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"Environmental Regulation of the Oil and Gas Industries", By ZHIGUO GAO

I. Introduction
The twentieth century represents probably the culmination of human development in many
respects. In the natural resources sector, the establishment of a modern petroleum industry
and its subsequent development and expansion is certainly one of the great success stories of
our generation. Another significant development during this period may be said to be the
global environmental change and movement, first started in North America and Western
Europe in the late 1960s and early 1970s, gradually reached out to other parts of the world in
the 1980s, and finally culminated into today's global push for sustainable development. The
environmental movement poses unprecedented challenges to natural resources industries.
The hydrocarbon sector is certainly no exception to this environmental development.
For nearly a century, petroleum production and consumption has probably brought out both
the best and worst of modern civilization. The industry has contributed enormously to world
economic growth and a higher standard of living in our time. On the other hand, the
downside of petroleum development has left profound adverse impact on the global
environment. Hydrocarbons are now viewed with increasing scepticism for their
environmental consequences.
It is clear the oil and gas industry and the environment are both the subject and scope of this
study. As the title of this study suggests, it employs a methodology of both backward and
forward-looking approaches. The principal purpose of this chapter is to provide a panoramic
view of environmental regulation of oil and gas throughout the 20th century. In so doing, this
study will accordingly proceed in three major phases: first, it gives a brief overview of the
relationship between the oil and gas industry and the environment, and the legal framework
governing this relationship in sections II to V; second, it examines the current state of the
regulatory approaches and management tools, and their effectiveness and effect on the
industry; third, it attempts to highlight the new themes for petroleum environmental
regulation and the possible direction for future legal development.
It should also be pointed out at the outset that this study has a wide coverage of the entire
petroleum fuel cycle, but with some emphasis on the upstream operations, namely petroleum
exploration and production (E&P).
II. Petroleum Exploration and the Environment
Before moving on to examine the subject matter of environmental regulation of oil and gas
activities, it is useful to briefly look at the environmental issues associated with petroleum
exploration and production. The industrial development and societal practices of the 20th
century have had a disturbing impact on the environment of the planet earth. The inadequate
use of natural resources and improper disposal of energy by-products poses adverse impact
not only on the air, water and land, but increasingly on the entire ecosystem. The causes of
the problems may be diverse and numerous, but the hydrocarbon fuel cycle may be the most
apparent on a global basis. It creates in particular three major forms of environmental
problems: air pollution, acid rain, and more importantly, global warming. The environmental
problems created by the production and consumption of fossil fuels in general and petroleum
in particular are of truly global dimensions. They represent one of the greatest environmental
concern shared by the entire international community.
Although in many cases the major focus is on the underlying process of energy
consumption, the upstream operations are not immune from environmental concerns. Tables
1.1 and 1.2 provide a classic examples of lists of the extent and severity of various problems
arising from the upstream operations and their potential effects on the environment and
human activities.
Table 1 Petroleum Environmental Problems in Upstream Operations


Activities Problems Impacts
Seismic survey a. Physical presence
b. Acoustic emission
c. Accidental spills
Visibility and clearance
Ground vibrations
Pollution of water and land
Exploration
and appraisal
a. Physical presence

b. Drilling discharges /
cuttings
c. Atmospheric
emission
d. Accidental spills /
blowout
e. Waste disposal
(solid)
f. Noise
Visibility, interference with
farming, shipping, fishing,
etc.
Land and marine pollution
and effects on plants and
soils
Air pollution, human health
Ground and marine
pollution / safety
Soil and water
contamination
Nuisance for inhabitants and
animals
Development and
production
a. Physical presence
b. Operation discharges
c. Atmospheric
emission
d. Accidental spills
e. Waste disposal
f. Noise

g. Transportation
collision

h. Community

i. Issues of ethics
Visibility interference
Ground and marine
pollution
Air pollution
Pollution of water and land
Soil and water
contamination
Nuisance for inhabitants and
animals
Various environmental and
safety risks
Social, culture and
biological effects
Human rights and
indigenous people
Abandonment a. Physical closure /
removal
b. Waste disposal
c. Leave in situ (partial
or total)

d. Dumping at sea
Human safety

On and off shore pollution
Hazard to other human
activities such as fishing and
navigation
Pollution, fishing and
navigation hazards




Source: Compiled by the author.
Table 2 Severity of Environmental Impacts of Exploration Activities
Degree of Environmental Impacts


Exploration
activities
Disturbance
Soil Veg Fauna Heritage
Pollution
Ground Water Air
Noise
Airborne surveys Z Z L Z Z Z L L
Recon. Geol.
surveys
L L L L L L L L
Recon.
Geophysics /
geochem
L L L L L L L L
Geo-physics L L L L L L L L
Survey gridding L M L L L L L L
Scout drilling L M L L L L L M
Track
contruction
M M M L L L L M
Target drilling M M M L L M L M
Pattern drilling H H M M M M/H L
M/H
Camp
construction
H H H L M M L M



Note: Z = zero to negligible L = low (minimal potential) M = medium potential H = high
potential
Source: A slightly adapted table in Environmental Protection Agency, Onshore Mineral
and Petroleum Exploration (Barton Act, Australia: EPA, June 1996), p.15.
Apart from the traditional environmental problems listed in the tables, a number of new
issues have recently emerged from natural resources industries, including socio-economic
issues, cultural impacts, indigenous people, and human rights issues. For instance, an
impact could arise from the movement of local people into the exploration and
exploitation area because of the easy access provided by the new tracks which were not
previously available; or because of the employment opportunities and compensation
payments that are going to be provided by the new exploration and production.
Petroleum exploration may also have a social impact on the local community and the
indigenous people. Often times, indigenous people have different ethnic moralities,
cultural values and a way of living, religion etc. These can be socially and biologically
vulnerable to external influences. Petroleum development in such localities could have a
disruptive effect on the rights, culture and life of the indigenous people. These issues
have largely been neglected in the past. They did not begin to be recognized until in
recent times. The famous Ok Tedi case in Papua New Guinea may be said to represent a
good example of these new issues. Human rights issues in petroleum and mineral
exploration have also loomed in the horizon lately, and we will return to it in due course
in the paper.
To sum up, environmental problems start right away with exploration activities such as
seismic surveys and geological prospecting, albeit the environmental interference and
disturbance at this stage are limited. Second, it is interesting to observe that, in the
upstream operations, environmental problems and their impacts tend to increase and build
up along with the project's progress, from the initial visibility and acoustic issues at the
exploration phase, accidental spills and blow-out at the development stage, and to
operational discharge and emissions such as gas flaring during the production period.
Environmental effects tend to culminate when the project reaches its production stage and
then begin to decrease towards the abandonment stage. Third, oil and gas exploration and
exploitation also have social impacts on the culture and heritage of the operating
localities. Fourth, petroleum environmental problems do not end with energy
consumption, rather it goes much further beyond the petroleum energy cycle, as
evidenced by the phenomenon of global warming. The global climate change has
effectively become the greatest environmental concerns of our time. It is mainly caused
by the emission of green house gases from use of fossil fuels. It is estimated that 60
percent of greenhouse gases comes from fossil fuels consumption; and about 21.7 billion
tonnes of carbon dioxide and 400,000 tonnes of CFCs are dumped into the air each year.
The following table provides a detailed regional breakdowns in these emissions.
Table 1.3 Carbon Dioxide and Chlorofluorocarbons Emission Yearly by Region


Region / emission CO2 (mm/t) CFCs (1000/t)
Asia 6,672 100
N. & Central America 5,764 100
Europe 4,114 120
Former Soviet Union 3,581 44
Africa 672 12
S. America 595 10
Oceania 289 6
Total 21,687 392




