Introduction to Environmental Regulatory Frameworks for Offshore Oil and Gas Industry

Introduction to Regulatory Profiles

The ‘Offshore Oil and Gas Environment Forum’ is one of a number of activities initiated by the United Nations Environment Programme (UNEP), the United Nations Commission on Trade and Development (UNCTAD) and the petroleum industry to help facilitate information exchange. The ‘Environmental Regulatory Frameworks for Offshore Oil and Gas Industry’ is one component that has worldwide application. The information is presented as a series of national profiles and demonstrates the variety of mechanisms- regulatory, co-regulatory and voluntary, in place between industry and governments.

How the profiles were developed

The profiles were compiled via contacts from UNEP, the Exploration and Production Forum (E&P Forum), World Wide Web, literature searches and a survey questionnaire. The survey was forwarded to government bodies responsible for environment and industry issues and non-government bodies including industry associations and oil companies. The draft profiles were checked by country regulators and industry associations before being uploaded to the Forum website. Several profiles have been completed. If you can provide further information on other countries or wish to update information on those countries already on the Forum, please contact UNEP with the information. A number of the countries profiled border the north Atlantic region. It is no coincidence that a region subject to serious environmental pressure has also attempted to find innovative and cost effective forms of operation and regulation.

Overview

As the petroleum industry has expanded exploration and production in all continents, so too has attention on the impact of its activities. There has also been a growing recognition that industry must operate within the scope of social, cultural, economic and physical factors at the local level, while remaining in the global context of Agenda 21. Industry has recognized that future access to petroleum resources depends on finding methods of exploiting resources in an environmentally sustainable manner and in cooperation, rather than in conflict, with regulatory bodies. The need to minimize environmental impact has been one of the most significant changes occurring in the upstream petroleum industry during the 1980’s and environmental regulation of the petroleum industry is therefore a relatively recent phenomenon. (1) The profiles show that government and industry are attempting to explore innovative strategies that go beyond the traditional adversary approaches to environmental management. The concept of sustainable development also calls for a different approach, to extend the debate about environment and development from that of simply reducing pollution from operations. Strategies must provide sustainable multiple use solutions to solve many of the conflicts surrounding conservation and resource use in the marine environment.

Types of Regulatory Approaches

A recent International Expert Meeting (Noordwijk, Netherlands, November 1997) on ‘environmental practices in offshore oil and gas activities’, noted that there are primarily two approaches to regulating the environmental performance of industry- the ‘prescriptive’ approach and the ‘performance based’ approach. (2)The prescriptive or ‘command and control’ approach is based on specific requirements made by government, to be met by operators. Technical prescriptions make it clear what is required and give the regulations legal certainty. This makes it relatively easy for government to determine, via an inspection procedure, whether an operator is meeting the requirements. (3) Performance based approaches place a greater emphasis on setting an objective or goal to be reached by industry. An example is a legally binding environment plan or covenant that is subject to reporting and auditing requirements. Concurrent with the shift in regulatory focus has been a greater acceptance by industry of the principle of voluntary measures. If voluntary action is effective, there is less need for regulations. These measures can include codes of practice, agreed action plans or negotiated targets and limits. Self regulation, an example of a performance based approach, is an agreement made between the operator and government with specified environmental standards. It is the responsibility of operators to define strategies on how they will achieve these standards and provide evidence to assure they are complying with the agreement.(4)

Conclusions of the Joint Chair from Noordwijk

The International Expert Meeting in Noordwijk, made some important recommendations concerning regulatory frameworks. It agreed that these should in part enable industry to assume its responsibility to achieve environmental performance. Furthermore, environmental best practice guidelines should be developed through information exchange and open discussion between industry, government and other interested stakeholders. "Companies should have, and behave according to, an integrated vision on production, safety, health and environment, regardless of where in the world they are active."(5)

