EUROPEAN COMMISSION Brussels, 14.9.2015 SWD(2015) 167 final COMMISSION STAFF WORKING DOCUMENT Liability, Compensation and Financial Security for Offshore Accidents in the European Economic Area Accompanying the document Report from the Commission to the European Parliament and the Council on liability, compensation and financial security for offshore oil and gas operations pursuant to Article 39 of Directive 2013/30/EU {COM(2015) 422 final}



Preface Directive 2013/30/EU (henceforth the Offshore Safety Directive or OSD) entered into force on 18 July 2013. It defines the elements of a comprehensive European Union wide framework for preventing major accidents and limiting their consequences. However, at the time of drafting, the European Commission, Council and Parliament considered it was not feasible to incorporate into the OSD definitive measures in one critical area of this framework – financial security, compensation, third-party liability and criminal liability for offshore accidents. The Commission has prepared this document to examine further these inter-related issues. It fulfils the obligations laid out in Article 39 of the OSD, which states: 1. The Commission shall, by 31 December 2014, submit to the European Parliament and to the Council a report on the availability of financial security instruments, and on the handling of compensation claims, where appropriate, accompanied by proposals. 2. The Commission shall, by 19 July 2015, submit to the European Parliament and to the Council a report on its assessment of the effectiveness of the liability regimes in the Union in respect of the damage caused by offshore oil and gas operations. That report shall include an assessment of the appropriateness of broadening liability provisions. The report shall be accompanied, where appropriate, by proposals. 3. The Commission shall examine the appropriateness of bringing certain conduct leading to a major accident within the scope of Directive 2008/99/EC of the European Parliament and of the Council of 19 November 2008 on the protection of the environment through criminal law. The Commission shall, by 31 December 2014, submit a report on its findings to the European Parliament and the Council, accompanied, where appropriate, by legislative proposals, subject to appropriate information being made available by Member States. It draws on studies performed for the Commission by the University of Maastricht, as well as Bio by Deloitte and Stevens & Bolton, LLP. A comprehensive group of stakeholders was consulted in the preparation of these studies, as well as in a stakeholder roundtable held on 17 September 2014 to discuss the findings of the study by Bio and Stevens & Bolton. The University of Maastricht study was further peer reviewed by Peter Cameron, Professor of International Energy Law and Policy, and Director of the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee.

Table of Contents Preface Introduction Offshore accidents in perspective Why liability is important Liability and the Offshore Safety Directive Document outline 1 The Appropriateness of Criminal Liability for Offshore Accidents and Resulting Damage 1.1 Conclusions 2 Liability Regime Effectiveness 2.1 Civil liability for the Deepwater Horizon incident

2.2 Civil liability for offshore accidents in the EEA 2.3 Industrial agreements 2.4 Contractual agreements 2.5 Economic loss and the floodgates issue 2.6 Strict liability and the negligence rule 2.7 Incentivizing precautionary measures among potential victims 2.8 Liability and enterprise 2.9 Beyond territorial waters 2.10 Transboundary compensation: Jurisdiction and applicable law 2.11 Conclusions 3 Financial Security Instruments and their Availability 3.1 The financial security instruments available on the market 3.2 The financial security instruments accepted by authorities 3.3 Conclusions 4 Handling Compensation Claims 4.1 Compensation schemes for offshore accidents in Norway 4.2 OPOL 4.3 Civil rules of procedure 4.4 Conclusions Annex I. Legal dispute over hypothetical oil spill claims under yhe US Oil Pollution Act

Annex II. Criminal Liability for offshore safety breaches in selected Focal States i. Denmark ii. Norway iii. UK Annex III. Summaries of EEA member country liability regimes applicable to offshore accidents iv. Bulgaria v. Croatia vi. Cyprus vii. Denmark viii. France ix. Germany x. Greece xi. Iceland xii. Ireland xiii. Italy xiv. Latvia xv. Lithuania xvi. Malta xvii. The Netherlands xviii. Norway

xix. Poland xx. Portugal xxi. Romania xxii. Spain xxiii. United Kingdom Annex IV. Financial security instruments accepted by competent authorities in the 20 Focal States to cover third-party damage from offshore oil and gas activities i. Bulgaria ii. Croatia iii. Cyprus iv. Denmark v. France vi. Germany vii. Greece viii. Iceland ix. Ireland x. Italy xi. Latvia xii. Lithuania xiii. Malta xiv. Netherlands

xv. Norway xvi. Poland xvii. Portugal xviii. Romania xix. Spain xx. United Kingdom



Introduction Although offshore oil and gas operations take place in many European Economic Area (EEA) member countries, liability for civil damage from these operations is poorly understood. Also known as third party damage, or 'traditional damage' in the EU acquis, such damage may include bodily injury and property damage, as well as economic loss by commercial fisheries, the tourism sector or other coastal businesses. A public consultation by the Commission revealed that the expectations of the public, civil society and some authorities are high, but there is no coherent perspective on the kinds of claims that would be permissible, nor how to manage such claims effectively in the case of major accidents – particularly accidents that cross boundaries. This document, and the Report to the European Parliament and Council it accompanies, aim to present an overview of these issues and propose ways in which the European Union (EU) could address any shortcomings that may exist in the current legal frameworks. Offshore accidents in perspective In recent years, major offshore incidents such as Deepwater Horizon and Montara have highlighted the need to tackle a handful of unresolved issues surrounding civil liability and compensation for such events. As well as raising questions such as whom to hold accountable, how and to what extent, these accidents have also flagged up more challenging problems. The first of these is the insolvency problem. The 2010 Deepwater Horizon disaster showed that offshore accidents could cost significantly more than previously thought, so much so that only the very largest companies would be able to cover the costs of the worst accidents. Not only were 11 lives and a state-of-the-art drilling rig lost, but nearly 5 million barrels of oil was also released into the Gulf of Mexico causing widespread environmental and economic damage. Should the costs of responding to, and recovering from, an accident overwhelm the resources of the liable company in the EU, the effect would be a socialization of these costs to local communities, the State and other businesses dependent on the marine economy. This is a salient issue in the EU because as technology opens access to new resources in deeper waters, there is an increasing penetration of smaller firms in the industry. The second problem raised is the transboundary problem. As well as being more costly to remediate, major offshore accidents are also more likely to have a large geographical footprint. Indonesia's unsuccessful legal efforts to claim compensation for damages resulting from the 2009 Montara blowout on the Australian Continental Shelf demonstrate the tremendous challenge posed by the current lack of international law applicable to offshore accidents. Insofar as the existing international legal framework makes it difficult to make successful transboundary damage claims, the costs of offshore accidents are further externalized. This may adversely influence the risk-related decision making of both firms and licensing authorities for offshore operations close to marine boundaries. It certainly has significant implications for victims seeking compensation for offshore accidents originated in other jurisdictions. Why liability is important It is widely accepted that the costs of pollution should generally be borne by those who cause it and not others. This is the polluter-pays-principle, an important pillar of EU environmental law as well as numerous other international agreements.