Source: Adapted from a graph in Time, 7 November 1994, pp. 46-47.
In conclusion, oil and gas operations are extractive in nature, and thus involving a high
degree of environmental disturbance with adverse impacts upon not only the ecosystem
and biodiverstiy but also socio-cultural groups. Environmental problems arising from
down-stream operations of refining and consumption in the form of air pollution and acid
rain, etc. have been well known to the general public. They therefore will not be dwelt
upon and repeated here.
III. Petroleum Environmental Regulation in Retrospect
Oil discovery and use are of ancient origin. However, scientific and large scale
commercial exploration and exploitation did not begin until the early part of this century,
and petroleum did not become a necessary commodity of the modern world until
approximately after the Second World War.
Environmental problems have always been associated with industrial and societal
practices. But in the past, pollution only occurred at local level and their effects were
limited. During the first half of this century, the world community was first beset with
global wars and then faced with such urgent tasks as decolonization, reconstruction, and
development. Environmental problems had not caught the world's attention.
Petroleum production and consumption were no exception to this situation. This author
conducted a general survey of national laws and concession systems a number of years
ago, and the study revealed that there was little environmental provisions governing oil
and gas activities in the first half of this century. By way of case studies, the following
sections attempt to illustrate the general lack of environmental awareness and provisions
in international and national laws and petroleum concession agreements.
1. Early International Legal Instruments
Modern international environmental law is of only a short history, though its development
may be traced to the 19th century. The few international environmental treaties developed
in the early days were all concerned with the conservation of valuable species such as
fisheries, birds and seals, and to some extent, the use and protection of navigable rivers.
The underlying aim of such protection is, perhaps, still for commercial utilization. Little
attention was given to natural resources extractive operations.
This is not to say that early international legal development is totally irrelevant to oil and
gas activities, but to suggest that its relevance to the petroleum industry was rather
limited. In this respect, a brief observation should be made on the famous case of the
Trail Smelter in 1941. The dispute arose between the United State and Canada over the
emission of sulphur fumes from a smelter in Canada which caused environmental
damages to its neighbouring State of Washington. In the arbitral award, the Tribunal held
that, under international law, "no state has the right to use or permit the use of its territory
in such a manner as to cause injury by fumes in or to the territory of another or the
properties or persons therein . . ."
The Trail Smelter is generally regarded as a landmark case in the history of
environmental law in the sense that the principle articulated in it lays down the
foundation for the subsequent development of international environmental law, and has
become a rule of customary international law. The principles of neighbourhood and
liability for pollution damage have a close bearing, even to date, on oil and gas
operations. Indeed, it has been argued that this customary law should be applied to
offshore petroleum operations.
To sum up, the development of international environmental law in the early days was
very limited in scope and depth. This situation is summarized by E. D. Brown in the
following words, as far as oil pollution is concerned:
Only a very partial knowledge of the law can be derived from a study of the relevant rules
of international law alone.
Few attempts, if any, were made to develop environmental legal rules focused on oil and
gas activities, due perhaps partly to the fact that the industry did not become a major
player in economic development, and the world environmental awareness was low at that
time.
2. Environmental Provisions of Domestic Laws
A. The United Kingdom (U.K.).
The U.K. is one of the major oil producers in the world. Its petroleum law dates back at
least to 1918. Despite its relatively long history of petroleum legislation, the petroleum
environmental regulation in the country was quite primitive in the sense that little, if any,
obligation in relation to oil pollution was introduced in its early legislation.
For example, the Petroleum (Production) Act 1934 was primarily concerned with the
petroleum ownership, which provided for the petroleum ownership and petroleum
licensing by the Crown. Although the act also provided that the competent minister may
place additional obligations on licensees, which presumably would include environmental
conditions, general obligations in relation to oil pollution were not introduced until the
1964 when the model clauses for incorporation into individual exploration and production
licences were first promulgated. Under these clauses, petroleum companies were obliged
to operate "in a proper and workmanlike manner in accordance with methods and practice
customarily used in good oil field practice . . ."; to take all practicable steps to prevent the
escape of oil; to plug any abandoned well; and to notify the competent agencies of any
escape of oil.
Apart from these and a few provisions of a similar nature in some other acts, the first
specific and comprehensive oil pollution law did not come into being until the Prevention
of Oil Pollution Act was adopted in 1971.
B. Nigeria.
Petroleum exploration began in Nigeria since 1908, and the country is now the biggest
producer in Africa. Like many other producing countries, Nigeria did not have any
legislation, either general or specific, on the petroleum sector for much of the first half of
the century.
The country's first Petroleum Act was finally promulgated in 1969. Likewise, the
Petroleum Act 1969 was meant specifically to confer ownership of petroleum resources
on the state, and regulate its exploitation. In addition, it included a few general provisions
relating to oil pollution arising from petroleum activities. For instance, the law conferred
general powers on the petroleum minister to supervise, inspect, arrest or even to suspend
any oil operations for the purposes of enforcing environmental and safety regulations
under the act; and to make regulations on matters relating to prevention of pollution and
safety in the conduct of oil operations.
The Petroleum (Drilling and Production) Regulations 1969 was the most important
implementing regulations made under the petroleum law in terms of environmental
protection. It required in more general terms the operators to "adopt all practicable
precautions" to prevent pollution of waters or the high seas by oil, and where it occurred,
"to take prompt steps" to control and end it; and to carry out all operations in" a proper
and workmanlike manner in accordance with the regulations and practices accepted as
"good oil field practice".
C. Environmental Provisions of Concession Agreements
The aforementioned survey by this author also reveals that many of the traditional oil
concessions in the early part of this century were silent on environmental protection, too.
The 1901 D'Arcy concession, the 1933 Aramco concession and its 1939 supplemental
agreement, and the 1953 Abu Dhabi Marine Areas (ADMA) concession, as revised in
1966, represent just a few examples of this majority group.
Environmental protection in some other concessions, if any, was only a barely relevant
reference such as: all petroleum operations must be conducted "in workmanlike manner
with reasonable precautions." But this phrase was used to require that petroleum
exploration and production be carried out in a proper and unwasteful manner, and
typically provided little environmental protection.
As an exception to this general trend, a few concessions in the early days did mention oil
pollution. For instance, the 1925 Iraq Petroleum Company (IPC) concession included a
clause under the subtitle "Access of Water, etc.," which reads:
The Company undertakes to take every reasonable precaution against the pollution of the
elements in the vicinity of its installations. But the Government recognizes that in certain
circumstances a pollution of the elements is inevitable by reason of the nature of the
operations of the oil industry, and will not for the purpose of preventing this
inconvenience ask the Company to undertake any measures which it could not be
reasonably asked to undertake.
Besides other legal defects, this provision contains a major and deliberate loophole which
speaks for itself: it recognizes that oil pollution in certain circumstances is "inevitable,"
so the company will not be asked to undertake any preventive measures. This is
tantamount to authorizing the concessionaire to go on to pollute under "certain
circumstances" which are not defined at all.
Generally, national laws and traditional concession agreements concluded in the first half
of this century made little reference to environmental protection and control. This is
hardly surprising, because at the time these statutes and agreements were being
developed, environmental consciousness and thinking was in its infancy. In fact,
environmental problems did not become a major concern until the late 1960s and early
1970s and sustainable development was not a popular issue until the 1980s and early
1990s. Thus, the omission and lack of environmental provisions in early concessions is
partly understandable.
In view of this historical context, it is perhaps too ambitious to have expected the
governments of producing countries and the contracting parties in those early days to
include at that time any environmental provisions in their laws and concessionary
arrangements. In summary, environmental regulation of oil and gas in the early days may
be summarised into the following points. First, major sources of international
environmental law relevant to petroleum activities can hardly be identified in the first half
of this century. Second, at the national level, environmental concerns travelled very
slowly into domestic legislation and petroleum concessions. For instance, despite its
status as a major natural resources country, there was no specific environmental
legislation in Papua New Guinea until 1978. Third, the few limited provisions in relation
to environmental control in both petroleum law and concession agreements made only
passing references to such notions as "proper and workmanlike manner" and "good oil
field practice". These traditional environmental concepts, it is submitted, are simplistic
and vague, as two British petroleum legal authorities commented:
The expression "good oilfield practice" is widely used both in the legislation and
elsewhere, but no indication is given of where such practice may be found.
In conclusion, it may be said that concerns for environmental protection in petroleum
development was not significantly expressed during this developmental period.
IV. Petroleum Environmental Regulation under International Law
The preceding historical review up to 1950 indicates that environmental regulation of oil
and gas operations is relatively a recent phenomenon. Since approximately the mid of this
century, there has been an increasing body of legal rules affecting oil and gas operations.
The legal framework for environmental regulation of petroleum transactions is a
combination of both international law and national legislation, with the former as some
elements and the latter the dominant component of the system. The issue may be best
looked at and analysed when following the breakdown of jurisdictions at international
and national levels.
1. Key International Treaties
Environmental law relevant to the petroleum industry may be classified into the following
three principal categories in accordance with their source and nature: international
treaties, regional agreements and "soft law" principles. The following discussion begins
with a brief look at some of the key international treaties, and then moves down to
regional agreements and "soft law" rules.
A. 1958 Geneva Conventions.
A good starting point to review contemporary international law in relation to petroleum
operations is the 1958 Geneva Conventions, or more precisely, the Continental Shelf
Convention and the High Seas Convention. The 1958 Continental Shelf Convention
includes a number of provisions related to prevention of marine pollution from offshore
exploration, which: (a) precludes offshore operations which cause unjustifiable
interference with other marine activities including conservation efforts; (b) calls member
states to establish 500 metre safety zones around all drilling platforms; ( c ) requires
member states to undertake all appropriate measures for the protection of the living
resources of the sea from all harmful agents; (d) stipulates that "any installations which
are abandoned or disused must be entirely removed." The 1958 High Seas Convention
also contains a broad article under which every state is required to draw up regulations to
prevent pollution of the seas by discharge of oil from pipelines or resulting from oil
exploration and exploitation.
The majority of offshore producing states, including the major offshore producers such as
the U.S.A. and the U.K., are parties to these conventions. All of these provisions remain
in force for the state parties, except for those that have ratified the 1982 United Nations
Convention on the Law of the Sea (LOS Convention), which is designed to replace the
1958 Geneva Conventions. The implications of the LOS Convention will be discussed
below. However, before that treaty was concluded there was a small number of
developments within the framework of international law that affect the offshore industry.
B. 1972 London Dumping Convention.
One of these attempts at environmental protection is the 1972 London Convention. It is a
major environmental instrument of global application to all marine areas other than
internal waters. Under this convention, dumping is defined as:
(a)(i) any deliberate disposal at sea of wastes or other matter from vessels, aircraft,
platforms or other man-made structures at sea;
(ii) any deliberate disposal at sea of vessels, aircraft, platforms or other man-made
structures at sea; . . .
( b ) The disposal of wastes or other matter directly arising from, or related to the
exploration, exploitation and associated off-shore processing of sea-bed mineral resources
will not be covered by the provisions of this Convention.
By so providing, the London Dumping Convention brings some of the offshore oil and
gas activities under the umbrella of its regulation. This includes the disposal of offshore
installations and structures.
In response to the increasing international concern in recent years over the issue of
offshore abandonment of petroleum installations and facilities, a special meeting of the
Contracting Parties to the London Dumping Convention adopted a new protocol on 7
November 1996 to clarify the treaty's position on the issue in question. The definition of
"Dumping" in the convention was updated and expanded to include explicitly:
[A]ny abandonment or toppling at site of platforms or other man-made structures
at sea, for the purpose of deliberate disposal.
By so providing, the London Dumping Convention further extends its jurisdiction to the
particular activities of decommissioning and abandonment of petroleum installations and
structures at sea, either totally or partially. This 1996 Protocol and its new definition of
dumping will produce profound effect on the offshore oil and gas industry because of its
direct relevance.
C. 1973/78 MARPOL.
Another significant international act is the 1973 MARPOL, which is aimed at the
shipping industry but has direct implications on the offshore petroleum operations.
MARPOL defines "discharge" to exclude the "release of harmful substances directly
arising from the exploration, exploitation and associated offshore processing of seabed
miner resources." By so providing, the convention excludes its application and
jurisdiction over pollution caused by such activities as blowout, structural failure of
installations, collision with structure, or accident of a pipeline.
Interestingly, MARPOL does not stop here and its Annex I goes on to provide that fixed
and floating rigs, when engaged in the exploration and exploitation of seabed resources,
must apply the rules applicable to ships of 400 tons and above. The effect of the
application of these rules is the prohibition of the discharging of oil and oily mixtures into
the marine environment, albeit with some specific exceptions.
D. 1982 Law of the Sea Convention.
The LOS Convention is the deliberation of international community over a period of
more than two decades. As mentioned earlier, it is designed to consolidate all relevant
rules and principles, both customary and conventional, into a single framework
convention.
For the first time in history, this global convention includes a separate chapter on marine
environmental protection (Section XII), which specifies in a comprehensive manner that
states must take measures to prevent, reduce, control the pollution of the marine
environment. As far as offshore operations is concerned, it calls upon member states to
take measures to prevent, reduce and control pollution of the marine environment and, in
particular:
Pollution from installations and devices used in exploration or exploitation of the natural
resources of the seabed and subsoil, in particular measures for preventing accidents and
dealing with emergencies, ensuring the safety of operations at sea, and regulating the
design, construction, equipment, operation and manning of such installations or devices.
It further provides that states shall adopt laws and regulations, which are no less effective
than international rules, standards and recommended practices and procedures, to deal
with pollution from or in connection with offshore activities; and shall cooperate in the
protection of the marine environment on a global and regional basis.
All these provisions are clearly relevant to offshore petroleum and mineral operations.
Nevertheless, it must be pointed out that what LOS Convention provides is an important
framework for future legal development, rather than operational obligations.
Consequently, there is a need for developing a set of complementary working rules for
offshore exploration and production activities. Both the substance of such rules and the
manner of their actual application remain yet to be worked out at the international level.
E. 1992 Climate Change Convention.
A more recent international covenant with some significance on the oil and gas industries
is the 1992 Climate Change Convention. This convention was adopted against the
international backdrop of global climate change caused by emission of greenhouse gases,
to which the consumption of fossil fuels, including coal, oil and gas, makes the lion
share's contribution. The convention aims at stabilising greenhouse gases concentration in
the atmosphere "at a level that would prevent dangerous anthropogenic interference with
the climate system". To achieve the objective of the convention, all parties are generally
required to develop national inventories of emission; formulate and implement national
and regional programmes of mitigation measures; all developed-country parties and the
EC are specifically obliged to take measures to limit greenhouse gas emission by the year
2000 at 1990 level.
As the climate change, or more precisely, global warming, continues to develop as
evidenced by the recent report on the vanishing Antarctic, steps are being taken to
implement the commitments laid down in the Climate Change Convention. For instance,
The European Union (EU) has agreed in March 1997, to put forward at the next
international summit on climate change in Kyoto in December, a proposal to call for a 15
percent cut in emissions of greenhouse gases.
It appears that more specific measures will be adopted by the international community to
implement the treaty obligations. The actual application of them will unavoidably have an
impact on petroleum production and consumption because fossil fuels account for 90
percent of energy demand and are an important cause of global warming. The Climate
Change Convention is likely to have far reaching effect on petroleum operations in the
long run, though the scope and depth of such implications remain to be articulated.
F. 1992 Biodiversity Convention.
Apart from climate change, another concern of late by the international community is
about the loss of biodiversity on the planet earth. It is reported that up to 8 percent of the
planet's species may be extinct within 25 years, and as many as 17 million hectares of
tropical rain forest - an area about the size of Japan and the home of many important and
valuable species - are destroyed every year. It is against this general backdrop that
another major instrument of the Biodiversity Convention was adopted at the Rio
Conference in 1992. Its relevance to the industry is also quite apparent since upstream
operations will always introduce interference with biological sources such as land,
vegetation and forests, and downstream operations cause various environmental problems
ranging from air pollution to climate change. Among other things, the convention
provides for state parties to identify and monitor the effects of such processes and
categories of activities which have or are likely to have significant adverse impacts on the
conservation and sustainable use of biodiversity; and establish a system of protected areas
or areas where special measures need to be taken to conserve biological diversity. All
these provisions possess the potential of a direct impact on upstream operations once fully
applied at the national level.
The above discussion on international law relevant to oil and gas operations is by no
means complete. The list could continue to include conventions such as the 1974
Offshore Pollution Liability Agreement (OPOL); the 1977 Convention on Civil Liability
of Oil Pollution Damage Resulting From Exploration for and Exploitation of Seabed
Mineral Resources (CLEE), and the 1985 Vienna Convention on the Protection of the
Ozone layer and its Protocols. However, these and other relevant instruments are not
studied here, due to space limitation and the nature of this paper. However, for a more
comprehensive list of these instruments, please refer to Appendix 1 at the end of this
book which lists the international environmental legal acts in relation to the oil and gas
activities .
2. Major Regional Agreements
The second level of the international law elements is an increasing amount of
environmental agreements concluded at the regional level since approximately the early
1970s. Again, only the majors ones at this level are briefly looked at in the following
paragraphs.
A. The 1972 Oslo Convention.
The Oslo Convention is a regional treaty covering only the North East Atlantic, the North
Sea and parts of the Arctic Ocean. The Convention provides that the bulky wastes, which
may present a serious obstacle to fishing or navigation, shall be dumped at water depths
of not less than 2,000 metres and at a distance of not less than 150 nautical miles from the
nearest land; and prohibits the dumping of certain listed materials from "ships and
aircraft" including fixed or floating platforms. The contracting parties remain divided as
to whether the treaty covers dumping of platforms themselves. But the debate over its
applicability to the disposal of platforms will become obsolete because the convention is
going to be superseded by a new treaty soon.
B. The 1992 OSPAR Convention.
In order to avoid ambiguity and update the existing provisions, the Oslo and Paris
Commission adopted in 1992 the OSPAR Convention, which is designed to consolidate
the previous regional conventions and to complement, rather than replace, the multilateral
treaties such as the 1958 Geneva convention and the 1972 London Convention. As far as
offshore oil and gas operations are concerned, the convention prohibits the dumping of
wastes or other matter from offshore installations; Discharge or emission from offshore
sources are not included in the prohibition, but they are strictly subject to authorization,
regulation and monitoring. The convention places an emphasis on disposal of installations
by providing:
1. No disused offshore installation or disused offshore pipeline shall be dumped
and no disused offshore installation shall be left wholly or partly in place in the
maritime area without a permit issued by the competent authority of the relevant
Contracting Party on a case by case basis.