What the profiles show

The regulatory frameworks now in place include a variety of traditional and new instruments to influence environmental performance. For the countries profiled, there is still a definite reliance by government on prescriptive legislation as the primary means of regulating the industry. This is demonstrated by the number of Acts and regulations such as permits and discharge standards, required by operators for offshore exploration and production activities. While the ‘Command and Control’ approach is still widely used by governments, this is gradually being complemented by performance based approaches. This is demonstrated by examples of goal setting, negotiated agreements and economic measures, to achieve better results at a lower cost than ‘command and control’ by itself. Historically industries response to ‘command and control’ was limited to simply achieving compliance. The shift towards performance based measures has provided industry with the opportunity to find other ways of meeting the goals or targets set by government. This has included the increased use of voluntary measures by industry – the so called ‘CO-regulatory’ approaches. The profiles show several proactive relationships with regulators to solve common problems, develop voluntary guidelines and codes to educate members, encourage and fund research programmes to improve daily operations and incorporate performance measures into their reporting approaches. Several industry associations are now attempting to expand beyond their traditional role of lobbying on behalf of their members, by developing their members’ capacity to implement environmental protection measures. The mechanisms established for more effective dialogue between government and industry show a greater emphasis on transparency, problem solving and being inclusive of various stakeholder interests. The following are examples of how information exchange and consultative mechanisms are being used to support the non- regulatory systems. Consultative forums.

MILJØSOK is the alliance between the Norwegian industry and government to create an open dialogue between the stakeholders on measures to better meet environmental challenges. An important outcome has been a programme to reduce total produced water discharges. Negotiated Agreement between Environment Department and Industry Association
A feature in the Australian profile is the strengthening relationship between the national environment agency and the leading industry association. Under an industry -government agreement, there has been a commitment to establish a joint work plan. Reviewed annually this plan will identify opportunities for cooperative programmes. It will also find solutions to the question of competing resource interests and sustainable multiple use. Regional Networks
The Atlantic Frontier Environmental Network (AFEN) is a coordinated and strategic approach to environmental management by 21 oil operators in the UK Atlantic margin. The companies work with government and regulatory authorities, academic research community and interested parties. The AFEN leads a range of regional activities and studies to understand the environment better. They believe that a joint approach can generate much better data and use resources more efficiently. Industry- initiated Environmental Codes and Guidelines
Many profiles demonstrate the use of codes and guidelines to assist operators understand and implement their environmental responsibilities. The United Kingdom Offshore Operators Association has produced good practice guidelines on ‘Environmental Management Systems’, ‘Internal Audit and Training’, ‘Exploration Operations in Near-shore and Sensitive Areas’ and ‘Reducing Atmospheric Emissions from Oil and Gas Facilities’.

The Merits of Various Regulatory Approaches

The International Expert Meeting in Noordwijk discussed the effectiveness of various regulatory instruments in protecting the marine environment. It found that in many countries the offshore industry is developing faster than the government’s ability to regulate them. The prescriptive approach requires governments to maintain a strict, regular and costly inspection service. Prescriptive regulations can foster a ‘compliance mentality’ within industry and discourage the development of new technologies and creative practical solutions. (6)In contrast, the focus of co-regulation is on self inspection to check compliance, and subsequently to report to the regulator. This moves the burden of auditing and inspection from government to industry. By allowing the operator flexibility in choosing practical measures to meet environmental objectives, a more cost efficient approach to improving industry environmental performance is achieved. (7)The success of performance- based approaches depends on effective goal setting, with active communication and a sophisticated and multidisciplinary skills profile of both the operators and regulating authorities. (8)The introduction of goal-setting approaches to the regulatory frameworks has not obviated the use of ambient discharge standards which are still necessary to protect environmental quality.

1. Options for Regulators to Interface with Environmental Management Procedures

1.1 Performance Standards Instead of Prescriptive Rules

The International Expert Meeting in Noordwijk discussed the effectiveness of various regulatory instruments in protecting the marine environment. It found that in many countries the offshore industry is developing faster than the government's ability to regulate them, and that the traditional approach to regulation is inhibiting the industry's capacity for innovation and technological change. This is because regulators impose a prescriptive approach, telling the industry exactly what measures it must take and requiring little interpretation on the industry's part. Prescriptive regulations can foster a 'compliance mentality' within industry and discourage the development of new technologies and creative practical solutions. There is also a limit to the extent to which it is possible to add more and more specific prescriptions without this resulting in counterproductive regulatory overload. Under this approach governments also maintain a strict, regular and costly inspection service, which is resource intensive.
In contrast, performance standards specify the outcomes to be achieved but not how to achieve them. For this reason, they can accommodate to changes in technology and the creation of new hazards. They also allow firms flexibility to select the least costly or least burdensome means of achieving compliance. On the other hand, because they are sometimes imprecise, performance standards are to that extent more difficult to enforce. The success of performance - based approaches depends on effective goal setting, with active communication and a sophisticated and multidisciplinary skills profile of both the operators and regulating authorities.