The liability regime is the primary means through which the polluter-pays-principle is applied. It ensures that firms are held appropriately accountable for any damage they may cause in the course of doing business. It also incentivizes them to adopt measures and develop practices that minimise the risks of such damage. Through this, liability can be thought of as a system for inducing people and firms to behave in socially efficient ways – that is to say, ways that minimize the combined costs of injuries and the precautions taken to avoid injuries. Liability plays in important role in complementing regulation because regulators may not fully appreciate some risks (which liability would incentivise industry to address) and industry may not fully appreciate others (which regulation would require industry to address). Moreover, regulation is necessary where external costs exist, as these prevent firms from taking all necessary steps to reduce accident losses efficiently. Together, regulation and liability thereby ensure a higher level of deterrence and are mutually reinforcing. Preventative benefits aside, the liability regime is also important in ensuring that injured parties can quickly recover damage costs, giving it an important restorative role following an accident. Finally, liability rules also reflect societal values. On the one hand, since it is the polluter who 'causes' the damage, fairness considerations entail that they should pay for this damage, not other members of society. On the other, societal preferences are also reflected in the kinds of damage that are compensable and how the legal system discriminates between legitimate and illegitimate claims. These safeguards help to ensure potentially liable parties also receive just treatment. Liability and the Offshore Safety Directive Member States are currently in the process of updating their national legislative frameworks for offshore oil and gas operations to be in line with the Offshore Safety Directive (OSD). They have until 19 July 2015 to enact the provisions of the Directive in national legislation, after which the basic elements of a comprehensive EU-wide framework for preventing major accidents and limiting their consequences should be in place. Whilst being primarily directed at the regulation and management of offshore risks, the OSD also puts in place several measures that directly or indirectly address liability and compensation for offshore accidents. First, Article 7 of the OSD requires licensees to be directly and solely financially liable for the prevention and remediation of environmental damage. Together with Article 38, which extends the Environmental Liability Directive (ELD) to Member States' continental shelves, this effectively makes offshore licensees strictly liable for any environmental damage resulting from their operations. Environmental liability within the meaning of the ELD refers to liability for ecological damage to protected species and natural habitats, damage to water and damage to soil. Environmental liability is based here on a public, administrative liability approach where the affected party is not a concrete natural or legal person but society as a whole due to the public and universal character of the effects of any damage to shared natural resources. The role of the claimant is fulfilled by public authorities, whose job it is to ensure that polluters remedy the ecological damage they cause. It is therefore the public authority which is entrusted with the representation of the environmental protection interest to ensure that the liable operator is identified, the causal link is established, the remediation plan is established and approved, the necessary preventive action or remedial action is taken, etc. Secondly, Articles 4(1) to 4(3) put forward preconditions on licensing aimed at ensuring that licensees never find themselves technically or financially unable to deal with the consequences of their offshore operations. If effectively implemented and enforced, these exposure-based requirements will mitigate significantly the insolvency problem described in the Introduction . Thirdly, Article 4(3) requires Member States to "establish procedures for ensuring prompt and adequate handling of compensation claims including in respect of compensation payments for trans-boundary incidents" without prescribing in detail what those procedures might be. Finally, that same article also obliges Member States to "facilitate the deployment of sustainable financial instruments and other arrangements," again without detailing how this should be done. Type of liability Applicable legislation Environmental EU law (Environmental Liability Directive) and national law Civil, third party or 'traditional' Bodily harm National law Property damage Economic loss Consequential Pure Criminal National law We therefore see that whereas the OSD contains specific provisions for liability and compensation-related issues it does not put in place a comprehensive EU framework for liability. First, it does not deal with liability for civil damage – damage caused to natural or legal persons. The kinds of damage and loss in this broad category include bodily injury, property damage and economic loss. In the case of the latter, courts may make a further distinction between consequential economic loss, which is economic loss resulting from bodily injury or property damage, and pure economic loss, which is economic loss in the absence of bodily injury or property damage. Secondly, the OSD does not address criminal liability for offshore accidents, the potential penalties for which include fines and imprisonment, as well as other non-custodial punishments. Criminal liability refers to liability that arises out of committing a criminal act qualified as such by the law. There is a fundamental difference between civil as well as environmental liability on the one hand and criminal liability on the other. Whereas the liability rules on the former result in penalties that are exclusively financial and aimed at compensating and remedying damage caused, criminal liability aims at punishing wrongful conduct and penalties may include imprisonment as well as fines and other non-custodial punishments. Document outline The remainder of this document addresses the principle outstanding issues around liability for offshore accidents. Chapter 1 presents a brief discussion of the possible preventative and punitive benefits of criminal liability for offshore accidents, as well as a description of Directive 2008/99/EC on the protection of the environment through criminal law.

Chapter 2 presents an overview and analysis of civil liability regimes for offshore accidents in the EEA – the focus of the current study – as well as the civil liability regime in the United States and the real-world civil damages awarded following the 2010 Deepwater Horizon disaster. Chapter 3 provides an overview of financial security instruments for managing offshore accident risk in the EEA and reviews the kinds of instruments accepted by authorities in the EEA member countries with offshore oil and gas activities (henceforth Focal States). Finally, Chapter 4 looks at the compensation mechanisms for offshore accidents currently in place in the EEA, including the existing legislation which harmonizes the national conflict of law rules in cases of transboundary pollution.