2. No such permit shall be issued if the disused offshore installation or disused
offshore pipeline contains substances which result or are likely to result in
hazards to human health, harm to living resources and marine ecosystems,
damage to amenities or interference with other legitimate uses of the sea.
At the last meeting of the OSPAR Commission in June 1995, the majority of the
contracting parties put forward and agreed upon a draft proposal on the disposal of
offshore installations, aimed at: first, a moratorium on the disposal of decommissioned
offshore installations at sea; second, a draft decision to be prepared by the OSPAR
working group for consideration at the next meeting for implementation by 1997.
C. 1994 Energy Charter Treaty (ECT).
The Energy Charter Treaty is the first one of its kind to limit its scope specifically to the
energy sector. It is a super-regional treaty in the sense that its scope covers the whole of
Europe and the members of Commonwealth of Independent States (CIS), plus Japan and
Australia. In its Preamble, the treaty explicitly recognizes "the increasingly urgent need
for measures to protect the environment, including the decommissioning of energy
installations and waste disposal, and for internationally agreed objectives and criteria for
these purposes". It also includes a separate article to address the environmental aspects of
investment and trade in energy. The environmental article contains a number of vague
provisions: first, it spells out three general principles of sustainable development,
prevention and "polluter pays" for parties to observe in implementing their environmental
obligations; second, it sets forth a general environmental obligation on contracting parties
to strive to minimize harmful environmental impacts from all operations within the
energy cycle; third, it provides for 11 action points for state parties to comply with, which
include environmental integration in energy policy; reflection of environmental costs in
energy price; harmonization of environmental standards; energy efficiency and renewable
energy sources; promoting cooperation and development of environmentally sound
technologies, etc.
Like some other environmental treaties, the environmental provisions of the ECT employ
quite a few permissive rather than formative terminologies such as "take account of",
"promote", "encourage", and "upon request". These provisions, therefore, "do not create
enforceable commitments but function rather as indicators of good practice."
D. The UNEP Regional Seas Programme.
Another component of the regional treaties is the Regional Seas Programme developed
under the auspices of the United Nations Environment Programme (UNEP). It is an
ambitious programme aimed at developing treaties and other rules and standards to
protect marine environment of marginal seas of the world. The programme now extends
more than 13 regional areas and has a total of 29 conventions and protocols. Many of
them affect offshore oil and gas exploration and production activities. Two such
agreements are the 1994 Offshore Exploration Protocol under the 1976 Barcelona
Convention and the 1989 Offshore Exploration Protocol under the 1978 Kuwait
Convention, respectively.
Despite their different geographical scopes of operation, the common issues addressed in
the Barcelona and Kuwait Offshore Protocols include: authorization and license for
drilling activities, disposal of wastes and harmful substances, and safety and contingency
planning. Both Protocols place an emphasis on removal of installations. Under the
Barcelona Protocol, the operator must "remove any installation which is abandoned or
disused, in order to ensure safety of navigation"; while under the Kuwait Protocol,
platforms and structures may be removed "in whole or in part", but they must not be
disposed of at sea. Moreover, the Barcelona Protocol is more aggressive in the sense that
it also includes provisions on liability and compensation, and requirement for
environmental impact assessment.
The UNEP Regional Seas Programme is characterized by its unique approach of a series
of framework conventions at the regional level, and substantive progress has been
achieved through additional protocols which transform an otherwise broad treaty into
effective working obligations.
E. Environmental Law/Directives of EC.
Last but not the least, the European Community (EC) environmental law must be
mentioned as another component of the regional treaties relevant to petroleum operations.
The last 25 years have seen the development of an extensive body of EC environmental
law, that now comprises more than 250 environmental directives, regulations and
decisions, which address virtually all the media of the environment and sectors of the
economy. Many of these directives affect the oil and gas industry, either directly or
indirectly.
The 1985 Environmental Impact Assessment Directive as amended by the Council
Directive 97/11/EC of 3 March 1997 is one of many environmental directives. The
objective of the EIA Directives is to assess certain public and private projects "which are
likely to have significant effects on the environment". The directive divides projects into
two categories: those projects presumed to have significant effects on the environment are
subject to mandatory assessment (Annex I projects); and other projects for which
assessment is not necessary but will be required if they are likely to cause significant
environmental effects (Annex II projects).
As far as oil and gas are concerned, it suffices to say that both up- and down-stream
operations such as petroleum E&P, crude oil refineries, large thermal power stations,
storage installations, integrated chemical installations, trading ports and waste disposal
installations are listed in Annex I and therefore, subject to mandatory assessment. More
specifically, the mandatory list includes among other things: extraction of petroleum and
natural gas with capacity exceeding 500 tonnes/day in the case of petroleum and 500,000
m3/day in the case of gas; pipelines for the transportation of gas, oil or chemical with a
diameter of more than 800 mm and a length of more than 40 km; installations for storage
of petroleum, petrochemical, or chemical products with a capacity of 200,000 tonnes or
more. Smaller projects of the oil and gas industry not subject to the mandatory
requirement are listed in Annex II and it is up to member states to decide whether or not
they should require an EIA through: (a) a case-by-case examination; or (b) thresholds or
criteria set by the member states. These projects include surface installations for the
extraction of petroleum and natural gas, surface storage of natural gas and fossil fuels,
and oil and gas pipeline installations. The EIA Directive as amended in 1997 also requires
that the information gathered in the process and determinations made by the national
authority be made available to the public within a reasonable time in order to give them
the opportunity to express an opinion before the consent is granted.
It must be commended that the new EIA directive brings back the mining and petroleum
exploration and exploitation to the mandatory EIA requirement, which had been
excluded under the original directive from the procedure for more than a decade. This
provides another firm example that EIA should be a mandatory requirement for oil and
gas E&P before a licence is granted since these development activities are always likely
to cause various environmental concern and consequences.
3. The "Soft Law" family
The third level of the international law element is the so-called "soft law" principles and
instruments. It is submitted that it is not always easy to precisely define and categorize
these instruments due to their recency, diverse sources, various scope of operation,
different characteristics and so on. Notwithstanding, an attempt is made to broadly group
them into the following categories.
A. International Environmental Declarations/Action Plans.
The practice of international environmental declaration and action plans started in 1972
with the Stockholm Declaration. Its famous Principle 21 provides that states have the
sovereign right to exploit their own resources and the responsibility to ensure that
activities within their jurisdiction or control do not cause environmental damages. More
recent examples of the international environmental declarations and action plans include
the three non-binding documents produced at the 1992 United Nations Conference on
Environment and Development (UNCED, or more popularly known as the "Earth
Summit"). The Rio Declaration and Agenda 21 are briefly examined here for their
potential impact on the oil and gas industry.
(a) The Rio Declaration. The Rio Declaration comprises 27 Principles which address such
important issues as: sustainable development to integrate environmental protection into
the development process; common but differentiated responsibilities to conserve, protect
and restore the Earth's ecosystems; public participation and information access at the
national level, reduce and eliminate unsustainable patterns of production and
consumption (more relevant to oil and gas); national environmental law to address
liability and compensation for the victims of pollution and other environmental damages;
polluter pays principle to internalize environmental costs; EIA to assess activities likely
to have significant adverse environmental impacts; indigenous people and their
communities to participate in development activities; and settlement of environmental
disputes in a peaceful and appropriate means. These important principles not only lay
down the foundation upon which states and people are going to achieve sustainable
development, but a careful reading of them also reveals how closely relevant they are to
the petroleum fuel cycle once they are fully put into practice.
(b) Agenda 21. It is a blueprint and action plan for international cooperation towards
sustainable development. It comprises a Preamble and four sections to address such issues
as social and economic dimensions (chs. 2-8); conservation and management of resources
for development (chs.9-22); strengthening the roles of major groups (chs. 23-32), and
means of implementation (chs. 33-40). It is important to note that Agenda 21 makes
particular reference to offshore oil and gas operations, which encourages states to assess
the need for additional measures to protect the marine environment against pollution
arising from offshore oil and gas platforms. It is one more general confirmation of the
growing international concern over the issue of removal and disposal of disused offshore
installations and structures in the exclusive economic zone (EEZ) and on the continental
shelf.
B. Guidelines and Standards of International Organizations.
An increasing volume of environmental guidelines and principles has been issued by
relevant international organizations over the last two decades. More recently, one trend of
international law development is the increasing use of cross reference to complement
working guidelines and standards developed by competent organizations. For instance,
the reference to "generally accepted international standards" in the LOS Convention, and
"guidelines and standards adopted by the competent international organization" in the
Barcelona Offshore Exploration Protocol.
(a) UNEP Guidelines. An early example of the international guidelines on petroleum
environmental regulation is the UNEP's environmental law guidelines and principles on
Offshore Mining and Drilling issued in 1982. The principal provisions of this document
are summarized in the following points:
State should take preventive measures against, limit and reduce pollution and
other adverse effect on the environment resulting from offshore exploration for
and exploitation of hydrocarbons and other minerals by adopting regulations and
through international cooperations. National laws and regulations should not be
less effective than international rules and standards.

