Environmental liabilities

In February 2013, the NSW Government announced it would reconsider its approach to coal seam gas development. It commissioned the NSW Chief Scientist and Engineer to conduct a comprehensive review of coal seam gas activities, focusing on impacts to human health and the environment.

The (former) Chief Scientist and Engineer released the Final Report of the Independent Review of Coal Seam Gas Activities in NSW (the CSG Report) on 30 September 2014. The report made 16 recommendations, including Recommendation 9:

  • That Government consider a robust and comprehensive policy of appropriate insurance and environmental risk coverage of the CSG industry to ensure financial protection short and long term. Government should examine the potential adoption of a three-layered policy of security deposits, enhanced insurance coverage, and an environmental rehabilitation fund.   

This recommendation focused on ensuring that the costs and impacts from the CSG industry are not a burden for the community. The recommendation supports the ‘polluter pays principle’ that the costs of remedying any environmental impacts from activities of the gas industry are paid by the industry and not inherited by the Government, and therefore the NSW taxpayer.

The NSW EPA was tasked with investigating Recommendation 9. In doing so, the EPA has considered the current state of the NSW Gas sector and consulted with industry operators, insurance providers and NSW Government agencies. The EPA also initiated conversations with environment and community groups, community representatives and relevant local councils in the formative stage of the project. The EPA received a wide range of comments, ideas and concerns during this consultation particularly around compensation for landholders, environmental impairment insurance and business implications for gas operators.    

Safeguarding future environmental liabilities

In February 2020, the NSW Government released the report Safeguarding future environmental liabilities from Coal Seam Gas Activities in NSW (PDF 1,143KB).   

To safeguard against potential future environmental liabilities and address the intent of the NSW Chief Scientist and Engineer’s recommendation, the NSW Government will:

  • continue the existing security deposit scheme which covers the costs of rehabilitation
  • require gas companies to employ effective risk management strategies throughout the life of a project and provide evidence of adequate insurance coverage or alternative financial arrangements to cover the clean-up costs of potential pollution incidents   
  • assess potential future environmental liabilities to determine whether a financial assurance is required for residual risks that are not covered by the rehabilitation security deposit. This will cover environmental liabilities that may arise after rehabilitation activities have been completed and the security deposit is released
  • continue the Government’s existing program managing abandoned petroleum wells, the Legacy Wells program which provides an existing framework for strategic management of abandoned petroleum wells where the former titleholder cannot be held responsible and no financial assurance mechanism applies.

The EPA considers that in implementing the recommendations of the Chief Scientist and Engineer and the NSW Gas Plan, NSW has already adopted best practice standards and strict regulations. These standards and regulations are enabled through the environmental assessment processes undertaken for planning approvals, petroleum titles and well decommissioning and rehabilitation. They govern all phases of gas well lifecycle and have resulted in reduced potential for residual risk to the environment.

Where gas wells have been constructed, maintained and decommissioned in accordance with the relevant standards, they represent a low risk to human health and the environment. These standards include:

  • codes of practice such as the Code of Practice for Coal Seam Gas Well Integrity and the Code of Practice for Coal Seam Gas Fracture Stimulation Activities for older activity approvals which ensure that risks to the environment are identified, eliminated where possible or minimised through appropriate management practices  
  • new codes of practice under the Improved Management of Exploration Regulation that support regulation of specific activities and impose enforceable mandatory requirements. For example, the Exploration Code of Practice: Environmental Management and the Exploration Code of Practice: Produced Water Management, Storage and Transfer set mandatory requirements to ensure risks to the environment are managed and minimised during exploration activities  
  • the NSW Aquifer Interference Policy which provides a framework for protecting aquifers and groundwater from developments, including coal seam gas activity
  • the Water (Part 5 -Drillers Licenses) Regulation 1995, the Water (Part 5 – Bore Licences) Regulation 1995 and the Minimum Construction Standards for Water Bores in Australia which regulate water bore drilling, including groundwater monitoring bores drilled by coal seam gas titleholders, and impose minimum standards and reporting requirements
  • environment protection licences issued under the Protection of the Environment Operations Act 1997 which set legally enforceable, site specific conditions and controls to prevent and minimise pollution and safeguard the community.

The EPA also works closely with the Resources Regulator and licensees to achieve the highest practicable standard when decommissioning wells that were constructed prior to the current standards.

The figure below illustrates the application of these financial protections to manage environmental liabilities during the different stages of a gas operations lifecycle.  

environmental liabilities

Insurance coverage

Existing and new gas operations will now be required to prove their financial arrangements to cover the costs of unexpected potential pollution incidents during the lifetime of the project.

The availability of adequate environmental impairment liability insurance for gas operations in Australia is currently limited. Where it is available it often excludes certain activities such as fracking. Industry has moved to a reliance on maintaining sufficient assets and funds to adequately manage their environmental risks.

Companies that choose not to hold relevant insurance will be required to prove the existence of sufficient potential clean up funds to the EPA. Companies will need to prove they hold adequate insurance coverage or alternative financial arrangements annually, and on commencement of new activities.

Future environmental liabilities

Environmental liabilities provisions are important as although unforeseen residual risks from gas activities are very low, they may remain particularly if well integrity is compromised in the future.

In determining whether to seek financial assurance for potential future environmental liabilities, the NSW EPA will use its existing powers in the Protection of the Environment Operations Act 1997. Factors that will be considered include the degree of residual environmental risk, additional remediation work that may be required and the environmental record of the licence holder.           

If ongoing residual risks are identified, the management costs of these will be calculated and used to determine the value of any financial assurance secured by the EPA. When a financial assurance is retained for ongoing residual risks, a regular review will be undertaken to determine whether to retain or release the funds.   

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