1The Appropriateness of Criminal Liability for Offshore Accidents and Resulting Damage Whilst offshore safety breaches already fall under the criminal code of many Focal States, neither the definition of the criminal offences nor the minimum type and level of sanctions are harmonized in the EU. For example, although the laws of Denmark, Norway and the United Kingdom (UK) contain provisions criminalizing certain compliance failures, these laws are widely divergent. More details can be found in Annex II of this document. Criminal liability for safety breaches could add a layer of deterrence beyond civil penalties, which can help improve protection of the environment and the compliance with safety measures. Accordingly, Article 39(3) of the OSD, tasks the Commission with assessing and reporting on the appropriateness of bringing certain conduct leading to a major accident within the scope of the Environmental Crime Directive (ECD). This report shall be accompanied, where appropriate, by legislative proposals. The European Court of Justice confirmed in 2005 that the Community had the competence to adopt criminal law measures related to the protection of the environment if this is necessary to ensure the efficient implementation of its environmental policy. Adopted on 19 November 2008, the ECD was the first EU Directive to contain provisions with regard to criminal liability. The ECD lays down a list of environmental offences that Member States must consider criminal if committed intentionally or with serious negligence. The Directive refers to existing EU legal instruments on environmental criminal law that already provide for prohibitions (listed in the Annexes of the Directive). In implementing this Directive in national law, Member States must attach criminal sanctions to these existing prohibitions insofar as the conduct causes or is likely to cause death or serious injury to any person or substantial damage to the quality of air, the quality of soil or the quality of water, or to animals or plants. Article 83(2) of the Treaty on the Functioning of the European Union, establishes the legal basis for creating minimum rules for the definition of criminal offences and sanctions in a particular EU policy area. This expressly enables EU legislators to adopt: "minimum rules with regard to the definition of criminal offences and sanctions in the area concerned" if this "proves essential to ensure effective implementation of a Union policy in an area which has been subject to harmonisation measures". The adoption of EU criminal law measures is therefore subject to the assessment of whether they are "essential" to achieving effective policy implementation. As such, the decision to include breaches of the OSD under the scope of the ECD can only follow a thorough necessity and proportionality test on whether criminal law measures would achieve the stated objective. As stated in the Commission's communication on criminal law, it is necessary to analyse whether measures other than criminal law measures – for example, civil or administrative sanction regimes – would not sufficiently ensure policy implementation and whether criminal law could address the problems more effectively. This will require a thorough analysis in an impact assessment preceding any legislative proposal, including an assessment of whether Member States’ sanction regimes achieve the desired result, as well as difficulties faced by national authorities implementing EU law on the ground. If it were to be determined in the future that OSD in its present form cannot sufficiently ensure the safety of offshore operations as intended and that it is essential to link its aims with criminal liability for offshore breaches, such liability could be introduced as a new provision in the OSD through an amendment of that Directive. It could also be introduced through a standalone new legal act. However, the most coherent way would be to harmonize criminal sanctions through the ECD. This would avoid creating a different standard for criminal sanctions compared to the one established by the ECD for many environmental offences. It is why Article 39(3) of the OSD foresees the criminalization of offences under the OSD via an amendment of the ECD. 1.1Conclusions The deadline to implement the OSD in national law is 19 July 2015. At this point in time, most Member States have not yet implemented the pertinent provisions of the OSD yet. It is therefore too early to properly assess whether the national legal provisions implementing the OSD are sufficiently effective and subsequently whether EU criminal law measures would be essential to ensure effective offshore safety in the Union under Article 83(2) of the Treaty. For these reasons, the Commission cannot yet provide a full report on the appropriateness of bringing certain conduct leading to a major accident within the scope of the ECD.

2Liability Regime Effectiveness The significant civil damages awarded following the 2010 Deepwater Horizon disaster reflect both the widespread damage caused and the liability rules in place in the United States. Whilst no offshore accidents on the scale of Deepwater Horizon have occurred in the EEA, the absence of large-scale case studies limits any analysis of the liability regimes applicable to offshore accidents. This chapter therefore opens with a brief description of civil liability for the Deepwater Horizon incident. Following this, the chapter provides a detailed overview and analysis of legal regimes for third-party damage for offshore accidents in the EEA, before closing with an evaluation of the 'effectiveness' of the liability regimes in place and the appropriateness of broadening liability provisions. As liability regimes seek to balance the interests of different parties following an accident, their 'effectiveness' is inherently subjective to those parties. Nevertheless, liability has an important role to play in maximising the social benefit of business operations (see Introduction ), an important holistic measure of effectiveness for the purposes of this document. There are two additional principles that this document will also take into account when evaluating the effectiveness of liability regimes in the Focal States: The degree to which liability rules facilitate access to justice and the degree to which they uphold the polluter-pays-principle. These reflect important societal considerations and, as such, are respectively set out in Articles 67(4) and 191(2) of the Treaty on the Functioning of the European Union. In line with the above, the following criteria will inform the analysis in this Chapter: The standard of liability, whether strict or fault-based; The extent to which the law provides for all legitimate claims; The application of tort law to the continental shelf and exclusive economic zone;

The clarity in the wording of legislation establishing civil liability for pollution damage or dangerous activities which apply to offshore oil and gas accidents; How courts have tended to interpret and implement the relevant legal legislation; How the legal framework balances the interests of different marine and coastal stakeholders; and The impact of liability rules on business operations. 2.1Civil liability for the Deepwater Horizon incident The purpose of this Section is not to present US law as a normative 'yardstick,' but as contextual information. It is intended to help readers understand how the EEA liability laws addressed in Section 2.2 of this document might translate into damages awarded in the case of a major accident. Three main bodies of law in the United States establish liability for civil damages from offshore oil and gas accidents: state common law; state oil pollution legislation; and – more importantly – the federal Oil Pollution Act of 1990 (OPA) and Clean Water Act (1972). Claims under one body of applicable law may not bar persons bringing claims under another. However, the application of state law may be displaced by federal law should there be a conflict between the two, in accordance with the United States Constitution Supremacy Clause. In the Deepwater Horizon litigation the Court applied CWA and OPA, as well as general maritime law, to pronounce on the liability of the defendant parties. Civil liability can be broken up into three main categories: Bodily harm, property damage and economic loss. Whereas claims for bodily injury and property damage can be made under State common law, the OPA lists several complementary categories of compensable damages likely to result from an oil spill. Notably, Section 2702(b) of the OPA provides for claims for environmental damage, as well as claims for “[d]amages equal to the loss of profits or impairment of earning capacity due to the injury, destruction, or loss of real property, personal property, or natural resources”. This includes certain claims for pure economic loss, although see Annex I of this report for a detailed discussion on exactly what sorts of claims would be covered, which has been the subject of a complex legal debate. Liability under the OPA is strict. The OPA has a $75 million liability cap for civil claims excluding clean-up costs, however BP waived this following the 2010 Deepwater Horizon incident, pledging to pay for all legitimate claims. Although there is still significant uncertainty regarding the total costs of the incident, the total cumulative charges recognized by the company stood at $42.7 billion at the end of 2013 – a figure that includes all clean-up costs, criminal settlements and the $20 billion Deepwater Horizon Oil Spill Trust that was set aside for compensation. The Gulf Coast Claims Facility (GCCF) was one a mechanism for settling claims drawn from the Trust. In its April 13, 2012 status report, the GCCF reported that over 96% of the $6.3 billion it had paid out to December 30, 2011 were for "lost earnings or profits" i.e. economic loss. Overall, as of June 2014, BP had paid around $11 billion in civil compensation through the following four processes. (N.B. this figure does not include clean-up costs and criminal settlements.) The latter two processes are ongoing: 1.Initial BP claims programme (5 May 2010 to 22 August 2010): $399 million 2.Claims paid by the GCCF (23 August 2010 to 4 June 2012): $6.67 billion 3.Claims under the economic and property loss settlement agreement: ongoing 4.Claims under the medical benefits settlement agreement: ongoing We therefore see that the legal framework constituted by state common law, state oil pollution legislation and the federal OPA and CWA in the United States recognised all major categories of damage from the Deepwater Horizon incident, albeit with a cap on liabilities voluntarily waived by BP. As well as significant clean-up costs and criminal settlements, the widespread pollution following the incident therefore also led to substantial civil liabilities, in particular claims for economic loss. 2.2Civil liability for offshore accidents in the EEA Table 2 below presents an overview of the legal regimes applicable to offshore accidents in the Focal States. It is based on the findings of a study done for the European Commission to address the subject. Annex I of this document provides a more detailed description of these findings. The tort law of the Focal States examined has evolved over a long period and is part of the jurisprudence of each country. It is not possible to directly compare the words or provisions in the Civil Code of one Target State with the same words in the Civil Code of another and conclude that they have the same meaning. Courts construe the meaning of words and provisions in Civil Codes and similar legislation in the context of the tort law of that Target State. This has especially important implications where the tort law of a country recognises pure economic loss, as claims for lost income or other losses from an offshore oil and gas incident will often be subject to subtle legal distinctions on criteria such as 'directness' or 'foreseeability' in order to succeed. For this reason, Table 2 addresses not only the availability of economic loss in each Target State but also whether courts are likely to be liberal or conservative with respect to the award of such claims, where such information is available. In certain cases, the table also specifically states whether compensation for loss of income due to physical damage to un-owned resources is available – crucial for compensation to the fishing and tourist industries, as well as other coastal businesses following an offshore accident.

