Oil drillers underinsured

The Government is jacking up the level of insurance cover oil explorers need to have before they can drill, after discovering the state was potentially on the hook for hundreds of millions of dollars. 

The oil exploration industry has been underinsured for decades, carrying cover that would pay for only a portion of the vast cost of an oil spill with the state likely to pick up the tab for the rest. 

Under current regulations, companies must carry adequate insurance before they are given a permit to explore for oil. The minimum level of cover required to get a permit is just $27.7 million. 

But Ministry of Business Innovation and Employment modelling suggests the cost of a spill could be much greater. Their worst-case scenario tops out at $800 million. This could leave the state to plug much of the $772.3 million deficit. 

The previous government noticed the deficit and began work on increasing the minimum level of cover to $600 million, bringing the law in line with the minimum level required in Australia. 

The new Government decided in February it would force companies to carry an additional $200 million in cover, which brought the law into line with advice from MBIE. 

Carrots, sticks and a compromise 

Industry consultation revealed a problem. 

The Maritime Transport Act 1994 imposes an “unlimited liability” on operators to cover costs related by an oil spill. This can include everything from clean up, to compensating businesses affected by a spill. 

The industry told Government that it would be difficult to obtain the level of cover required if the requirement for unlimited liability remained. 

The Government has come to a compromise. It will amend the legislation and set limits on the level of liability companies must carry, while also setting the minimum level of cover at $800 million. 

Acting Associate Transport Minister James Shaw told Newsroom the wording of the Act meant companies could not purchase the level of cover required under the new settings. 

“It’s fine to change the level, but there’s a problem with the wording of the Act,” he said. 

He said insurance companies would not insure at the new, higher level required. 

The legislative change could, in effect, mean the state takes on additional liability. By specifying the liabilities to be borne by companies, the state may have to carry liabilities beyond that.

Shaw said the low level of cover required by the current regime effectively meant the state currently carried additional liability as it would be forced to step in if a company did not carry adequate cover. 

“The issue is we’ve already got that scenario,” he said.

The issue was raised in a cabinet paper from then Transport Minister Simon Bridges. It said the Crown “may need to respond to control the well” if “a permit holder does not, or cannot, fulfil their legal obligations to respond to an incident”. 

Deepwater horizon memories 

Shaw said there was always a risk of a disaster on the scale of Deepwater Horizon, the rig which famously exploded in the Gulf of Mexico in 2010, requiring a multi-billion dollar clean up, much of it paid for by the government. 

“That risk exists this year, but once we’ve fixed it that risk will be dramatically reduced,” he said. 

The Government has’t yet decided what limits it will put on companies’ liability, but it hopes to have legislation completed and enacted by summer next year.

New oil and gas exploration has been banned, although companies with existing permits are allowed to continue operating. 

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