OIL POLLUTION FROM OFFSHORE INSTALLATIONS: A COMPARATIVE APPROACH

1 Black, liquid gold. A name very fitting for petroleum, a resource that has been the most valuable commodity of the past century and whose price still influences heavily the energy markets and the global economy. That was not always the case.

2 The word petrol etymologically derives from the Greek word «πέτρα» and the Latin word «olium» which translates as “the oil of the stone” There are many references to petroleum and its uses that date back thousands of years. Archaeological evidence trace the use of oil 6000 years ago in the banks of the Euphrates as an insulator for ships, while Herodotus mentions that asphalt was used as a mortar between building stones and for the construction of the tower of Babylon. Apart from the insulating and stabilizing properties of some forms of petrol, the Ancient Greeks, the Persians and the Japanese were also aware of its properties as fire ignitors. From the seventh century onwards, the Byzantines had devised a mixture called «υγρό πυρ» (literally translated as liquid fire or oleum incendiarium) that had the unique property of catching fire upon physical contact with moisture. The chemical formula of this substance, which was considered one of the most devastating and feared weapons of the time, was a well-guarded secret, but it is widely established that it contained petroleum.

3 Unfortunately, the knowledge of the properties of oil followed the ill fate of much of the achievements of the ancient world: it was forgotten. The Western civilization managed to erase from its collective memory the chemical properties of petroleum, which downgraded to a mere peculiarity of nature, that was occasionally used as a medicinal remedy for a variety of conditions. This changed during the 19th century,

Σελ. 2

4 Petroleum unfolded its various uses as an illuminant, an explosive, an insulator and a power generator and contributed to the rise of some of the biggest and more influential companies in the world. But oil upgraded its status as a strategic resource after the British Navy Admiral, Winston Churchill, decided right before the First World War to gain a competitive advantage in terms of speed and power and commissioned a fleet of armed vessels that were running not on coal (as it was accustomed at the time) but on petroleum. Since the United Kingdom had no oil that made it imperative that the British controlled Saudi Arabian oil. The control, extraction and transportation of oil became the most important sovereign bet and fueled several armed conflicts. The thirst for oil also resulted in amazing technical advancements: a booming oil industry wanted this resource extracted in every possible and cost-efficient way. The reason for this intense need for oil derives from the concept of ‘energy security’.

5 Energy security has been defined as “the uninterrupted availability of energy sources at an affordable price”. This is a very broad definition, an ‘umbrella’ term that

Σελ. 3

6 On the eve of the 21st century though, those strategies are widely reconsidered. Oil is a heavy pollutant and burning its derivatives contributes immensely to CO2 emissions. After scientific evidence on climate change was produced back in the 70s, public opinion and the political will have gradually shifted towards greener and more sustainable energy sources. Renewable energy has been put at the top of the political priorities in the energy field, energy security is achieved through the introduction of renewables in the energy mix and the less polluting of hydrocarbons, gas has been taking over markets that traditionally belonged to petroleum acting as a ‘transit fuel’ for a greener era.

7 So, is the oil industry redundant, a mere sector of the past and part of the human history of evolution? Experts seem to disagree, and despite decelerating oil demand growth(partly thanks to other renewables), gas and nuclear energy, oil is set to retain the highest share in the global energy mix covering 31% of global energy requirements until 2040. Disregarding the growing needs of developing countries in energy and the expected population rise, there are other reasons why oil is still relevant:

8 First and foremost, it is true, green energy is the way to go forward. The technological advancements (and considerable public financial resources spend in that direction) are making the production of energy from renewable sources more and more cost-efficient. Yet, not all markets are ready to transition to renewable energy. For some of the energy uses of petrol (such as its use as aeroplane fuel), substitution is currently not easy or (in some cases) feasible.

9 Secondly, hydrocarbons are extremely important for energy security because they can balance the continuously fluctuating demands of the energy grid by providing quickly and reliably the needed amounts of energy. Renewables on the other hand are by their nature much less dependable and cannot be used as a base fuel. It is also important

Σελ. 4

10 Thirdly, the use of petroleum as an energy source is not only connected to the available alternatives. Many countries (and especially the ones that have petroleum resources available in abundance) are reluctant to invest in the renewables sector. This can be attributed to several factors, from the national interest for energy security to a need to recuperate the capital invested in specialized infrastructure, before venturing to new sectors.