Applicable legislation Bodily injury and property damage Economic loss Further comments Bulgaria a) Law on Obligations and Contracts b) Environmental Protection Act (probably not) c) Water Act (probably not) • Recognised under a), b) and c) • Unclear whether strict or fault-based under a) • Fault-based under b) and c) • Unclear whether recognised or not under a), b) and c) • If recognised, damage must be a direct and immediate consequence • Liability uncapped • Burden concerning proof of fault under a) is reversed i.e. the tortfeasor (wrongdoer) must show they did not act with fault Croatia Civil Obligations Act • Recognised • Unclear whether strict or fault-based (no precedent on whether courts consider offshore activities 'dangerous') • Recognised • 'Liberal' regime* • Unclear whether strict or fault-based (no precedent on whether courts consider offshore activities 'dangerous') • Claimant must show likelihood and intention of making a profit, and that pollution from offshore accidents is likely to cause the damage suffered • Liability uncapped • Production Sharing Agreement includes an indemnity and hold harmless agreement for compensation and other losses to the State Cyprus Law of Civil Wrongs • Recognised • Fault-based • Recognised • Fault-based • Persons must have also suffered damage to property in which they had a legal interest, or bodily injury • Liability uncapped • Production Sharing Contract imposes liability for bodily injury, property damage and, perhaps, pure economic loss • Production Sharing Contract includes an indemnity for compensation to the State Denmark a) Subsoil Act (section 35) b) Liability for Damages Act c) Environmental Damage Compensation Act (perhaps) • Recognised under a) and b) • Strict under a) and c) • Fault-based under b) • Recognised under a) and b) • Strict under a) and c) • Fault-based under b) • Claimant must show that loss is direct and that defendant’s act was likely to cause the loss • Liability uncapped France a) Civil Code b) Mining Code • Recognised • Fault-based • Recognised • Fault-based • 'Liberal' regime* • Claims for pure economic loss from physical damage to “un-owned resources” in the public domain recoverable* • Liability uncapped Germany a) Civil Code b) Water Resources Act (perhaps) c) Environmental Liability Act (perhaps) • Recognised under a), b) and c) • Fault-based under a) • Strict under b) and c) • Recognised by a) and b) • Fault-based under a) • Strict under b) • 'Conservative' regime* • Claimant must show that loss is direct and that business was established • Claims for pure economic loss from physical damage to “un-owned resources” in the public domain not recoverable* • A limit of liability may exist under a tort cause of action to which strict liability applies Greece a) Civil Code b) Law 1650/86 • Recognised under a) and b) • Fault-based • Recognised under a) • Fault-based • 'Liberal' regime* • Claimant must show the defendant was likely to cause the harm and that their act affected an interest protected by the law • Claims for pure economic loss from physical damage to “un-owned resources” in the public domain unsettled* • Liability uncapped • Draft Model Lease obliges a lessee, under strict liability, to ensure adequate compensation for bodily injury and property damage Iceland a) Hydrocarbons Law b) Tort Damages Act • Recognised under a) and b) • Strict under a) • Fault-based under b) • Recognised under a) and perhaps b) • Strict under a) • Fault-based under b) • Unclear whether a) recognises pure economic loss • Liability uncapped • Model Licence includes an indemnity and hold harmless agreement for compensation to the State Ireland a) Civil Liability Act b) Common law • Recognised under a) and b) • Fault-based • Pure economic loss may be available, but only if the loss was foreseeable and significant, and even if so the claimant would face a heavy burden establishing liability • Fault-based, if available • Liability uncapped Italy Civil Code • Recognised • Unclear whether strict or fault-based (no precedent on whether courts consider offshore activities 'dangerous') • Recognised • Unclear whether strict or fault-based (no precedent on whether courts consider offshore activities 'dangerous') • Claims for pure economic loss from physical damage to “un-owned resources” in the public domain unsettled* • Liability uncapped Latvia Civil Code • Recognised • Unclear whether strict or fault-based (no precedent on whether courts consider offshore activities 'dangerous') • Recognised • Unclear whether strict or fault-based (no precedent on whether courts consider offshore activities 'dangerous') • Claimant must show that loss is direct • Liability uncapped Lithuania a) Civil Code b) Law on Environmental Protection • Recognised under a) and b) • Unclear whether strict or fault-based under a) (no precedent on whether courts consider offshore activities 'dangerous') • Fault-based under b) • Recognised under a) • Unclear whether strict or fault-based under a) (no precedent on whether courts consider offshore activities 'dangerous') • Fault-based under b) • Unclear whether pure economic loss is available • Liability uncapped Malta Civil Code • Recognised • Fault-based • Recognised • Fault-based • Claimant must show that loss is direct • Liability uncapped • Model Production Sharing Contact imposes liability for any loss or damage suffered by or done to the Government, to the environment or to third parties. Netherlands Civil Code • Recognised • Strict • Recognised • Strict • Claims for pure economic loss from physical damage to “un-owned resources” in the public domain unsettled* • Liability uncapped Norway a) Petroleum Act b) Pollution and Waste Act c) Act Relating to Compensation in Certain Circumstances d) Svalbard Act • Recognised under a), b), c) and d) • Strict under a), b), c) and d) • Recognised under a), b), c) and d) • Strict under a), b), c) and d) • The liability of a tortfeasor may be reduced under a) and c) depending on the circumstances of a pollution incident • Categories of available economic loss to fishermen explicitly stated in a) Poland a) Civil Code b) Mining Law • Bodily injury and property damage recognised under a) • Property damage recognised under b) • Unclear whether strict or fault-based under a) (no precedent on whether courts consider offshore activities 'dangerous') • Strict under b) • Recognised under a), but only if there is a high probability of the loss from the tort • Unclear whether strict or fault-based under a) (no precedent on whether courts consider offshore activities 'dangerous') • 'Conservative' regime* • Claims for pure economic loss from physical damage to “un-owned resources” in the public domain not recoverable* • Liability uncapped Portugal a) Civil Code b) Decree-Law No. 147/2008 (if applicable) c) Law 11/87 (if applicable) • Recognised under a), b) and c) • Strict under b) and c) • Unclear whether c) applies (no precedent on whether courts consider offshore activities 'particlarly dangerous') • Recognised under a) • Fault-based • Claimant must show that loss is direct • 'Conservative' regime* • Claims for pure economic loss from physical damage to “un-owned resources” in the public domain not recoverable* • Liability uncapped Romania a) Petroleum Law b) New Civil Code • Recognised under a) and b) • Fault-based under a) and b) • Recognised under b) • Fault-based • 'Conservative' regime* • Liability uncapped Spain Civil Code • Recognised • Fault-based • Recognised • Fault-based • Loss must be foreseeable, certain and adequately proven • 'Liberal' regime* • Claims for pure economic loss from physical damage to “un-owned resources” in the public domain not recoverable* • Liability uncapped United Kingdom Common law • Recognised • Fault-based • Recognised • Persons must have also suffered damage to property in which they had a legal interest, or bodily injury • Claims for pure economic loss from physical damage to “un-owned resources” in the public domain not recoverable* • Liability uncapped • Model Clauses for a licence include an indemnity for third-party claims to the State * Francesco Parisi, Vernon V. Palmer and Mauro Bussani, The Comparative Law and Economics of Pure Economic Loss, International Review of Law and Economics 16, 22 (George Mason University School of Law, Law and Economics Research Paper No. 05-12 and University of Minnesota Law School, Legal Studies Research Paper No. 07-18, 2006); available at https://www.lider-lab.sssup.it/lider/it/home/documenti/doc_download/42-the-comparative-law-and-economics-of-pure-economic-loss-francesco-parisi-vernon-v-palmer-mauro-bussani.html 2.3Industrial agreements Although it is an industry mutual agreement, and therefore primarily addressed in Chapter 3 of this document, the Offshore Pollution Liability Association Ltd (OPOL) forms an important part of any analysis of civil liability for offshore accidents in the EEA because it requires its members to accept strict liability for damage and loss as a condition of membership. The scheme is open to offshore operators in many Focal States and is a prerequisite of licensing in the United Kingdom (UK). It therefore complements existing liability legislation even though it is a voluntary, non-legislative scheme. When established in 1975, OPOL was intended to be an interim measure until a Convention of Civil Liability for Oil Pollution Damage resulting from Exploration for and Exploitation of Seabed Mineral Resources came into effect. However, the regional convention has not entered into force and is highly unlikely to do so due to a disagreement concerning its provisions. OPOL has therefore continued in existence. OPOL is not a fund. Following an incident, claims are not made directly against OPOL itself, but against the member company liable for damage and loss. Member companies agree to compensate claimants according to certain terms and conditions (see paragraph below) up to a limit of $125 million for remediation costs and $125 million pollution damage. In return, they benefit from a guarantee that other companies in the scheme will pay for any liabilities they are financially unable to pay for themselves up to the aforementioned financial limits. This mutualisation of insolvency risk helps reduce insurance costs and reassure regulators and the public of the financial capacity of offshore operators. The industry scheme may also have reduced the need for more stringent liability laws. The OPOL Liability Agreement sets out the terms and conditions under which the members shall pay compensation in the event of a spill of oil from an offshore facility. Under this, members accept strict liability for remediation costs incurred by public authorities as well as “pollution damage”, defined as “direct loss or damage… by contamination which results from a Discharge of Oil”. There are therefore obvious benefits in this scheme for claimants in the UK, where liability is fault-based under common law. The scheme also adds a layer of industry scrutiny of financial responsibility over and above the checks performed by public authorities. In order to join OPOL, companies must provide proof that they would be able to cover liabilities set out in the OPOL Liability Agreement (see Section 3.2). This reassures current members that they probably will not have to bear the costs of any damage the applicant might cause, cross subsidizing their risk and violating the polluter-pays-principle. Notwithstanding these benefits, a study done for the European Commission found concerns that OPOL may suffer from certain limitations from the viewpoint of a claimant. These include: the fact liable operators decide whether claims made against them are covered by the scheme i.e. whether damage is “direct” and whether a claim is “reasonable, quantifiable and justifiable”; the $250 million cap on reimbursement and compensation per incident that OPOL covers, which may not cover all damage and loss from the worst accidents; the lack of cover for claims for compensation as a result of a discharge or release of gas, dispersants or any substance other than oil; the inability of a person, other than a governmental entity, to claim compensation for remedial measures; the one-year limitations period to file a claim; the (perceived at least) requirement to enter into an arbitration agreement with the operator in order to file a claim under OPOL; the lack of a requirement to show a minimum net worth, a positive net income, or similar indications that a member of OPOL is sufficiently financially secure to pay claims if they arise. OPOL does not bar a claimant bringing an action against the operator (or other persons) in a court. However, if the claimant does so, national law would apply and not the OPOL Liability Agreement. If the applicable jurisdiction placed a heavy burden on the claimant in establishing liability, there would be a strong incentive to comply with the procedures set out by OPOL despite the shortcomings mentioned above. 2.4Contractual agreements Another way of complementing liability legislation is to impose more stringent liability rules through contractual agreements, an option that seems to have been chosen by Cyprus and Greece. The Production Sharing Contract for Cyprus appears to impose strict liability for bodily injury and property damage whereas liability under the Law of Civil Wrongs is fault-based. The Contract provides that “[t]he Contractor shall indemnify and compensate any person, including the Republic [of Cyprus], for any damage or loss which the Contractor, its employees or subcontractors and their employees may cause to the person, the property or the rights of other persons, caused by or resulting from Hydrocarbons Operations, including any environmental damage”. The meaning of the word “rights” is not entirely clear. It may mean, for example, the right to occupy or to use property. The Contract does not appear to provide liability for pure economic loss. Likewise, the Draft Model Lease Agreement for Greece provides that the lessee agrees “to take all necessary and adequate steps… to ensure adequate compensation for injury to persons or damage to property caused by the effect of the Petroleum Operations”. If the agreement imposes liability on a lessee, this liability does not appear to extend to pure economic loss.