The granting of an authorization should be preceded by an environmental
assessment. Authorizations should be refused if there are clear indications that
significant adverse effects caused by such operations could not be avoided.

State have the responsibility to ensure that activities within their jurisdiction do
not cause damage to the environment of other states or areas beyond the limits of
national jurisdiction.

States should ensure that safety measures, contingency planning and
implementation measures are undertaken for offshore operations; and
appropriate measures are adopted for determining environmental liability and
compensation for damages resulting from offshore operations.
Admittedly, these provisions are general and can amount to only some broad policy
recommendations as the word "should" used in the text suggests. Nonetheless, they still
provide some policy and legal direction for states to follow in environmental control and
management of offshore petroleum and mining operations within the limits of national
jurisdiction.
(b)The IMO Guidelines. As far as petroleum industry is concerned, the most noticeable
example in recent time is the offshore removal guidelines adopted by International
Maritime Organization in 1989 (the IMO Guidelines). The major points of the IMO
Guidelines are summarized as follows:
(1) the general principle is that all disused installations "are required to be
removed";
(2) Installations in water depths of less than 75 metres, or 100 metres after 1
January 1998, and weighing less than 4,000 tons should be removed unless: (a)
not technically feasible; (b) involving extreme cost; or (c)constituting
unacceptable risk to personnel or the marine environment;
(3) an unobstructed water column of 55 metres must be left in the event of a
partial removal;
(4) all installations after 1 January 1998 are to be designed and built so that their
entire removal is feasible.
As the title of the guidelines suggests, they are of recommendation in nature and do not
have the binding force as international law. The IMO has in the recent past developed a
number of codes and guidelines, some of which are applicable to offshore oil and gas
industry. These include the 1989 Code for the Construction and Equipment of Mobile
Offshore Drilling Units.
( c ) The 1991 OSCOM Guidelines. A regional example is the OSCOM Guidelines
adopted by the Oslo Commission under the 1973 Oslo Convention. With a view to
complementing the 1989 IMO Guidelines, the OSCOM Guidelines provide in principle a
system of special permit to be issued by the contracting parties for disposal of an offshore
installation on a case by case basis. The OSCOM Guidelines are recommended to the
contracting parties to follow on a trial basis.
C. Environmental directives of international financial institutions.
At the next level of the "soft Law" are perhaps the operational directives and
environmental guidelines developed by the multilateral development banks and
institutions around the world, of which the most noticeable and widely studied is the
environmental procedures and requirements adopted by the International Bank for
Reconstruction and Development (the World Bank). The World Bank's environmental
requirements and operations directives cover a wide range of projects and sectors, and has
specific procedures and requirements for each industrial activity. For the hydrocarbon
sector, the Bank has introduced particular environmental guidelines for offshore oil and
gas exploration and exploitation projects. Generally, they introduce assessment
requirements on: information on the context of the project; base-line data on the natural
environment of the project area; potential and direct effect on the environment; measures
to prevent and reduce environmental harms and so on.
On the balance, the World Bank's environmental guidelines work well with industries in
practice, but they have been subject to some criticisms in one or two major areas. First,
most of the present guidelines were prepared in the late 1980s and they are generally "not
very detailed or restrictive". Second, some of the World Bank documents have failed to
provide for a "no-action alternative" under which the proposed project needs to be
stopped because the associated environmental risks are too great, if it is allowed to
proceed; and their silence on mandatory requirement for provision of environmental
information to concerned communities and their rights to participate in the EIA process.
Notwithstanding, many regional development banks have used the environmental
documents introduced by the World Bank as the basis upon which to develop their own
environmental requirements. For instance, the Environmental Procedures published by
the European Bank for Reconstruction and Development (EBRD) in 1992 provides that
oil and gas developments and pipelines (large-scale) and mineral development and
processing operations are subject to mandatory full environmental assessment.
D. International technical standards.
The "soft law" family also include a mushrooming body of international technical
standards adopted by international technical and standard agencies such as the
International Standards Organization (ISO). The most influential one of ISO's standards is
the ISO 14000, a comprehensive set of standards, guidelines and principles on
environmental impact assessment, environmental management, environmental audits,
environmental performance evaluation, etc. More importantly, apart from these general
technical standards, the Technical Committee of ISO is currently preparing a draft
standards for offshore oil and gas operations. This new document will include criteria on
discharge, emission, petroleum health and safety, environmental management systems,
contingency plans and so on, all of which are likely to have a significant impact on the
offshore industry. Expectedly, those companies that have met the standards are likely to
receive preferential treatment in the bidding evaluation process for petroleum licenses.
E. General and specific industry guidelines.
Last but not the least within the "soft law" are the general and specific industry guidelines
adopted by various industry and corporate associations. Many of these industry
associations have begun to play an increasingly important role in promoting
environmental management and performance through developing environmental
principles and guidelines for their members. Two examples are mentioned here for
illustrative purposes.
(a) The International Chamber of Commerce (ICC). ICC adopted in 1991 a 16-principle
"Business Charter for Sustainable Development", which calls upon all types of businesses
around the world, including oil and gas industry, to promote and achieve sustainable
economic growth. Under these newly established business principles, corporation are
required to do business in a sustainable manner. Therefore, oil companies need to shift
their management perspective from a traditional business-as-usual view towards one that
stimulates thinking about environmental management and performance, and sustainable
development of petroleum resources.
(b) The Oil Industry International Exploration and Production Forum (E&P Forum). E&P
Forum is a specific industry association for oil and gas companies worldwide. The Forum
has been in recent years actively involved in environmental initiatives such as workshops,
environmental guidelines and publications to promote the industry's environmental
performance and image. Among its many useful documents is a set of guidelines on
environmental management in oil exploration and production published in 1997. The
guidelines provide for a series of technical guidelines on environmental management such
as impact of oil exploration, petroleum working environment, procedures for
environmental control, and environmental management within oil companies, with the
view to reducing the environmental impacts of petroleum exploration and production
operations.
The above list of the "soft law" elements in relation to oil and gas listed above are far
from complete. Many other documents are produced in recent time by relevant
institutions such as the International Association of Geophysical Contractors (IAGC),
petroleum industry associations at the national level, and corporate guidelines at the
industry level. It is simply not feasible to delve into all of them in this study.
4. Some Findings and observations
The following remarks can be made from the above brief overview. The first finding is
that, with perhaps the exception of those provisions in the 1982 LOS Convention, there is
to date no general multilateral convention dealing specifically with environmental control
of petroleum operations. All the existing provisions that relate to oil pollution have
largely evolved on a sectoral or ad hoc basis, normally for offshore operations alone.
A second interesting finding is that the offshore oil and gas industry has become the
centre of focus of the relevant international law provisions over the last few decades.
Nearly all the international legal instruments surveyed in this study, be it at international
or regional level, "hard" or "soft", have incorporated some provisions for offshore
petroleum operations. In contrast, onshore petroleum operations have largely been left
unattended by international law. More curiously, not even a passing reference has been
even made in either these treaties or elsewhere to their possible application or extension
to land petroleum operations.
There may be some possible explanations for such a strong phenomenon, which may
include the following: first, the marine environment is more ecologically sensitive and
susceptible to pollution; second, there are usually more than one coastal states bordering
on the same marine area; third, the same marine environment may be shared at the same
time by other sea users rather than the offshore oil industry alone; fourth, marine
pollution does not recognize concession blocks or even boundaries and travels well
beyond where it occurs; fifth, there are specialized international organizations, such as
IMO, that are charged with maritime safety and marine environmental protection; last but
not the least, national sovereignty could also contribute to the phenomenon in question
since land territory is historically regarded as the exclusive domain of the sovereign state,
while offshore waters may be subject to other jurisdictions such as the freedom of
navigation, scientific research, and construction of artificial islands and installations in
the EEZ and on the continental shelf. Nonetheless, all of these would, perhaps, not suffice
to justify the exclusion of onshore petroleum operations from the effect of relevant
international treaties. Hence, the argument could be made that international law should
develop some general principles and procedures for the onshore oil and gas industry as it
has done for offshore operations.
A third finding is that the development of petroleum environmental regulations at the
international level has not been a concerted action. There are diverse organizations at
different levels whose efforts have seldom been coordinated. As a result, contradictory
provisions and requirements are found at international level, regional level, or even
between them. For instance, the 1958 Continental Shelf Convention and the 1982 LOS
Convention provide for conflicting provisions and obligations for their parties in terms of
total and partial removal. A similar problem is also found between the 1994 Barcelona
Offshore Exploration Protocol and the 1989 Kuwait Offshore Exploration Protocol at the
regional level. This inconsistency has caused considerable concerns and difficulties in
terms of interpretation and application.
A fourth finding relates to the confusing position taken by some of the treaties in terms of
their jurisdictional coverage. It is very interesting to note that the 1973/78 MARPOL, for
instance, first specifically excludes jurisdiction over pollution and discharge arising from
offshore exploration and exploitation, and other associated operations; and then the annex
brings back some facets of offshore operations under its provisions. "Hence the
agreement as a whole is a useful precedent, but of limited relevance to the prevention of
oil pollution from continental shelf operations." Similarly, the 1972 London Dumping
Convention covers only certain activities of the offshore industry, as noted earlier. As a
result, regulation of offshore operations has been marginalized in these environmental
treaties, despite the fact that the offshore petroleum industry has become one of the three
principal ocean uses, together with the other two traditional industries of navigation and
fishing.
Fifth, many of the key international treaties, including the 1982 LOS Convention, provide
in principle for a framework for future legal development, and in many cases their
relevant provisions are vague and general, and do not amount to operational obligations.
They therefore need to be supplemented by periodical protocols for implementation. In
this regard, a useful experience can be drawn from the Barcelona and Kuwait
Conventions which have adopted a special protocol to regulate environmental protection
of offshore exploration and production activities. By way of analogy, the international
community may wish to consider the need and possibility of adopting a new international
legal instrument devoted entirely to the offshore industry, or even better, to oil and gas
activities of both onshore and offshore. The benefits of such an approach include at least
the following: it will be able to consolidate and complement all the existing provisions in
various treaties and at different levels; it can serve to coordinate the regulatory functions
currently exercised by a variety of organizations; it can rectify the present piece-meal
approach to environmental regulation of oil and gas activities; and moreover, it will fill
the gap of lack of international law over onshore operations.
Sixth, the period since 1970s has seen a proliferation of "soft law" principles, which are
characterized by two common features: non-binding in nature; and promotion of
environmental management and performance. The "soft law" is not only complementary
to legal rules, its importance also lies in the fact that some of the principles may be said to
reflect rules of international law, while others point to the direction for future
developments. Hence, their relevance and importance to the industry should not be
underestimated in the long run.
Last but not the least, many provision of international law in this respect are not capable
of reaching the industry without national translation, or in other words, their effect on the
industry in most cases is indirect. The only exception to this generalization would,
perhaps, be the provisions on offshore decommissioning and abandonment, which would
perhaps pose, in the author's view, the most significant and direct impact of international
law on the oil and gas industry in the short to medium term. This proposition is based on
the following assessments. First, as noted earlier, the recent development of international
law has paid an overproportionate attention to the issue of offshore abandonment. Many
major treaties and other instruments have touched upon the issue. Second, the provisions
on offshore removal have gone from general requirements in the 1958 Continental Shelf
Convention and 1982 LOS Convention to specific standards in the IMO Guidelines,
which lays down a set of detailed working rules for not only state but the industry to
follow. Third, decommissioning and abandonment which was not an issue for the
industry in the past, has now been widely recognized as a distinctive phase of petroleum
operations. Yet both governments and the industry have not, generally speaking, been
well prepared for it. Fourth, the performance of the obligation can be costly to both
governments and companies. There are about 7,000 oil and gas offshore installations
worldwide, the total cost of decommissioning these structures is estimated at $30-50
billion. Finally, in this environmental era, what the industry perceives to be the best
option and lawful under the legal framework may not necessarily be acceptable to the
