Arctic Risk Liability in the Arctic

from Lloyd’s Report 2012: Arctic Opening – Opportunity and Risk in the High North

The question of an appropriate liability regime for oil companies operating in the Arctic is contested amongst local populations, environmental campaigners, oil companies and central and federal governments.

Several international regimes govern liability for marine pollution caused by shipping (xlii).There are well-established norms that provide for prompt compensation payments to victims for damage suffered in the territory of a state that is bound by the relevant treaties. Civil liabilities for shipowners are limited under these regimes to around $139m (xliii), but an international fund accumulated from levies on oil cargo interests (xliv) can supplement compensation to a maximum of around $315m¹ . Environmental liability for shipowners is limited to economic losses caused by the pollution and the reinstatement of clean-up costs and only extends to damage in coastal state maritime zones.

These conventions have been evolving since 1969 and the trend is towards increasing liabilities and the scope for claims. For example, a further convention from the IMO on hazardous and noxious substances, not yet in force, covers risks to life and property beyond pollution and increases the coverage beyond oil to, for example, other liquids and solid materials possessing chemical hazards² . When this convention is enacted, shipowners from contracting party states will be liable to a maximum limit of 115 million “Special Drawing Rights (SDR)”, currently $178 million (xlv).

At the time of writing, there is as yet no international instrument on liability and compensation resulting from spills from offshore oil rigs, pipelines and sub-sea wellhead production systems³ . An EU proposal currently under discussion would apply to offshore oil projects in the Arctic territories of Norway and Denmark and possibly to all EU companies, wherever their operations. This would increase the companies’ compliance requirements for both equipment standards and financial guarantees. An Arctic Council Task Force is developing recommendations on an international instrument on Arctic marine oil pollution, preparedness and response, due for release in 2013. This aims at developing a more streamlined process to ensure more rapid clean-up and compensation payments. Given the potential trans-national impact of spills, this may include an international liability and compensation instrument. Greenland, for example, has argued that “different national systems may lead to ambiguities and unnecessary delays in oil pollution responses and compensation payments” and that any regime must adapt as understanding of the ‘worst case scenario’ in the Arctic changes⁴ .

The appendix illustrates the variety of national environmental regulations covering Arctic offshore operations. The inadequacies of both company and government capacities to act in the event of a disaster were demonstrated following the Macondo blowout in the Gulf of Mexico in April 2011. The Arctic’s vulnerable environment, unpredictable climate and lack of any precedent on which to base cost assessment have led some environmental NGOs to argue that no compensation would be worth the risk of allowing drilling to take place in pristine offshore areas. Others are campaigning for more stringent regulations and the removal of liability caps for investors.

At the licensing stage, governments need to assure themselves of the capability of companies to prevent a blowout and, in the event that it occurs, the capacity to stop it quickly, contain it and clean up any oil leakage. Arctic conditions could present difficulties in reaching the site of a blowout and containing a spill. The Canadian National Energy Bureau’s ongoing Review of Offshore Drilling in the Canadian Arctic (RODAC), for example, takes into account infrastructure gaps (e.g. coastguard facilities, dedicated emergency helicopters, booms, absorbents and skimmers) that would hinder the rapid distribution of oil spill response equipment to the Beaufort Sea⁵ . Companies drilling in offshore Canada must already have well-control technology installed and maintain the capacity to drill a same-season relief well (to mitigate the consequences of a blowout), despite the high costs this would impose on producers, potentially driving investors away⁶ . New filing regulations released as part of the RODAC allow companies to waive this condition if they can prove the same containment impact by other methods. The Pew report cited above recommended that the US Government should require oil companies to demonstrate their containment capacity in test drills⁷ .

Whether the liability for damage to human health and economic losses should be limited or unlimited is an ongoing debate in Canada and the US. General ‘unlimited liability’ is often thought to create a risk too great for investors, although some may accept it for specific aspects such as the loss of current and future fishing harvest revenues⁸ . Apart from the damage to local economies, ecosystem damage and degradation are notoriously difficult to put a value on and are not currently accounted for under national regimes. Some upper liability limits apply to companies operating facilities in offshore Alaska and Canada’s eastern Arctic. The US Oil Pollution Act specifies a limit of US$75m for economic damages (xlvi), and the Canada Oil and Gas Operations Act of 1985 specifies CAN$40m for loss or damage, remediation and restoration (xlvii).  However, neither applies in cases of fault or gross negligence, where liabilities are unlimited. Norway, Greenland and Russia do not set upper limits for companies (see Appendix for more details).

Even though much greater claims can be pursued through the courts where fault can be established, some NGOs are arguing that the liabilities cap and extent of financial responsibility a company must demonstrate to win a lease put the public purse under enormous risk⁹ . In allowing investors without sufficient funds to pay for the clean-up and reparations for a large-scale environmental disaster, the cap is essentially a transfer of risk to the public sector to encourage investment. In the US a company must demonstrate financial capability of up to US$150m. This is a fraction of the estimated US$40bn clean-up and compensation costs for the Macondo disaster. A smaller company than BP, for example, might have had to declare bankruptcy, leaving the state to foot the bill.

Financial capacity is an evolving area. The requirements are especially stringent in Greenland. In its 2010 Baffin Bay licensing round, the government, recognising the population’s reliance on the local ecosystem for its livelihood, specified that companies must have at least $10bn of equity to qualify and that smaller companies winning exploration acreage would have to provide a $2bn bond to cover the clean-up costs of a spill. This would either involve a parent company guarantee for the larger companies or be a straight advance at the time of the award¹⁰ .

In most cases, several companies will be involved – the concessionaires and the service companies – with various financial capacities and insurances. An efficient liability regime will help allow rapid identification of the responsible party and collection of compensation. In Norway, for example, the law clearly states that the licensee of a block is responsible for any pollution caused by operations there, regardless of fault. If a service company were at fault, the licensee would still be liable for all damages. They would have to pay out and then fi le a suit against the service company to recover its costs. This is in marked contrast to the US, which apportions responsibility to the entity owning the vessel or infrastructure from which pollutant was discharged. Companies will need to be aware of how binding agreements with the government would be if a major accident occurred, and of the potential for future international legislation – such as that proposed to the EU and to the Arctic Council – to override national jurisdictions.

As the appendix demonstrates, environmental regulation and liability in the Arctic are under scrutiny and subject to change. They will be shaped by public responses to recent and future cases of pollution, by evolving scientific understanding of Arctic ecosystems and by the domestic politics of the resource holders.

Appendix: Environmental Regulation of Arctic Offshore Oil and Gas Activities 

Footnotes:

(xlii) These are: The 1969 International Convention on Civil Liability for Oil Pollution Damage (CLC) and the 1971 International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage (Fund Convention); International Convention on Civil Liability for Bunker Oil Pollution Damage 2008.

(xliii) International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage in 1992, based on the value of Special Drawing Rights (SDR) at 27 February 2012.

(xliv) Levies are calculated on the basis of the shipping company’s national share of international oil receipts.

(xlv) SDRs are an international accounting unit.

(xlvi) This limit is set by the US Oil Pollution Act of 1990 and does not apply to civil and criminal penalties under federal and state law, oil spill removal costs under federal law, or claims for damages brought under state law.

(xlvii) In Canada, higher amounts of liability could be sought under the Fisheries Act with the civil liabilities provisions not subject to any limitations. Amos and Daller, 2010.

Charles Emmerson, Glada Lahn, 2012, Arctic Risk Liability in the Arctic, Lloyd’s.©