Under the Cypriot and Greek contractual agreements, only the State has the right to require the licensee / lessee to carry out its obligations under the contract. Claimants do not have any rights under the contracts so would need to persuade the State to act on their behalf. The contractual provisions do not explicitly unpack the details of the type of claims that are covered. 2.5Economic loss and the floodgates issue Sections 2.2 to 2.4 above show that, the law in Focal States always provides for claims for bodily injury and property damage from offshore accidents. They also show that liability for offshore oil and gas accidents is almost always financially uncapped in the EEA. Apart from this, however, Focal States handle civil liability for such accidents very differently and there is sometimes uncertainty surrounding how their legal systems would deal with the variety of civil claims that could result. The following sections in this Chapter describe and discuss these differences and uncertainties in greater detail. An important finding is that the legal regimes of Focal States handle liability for economic loss in different ways. They limit economic loss claims based on the 'directness' of the loss suffered to different degrees, or even exclude them outright in the absence of bodily harm or property damage (the exclusionary rule). 'Pure' economic losses such as these are sometimes deemed too remote and speculative to be laid at the defendant’s door. It is important to note, however, that all Focal states limit economic loss claims in some way. To illustrate, claimants that seem unlikely to obtain redress in certain Focal States include ferry companies and businesses that process fish affected by a ban on fishing. The economic losses suffered by such claimants may not arise directly from a spill, but the experience of Deepwater Horizon tells us that they can still comprise a sizeable portion of the damage from an offshore accident on rare occasions. This may affect the fishing and tourism industries in these Focal States, which comprise a great number of small and medium-sized enterprises (SMEs), as well as other sectors that rely on the good condition of the shared marine environment for their business. Besides the exclusionary rule, the tort law Focal States recognises only 'direct' claims and not claims for damage and loss that are remote from the event causing the harm. For example, a court may consider that the income lost by a fisherman due to a fishing ban is direct because pollution directly affects the fish in the sea: there is no person between the fish and the fisherman to make the harm indirect. However, a court may consider that a claim for lost income by a seaside hotel is indirect because it results from the decisions of people that would have come to the hotel but for the oily beaches, i.e. there is a legal or natural person between the polluted beach and hotel that makes the claim more remote. Insofar as the legislation in Focal States excessively limits economic loss claims, it creates externalities and disincentivizes firms from taking the appropriate steps to reduce accident losses. However, there are valid reasons for limiting liability for economic loss, in particular liability for pure economic loss. The court proceedings following the Deepwater Horizon incident show that oil spill claims litigation can be complex and that a practical balance needs to be struck between the need to compensate victims fully and the danger of inviting illegitimate claims. Setting well-defined and well-designed parameters is essential to achieving this. The major argument against the recognition of pure economic loss is the “floodgates” issue: If unlimited liability for economic loss is recognised, the floodgates would be open and it would be impossible to prevent the payout of remote claims that society would not view as legitimate. The difficulty lies in the fact that economic losses are likely to be serially linked to one another in an interdependent, modern economy. It is therefore necessary to set reasonable limits to the extent to which the more remote economic impacts of an accident should be compensable to avoid excessive liability and introduce certainty on levels of financial responsibility. Member State differences on economic loss often extend beyond the offshore sector, to general tort law. Whilst Member States handle economic loss claims differently, these differences often stem from well-established legal traditions and may reflect societal preferences on how to resolve grievances fairly. These factors influence the kinds of claims considered legitimate by Member State justice systems, as well as the principles that courts use to differentiate between legitimate claims and ordinary risks faced by participants in the economy. 2.6Strict liability and the negligence rule Another key finding is that offshore accidents mostly fall under the tort law of Focal States and therefore the negligence rule usually applies. Here, claimants must prove negligence in order to win damages. Courts rule on whether the liable party breached a standard of care by weighing the risk of their activity against the cost and effectiveness of precautions to reduce this risk. As well as serving an important societal utility function, the negligence rule also reflects the moral position that recklessness should be more blameworthy than conduct with due care. Where purpose-built legislation is in place, strict liability usually applies. Strict liability also applies under the Offshore Pollution Liability Association Ltd (OPOL), membership of which is a prerequisite for offshore operations in the UK (see Section 2.7). Under a strict liability rule, the polluter pays for the damage and loss his conduct causes the victim regardless of whether it can be proved he was negligent. Strict liability makes it easier for a claimant to gain compensation, but it does not mean all claims will succeed. As a safeguard against excessive liability, claimants must still establish causation and damage. Strict liability may sometimes also apply under special sections of the Civil Code or common law that deal with so-called 'dangerous activities'. However, this document finds that there is almost always a lack of legal precedent that would clearly classify offshore operations as 'dangerous' where this is the case. The literature suggests that strict liability may have a number of benefits when applied to offshore oil and gas operations. As information about offshore accidents can be scarce, monitoring problematic and damage diffuse, strict liability reduces the ability of firms to unduly benefit from the difficulty of establishing legal proof of negligence to avoid paying out for legitimate claims. Under the negligence rule, the burden usually falls on claimants to present enough information to prove a breach of the standard of care. However, information relevant to this – the frequency of accidents or the cost and efficacy of countermeasures, for example – may only be available to the liable party. Furthermore, where such information is available, interpreting it may be unfeasibly complex, particularly when dealing with high-impact, low-probability events. Strict liability therefore removes a heavy bias against offshore accident claimants. Strict liability reduces transaction costs following an offshore accident. It does this by speeding up compensation as there is no need for legal proceedings to establish fault beforehand. Furthermore, it facilitates the quick settlement of lawsuits by reducing uncertainty about probable judgements. As the costs of accidents tend to rise steeply with time and major accidents may involve a large number of victims, all parties may share an interest in this. Finally, strict liability better internalizes accident costs and helps to achieve greater efficiency. Although the negligence rule incentivizes firms to exercise the standard of care in carrying out an activity, it does not lead these firms to moderate the level of this activity because this is not normally a part of determining negligence. This is a problem where adherence to the standard of due care does not fully eliminate the possibility of accidents. Here, uncompensated damage from claims in which victims are unable to prove negligence becomes an external cost, leading to underdeterrence. The higher administrative cost of establishing negligence compounds this by discouraging victims from seeking redress. Holding a firm strictly liable for the injuries caused in producing a good could help ensure that accident costs are reflected in the price of that good. This, in turn, provides a price signal that moderates the demand for more dangerous goods and encourages consumers to select safer alternatives. 2.7Incentivizing precautionary measures among potential victims Liability can be limited in several ways. As well as the negligence rule, exclusionary rule and directness provisions, all discussed above, liability may also be financially capped. Liability is generally uncapped in the Focal States. Only Germany applies a financial cap, and only under certain conditions.