11 Finally, petroleum might be extremely important due to its function as an energy source, but its uses are not limited to meeting our energy needs. Plastics, cosmetics, pharmaceuticals, fertilizers, synthetic rubber, detergents and so many other products include some form of petroleum in their ingredients. Therefore, substituting it completely might not be feasible for some years. Taking into account all the above, a discussion around petroleum exploration, extraction and the legislative framework regulating them is far from redundant, on the contrary, it is imperative.

12 Long before the increase of both traditional and unconventional supplies, the global economy became aware that the oil reserves found on land might not be sufficient to cover the growing energy needs. A declining output and an increased demand (especially during the oil crisis) have been ‘pushing’ the industry into the more difficult (both technically and politically) offshore areas. Offshore oil exploration and production is already systematically occurring in the Gulf of Mexico, the Caribbean, the South China Sea, the wider region of West Africa, the Persian Gulf,

Σελ. 5

13 To fully appreciate the complexity and the challenges of such operations, a short overview of offshore exploration and production is deemed necessary. The initial step of such a process is estimating the existence of an oil reserve. This stage is by far the most accessible to small and medium-sized companies because it is done through desk research with data available to the general public. Geologists rely on geophysicists to collect and process indirect images of subsurface earth properties. Such images are provided by satellites that can measure subtle changes or anomalies in the Earth’s gravity and magnetic fields, caused by sub-surface variations in rock type and structure. This is useful in locating the oil reserves because of the way oil and gas reserves are formed, which creates a very particular, relatively easily identifiable geophysical pattern.

14 If such a promising subsurface is identified, the next step is contacting a seismic survey. This is essentially a more detailed mapping of a region through the use of

Σελ. 6

15 After the relevant data have been assembled and the existence of a reserve is conjectured, an oil company might wish to acquire a license to drill. This is called a production license and, contrary to an exploration license, is exclusive and connected to a strict development plan that determines the pace of the operations. The initial drills that take place are called exploratory drillings and are carried out to determine the results of the original survey, the structure and size of the field as well as the existence of hydrocarbons. If it is deemed that oil production is commercially viable and that extraction of hydrocarbons is possible, then the borehole is temporarily sealed until the appropriate equipment for the exploitation of the reserve is in place.

16 This leads to the third (and most profitable) stage of offshore operation, called the production phase. Production is also taking place under a production license and according to the development plan. To drill an oil company uses a variety of offshore units. Fixed and floating units vary in forms, sizes and in the mechanics used to stabilize themselves at the bottom of the sea. Furthermore, in principle, they do not operate autonomously but are connected to needed infrastructure and auxiliary facilities. Fixed platforms were the first types of platforms to appear in the offshore oil industry but in the last decades, the market is favoring floating offshore units for many reasons:

17 A floating offshore unit can be moved to multiple locations to assess the size (or even existence) of a reserve and to reach depths where the construction of a fixed platform might be challenging, or even impossible. From a commercial point of view, companies that operate in more than one site can move the unit around

Σελ. 7

18 The final phase of drilling is decommissioning. Decommissioning is required by international law, even though each country has a certain discretion on the rate and the extent of the removal it strives to achieve. When the field ceases to be a commercially viable asset, the offshore installation is disconnected partially or totally from the bottom of the excavation site and the well is permanently sealed. The above activities are part of the life circle of an offshore oil reserve and are indicative of the size of the operations and the time required for their completion.

Σελ. 8

19 Oil and gas exploration and production is to an extent a ‘closed circuit’. The market participants are limited and the market itself, although international has a certain structure that defies borders and political systems.

20 To begin with, drilling for oil and gas is an activity that requires considerable financial resources, with the cost of drilling being truly exorbitant especially offshore This, by definition, reduces significantly the number of undertakings that can enter the market. Furthermore, oil and gas operations are technically challenging. Every oil and gas reserve has different characteristics to address and difficulties to overcome. This, combined with the wide range of operations that have to be undertaken during the multiple stages of production as described above requires advanced technical know-how and highly specialized personnel. Finally, a strong state interest is expected in oil and gas operations. Apart from the developmental and political significance of oil for any sovereign state, the physical characteristics of the oil in situ (and especially the fact that the liquid reserves found underground can migrate across borders) require a certain level of political stability for the commencement and the continuation of the operations.

