Environmental Regulation of the Oil and Gas Industries

"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 ImpactsSeismic survey a. Physical presence

b. Acoustic emissionc. Accidental spills

Visibility and clearanceGround vibrationsPollution of water and land

Exploration and appraisal

a. Physical presence

b. Drilling discharges / cuttingsc. Atmospheric emissiond. Accidental spills / blowoute. Waste disposal (solid)f. Noise

Visibility, interference with farming, shipping, fishing, etc.Land and marine pollution and effects on plants and soilsAir pollution, human healthGround and marine pollution / safetySoil and water contaminationNuisance for inhabitants and animals

Development and production

a. Physical presenceb. Operation dischargesc. Atmospheric emissiond. Accidental spillse. Waste disposalf. Noise

g. Transportation collision

h. Community

i. Issues of ethics

Visibility interferenceGround and marine pollutionAir pollutionPollution of water and landSoil and water contaminationNuisance for inhabitants and animalsVarious environmental and safety risksSocial, culture and biological effectsHuman rights and indigenous people

Abandonment a. Physical closure / removalb. Waste disposalc. Leave in situ (partial or total)

d. Dumping at sea

Human safety

On and off shore pollutionHazard to other human activities such as fishing and navigationPollution, fishing and navigation hazards

Source: Compiled by the author.

Table 2 Severity of Environmental Impacts of Exploration Activities

Degree of Environmental Impacts

Exploration activities

DisturbanceSoil Veg Fauna Heritage

PollutionGround Water Air Noise

Airborne surveys Z Z L Z Z Z L LRecon. Geol. L L L L L L L L

surveysRecon. Geophysics / geochem

L L L L L L L L

Geo-physics L L L L L L L LSurvey gridding L M L L L L L LScout drilling L M L L L L L MTrack contruction M M M L L L L MTarget drilling M M M L L M L MPattern drilling H H M M M M/H L M/HCamp 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 100N. & Central America 5,764 100Europe 4,114 120Former Soviet Union 3,581 44Africa 672 12S. America 595 10Oceania 289 6Total 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 1Pinjarra Rare Earths, WA Rhene Poulenc 2+Gretley Coal, NSW Newcastle Wallsend 5+Ranger Uranium, NT ERA 10Clinton 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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Environmental Regulation of the Oil and Gas Industries