No matter how it is done, however, limiting liability for offshore accidents encourages potential victims to take precautions against the harms they could be exposed to. If this is cheap for them to do and effective, then the combined costs of accidents and precautions would decrease, which would be socially beneficial. However, while this may work for many kinds of accidents – road traffic accidents, for example – it seems less relevant for offshore accidents. There is little that many potential victims could reasonably do to reduce the economic impact of an oil spill. 2.8Liability and enterprise Although subsidies are commonly understood as the direct budgetary support of governments, the OECD has concluded that "there is no universally accepted definition of a subsidy" and instead defines subsidies as "any measure that keeps prices for consumers below market levels, or for producers above market levels or that reduces costs for consumers and producers." Viewed in this light, limiting liability for offshore accidents can be seen as an indirect subsidy. If occasional accidents are a normal part of doing business for offshore oil and gas firms – albeit an unwelcome part – then a permissive liability regime effectively provides these firms with an ex post payout following an accident as uncompensated victims bear some of the costs of their doing business. Risk is reallocated from the firm to society. On the one hand, because the 'orphan shares' of pollution damage represent external costs, they could diminish social welfare in the same way any arbitrary tax or subsidy would (see final paragraph of Section 2.6). On the other, liability can also be deliberately limited in spite of these concerns as a practical measure to facilitate enterprise. The general concept has other analogues in the economy. For example, encouraging enterprise is the explicit goal of the limited liability business structure. Although controversial when initially introduced, the widespread acceptance of limited liability is acknowledgement that the benefits of limiting potential losses faced by shareholders far outweigh the cost of a slightly higher risk of debt default. The offshore sector's external benefits are numerous and include substantial tax revenues (see Text Box 2 ), employment, energy security and improving the trade balance. Given that the combined value of these benefits may be very significant, the state could seek to provide some level of public risk funding to the sector as a Pigouvian subsidy – a subsidy that recognizes the external benefits an activity brings. Almost all economic activity produces some form of risk. Provided this subsidy does not result in significantly increased accident costs, then it could respect legitimate societal interests. The UK accounts for the largest levels of offshore oil production in the EU. Producers of oil in the UK or UK Continental Shelf were subject to corporation tax and supplementary charge to corporation tax, at 30% and 32% respectively for the financial year to 31 March 2013. In addition, depending on the date on which the government gave its initial consent to the development of a field, that producer may also be subject to petroleum revenue tax (PRT), at 50%. Combined, these taxes result in a government take of between 62% and 81% on the production value of oil, depending on whether the field was chargeable to the PRT or not. A more limited liability regime will lower the costs of doing business for many offshore firms by introducing greater certainty on levels of financial responsibility. It may also allow firms reduce the precautions necessary for risk-neutral operations and take out lower limits of indemnity, discounting insurance premiums (see Chapter 3). Reducing barriers to entry and increasing competition within the offshore sector will help to ensure the efficient development of oil and gas resources, along with any aggregate social benefits this brings. Nonetheless, there are numerous ways for the state to encourage enterprise and a full discussion of the relative merits of doing this through the civil liability regime is beyond the scope of this document. The findings presented here suggest that there is no prima facie relationship between the variety of civil liability regimes in place and the health of the oil and gas industry in Focal States. If such a relationship did exist – i.e. if firms operating in less stringent liability regimes benefitted from a competitive advantage over those in more stringent regimes – the absence of a level playing field for civil liability might raise EU competition questions. 2.9Beyond territorial waters Preliminary research for the European Commission did not locate laws to extend jurisdiction for the relevant civil legislation for offshore accidents to the Continental Shelves and Exclusive Economic Zones in certain Focal States. This raised the possibility that at least some have not enacted such legislation, a legal loophole that may hamper redress for civil damage resulting from offshore activities in some Focal States. Nevertheless, there is case law that suggests any litigation over the issue would be resolved in a manner favourable to claimants. A landmark judgement of the International Court of Justice found that a coastal State has rights in respect of the area of the continental shelf by virtue of the coastal State’s sovereignty over the land and by extension of that sovereignty in the form of the exercise of sovereign rights for the purposes of the exploration of the seabed and the exploitation of its natural resources. Any installations and devices on the continental shelf are therefore under the jurisdiction of the coastal State. 2.10Transboundary compensation: Jurisdiction and applicable law The sections above have highlighted that there are sometimes significant differences between the liability regimes of Focal States. As offshore accidents can have a large geographical footprint and cross the waters of many countries, this raises the question of how claimants in countries outside of the country of the origin of the accident will be treated under the law. The following section looks at the legal framework for liability for transboundary damage resulting from offshore accidents. In any case of transboundary compensation, three interdependent questions of private international law must be resolved: 1.Jurisdiction: Which court/s should try the case? 2.Choice of law: What law/s should that court apply? 3.Foreign judgements: Will a judgment be recognised or enforced in another country?

