Are bonds the answer to managing environmental liabilities?

Abstract

Traditionally the requirement for meeting environmental liability obligations for regulated activities has focused on financial security. A single or blanket bond covering many licenses of an operator is often used to cover a state’s financial exposure to the environmental liabilities from disclaimed licenses in the event of operator insolvency. Less attention has been given to changes in regulated activities, operator risk and market changes, and management of wells over the life cycle. The Department for Energy and Mining (DEM) in South Australia has revised its policy for managing the environmental liabilities from petroleum and geothermal activities to be more holistic, risk and evidence based. Operators are now required to account for the status of all licensed activities in annual reporting, or for any change in ownership. Wells and infrastructure that have not been in production for over 24 months require an assessment based on prescribed future use criteria. If a future use can be demonstrated with sufficient evidence, the activity is categorised as ‘inactive’. Inactive wells are subject to an annual fee that finances the rehabilitation of legacy wells that may become orphan. If no future use is established, the activity is categorised as ‘expired’, and a rehabilitation plan of a minimum number of wells, or equivalent expenditure on infrastructure rehabilitation, is required. DEM also review the inventory of licensed activities and financial capacity of operators to meet environmental rehabilitation obligations to determine the amount of financial security required. This approach allows for risk-based financial security commensurate with regulated activities.