general public, who are increasingly environmentally sensitive, as evidenced in Shell's
Brent Spar case in 1995. Finally, though non-binding at present, the IMO guidelines have
the likelihood of being transformed into a rule of customary international law in the near
future since many states are generally in their support.
IV. Petroleum Environmental Regulation under National Law
As commented above, most environmental provisions on oil and gas activities come from
the laws of national states who have sovereignty over hydrocarbon resources and
jurisdiction over their development. It is not feasible in this paper to look at every legal
jurisdiction and their petroleum systems. Rather, the following discussion of national
petroleum environmental regulation is conducted by way of case studies and literature
analysis.
In terms of environmental regulation of oil and gas activities, perhaps three major
prevailing regulatory modes can be identified at the national level: the statutory approach;
the contractual approach; and the integrated legislative approach.
1. Statutory Approach
Under this approach, the environmental aspect of the oil and gas industry is regulated by
means of multiple statutes. It is therefore more appropriate to term it multi-statutory
approach. Typical models of this regulatory approach include the U.S.A. and the U.K.
A. The U.S.
The United States is perhaps the birth place for both the petroleum industry and
petroleum licensing. The country is also well known for its pioneering environmental
laws and innovative regulatory methods. Over the past 30 years or so, the US has
introduced a highly comprehensive, complex, sophisticated set of environmental laws to
address issues from all phases of the petroleum fuel cycle. As a federal state, these laws
and acts were not only adopted at the federal level by both the Congress and Executive
Branch agencies, but also their counterparts at the state level.
For instance, at the federal level, at least 25 statutes are directly applicable, albeit in
varying degrees, to the environmental regulation of oil and gas industry, with the 1990
Oil Pollution Act (OPA) as perhaps the most important one. OPA established for the first
time a comprehensive scheme governing oil pollution in the U.S., addressing, among
other things, legal liability, response to oil spill, pollution prevention plans, double-hull
construction for tankers, criminal and civil liabilities for violation.
On the other hand, the U.S. has in place neither a national environmental policy nor a
national energy policy to guide the formation and application of a uniform body of
environmental regulatory rules for the oil and gas activities. The regulatory result is
sometimes confusing and incomplete. For instance, the 1980 Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA, or the "Superfund
Law") exempts the petroleum industry from its jurisdiction of strict liability, and the OPA
of 1990 brings it back under the strict liability regulation. In summary, despite its
leadership role, the U.S. environmental regulation of energy development, including oil
and gas, is fragmented in many relevant pieces of statutes, laws, regulations, and even
court decisions which are not always consistent and are sometimes even in conflict.
B. The U.K.
Like in the U.S., there is a myriad of environmental laws adopted in the U.K. over a
period of 20 years or so. This situation of sporadic development did not change until
1990, when the country introduced its first comprehensive Environmental Protection Act
which is a consolidation of a number of existing laws. In turn, environmental provisions
in relation to oil and gas operations can be found in many pieces of the national
legislation. Coincidentally, there are also 25 major U.K. acts and regulations affecting the
oil and gas industry. The U.K. is a highly centralized state, yet many government
agencies are involved in regulating the industry from an environmental point of view,
with the main ones being the Department of Trade and Industry (the Department of
Industry, Department of Energy prior to 1992), Her Majesty's Inspectorate of Pollution,
the National Rivers Authority, the Water Authority, let alone the numerous councils at
local levels.
Environmental regulation of onshore and offshore oil and gas activities are slightly
different. Two main legal techniques are used in the U.K. for regulating environmental
aspects of economic activities: planning of land use and licensing of specific activities.
Both are used with respect to onshore oil and gas activities. Onshore operations are
subject to the general planning controls. Before a planning permission is granted, an EIA
has to be submitted. However, for exploratory drilling, EIA is not normally required
unless its site is in a sensitive location or sensitive to disturbance. For petroleum
production, EIA may be necessary if (a) production is substantial (300 tons or more p/d);
or (b) the site is sensitive to normal operations. New processing and treatment plants
requiring sites in a range of 20 -30 hectares or above may well require EIA. For terminals
and refineries, an EIA will now normally be required. Apart from planning permission
and EIA, both new and existing developments will require Integrated Pollution Control
authorization under the 1990 EPA.
For offshore operations, it is more complicated as international conventions and
community directives are involved. But the two principal laws affecting land petroleum
operations are not applicable to the offshore operations. Therefore, of the two techniques
of government regulation and licensing, only the latter remains as the principal, if not the
only management tool for the offshore area. The U.K. therefore relies heavily on
contractual terms and conditions to carry not only its petroleum policy but also
environmental regulation. The Petroleum (Production) (Seaward Areas) Regulation 1988
provides: the licensees are obliged to operate "in a proper and workmanlike manner in
accordance with methods and practice customarily used in good oil field practice..."; to
take all practical steps to prevent the escape of oil; to plug any abandoned well; to notify
the government agency of any escape of oil; the ultimate sanction for breach of any of the
terms and conditions is revocation of the licence. Since the 7th licensing round in
1980/81, the government has applied a set of rules known as the "special elements", i.e.,
Oil spill contingency plan and EIA. However, it needs to be pointed out that a full EIA is
required only when the development is to take place near shore waters with 25 miles of
the coast or beyond in a sensitive area.
Moreover, DTI, the government department responsible for promoting offshore
petroleum development, is also charged with environmental policing of offshore oil and
gas operations. Such a "poacher and gamekeeper" approach has come under increasing
criticism in recent time because of the concern that the offshore environment would not
be adequately protected under the current administrative arrangement. Thus, the level and
standards of environmental regulation of oil and gas in the U.K. are perhaps quite
moderate.
In view of the above national case studies, the multi-statutory approach may be
summarized in the following general remarks. Under this approach, there are many laws
affecting petroleum activities, but oil and gas are excluded from the effect of some
environmental laws (OPA in the U.S.A. and the land planning law in the U.K. in terms of
offshore). In these petroleum jurisdictions, there is little unified legislation specifically
formulated for the oil and gas industry. This multilateral-statutory approach is adopted in
many other developed economies.
2. The Contractual Approach
Another major mode of regulation over petroleum activities is mainly through provisions
in petroleum agreements, which is termed the "contractual approach" in contrast to the
statutory approach. Unlike in many developed economies such as the U.S.A. and the U.K.
which have a complex web of environmental laws and regulations in place, the
environmental awareness and management in the developing world has generally been
slow to develop. Many of them traditionally preferred development to environment for
historical, ideological and economic reasons. It was perhaps not until sometime in the
1980s that many of them began to realize the important relationship between
development and environment, and started to introduce environmental policy and
legislation on a noticeable scale. Due to the general lack of environmental legislation,
many producing counties turn, even to date, to contractual arrangements for
environmental control of foreign investment in the petroleum and mining sectors.
As noted earlier, this author conducted, a few years ago, an appraisal of environmental
laws and contracts in the developing countries. The study reveals that world petroleum
"agreements, by and large, have followed the pattern of a general principle of, or
reference to, environmental protection." This finding is confirmed in other relevant
studies. The United Nations Centre on Transnational Corporations (UNCTC) stated in a
commissioned report on alternative arrangements for petroleum development in the early
1980s that in many developing countries' petroleum contracts "the only explicit reference
to environmental protection is a brief clause," such as:
Contractor shall . . . carry out operations in such a manner as to cause minimum social
and ecological disruption and use its best endeavour to cause no damage to public and
private properties. If pollution results from contractor's operations, contractor shall
promptly carry out cleaning operations to the satisfaction of the appropriate governmental
authorities and the costs therefor shall not be chargeable as exploration, development or
production costs.
The period since the early 1990s has seen some improvement in environmental provisions
in some jurisdictions. For instance, the 1996 model concession agreement in Romania has
introduced a separate article on environment, safety and insurance, which provides for:
compliance with all environmental permitting procedures under "prevailing Romanian
Law"; a "full environmental assessment"; conduct of petroleum operations "in accordance
with generally accepted international petroleum industry practice"; remedial measures by
the government in case the contractor fails to do so; insurance programme property,
pollution damage and third party liability; and revocation of contract in the event of
repeated violation of environmental requirements. On the other hand, the majority of
petroleum contractual systems remain weak on environmental control and regulation.
Take Nigeria for example, the country is the largest producer in Africa, yet its Model
Production Sharing Contract of 1995 is surprisingly almost silent on environmental
protection. The only relevant provision is the clause on insurance which provides that "all
insurance policies ... shall be based on good international petroleum industry practice . . ."
In sum, the general and vague provisions have made some progress towards
sophistication over the last few years, but the overall situation remains largely in need of
improvement. The contractual approach to petroleum environmental regulation is
characterized by a number of features. It is normally found in use in countries where the
legal infrastructure is incomplete. Environmental conditions therefore are imposed
mainly through contract provisions. Petroleum contracts therefore bear a heavier
responsibility of environmental protection. Many developing producing countries still
rely upon this approach to petroleum environmental regulations and management. The
use of contractual approach may be a part of the legacy from traditional concession
agreements which predated the environmental era. When the time and need come for
environmental control, it is always found to be easier to add a few provisions to the
existing contracts rather than introducing new legislation. However, with the passage of
time and environmental awareness and development, some changes may be expected to
take place in terms of a more effective regulatory approach, as evidenced by the recent
introduction of the comprehensive legislative approach discussed below.
3. Integrated Legislative Approach
Apart from the two main-stream approaches of statutes and contracts, there has emerged
in the recent past a brand new approach to environmental control and management of
petroleum activities. A few countries have taken the initiative to adopt a framework
legislation particularly for petroleum operations. Such a development is described as the
integrated or comprehensive legislative approach.
An earlier example of this practice is the offshore petroleum environmental regulations
adopted by China in 1982. It covers the environmental aspect of the upstream operations
in the offshore waters of the country and provides for a series of requirements for
environmental protection, such as EIA, emergency plans and measures, discharge
standards, preventive, protective and resources protection measures, anti-pollution
records, and liabilities for violations. The regulation has a major loophole of being
completely silent on the issue of offshore decommissioning and abandonment. A second
flaw of the legislation is that it does not have jurisdiction over the onshore industry which
produces about 90 percent of China's total crude oil. Environmental regulation of the
onshore operations rely heavily, if not exclusively, on a few provisions in the petroleum
contracts. For this reason, China may be suggested to fall in the category of contractual
approach in terms of environmental regulations of oil and gas activities. Finally, the
offshore petroleum environmental regulation in general and the environmental provisions
in the onshore petroleum contracts in particular have seldom been vigorously
implemented and enforced.
The best examples of the integrated petroleum environmental legislative approach is
found at the moment in Latin America. During its petroleum reform, Argentina adopted
in 1992 a new law on environmental regulation and procedures for hydrocarbon
development to address the environmental issues of petroleum E&P activities in a
comprehensive manner. The government of Ecuador introduced its decree on
environmental regulations concerning hydrocarbon activities on 17 August 1995.
Peru is even more aggressive in the sense that it promulgated two regulations for both the
mineral and petroleum sectors: environmental regulations in petroleum activities and
environmental regulations for mining activities. The petroleum environmental regulations
consolidates all relevant provisions in various national laws and include 17 titles, 60
articles and appendices on technical standards of discharge and emission, etc., which
covers all stages of petroleum operations from exploration and production to processing,
transportation and storage throughout the country. Its main operative provisions provides
for a series of environmental requirements including environmental auditing, EIA,
environmental management plan, plan for abandonment, procedures and standards for the
conduct of operations in each phase of petroleum operations, violations and penalties. It is
very important to note that the Peruvian petroleum environmental regulations are
retrospective. Existing companies and their operations prior to the promulgation of the
regulations are required to prepare and submit a Programme for Adaptation to and
Management of the Environment for approval within 18 months and its implementation
may not exceed 7 years.
These producing countries in Latin America must be commended for having taken the
leadership role in introducing specific petroleum environmental regulations. Such an
encouraging practice is not confined to South America but has reached other parts of the
world. For instance, the government of Angola in Africa has been working over the last
few years on its Draft Law-Decree on Environmental Protection in the Petroleum
Activities; In South-East Asia, Vietnam, being a very young petroleum producer, has also
been in the process of drafting its environmental regulations on petroleum activities.