Whilst some of these issues are resolved by individual countries´ conflict of laws rules, many are the subject of international conventions. As for the EU Member States, the Brussels I Regulation on jurisdiction and the recognition and enforcement of judgments and the Rome II Regulation on the law applicable to non-contractual obligations are two EU regulations that respectively determine the court having jurisdiction and the conflict of law rules in transboundary claims for third party damage. As regulations, Brussels I and Rome II are directly applicable. They can be invoked and relied upon in the national courts of the Member States bound by them and these courts must interpret them in line with their wording and purpose. While the Brussels I Regulation applies to all the Member States (including Denmark, on the basis of a 2005 parallel agreement between the Union and Denmark), the Rome II Regulation applies to all the Member States with the exception of Denmark. The rules of the Brussels I Regulation have been extended to Switzerland, Norway, and Iceland on the basis of the 2007 Lugano Convention on the same subject. It should be noted that the Brussels I Regulation and the Lugano Convention generally apply whenever the defendant in legal proceedings is domiciled in the EU/EEA; if the defendant is domiciled in a third State, national law applies. The general jurisdiction rule under the Brussels I Regulation (Article 2) of the Brussels I Regulation is that civil legal proceedings must be brought before the courts of the Member State where the defendant (e.g. the operator of the installation) is domiciled. In addition, Article 5 of the Brussels I Regulation provides for alternative jurisdictional grounds: Article 5(3) states that civil non-contractual or tort claims may be tried "in the courts for the place where the harmful event occurred or may occur". There is an extensive ECJ case law on the meaning of 'the place where the harmful event occurred or may occur' which tends to interpret this article in terms that are favourable to victims. Claimants/victims may choose to bring proceedings before the courts of the country where the damage originated or the courts of the country where the damage was sustained. In case the injured party sustained damage in multiple States, the courts of the place where the event giving rise to the damage occurred and the court of the State of the defendant's domicile have jurisdiction to hear the action regarding all damages caused by e.g. an oil spill, wherever such damages have occurred. The courts of the place where the damages are sustained, on the other hand, only have jurisdiction with regard to damage sustained in its own (the forum) State. Under Article 5(4), if the civil claim for damages is brought on the basis of an act giving rise to criminal proceedings, the victims could also bring the case in the court seised of those proceedings, to the extent that the court has jurisdiction under its own law to hear civil proceedings. The court with jurisdiction will determine the law applicable to the dispute on the basis of the Rome II Regulation. Article 4 of the Rome II Regulation contains the general rule on applicable law regarding non-contractual liability. The governing law will be the law of the country in which the damage occurs, irrespective of the country in which the event giving rise to the damage occurred. Article 7 of the Rome II regulation specifically addresses "environmental damage or damage sustained by persons or property as a result of such damage". According to this article, a person seeking transboundary compensation for such damage within the EU can choose whether to base the claim on either the law of the country where the damage occurred or on the law of the country where the event giving rise to the damage took place. This law shall apply irrespective of whether it is the law of a Member State or of a third country. The parties to a dispute may also agree on the law applicable to their dispute, subject to certain limitations and conditions contained in Article 14 of the Rome II Regulation. For example, unless they are both pursuing a commercial activity, such an agreement can only be entered into after the event giving rise to the damage and not before. The Rome II Regulation only determines which national law shall be applied. The national law designated by the conflict rule will then provide the answer to questions such as: what is the basis and extent of liability, what are the grounds for exemption from liability, the assessment of damage claimed, who are the persons entitled to compensation and what is the manner in which an obligation may be extinguished. The national laws of Member and third States differ on these matters. The application of Rome II therefore means that, depending on where a lawsuit is brought, the courts of a Member State which apply the Rome II Regulation may apply a foreign law which differs from the law applicable in their own country. As such, courts may recognise claims for pure economic loss even if in their own country such loss would not give rise to compensation or the level or scope of compensation for pure economic loss may be different. The same would be true for the determination of the amount of recoverable damages, which may also differ depending on the applicable law. Recital 25 of the regulation outlines the reasoning for giving the victim a unilateral choice between the two laws most closely linked to the damage: Article 174 of the Treaty, which provides that there should be a high level of protection based on the precautionary principle and the principle that preventive action should be taken, the principle of priority for corrective action at source and the principle that the polluter pays, fully justifies the use of the principle of discriminating in favour of the person sustaining the damage. Regarding accidents on the continental shelves or exclusive economic zones of Member States, the ECJ case law seems to indicate that for the purposes of applying EU law, the territories of the Member States comprise their respective continental shelves and exclusive economic zones. In the context of an employment dispute, the ECJ held that: "work carried out on fixed or floating installations positioned on the continental shelf, in the context of the prospecting and/or exploitation of natural resources, is to be regarded as work carried out in the territory of that State for the purposes of applying EU law" (see also Section 2.9). Therefore, it may be assumed that Member States' courts may have jurisdiction and their laws may apply if an accident occurred on their respective continental shelve or in their exclusive economic zone. It is important to note that the Brussels I and Rome II Regulations ensure access to the Union courts and determine the applicable law for any claimant in proceedings pending before the courts in the Union, irrespective of whether such claimant is from an EU Member State or from a third State. This means that, for example, Norwegian victims of an offshore accident which took place in the UK may launch claims for damages before the UK court (as the place where the event giving rise to the damage occurred). The UK court may apply Norwegian liability rules (as the law of the place where the damage occurred). At the same time, because of the territorial scope of application of the Rome II Regulation, victims located in the EU, while they have access to the Norwegian courts (pursuant to the Lugano Convention) may not have the same rights before Norwegian courts. For example, victims in the UK suffering damage as a result of an offshore accident in Norway may initiate proceedings in Norway but their ability to invoke the liability regime of the UK is subject to the conflict of law provisions applicable in Norway. The Brussels I and Rome II Regulations provide important avenues for settling conflicts of jurisdiction and conflicts of laws questions in the context of transboundary claims for damage caused by offshore accidents in a way that is favourable to victims, without introducing EU-wide liability legislation. One limitation, however, lies in the applicability of Rome II, which does not apply to Denmark or Norway – two countries which together are responsible for half of all oil and gas production in the EEA. Although Denmark is an EU Member State, it does not generally participate in EU civil justice matters. 2.11Conclusions Whereas the law in Focal States always provides for claims for bodily injury and property damage from offshore accidents, there are significant differences regarding the standard of liability (strict or fault-based) and liability for economic loss. Civil liability for offshore accidents in most Focal States is limited by legal proof of negligence, requirements on the directness of economic loss suffered and/or an outright bar on the payment of compensation for economic loss in the absence of bodily injury or property damage (the "exclusionary rule"). Ambiguity in the relevant legal texts may also make some economic loss claims uncertain. In Denmark, France, Iceland and the Netherlands compensation for damage and loss, including pure economic loss, is available through either tort law or specific pollution legislation. Fewer limitations apply stemming from the need to establish proof of negligence or directness provisions. A degree of ambiguity in the relevant legal texts may, however, still make some economic loss claims uncertain. Norway has put in place comprehensive legislation to deal with civil liability for offshore pollution. This imposes strict liability for bodily injury, property damage and economic loss, including pure economic loss, albeit with limitations stemming from the need to establish that the economic loss suffered was sufficiently direct. It also specifically states that “financial losses incurred by Norwegian fishermen as a result of the petroleum activities” are compensable. Whilst UK authorities require membership of OPOL, there are questions as to how binding and comprehensive coverage under OPOL may be in practice. Issues include the fact that the liable operators themselves decide whether claims made against them are valid and the current liability cap on compensation.