However, performance standards offer less guidance to enterprises as to what is required of them, and this can present problems for smaller companies and subsidiary parts of the oil and gas industry such as contractors and suppliers. For these enterprises, effective compliance will be facilitated by the provision of more precise guidance as to how to identify and resolve problems. This could be provided for through technical data sheets and other advisory material, which could be issued not only by regulatory agencies, but also by independent standard setting bodies or by industry itself. It may also be desirable, as under comparable occupational health and safety legislation, to insert a statutory provision making clear that compliance with the advisory material/code of practice will be deemed to be compliance with the performance standard.

1.2. Management system standards

Both prescriptive and performance standards have a substantial limitation: they only require enterprises to achieve minimum standards and provide no incentives or encouragement to go beyond those minima. They do not encourage continuous improvement or industry best practice. Nor do they directly encourage enterprises to develop an environmental culture or to "build in" environmental considerations at every stage of the production process. They are also demanding on regulatory resources.

A number of countries and regulatory regimes are experimenting with an alternative approach which gives industry greater flexibility and autonomy over how it achieves better environmental performance, but within a framework designed to "make industry think" about its environmental challenges and to establish systematic solutions. This is achieved principally by encouraging or requiring industry to adopt certain processes and an environmental management system (EMS). An EMS is a potentially powerful management tool, which involves the assessment and control of risks and the creation of an in-built system of maintenance and review. It is capable not only of assisting an organisation to achieve its environmental goals but also of building in continuous improvement and embedding cultural change on environmental issues within the organisation. In future, the most popular form of EMS will almost certainly be one that complies with the International Standards Organisation's (ISO) EMS standard, ISO 14000. (Visit also the OEF section on EMS, and the International Standard Organisation (ISO) and on Eco-Management Audit Scheme (EMAS).

Two options are available to policy-makers who want to make regulations interface effectively with environmental management systems. First, they can make the use of such systems mandatory in prescribed circumstances. This approach could involve an environmental management system being developed by the rig operator and submitted to the regulator for scrutiny and approval. This must not only explain strategies but also demonstrate the adequacy of hazard control and environmental management. The regime should be accepted and technologically challenged by the relevant authority.

The other approach is 'two track' regulatory system whereby enterprises are offered a choice between a continuation of existing forms of regulation on the one hand (track one), and the adoption of a EMS-based approach on the other (track two). Track two would put primary responsibility on the operator to find the best means of reducing environmental harm built around an EMS and subject to government and third party oversight. It would provide considerable flexibility and enable enterprises to devise their own least-cost solutions, and give them direct incentives to go "beyond compliance" with minimum legal standards. Experience in the USA suggests that few enterprises will adopt track two unless considerable incentives are provided to do so. These might include regulatory flexibility (reducing the likelihood of inspections and prosecutions, less prescriptive regulatory requirements; reductions in penalties if prosecutions take place) and logo or other publicity or public relations benefits to participating enterprises.

If an EMS, such as ISO 14001, is used as a regulatory tool, it will still be necessary to maintain a variety of oversight and regulatory fall back mechanisms to ensure that the system actually delivers improved environmental performance to a prescribed level or beyond (because ISO 14001 emphasizes processes but not particular environmental outcomes, and does not require independent verification). Regulatory flexibility initiatives must be based on "ISO Plus" rather than merely on conformity with ISO 14001 itself. Four key components are necessary to the successful implementation of such regulatory flexibility initiatives. These are:

(i) That those enterprises must commit to outcome-based requirements, the achievement of which can be measured through specific performance indicators;
(ii) That there should be independent verification both of the functioning of their management system and of environmental performance under it (e.g. by a third party environmental auditor or regulator), with the results or a summary of the results available both to the regulator and third parties such as community groups;
(iii) That there should be an ongoing dialogue with local communities (where such communities exist) concerning compliance goals and the means of achieving them, thereby ensuring the credibility and legitimacy of the process and third party input and oversight; and
(iv) That there should be an underpinning of government intervention; acting as a safety net which only "kicks-in" when triggered by the failure of the other less intrusive mechanisms described above.