21 Because of all the above reasons, National Oil Companies (NOCs) have indisputably dominated the upstream oil and gas sector. NOCs are state-controlled oil companies that are not merely aiming to acquire more profit but are also preoccupied with energy strategy considerations (including energy security and independence, development of know-how etc). NOCs do not operate in strictly commercial terms

Σελ. 9

22 While NOCs are dominating the game of the numbers, with a titanium output of barrels of oil holding the majority share of the market, the private initiative scooped in to drive costs down and increase competition. International Oil Companies (IOCs) grew gradually to extensive corporate structures that operate in the four corners of the Earth and control to a large extent the production and distribution of oil. Their aggressiveness in seeking to maximize profit, their flexibility in making decisions and of course, the diversification of their portfolio in oil fields all over the world are balancing the lack of infinite resources.

23 In general, IOCs are considered more aggressive and technically capable, because they are competing with each other in a global market and are familiar with the necessity of taking risks. This creates incentives for cost control and heavy investment in new technologies. Furthermore, the engagement of an IOC in the production of oil, apart from the reduction of the cost and the risk of operations in a country serves as an affirmation that risk factors are low, therefore investment conditions are favourable and the economic and political situation relatively safe. This can attract further international investment. On the contrary, NOCs are often less effective, since profit is not a priority. NOCs might be supported by subsidies and in some cases, they are operating in a monopoly state-wide market. Furthermore, if public institutions are weak and decision-making is not well separated from the political scene, their governance might become part of the governmental policies. NOCs are also more prone to limit their activities within their country of origin which bears significant advantages yet bounds them to a regional operational centre.

Σελ. 10

24 Despite the intense competition between the oil companies, collaboration is the rule and not the exception. The most obvious reason for that is the need to split the immense cost of operations and reduce the financial risks connected to the exploration of a specific field. By participating in more than one field around the globe, the risk of not finding commercially viable oil and gas reserves is sufficiently distributed through a varied portfolio. In addition to the economic aspect of sharing risks and costs, there are also many technical considerations in place. Some of those companies have been operating on the same continental shelf for decades and are therefore familiar with the peculiarities and the technical challenges it holds. In other cases, the extensive research and development undertaken by one of the companies has allowed it to acquire the particular technology that is needed for the extraction of hydrocarbons. Finally, sometimes, it is -implicitly- a matter of transferring know-how, especially between more experienced and newer players. To that end, upstream exploration companies are usually forming a consortium with the sole purpose of jointly bidding for a license from the state to engage in exploratory or production drilling operations in a pre-determined area under its jurisdiction. A license can be attributed to more than one company, and the joint bidders are called licensees, title holders or lessees. The relationship between those companies is regulated through a legal agreement called a joint operation agreement (JOA).

25 There are two distinct roles in this joint operation agreement: the operating and non-operating party. The operating party (commonly known as ‘the operator’ is fully

Σελ. 11

26 There are also several other companies (that range from international service providers to small start-ups of a handful of specialized people) that cater for the needs of the operators. Those companies are called ‘contractors’ and they usually maintain the needed equipment and human capital to take over a specific part of the operation. The tasks attributed to contractors vary: from seismic surveying to drilling and well logging, from storage, transport and analysis of oil and gas to providing specialized divers or even cater the offshore workers of the installations with ships and/or helicopters.

27 Conducting exploration and production in the outer limits of a state’s jurisdiction is introducing some complexities relating to the control of natural resources, the supervision of the operations and the state’s obligations to protect the marine environment. This was not as obvious in the dawn of the industry when exploration

Σελ. 12

28 The UNCLOS is providing for the separation of the oceans of the world into six zones: the Territorial Sea, the Contiguous Zone, the Exclusive Economic Zone (EEZ), the Continental Shelf, the High Seas and the Area. Those six zones are extending from the coast towards deeper waters, creating a concentric circle of gradually reducing power that moves away from the coast. Regarding the issue of control over the resources and supervision of operations, the power of the coastal states is established through the concept of sovereignty. More specifically:

Σελ. 13

29 In the Territorial Sea, which can extend as far as 12 nautical miles from the coast’s baseline, the state’s sovereignty extends to the resources found in the sea subsoil. The Exclusive Economic Zone which is adjacent to the Territorial Sea cannot extend to more than 200 nautical miles from the baseline. In the EEZ, the coastal State has sovereign rights for exploring and exploiting natural resources from the seabed and the subsoil and the exclusive right to construct installations and artificial structures. Finally, the Continental Self comprises the seabed and subsoil of the submarine areas that extend beyond its territorial sea. The Continental Shelf can be defined as the natural prolongation of the coastal state’s land territory to the outer edge of the continental margin or can extent to a distance of 200 nautical miles from the established baseline. As opposed to those three zones, the rest of the UNCLOS’s zones are not attributing control over resources to any coastal state.

