promptly published a response to the report on its website.  Chief Executive  Keith Cronin commented, We have studied this report and the fact is that many of the recommendations are already in place in the UK or are in the process of being put in place. We hope that the publication of this report, despite a number of critical inaccuracies, will kickstart a process of open dialogue which we have already proposed to conservation agencies.”

Are we fit to frack certainly has the potential to kickstart a constructive dialogue.  However, it also has the potential to polarise the debate, with important stakeholders on each side.  Indeed the debate already looks adversarial, with the current UK Government adopting an entrepreneurial “pro-shale” stance, but the EU Commission, conservation groups, and local residential groups all urging caution.

This emerging fault line could pave the way for legal challenges against decisions taken by DECC in the 14th licensing round.  Demonstrating the absence of harmful effects on protected species (for the purposes of the Habitats Directive) could prove costly for developers, whether this is tackled at the licensing / consenting stage, or subsequently in court.

The prospect of legal challenges can lead to considerable uncertainty for developers and investors.  More generally, the impact of the Are we fit to frack? report on public perception should not be overlooked.  Unlike other published environmental assessments, the report was widely covered in the media, thereby contributing to the groundswell of public concern about fracking.  This recently released video from the European Commission summarises the divergence of public opinion on fracking.  Both the video and the Are we fit to frack? report emphasise that navigating the route to achieving a “social licence” is inextricably linked to the route to obtaining regulatory consents.

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Round 14 for onshore oil and gas licensing: are fault lines emerging between DECC and environmental groups?

Are you ready for the Offshore Safety Directive?

Deepwater HorizonThe Deepwater Horizon incident in April 2010 killed 11 people and caused one of the worst oil spills in history. It prompted an industry-wide review of offshore environmental and safety policy and legislation.

The EU’s response was the Offshore Safety Directive (“OSD”). The OSD entered into force on 18 July 2013 and aims to “reduce as far as possible the occurrence of major accidents relating to offshore oil and gas operations and to limit their consequences”.

The OSD establishes, for the first time, an EU-wide legal framework for offshore safety and environmental management in the oil and gas sector. It largely reflects the current UK model, so much of its content feels familiar. That said, there are some significant new, or at least modified, regulatory requirements that both Government and industry need to start thinking about. Extension of environmental liability, enhanced reporting requirements, the structure of our regulators, financial liability of licence holders for environmental damage and contractual allocation of liability will all require serious consideration.

Time is ticking away. Member States have until 19 July 2015 to introduce implementing legislation to transpose the OSD’s requirements into national law. They then have up to one or three years to apply this national legislation (depending on the parties and types of installation involved). Companies could theoretically therefore be required to comply with new domestic legislation in less than a year and a half.

Over the coming months we are going to be exploring some of the changes required by the OSD and the tricky issues that arise from the Directive’s application in the UK, so watch this space! (Or, subscribe to our blog to receive our next OSD updates)

Are you ready for the Offshore Safety Directive?