Insurance and its adequacy (Part 2)
Introduction
Yesterday’s column addressed three Guarantee and Indemnity Agreements (GIA) granted by the oil companies to the Environmental Protection Agency. These we are told, is to provide some assurance to Guyana that there is money available to deal with any environmental events or accidents arising from petroleum operations under the 2016 Petroleum Agreement.
On environmental matters, petroleum operations in Guyana must be conducted in accordance with the requirements of that Agreement, and the Environmental Permits issued to the oil companies under the Environmental Protection Agency Act (EPA). It must not be forgotten too that the 2016 Agreement was issued under the Petroleum Exploration and Production Act of 1986 (PEPA) which has its own Regulations, also addressing environmental issues. Not surprisingly, however it is the EPA came some ten years after the PEPA which is the main environmental protection and regulation statute. And just for completeness, the Constitution has elevated the citizens’ right to an environment that is not harmful to his or her health or well-being – a negative right rather than a positive right to a healthy environment.
The EPA
The EPA was passed in 1996 and was probably then in line with international best practice. The problem is that that was twenty-eight years ago, and the law appears to have been frozen in time. The official copy of the Laws of Guyana shows that except for a single amendment in 2005 there has been no modernisation of the legislation since its passage. That is a most unfortunate state of affairs, and one must wonder why no Government since the discovery of oil has thought it necessary to review the legislation. What we are stuck with therefore, is an Act that is out-of-date, and which is administered and enforced by an under-resourced and under-qualified management.
The 2016 Agreement
Because the 2016 Agreement enjoys a forty-year stability, it is perhaps the first place we need to look. In summary, this is what the Agreement provides.
- The oil companies must obtain an environmental authorisation from the Environmental Protection Agency and comply with the Act, for any activity governed by the Act. Generally, the geographical area over which activity is allowed and the scope of the activity would be set out in the Permit.
- The oil companies must take necessary and adequate precautions to prevent pollution and protect the environment and living resources in rivers and sea. “Living” in this context will include flora and fauna, such as birds, animals, plants.
- If non-compliance with its obligations results in pollution or environmental damage, the oil companies must take reasonable measures to remedy the situation and treat or disperse the pollution in an environmentally acceptable manner. However, the Contractor is not obligated to remedy pre-existing pollution or environmental damage.
- Where there is an emergency or accident arising from Petroleum Operations, the Contractor must notify the Minister immediately and take prudent and necessary actions in accordance with good international petroleum industry practices. If the Contractor fails to control or clean up pollution within a reasonable period specified by the Minister, the Minister may take necessary actions after giving notice to the Contractor and pass on not actual costs but reasonable costs and expenses to the Contractor.
Now, this is where the Agreement looks asinine – is it realistic to expect the Government to find the resources, negotiate the terms and contract some third party to come and sort out the problem or disaster while the oil companies sit back and contact their lawyers? This also places the US$2 BN. in some relief. As noted in yesterday’s column, drawdown from the Indemnity Agreement is not automatic, and the Government will have to carry out a series of preliminary tasks. Of course, one needs to be realistic: a spill will have serious effect on the stock price of the oil companies which is always their first consideration. Altruism, self-interest and reputation protection will push those companies into high gear to deal with the disaster.
It’s the risk, stupid.
But that brings us back to the US$2 BN. While the probability of an oil spill may seem low, there are so many things that can go wrong – an electrical fire, an explosion, equipment failure, ship’s collision, etc. More importantly, this is not only about the probability of an accident but also the consequences of that eventuality.
The US$2 BN. might have been a direct result of pressure from certain quarters of society, but that itself raises several questions. While Article 28 of the Agreement seems to cast the responsibility new far and wide, the Indemnity sub-clause 2.4 provides some express limitations, as follows:
Liability by the Contractor to the Government for damages in respect of Petroleum Operations under this Agreement is limited to insurance required in accordance with Article 20.2 (a), provided however, that the Contractor shall not be liable to the Government for indirect, punitive or consequential damages, including but not limited to, production or loss of profits.
But Article 20.2 (a) seems to be wider, not narrower, than Article 2.4. It requires the Contractor to effect at all times, insurance of such type and sums customary in the international petroleum industry and not limited to loss or damage to all assets used in Petroleum Operations; pollution caused in the course of Petroleum Operations for which the Contractor or the Operator may be held responsible; and loss or damage to property or bodily injury suffered by any third party.
Self-insure
But here is the catch. The oil companies have the right to self-insure with the permission of the Minister. There is no indication from their financial statements that the oil companies are self-insured, and it appears therefore that the companies are in breach of their obligations under Article 20.2 (a) for which the Guarantee and Indemnity Agreement is not a substitute.
It is evident that this whole question of insurance, guarantee and indemnity is a mess. Hopefully, there is an adult somewhere in the room who understands the Petroleum Agreement, is not compromised, and who is courageous enough to stand up for Guyana. Will that person please get to work and resolve this confusion.
This Friday, I will address the 159-page Insurance Contract.