30 From the above it comes as no surprise that a clear delineation and delimitation of maritime borders is a sine-qua-non for the commencement of offshore operations. The insinuation that natural resources are available offshore is also a strong catalyst for the settlement of long territorial disputes and -in some cases- even for the

Σελ. 14

31 While the control over the natural resources is a subject of conflict and tension, the protection of the environment, in the form of the precautionary principle has been affirmed in international law very early through both case and soft law instruments. UNCLOS is no exception to this rule and has a chapter dedicated entirely to the efforts of the states to protect and safeguard the environment. A specific obligation to pursue all marine offshore activities following the duty to protect and preserve the marine environment is set in articles 193 and 194(3). This obligation is further specified in Article 208, through which the coastal states are obliged to adopt regulations to prevent, reduce and control pollution from offshore installations, taking into consideration international standards and aiming for harmonisation at a regional and global level.

32 From a legal point of view, it was an immense step forward to establish an obligation of the states to both prevent, reduce and control pollution of the maritime environment during offshore operations and also to ensure that pollution incidents do not affect a neighbouring state. Those provisions are introducing international liability for states that do not supervise adequately offshore operations, even though they do not introduce specific regulations to address transboundary pollution per se. Yet, aside from the general obligations introduced by UNCLOS and some

Σελ. 15

33 The reasons for this deregulation and light-hand supervision vary. The coastal state might not have the technical capacity or the will to design and enforce a regulatory framework that could effectively supervise the industry. Furthermore, in principle, states are very protective of activities connected to their energy resources and inherently hesitant to limit their sovereignty through international rules and conventions in any subject connected to the production of energy. This allows the industry to adopt a ‘double standard’ in the materials and the processes used in each jurisdiction, which can be significantly inferior to the internationally accepted standards. Those substandard practices might trigger the international liability of a state for a violation of the precautionary principle or even for a violation of human rights. In such cases, the existence of natural resources is more of a curse than a blessing while it becomes clear that countries that are underprepared when commencing the exploitation of their resources are bound to pay a price.

34 Taking into consideration all the above, it is evident that there are legal challenges in setting both national and international legislation for the prevention and restitution of offshore pollution. The extent of the operations, the number of market actors engaged in it, the complexity of the contractual relations developed and the ramifications of international law render oil pollution in the offshore sector a difficult issue at best.

Σελ. 16

35 Undoubtfully, accidents offshore are part of the operations. Even the more experienced and mature oil and gas regions have had their fair share of accidents over the years. Some of them have taken a heavy toll on human lives (such as the Alexander Kielland or the Piper Alpha incidents). Some others have had significant environmental effects (such as the accidents in Santa Barbara and the explosion of IXTOC I in the Gulf of Mexico). Those accidents have led to re-evaluation and reconsideration of the frameworks across jurisdictions. There were only periodical efforts to introduce international legislation for offshore matters, and the most recent of those efforts was the outcome of two major accidents: the Montara accident taking place on the continental shelf of Australia and the Deepwater Horizon taking place offshore the United States of America at the Gulf of Mexico.

36 On the 21st of August 2009, an incident occurred in the Timor Sea, where the Montara platform was undertaking exploratory drilling for the company PTTEP Australasia. There was an uncontrolled leakage of oil and gas that led to a fire on the Montara platform and the connected West Atlas platform. The platform’s personnel managed to escape, but for 74 days natural gas and oil had run uncontrollably into the Timor Sea, contaminating approximately 90,000 square kilometres of ocean. The actual volume of oil escaped from the field of mining remains unknown as well as the full range of environmental impacts it had in the marine area. Based

Σελ. 17

37 What made the case special was its transborder effects. Indonesia shares the waters of the Timor Sea with Australia and, despite expert reports provided by the oil and gas company claimed that the detergent used to clean the spill had caused a decrease in the population of the region’s fishing grounds and in particular the decline in the income of the fishermen on the island Rote, whose southern side was affected by the incident. The Government of Indonesia took legal action against PTTEP Australasia demanding reimbursement The company that was so eager to meet the Australian government’s clean-up costs (in whose territory and under whose authorisation the drilling was carried out), refused to recognize the merits of the Indonesian Government’s claim. Indonesia then turned against seeking compensation for inadequate supervision of the facility. When finally the case was settled with the agreement of partial restitution to the Indonesian government (and not directly to the fishermen) a partial indemnification (to the Indonesian state and not directly to the fishermen) was finally agreed upon more than nine years later In view of those events, Indonesia resorted to the most appropriate international body available: the International Maritime Organization (IMO), with the request to include on its agenda the drafting of an international treaty on civil liability for oil accidents resulting from oil pumping platforms. This effort did not bear fruits.