The legislative practice on comprehensive petroleum environmental regulations is
apparently still limited. Yet there should be little doubt about its better approach to the
issue of environmental control and management of the oil and gas operations. More
significantly, its importance lies in its indication of a new direction that should be pursued
by producing states in the future.
4. Some Issues and Practical Considerations
It is to be noted that the precise categorization of environmental regulatory approach is
not always possible. There would always be exceptions to these broad generalizations.
Moreover, these approaches are not mutually exclusive in practice. They may overlap
with one another, or even used together in some jurisdictions. For instance, the U.K. uses
in principle, statutes for its onshore regulation and licence clauses for offshore regulation,
while in China, there is a comprehensive regulations for the offshore oil and gas industry,
but onshore relies predominantly on contractual provisions. Despite these differences, we
still find that, generally speaking, developed producing countries tend to use the multi-
statutory approach; and developing producing countries tend to prefer the contractual
approach. The employment of the different approaches is not necessarily a matter of
choice, but rather, has a lot to do with a combination of factors including the legal
tradition, the history of petroleum development, environmental awareness and
development, or even economic imperatives of the country concerned.
As a result, the industry operating in these legal environments faces different sets of
concerns and issues. In the countries with a multi-statutory framework, the industry is
overwhelmed by a host of relevant laws and acts, plus very often a number of regulators.
The net effect is that, on the one hand, the industry is regulated to death in a tangled web
of environmental laws and regulators; on the other hand, the industry is not always
effectively regulated because of the inconsistency in law, exclusion of the industry from
the effect of some laws, the lack of coordination between regulators and so forth. In those
petroleum systems employing a contractual approach, the environmental provisions are
often vague and simplistic, and hardly spell out any legally binding and practically
operative obligations. The industry is left to decide as to what their environmental
obligations are precisely about.
This notwithstanding, the two major approaches face the same need for reform in
petroleum environmental regulation, but with different tasks. For developed producing
countries, the task of reform is to simplify and consolidate regulatory framework and
concentrate the regulatory power into one public agency. For developing producing
countries, the priority is to introduce and complete petroleum environmental regulatory
framework. For both groupings, the different tasks of the reform can be achieved by
probably the same way, that is, to introduce an integrated petroleum environmental
regulations like the ones adopted in Peru and Ecuador.
Such a law will be able to consolidate all relevant provisions in various existing statutes
so as to make the system more consistent, effective and easy to follow in the multi-
statutory countries. It can fill the gap in the legal infrastructure by introducing a more
comprehensive regulatory framework in the contractual countries. In sum, a
comprehensive petroleum environmental regulation is politically desirable, legally
feasible, and practically implementable. For this and other reasons, it should be
encouraged not only at the national but also international levels.
As a final note on regulatory approach, it would perhaps be neither appropriate nor
sufficient to rely on a single system of either statutory or contractual approach. The ideal
approach should be one of a combination of both a comprehensive petroleum
environmental regulation and some complementary contractual provisions. In this sense,
the failure of cross-reference in many petroleum contracts of developing producing
countries to national environmental laws is a serious loophole. Of course, there is no
point to make any reference if there is no such legislation at all in the country. In short, a
twofold regulatory approach - an integrated comprehensive petroleum environmental law
and complementary provision in contract/licence - would serve the best interests of
environmental control and management.
VI. Petroleum Environmental Regulatory and Management Tools
From the above overview of the legal framework for petroleum environmental regulation,
it is possible to briefly summarize the regulatory and management tools employed at both
international and national levels.
As shown above, in the first half of this century provisions relevant to oil pollution
accident were only found in a limited number of petroleum laws and concessions. All
these provisions relied heavily on some general traditional petroleum environmental
concepts such as "good oil field practice", "safe and sound engineering principles", whose
definition, interpretation are hardly traceable either in the law and concession agreement
themselves or anywhere else.
The period of environmental era since the early 1970s has seen a steady improvement
over the previous situation. Much progress have been made in both laws and contracts in
terms of introducing new mechanisms for environmental control and regulations. Apart
from the traditional environmental concepts which are retained and still widely used in
many petroleum laws and contracts, a number of modern policy and regulatory tools of
environmental control and management in petroleum industry have been introduced into
petroleum legislation and contractual systems over the last 20 years.
Generally, this second generation of regulatory tools in most countries is featured by such
techniques as standards setting and command control. But they have also included such
important procedures and requirements as considered below.
A. Environmental impact assessment (EIA).
EIA has been generally acknowledged as the most effective approach to environmental
management and protection. It is now widely required in the oil and gas industry. EIA is
the most effective form of precautionary procedure which provides for detailed
assessment of the expected direct and indirect environmental effects of the proposed
operations, possible mitigation measures, and programmes to manage, monitor, and
evaluate the project impacts and effectiveness of mitigation. Ideally and increasingly,
socioeconomic and even human rights effects should also be considered alongside
environmental effects. The EIA serves a dual function: it informs the decision makers of
the potential effects on the environment of the proposed petroleum project, and it gives
the industry an opportunity to look into and mitigate any likely environmental damage
posed by oil and gas operations. It is very encouraging that many countries have made it a
mandatory regulatory requirement for petroleum projects and activities. For example, the
Nigerian EIA Decree promulgated in 1992 includes the extractive industry in general and
the petroleum industry in particular in the mandatary list of projects subject to EIA
requirements, and also extends the EIA application to cover decommissioning projects.
Petroleum operations should require at a minimum the submission of an EIA before
licence is granted and operations can proceed. In view of the fact that petroleum
exploration is a high-risk venture and investment may be deterred by stringent
requirements, it is more feasible for regulatory agencies to require a staged EIA, or a
preliminary EIA followed by a full EIA if necessary.
B. Environmental management plan/programme.
Environmental management plan/programme is another tool. Among other things, it
normally specifies the company's environmental policy and objectives, environmental
personnel and their responsibilities, emergency planning and procedures, and
environmental training and awareness, incident reporting and investigation, review of
environmental performance.
C. Environmental report.
In many petroleum systems, petroleum operators are obliged to file at specified time
intervals, or immediately upon an incident, an environmental report on the environmental
situation, cause of the pollution accidents, and the measures adopted to mitigate adverse
effects and prevent reocurrence.
D. Environmental assurance programs.
In addition to the traditional insurance policies on petroleum property and equipments,
an increasing number of petroleum countries have introduced requirement for a
mandatory environmental insurance program. Coverage under these environmental
insurance policies normally include pollution liability, clean-up expenses, and expenses
for killing blowouts.
E. Decommissioning and abandonment fund/plan.
The issue of reclamation and abandonment has increasingly captured the attention of the
industry. Rehabilitation is intended to restore resource sites to a safe state or to some
approximation of the previous natural state through such methods as refilling or
replanting. In the case of offshore petroleum development, restoration of depleted areas
poses essentially the same problem, but in a different form of abandonment of offshore
platforms. The purpose of rehabilitation or abandonment is to minimize adverse effects
on the environment and society. The issue of decommissioning and abandonment had
largely been a neglected issue. Until the 1980s, few countries had any provisions on
offshore abandonment. The period afterwards has seen a sudden awakening of the
industry to the issue. A number of countries have successfully adopted provisions on
abandonment funds.
F. Environmental monitoring and audit.
Another new tool of environmental management is the requirement for environmental
monitoring and audit, developed in the recent past and used, perhaps, more often by the
industry for internal management purposes. Environmental audit serves as a kind of
follow-up or monitoring procedure, which facilitates the management and control of
environmental protection, evaluates the environmental performance, and ensures
compliance with environmental obligations. An environmental audit is considered to be
one of the most effective tools in managing environmental protection.
It needs to be recalled that the philosophy of environmental policy and law has
traditionally been one of command and control. Petroleum environmental regulation to
date is not an exception to this general situation. Many of the environmental management
tools discussed here fall squarely into the category of command-control regulations. In
other words, governments of producing countries have developed and promulgated
statutes, regulations, and policies to "command" the industry and companies to achieve
the appropriate goals of pollution control set forth by these regulations. The command
and control strategy, which involves licences, standards, bans and cancellation of
contracts is still the most common and usual approach in nearly all petroleum resource
countries.
VII. Effects of Petroleum Environmental Regulation
Environmental developments and regulation over the past 30 years have introduced a new
element into petroleum transactions. No matter what regulatory approaches and
management tools are employed, they have all produced practical and economic effects
on the petroleum fuel cycle and the industry. There is little doubt that the investment and
operating conditions of the oil and gas industry in the 1990s are quite different from what
they used to be in the first half of this century.
The effects of environmental regulations on petroleum industry may vary from country to
country due to the different levels of regulations adopted. Nonetheless, they can still be
broadly categorized into the following points.
A. Change in investment conditions.
The biggest development for the industry is perhaps the change in investment conditions.
The change in this respect are numerous, and include a new host of stakeholders such as
the indigenous people, the local communities, environmental non-governmental
organizations (NGOs), and even the media and general public. In the Brent Spar case
involving Shell, Greenpeace, the media and the general public effectively forced Shell to
give up its plan to dispose of the storage facility Brent Spar at sea. The most significant
change of all is perhaps the introduction of procedures for environmental control in law,
policy and contracts. A typical example of its kind is the EIA, which is legally required
now in some 90 countries around the world. For example, in Vietnam, hydrocarbon
projects cannot proceed until an EIA report is submitted and approved, and an
Environmental License is issued by the competent government ministry.
B. Changes in corporate structure and management.
Environmental regulation also affect the structure and management of the industry.
Corresponding changes have taken place within oil companies to respond to the
environmental requirements. For examples, many oil companies, both the majors and the
independents, have issued their own corporate environmental policy, codes of conduct,
guidelines, etc. Environmental management programmes and responsibilities are
established at each level of the company's management, department, line supervisors, and
employees to ensure environmental performance and accountability. Financial and
manpower resources are allocated to ensure that the environmental standards and targets
will be met. Some companies also require internal environmental monitoring and audits
on a voluntary basis.
C. Changes in capital and operating costs.
Without doubt, the environmental imposition have increased the capital and operating
costs of all phases of operations. Before production, oil spills response capabilities and
anti-pollution equipments are nowadays required in many petroleum jurisdictions. Under
the Chinese offshore environmental regulations, the pollution control equipments
required for fixed and mobile platforms include oil-water separators, discharge/emission
monitors, recovery facilities, garbage-smashing equipments. During production, the
additional cost may include insurance policy to cover blow-out, environmental damages,
and third party liability and other environmental control measures. In the U.S., oil
companies are required to force back underground production waters containing heavy
metals. The high-pressure injectors required in the process can cost more than $1 million
per well. For post production measures, offshore abandonment has become a major
economic burden for the industry. The U.K. Offshore Operators Association (UKOOA)
has estimated that the total cost of removal of all the 219 installations on the UK sector of
the North Sea could be well over $7 billion, and partial removal $4.6 billion. All these
contribute to increasing the production cost. It was reported that the big American oil
companies spent more than 10 percent of their profit on pollution control measures in
1989.
D. Limitation on access to exploration acreage.
Along with increasing environmental awareness worldwide and lately the rising issue of
biodiversity, many countries introduced legislation to protect environmentally sensitive
areas such as wetland, sanctuaries, forests, areas with conservation values. The protection
measures normally include seasonal restriction of various types and special screening
procedures. For instance, any petroleum project in an environmentally sensitive area in
the U.K. will require an EIA, which is normally needed for other areas. In some extreme
cases, some of these areas are entirely closed down for any exploration activities.
E. Delays or even rejection in project/contract approval.
One of the major effects is probably delays or even rejection in project and contract
approval, if the environmental procedures and requirements on environmental insurance
policy, management plan, EIA report, etc. are not either followed, or complied with in
full, for one reason or another. The following table provides an illustration of projects that
were delayed because of environmental concerns in Australia.
Table 1.4 Sample Projects Delayed because of Environmental Concerns in Australia