Such an approach is a form of co-regulation whose goal, rather than regulating prescriptively, is to encourage enterprises to establish processes of internal self-regulation to self-inspect, monitor, control and continually improve their environmental performance. Enterprises subsequently report to the regulator on all these issues. The result is to move the burden of auditing and inspection from government to the industry. The well-documented failures of pure self-regulation (which is often ineffective in bringing laggards up to acceptable standards) are overcome by building in transparency and government and third party oversight mechanisms.

If successful, this approach will be a more cost-efficient and cost-effective way of dealing with environmental problems, it will streamline procedures, provide more reliable and verifiable reporting, and encourage industry to go 'beyond compliance' with fixed standards. It will also substantially reduce the cost of regulatory enforcement. However, not all-regulatory flexibility initiatives using EMS have been successful and careful regulatory design will be essential if such an approach is to achieve better economic and environmental outcomes than traditional regulation. It will also be important to identify best practice models and to learn from them.

As regards smaller enterprises, including some contractors and suppliers, it is less clear that an EMS (even in a simplified form) is the most appropriate regulatory tool, and there may be greater emphasis on providing them with more specific guidance by codes of practice and other mechanisms. There is considerable scope however, for large companies to partner with and mentor their smaller contractors and suppliers, to include an evaluation of their contractors and suppliers in their EMS and in their procurement criteria, and to insist upon environmental performance based incentive programs and greater oversight of their activities. These extended responsibilities could also be required of large companies under EMS based regulation.

A further challenge relates to regulation in developing countries, where enforcement by regulators is often constrained by economic and political factors, and regulation may lag substantially behind community expectations. In this context, EMS-based regulation may be an attractive option because by requiring or encouraging companies to undertake a goal-setting certified EMS, they can establish a performance-based regulatory program without a major commitment of resources. Even without pressure from regulators, multi-national corporations may decide to adopt an EMS in order to protect maintain corporate reputation and legitimacy, or in response to pressure from public interest and environment groups. Industry associations could also be important in identifying and disseminating best practice models, in developing EMS based codes of practice, and in requiring reports on how far their members are achieving compliance. Here the best practice model is likely to be the chemical industry's Responsible Care initiative.

The overall goal is to find the right mix of regulatory, co-regulatory, incentives and voluntary mechanisms to suit the context of a particular state and the particular types of enterprise being regulated. In this quest, EMSs are destined to play a central role.

Written by
Neil Gunningham
Professor Of Environmental Law
Canberra University

1.3. References

Cullen L, (1990) The Public Inquiry into the Piper Alpha Disaster, London, HMSO.
Enterprise for the Environment (1998) The Environmental Protection System in Transition: Towards a More Desirable Future Final Report of the Enterprise for the Environment, Center for Strategic and International Studies, Washington DC.
Gunningham N and P Grabosky (1998) Smart Regulation: Designing Environmental Policy, Oxford University Press, UK, 1998, Chs 5, 6.
Gunningham N and Johnstone R Regulating Workplace Safety: Systems and Sanctions Oxford University Press, UK (1999).
Martin JH 'Environmental Issues for Exploration and Production Companies in South East Asia' APPEA Journal 1998
Perrow C (1999) Normal Accidents: Living with High Risk Technologies, Princeton UP.
Rees J (1994) Hostages to Each Other: The Transformation of Nuclear Safety Since Three Mile Island Chicago, Univ of Chicago Press.
'Technical Meeting Document- Environmental Practices in Offshore Oil and Gas Activities' Expert meeting in Noordwijk November 1997, Document located at http://www.oilandgasforum\management\regula\nordv.pdf

The Use of Prescriptive Instruments

A visible feature of the profiles is the continued reliance by countries on permits, usually for each of the exploration, production and abandonment stages. Some permits include a variety of mechanisms like Environmental Management Systems (EMS) and Environmental Impact Assessment (EIA). The use of an EIA process has formed an integral part of the regulatory process. EIA has become widely accepted as an important tool to identify and address the environmental effects of activities. While there appeared to be no standard procedures for undertaking an EIA, the majority of countries profiled did share key objectives covering planning, operation and decommissioning.