38 What was ultimately needed to mobilize not only the industry but also the international organizations was a ‘black swan incident’. A black swan incident is an event that deviated far beyond what was normally expected of a situation and was extremely difficult to predict. This was the case of the Deepwater Horizon accident in the Gulf of Mexico., The Deepwater Horizon platform was a mobile semi-submersible installation that have been subjected to multiple tests and was verified as safe to be operated. The owner of the platform was Transocean and the charter (and operator of the field) was BP, which together with Anadarko Petroleum Corporation and Mitsui Oil Exploration Company of Japan were the licensees of the

Σελ. 18

39 On April 20th 2010, the platform proceeded to one of the final phases of the exploration process: the temporary abandonment and sealing of the well by Halliburton (the contractor that was hired for that task). The operations proceeded uneventfully and after the necessary tests had been carried out, the most unexpected thing happened: a high-pressure methane blast coming from the well surrounded the platform with natural gas. The safety valves that were installed specifically to prevent the occurrence of the accident (blowout preventers) did not function, and, as a result, a few minutes later a series of explosions followed, and the platform was wrapped in flames.

40 The accident’s report was tragic: eleven workers on the platform were killed during the explosion while several others were seriously injured. Two days after the incident, the platform itself sank. Despite the rapid reactions of both the US authorities and BP, efforts to seal the well lasted several months. The feat was achieved on the 15th of July 2010 and only on the 19th of September 2010 (five months after the unfortunate event) BP announced that the reserve was rendered inactive.

41 Between the occurrence of the accident and the sealing of the well, oil flowed uncontrollably in the Gulf of Mexico. BP has made some moderate calculations on the amount of oil that had spilt from the well, but more accurate federal government estimations support that 50,000 to 60,000 barrels of oil were leaking every day from the well, and the total amount of oil spill reached 4.8 million barrels of a spill and 180,000 square kilometres of polluted sea. It was an unimaginable

Σελ. 19

42 As expected, the destruction caused by the Deepwater Horizon lead to one of the largest and most complex court litigations of the century due to two contributing factors: The first was the extent of the damage: the oil spill had affected five US coastal states (Louisiana, Florida, Texas, Mississippi and Alabama) and part of Mexico’s coastline. The second was due to the oil pollution legislation in the US which, even though it was designed to ensure uniformity and effective satisfaction of claims, ‘crashed’ under the public outcry and the number of the claims. The fact that the offshore installation that caused the damage was mobile, and therefore maritime law applied complicated the case even further.

43 The result was a nightmare for the Federal American Courts, since multiple of the lawsuits were directed towards BP (which was the operator of the platform but also one of the licensees) as well as towards other contractors (MOEX and Adarko Petroleum), Transocean (the owner of the semi-submersible offshore unit) and Halliburton (the contractor who had sealed the well).

44 It soon became clear that the legal statute for pollution was neither adequate nor appropriate to deal with the size of that tragedy. In an effort to address the volume and complexity of the claims, BP, in cooperation with the United States government, set up a $ 20 billion fund ( called Gulf Coast Claims Facility) to facilitate

Σελ. 20

45 The relations of the members of the joint venture were settled and all involved companies paid their share, but BP (being the operator) suffered the biggest financial hit, paying to the day, 65 billion dollars to cover all outstanding claims. Apart from clean-up costs and civil liability claims, all companies involved faced severe criminal and administrative penalties.

46 The accident caused in the Gulf of Mexico had a domino effect. The United States of America was a developed Western economy, at the forefront of many environmental initiatives that had years been supervising private oil and gas operators since 1930. If an accident of such magnitude could happen there, it could happen anywhere, and that inspired fear in the rest of the world. The industry invested heavily in research and development to develop technology that would prevent a similar accident to happen again, while the insurance sector struggled to provide cover for the newly realized magnitude of the risk Any suggestion to further relax state supervision of offshore activities in the USA was forgotten. Instead, a series of changes rendered the regulatory regime more austere. There was also significant pressure for the development of a more generous, easily accessible and effective system of civil liability.

47 Reactions were not limited to the other side of the Atlantic Ocean. The European States with offshore activities expected the results of the Independent Examining Committees that were investigating the reasons behind the accident. There were calls for a moratorium on offshore activities in European waters, but some of the Member States of the European Union took action on their own.