Project Company Delay (years)
Dunolly Gold, Vic BHP Gold 1
Pinjarra Rare Earths, WA Rhene Poulenc 2+
Gretley Coal, NSW Newcastle Wallsend 5+
Ranger Uranium, NT ERA 10
Clinton Mineral Sands, Old Pivot 20+




Source: Adapted from a table in R. Trewin, D. Vincent, P. Dee, Effects of Environmental
Constraints on Mining Performance and Community Living Standards (Canberra:
National Centre for Development Studies, 1992), p. 26.
E. Suspension of operations or cancellation of licence.
Another effect is the suspension or even cancellation of the ongoing operations or
existing license. In the U.K., petroleum license can be cancelled by the energy minister, if
the environmental conditions have not been met by the licensees. The Peruvian Petroleum
Environmental Regulations provide that non-compliance and violations will result in
suspension "for 1 month, 2 months, 3 months, or for good".
F. Fines and liability.
Environmental fines and liability including administrative and criminal penalty are also
steadily on the rising trend. For instance, under the above mentioned Peruvian Petroleum
Environmental Regulations, a fine of between 1 to 1,000 UIT (approximately $1,000 to
$1 million) will be imposed for non-compliance, plus the following administrative
penalties: prohibition or restriction of the activity which caused the violation; obligation
to compensate the affected parties; and immediate restoring of the area. Under the
Vietnamese regulations on violation in environmental protection issued in April 1996,
petroleum operators causing oil spills in petroleum exploration are required to pay a
penalty from VND30,000,000 to VND 50,000,000 ($30,000 to $50,000)..
G. Effect on product and pricing (mainly downstream).
Environmental control and management of petroleum operations certainly means cost, not
only in the form of financial and manpower resources within the industry, but also
increase in the price of consumer products. The polluter pays principle is concerned about
the rationalization of environmental costs. It requires the costs of pollution to be borne by
the person responsible for causing the pollution and consequent costs, or in other words,
internalizing the costs rather than being paid by the public. In actuality, it is doubtful if
any operator would bear the additional environmental costs. On the contrary, it is not
unlikely that such additional costs would ultimately be passed on the consumer of end
products. For example, the U.K. has recently imposed a Government Fossil Fuel Levy,
which resulted in a rise in petrol and fuel prices to be paid by utility consumption.
Emission and carbon taxes have been successfully introduced in a number of EC and
OECD countries, as discussed in the following paragraph. All of which have a cost effect
on products and their pricing.
H. Environmental charges and taxes.
Since approximately the early 1980s, a shift in environmental control and management
from command and control to market incentive has gained currency and made headway in
the member states of the Organization of Economic Cooperation and Development
(OECD) countries in general and the Scandinavia countries in particular. These new
economic and fiscal instruments in relation to the oil and gas industry include pollution
charges, energy taxes etc. Carbon taxes have been successfully implemented in countries
such as Denmark, Finland, Norway, Sweden, the Netherlands, and sulphur taxes in
France, Norway, and Sweden. A number of countries have introduced heavier taxes on
leaded petrol and products. A recent move in this direction, though not yet successful, is
the proposed EC energy tax under the EC draft "EC Council Directive Introducing a Tax
on Carbon Dioxide Emissions and Energy" published in September 1994. It is a mixed
tax on both energy and carbon, and has two components - a uniform energy tax applied
to all sources of energy except renewable energy; and a tax graduated according to the
carbon content of individual fuels. Under the proposal, the tax would be initially imposed
at a level of $1 per barrel (p/b) of oil and would rise within 10 years to $10 p/b. As the
global warming continues and steps are being taken to implement the 1992 Climate
Change Convention, it can be reasonably expected that more energy charges and taxes
are on the way in the industry.
I. Environmental litigations and liabilities.
Last but not the least, environmental litigation is steadily on the rise. There have been in
recent years a number of cases in which oil companies are put on the defensive side. This
will be discussed in the following section on new themes of environmental regulation.
The above list is not purported to exhaust all the effects of environmental regulation on
the oil and gas industry. Rather, it is an attempt to illustrate how and to what extent oil
and gas operations can be affected by the legal framework from both a practical and
economic point of view.
VIII. New Approaches and Themes in Petroleum Environmental Management
1. Economic Regulatory Approaches
The "command and control" approach discussed previously has by and large worked
fairly well in servicing environmental management in the oil and gas industry. But it is
not without its limitations. A major flaw of this approach is that it is mostly control-
based, namely obligatory and prohibitive in essence. Among its deficiencies, the most
significant one is the lack of inherent incentive for compliance.
Over the last decade or so, an alternative market-based approach, or simply the market or
economic approach has been proposed and employed in some countries to complement
the "command and control" regulation. Petroleum environmental regulation should take
into account this developmental trend and incorporate some of the economic approaches.
In a newly published policy study, the following economic mechanisms have been
suggested for the petroleum industry.
A. Performance bonds.
Under this mechanism, oil companies are required to make a deposit of a specified
amount of money for environmental control purposes before the petroleum license is
issued. If no oil pollution or environmental incident occurs in the course of petroleum
operations, the bond is eventually cancelled and returned to the investing company. In
this way, the bond can serve as an economic incentive to oil companies to give the best
possible environmental performance so that no money has ever to be paid out from the
bond.
B. Environmental Trust Funds.
Environmental trust funds have been, slowly but steadily, used for conservation and
mitigation purposes. It requires an oil company to put some money into the fund before
commencing exploration and production. If no oil pollution or environmental damage has
occurred during the course of oil and gas operations, the fund will remain as an
endowment and the interest generated can be used for conservation and prevention
measures. However, should environmental damage occur, the fund capital will be invaded
and disbursed for mitigation and clean-up measures. In such a case, money will be
required from the oil company to top up the initial principal each time it is reduced to a
specified level.
C. Environmental liens.
Another more assertive mechanism is the so-called environmental liens, as exemplified
by the U.S. Superfund. Under the environmental liens scheme, the government agencies
will be empowered to effect a lien on all the operator's assets towards mitigation and
clear-up costs should the company in question fail to do so.
D. Environmental taxation.
Environmental taxation could be a useful tool of public policy for pollution control and
management in the oil industry. For instance, the tax could be levied selectively on
companies that did not actively pursue environmental performance. A prescribed non-
compliance or violation will trigger the application of the tax.
The above examples of market-based mechanisms represent a new approach to
environmental regulation of oil and gas activities. The most important feature of the
economic approach is that these policies are essentially incentive-based, as opposed to the
traditional one, which is largely based on artificial control and penalty. Thus, it is able to
give the industry the motivation for compliance for their own benefit.
Admittedly, economic instruments cannot be applied in isolation. They need to be backed
up by regulation, which provides a general framework and a form of protection against
pollution that is best banned altogether or limited by restrictive standards. Unfortunately,
the use of economic approach to date has found little place in either international or
national environmental policy and laws in relation to petroleum operations. They should
be promoted as a useful supplement to the existing mainstream regulatory methods.
2. New Themes in Petroleum Environmental Regulation
After much backward looking at what happened in the past, it is now time to look ahead
at what are the new themes of petroleum environmental regulations in the 21st century.
The environmental challenges and legal risks facing the oil and gas industry for the years
to come may be numerous, the following four may be mentioned as some more imminent
examples of greater significance for the petroleum industry.
A. Environmental litigation.
First, it may be said that environmental litigation is steadily on the rise in the recent past.
What is even more contrasting is the class-action lawsuit filed by environmental and
citizen rights groups against damages caused by oil companies in their home countries. A
number of cases involving human rights issues in petroleum and mining have been
reported in the past few years, with the Ok Tedi case as perhaps the most famous one.
Entering the 1990s, a group of plaintiffs represented over 43,000 native people in Papua
New Guinea (PNG) brought class actions against Broken Hill Proprietary Ltd. (BHP) and
Ok Tedi Mining Ltd., in Australian and PNG courts, for alleged environmental damage
to the Ok Tedi and the Fly River system. Among matters raised in the proceedings was
whether the Victorian Supreme Court had jurisdiction over matters relating to a project
located in a foreign country. In a considered ruling, the court assumed such jurisdiction
to entertain the matter. But the cases were finally settled out of court in 1995 due to the
PNG governments intervention and the mining company's agreement to pay a total
compensation to the local communities of about PNGK110million ($80 million).
During the same period, Amazon Indians and settlers in Ecuador and Peru filed perhaps
the first class action lawsuits of its kind in history in New York and Texas, respectively,
against Texaco for over $1 billion damages to air, land, and rain forests caused by the
company's more than 20 years operations in the host countries. It is interesting to observe
that these lawsuits were instituted long after Texaco had transferred its operations in
Ecuador to the state oil company. While the court in Texas dismissed the case on grounds
of forum non conveniens, the New York court retained jurisdiction and is willing to
entertain the matter, if it was supported by the new government in Ecuador.
Though not successful so far, the two cases may still be viewed as landmark law suits at
least for the following two reasons. First of all, they set up a precedent to be followed in
similar situations in the future. The message has spread very quickly around that alleged
environmental malpractice by some companies can be taken back and sued in their home
states, when legal remedies are not available in host countries. Second and more
significantly, some judges may be willing to stretch jurisdiction on the basis of morality
and ethics, and articulate "judicial philosophy and policy that may someday end up in
statute." The cases perhaps reveal some willingness on the part of courts in the home
countries of international petroleum and mining companies to entertain such cases.
Third, these cases probably send a signal of change in the traditional perception of
jurisdictional limitations under classic international law.
B. Human rights issues.
A second new theme for natural resources industries is the human rights issue, which has
lately surfaced to become another concern for the industry. The development of
international environmental law has since the outset been heavily influenced by the
consideration of protection of the basic rights of human beings. This is evidenced by
Principle 1 of both the Stockholm and Rio Declarations, which state that human beings
have the fundamental right to life in an environment of quality, and are entitled to a
healthy and productive life in harmony with nature. In the recent past, international
environmental law has become increasingly concerned with impact on and protection of
indigenous peoples. In the Texaco cases mentioned above, part of the damage claims
against the company is to compensate the indigenous people living in the polluted areas.
Home state environmental litigation and human rights cases are rapidly reaching out to