The Use of Economic Instruments

A tax on CO2 emissions came into effect in 1991 in Norway on offshore production to encourage a reduction in air emissions. In a short time, the tax has improved overall energy use in the petroleum sector and greatly reduced the use of certain practices such as gas flaring. Norway is the only country to have introduced this form of economic instrument into its regulatory framework. This approach may be difficult for all countries to apply as it requires a well developed infrastructure for monitoring emissions which is not always present in developing countries for example. (9)Generally, however, the profiles highlighted the use of permits, fees, fines and liability measures as the traditional economic instruments in place.

The Use Environmental Management Systems

The profiles also demonstrated the increased use of Environmental Management Systems (EMS) by industry. Most of the major oil and gas companies have started to adopt detailed EMS and internal environmental operating guidelines. (10) The development of integrated health, safety and environment management systems was also noted in Norway and USA. Such systems can be used by governments to ease the regulatory burden, essentially by using the reporting systems already developed under the EMS and by placing responsibility for meeting agreed performance on the management system developed by the operator.

And in developing countries…

In many developing countries the regulatory mechanisms in place are modeled on earlier established approaches in developed countries. Many South East Asian nations, for example, have based their environmental protection frameworks on command and control models from the USA or European countries. Like their OECD counterparts, they are now faced with the practical shortcomings of this approach. This includes the lack of enforcement capability and institutional capacity to effectively administer regulations. The need for well- developed monitoring mechanisms may also be beyond the financial and technical capabilities of an often over stretched environment agency. (11)The concepts behind performance based regulations, voluntary agreements and EMS are not in common use in developing countries. It is therefore difficult for government to rely on these as regulatory approaches at the present time.

Combining Approaches

The profiles demonstrate that in several countries performance based approaches are now being adopted to complement prescriptive regulations. The trend is for industry to take more responsibility for its environmental activities by the use of CO-regulatory and performance based measures. Good communication between government regulators, operators and industry associations is vital to develop a meaningful approach to regulation. It is important also to ensure that research and studies continue to add information to the process. The International Expert Meeting concluded that there is a need for more information on how voluntary instruments work in practice, and on the differences between goal setting prescriptive approaches and self regulation. More information is also needed on the role that these 'complementary’ mechanisms should play alongside legislation. (12)In response to this the regulatory profiles, one of the initiatives of the Offshore Oil and Gas Environment Forum, hopes to assist countries share information on how the oil and gas industry operates worldwide and learn from each others’ experiences.

Footnotes

1-Environmental Control in Petroleum Engineering’ John C Reis 1996

2-3-4 ‘Technical Meeting Document- Environmental Practices in Offshore Oil and Gas Activities’ Expert meeting in Noordwijk November 1997, page 77-78.

5- ‘Technical Meeting Document- Environmental Practices in Offshore Oil and Gas Activities’ Expert meeting in Noordwijk November 1997, page 66-7-8-9- ‘Technical Meeting Document- Environmental Practices in Offshore Oil and Gas Activities’ Expert meeting in Noordwijk November 1997, pages 78-7910- ‘Operational Discharges from Offshore Oil and Gas Exploration and Exploitation Activities: Regulatory Requirements and Enforcement Practices’ Petro-consultants (UK) Ltd. 1997, page 43. URL www.petroconsultants.com

11- ‘Environmental Issues for Exploration and Production Companies in South East Asia’ JH Martin , APPEA Journal 1998

12- ‘Technical Meeting Document- Environmental Practices in Offshore Oil and Gas Activities’ Expert meeting in Noordwijk November 1997, pages 78-79

Useful References

‘Environmental Management Tools in Industry and Environment’, UNEP, Vol. 18 April 1995‘Environmental Management in Oil and Gas Exploration and Production’ Joint E&P Forum/UNEP publication ‘Environmental Impact Assessment and Offshore Oil and Gas Activity’, A report on behalf of the Joint Links Oil and Gas Environmental Consortium by Berry Marine Consultants. Contact ‘Wales Wildlife and Countryside Link’ for more information on fax 01 686 622 339‘Zhiguo Gao ‘Environmental Regulation of the Oil and Gas Industries’ (abstract) Available via University of Dundee email r.m.carstairs@dundee.ac.uk