other parts of the world. Two more cases of late, albeit not of petroleum operations, are
of interest for our discussion. It was reported in March 1997 that a class-action suit was
filed by the Amungme tribals against Freeport-McMoran Copper & Gold for alleged
environmental and human rights abuses around its mine in central Indonesia. Although
the case was dismissed by a Louisiana district court on the basis of no jurisdiction to hear
the case under state law, another similar federal class-action suit is pending.
The other case is a direct petroleum one. In the Ogoni case, Shell was accused of aiding
the Nigerian government to repress the Ogoni people demanding compensation for
environmental degradation of their local community caused by the company's petroleum
operations. The leaders of the Ogoni people were tried by a military tribunal for alleged
murder and executed. Consequently, Shell Transport and Trading in the U.K. is
currently facing its shareholders' charge on issues of human rights abuses and
environment. A significant minority of shareholders holding about 12 percent shares of
the company has recently adopted a special resolution demanding an improvement in
environmental accountability and business ethics. They argue that Shell's reputation and
business have been damaged by controversies such as the aborted plan to sink the Brent
Spar at sea and its environmental and human rights record in Nigeria. It is perhaps
beyond the scope of this paper to make judgement on the merit of their human rights
allegations in these cases, but what becomes clear from them is that the issue of human
rights is becoming another major issue of importance for the industry. These cases, albeit
still limited in number, provide fresh grounds to believe that human rights in natural
resources development will constitute an unusual challenge to the industry in the years to
come.
C. Local community interest.
A third theme closely related to the above two issues is the issue of local community
interest. Local community interest was perhaps almost a non-issue in the traditional
government-company relationship in the petroleum and mining sectors in the past.
Nonetheless, since the advent of the modern petroleum and mineral contracts of
approximately the 1950s, promotion of local interest has nearly become an accepted part
of doing petroleum business. It normally takes the form of preferences for local service
and equipments, training of nationals and transfer of technology, and other material
benefits such as local infrastructure of roads, schools and hospitals.
The concept of local interests has developed further in the last decade or so to include
such notions as local community participation and allocation of petroleum proceeds from
local resources development. Local consultation and participation is probably started with
the introduction and practice of EIA which requires public input in the decision-making
process. It has now become a legal/policy requirement by international financial
organizations, governments and industry associations. In some cases, local participation
can be so substantial as to the extent of determining the fate of the proposed project.
Lately, local community interest has further expressed itself in the form of requirement
for allocation of petroleum revenues from development of local resources. Historically,
oil companies dealt with only the central governments in terms of both licensing and
taxation, and had neither interest nor control over government revenue allocation. But this
tradition has lately began to change due to a combination of factors, including
democratization and human rights movement and demonopolization and decentralization
of the petroleum reform process since the late 1980s. National governments are under
increasing pressure from local communities as well as authorities to return part of the
revenue to the communities that both contribute to and are affected by such natural
resources for development. For instance, the oil producing provinces in Argentina are
given greater authority in hydrocarbon development, including the determination of
royalty. Admittedly, the issue of allocation of petroleum revenue is a matter of internal
affairs of the host government. Nevertheless, it may have a direct bearing on the industry,
that is, oil companies and their investments may get trapped between these two different
interests at national and local levels.
D. Sustainable Development.
Although estimates of oil flow differ from source to source and views on its sustainability
vary between economic and environmental theories, a 1993 United Nations report states
that at the current rate of world oil production, the world's remaining oil supply would
stand at around 75 years. Oil will stop flowing sometime in the next century.
Consequently, sustainable development could become the single biggest challenge to the
industry in the 21st century. Since its inception in the 1980s, the concept of sustainable
development has gained widespread support. But the idea has probably not been well
picked up by the industry. At least, little has been done to put the principle into practice.
Despite its nature of being non-renewable, this author is of view that it is possible to
develop non-renewable resources such as oil and gas in a quasi-sustainable manner by
limiting their rate of depletion to the rate of creation of renewable substitutes. Quasi-
sustainable development requires that any investment in the exploitation of a non-
renewable resource be paired with a compensating investment in a renewable substitute,
for example, oil extraction coupled with tree planting for wood alcohol. The idea is to
divide the net receipts from the non-renewable resources into an income component for
current consumption each year and a capital component for investment in renewable
substitutes. Capital must be invested in a sustainable substitute in such a way that it
produces, at the end of the life of the non-renewable resource, an annual sustainable yield
equal to the income portion of the receipts from the non-renewable resource. In this way,
the development of non-renewable resources is made "sustainable," since the
consumption reduced from the non-renewable resource is converted into sustainable
consumption.
One application of the quasi-sustainable development principle might be the
establishment of a "Resources for the Future Fund" (RFF) in national petroleum laws and
contracts which sets aside a specific percentage of royalty or rent paid by governments
and companies for sustainable development, such as research and development of
renewable substitutes, or investment and saving for future use. RFF is one mechanism
that can transform non-renewable resources into renewable ones. The above proposal
may sound a bit too theoretical at present. But the point it tries to get across is that the
industry needs to think seriously about how to put the principle of sustainable
development into its business practice.
These new themes examined above have just loomed in the horizon in the early 1990s.
They have nonetheless effectively demonstrated that the industry can no longer afford to
ignore the environmental issues, local community concerns and the human rights issues in
the natural resources operations. Furthermore, it shows that petroleum and mining
operations may not be necessarily stable unless environmental safeguards are effected and
local community perceptions and interests are adequately anticipated and addressed.
These new themes have not yet captured sufficient attention from either the governments
or oil companies, due perhaps largely to their recency. Though their nature, effect and
implication for the industry all remain to be fully appreciated, yet there are reasons to
believe that they will be among the major challenges to the international oil community in
the 21st century.
IX. Summary and Conclusion
Petroleum development and consumption have always been associated with various
impacts on the environment and societies. But the environment has not historically been a
focus of the world, and the petroleum industry was not regulated from an environmental
point for a substantive period of its operations. It appears clear from this study that
environmental regulation of the oil and gas industry is of a recent phenomenon over the
last 25 years. The current legal framework for environmental regulation of petroleum
operations is a combination of elements of international law and national legislation.
Some of the major developments at the international law level may be recalled as some
concluding observations. First, it appears that international law has always given
emphasis to offshore oil and gas activities. The principal international legal instruments in
relation to the oil and gas industry are IMO treaties and conventions. Onshore petroleum
operations have to date received little attention from international law. The 1992 Climate
Change and Biodiversity Conventions have the potentiality to affect the petroleum cycle.
But even these conventions will remain peripheral for years to come before they can take
full effect on the industry. Second, the development of international law elements in
relation to oil and gas has been sporadic and uncoordinated. What the relevant rules and
provisions of international law provided for are some general principles, which require
implementing support by further legal developments. Consequently, their effect on the
industry has largely been peripheral, limited and indirect.
One of the biggest findings in this study is that the mainstream provisions of the legal
framework come from national jurisdiction. Most of the environmental regulation of
direct application to the oil and gas industry are domestic laws and stipulations. This
dominant component has a number of interesting features. First, the development at the
national level are uneven, more complex in some jurisdictions while elementary in many
others. Second, it appears in domestic law that downstream activities have traditionally
been the focus of attention. Numerous standards have been formulated to regulate
emission and discharge from precessing and consumption. Third, the result of petroleum
environmental regulation at the national level is not entirely satisfactory. The regulation
can be either overwhelmingly complex in some jurisdiction, or exceedingly simplistic in
others. Nevertheless, there has been some encouraging sign of the comprehensive
petroleum environmental regulation approach that has been introduced in the early 1990s.
This practice perhaps has shed some light on the new directions for the future
development of the petroleum environmental regulation.
The overview of environmental regulation of oil and gas over the passing 20th century
has perhaps presented a mixed assessment. On the one hand, the environment issues have
traditionally been regulated from the mainstream activities of petroleum development. On
the other hand, a legal framework for oil and gas environmental regulation has taken
shape over relatively a short period of roughly 25 years. The effect of environmental
regulation on the industry is significant and profound, both procedurally and
substantively. They can range from denial or cancellation of licence to loss of business
and profits as a result of the environmental control.
A second biggest finding in this study is perhaps the dynamism of the legal framework
for environmental regulation of oil and gas. It has kept growing at an accelerated pace
ever since its inception, and will continue to develop on a fast track into the foreseeable
future. It may be suggested that many provisions of the current legal system concern
matters of procedure in nature, like EIA, environmental planning, report, audit, etc. But
the new themes identified for the late 1990s and beyond are mostly issues of a more
substantive nature. Such issues as human rights, local community interest and sustainable
development will be increasingly incorporated into the future framework. It is relatively
safe to suggest that petroleum environmental regulation will maintain its momentum of
evolving towards a high degree of completion and efficiency as more elements of
international law continue to unfold, and national legislation in many jurisdictions
continue to build up.
In the final conclusion, the environment has permanently, and will continue to, change
the circumstances in which the oil and gas industry operates. Apart from those traditional
issues of petroleum business: finding a commercial deposit, producing it at a reasonable
cost, and marketing it at a competitive price, the oil and gas industry has now faced one
more task of environmental accountability. Environmental regulation of oil and gas
represents both a challenge and opportunity to the industry: the challenge to manage
environmental legal risks; and the opportunity to have petroleum developed more
sustainably.

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