Likewise, the reliance of Greece and Cyprus on contractual law to complement their Civil Codes has some drawbacks. Only the State has the right to require the licensee/lessee to carry out its obligations under the contract. Claimants do not have any rights under the contracts, so would need to persuade the State to act on their behalf. Further, the contractual provisions do not specify the type of claims that are covered. We therefore see that while the law in Focal States provides for claims for bodily injury and property damage from offshore accidents, there are differences between Focal States regarding liability for certain kinds of more remote or indirect economic loss. This has implications for the fishing and tourism industries, as well as other sectors that rely on the good condition of the shared marine environment for doing business. Experience has shown that in these sectors, which include many SMEs, could suffer significant economic loss in the event of a major offshore accident. Legal proof of negligence for bodily injury, property damage and economic loss is another area where Focal States differ from one another. Offshore accidents mostly fall under the tort law of Focal States and therefore the negligence rule usually applies. Here, claimants must prove the negligence of wrongdoers (tortfeasors) in order to win damages and courts rule on whether the liable party breached a standard of care. The negligence rule helps to ensure negligent acts are penalized more severely, but it increases the burden that claimants face in establishing liability. Strict liability for accident damage and loss incentivises firms to carry out their operations with even greater care. Whilst not practicable or desirable for general application, strict liability may have benefits when applied to offshore accidents because it reduces the ability of firms to unduly benefit from the difficulty of establishing legal proof of negligence to avoid paying out for legitimate claims. In addition, it reduces the transaction costs to both liable parties and claimants by speeding up compensation – essential for lowering total accident costs where a great number of victims are affected. The Focal States thus limit civil liability for offshore accidents in different ways and to different degrees. Holding firms accountable for all damage and loss caused by offshore accidents – including pure economic loss, and damage and loss where claimants cannot prove negligence –facilitates access to justice for victims. It incentivizes firms to take adequate precautions and develop safer ways of operating. It also helps ensure that offshore activities only take place if their benefits outweigh their risks. Notwithstanding this, there are good grounds for limiting liability that allow a principled understanding of how, and to what extent, it could be done in this context. First, oil spill claims litigation can be complex and a practical balance needs to be struck between the need to compensate victims and preventing the payout of illegitimate claims. Economic losses are likely to be serially linked to one another in the economy and so setting well-defined liability parameters is essential to preventing excessive liability – also known as the floodgates issue – even though this may result in the exclusion of the most indirect, speculative claims. Limiting liability may also be beneficial if it brings significant benefits to enterprise without effectively resulting in increased accident costs. Offshore oil and gas is a high-value sector that contributes to jobs, tax revenues, energy security and the trade balance, each of which can be considered an external benefit. Introducing certainty on levels of financial responsibility will lower the costs of doing business for many offshore firms. Although it may also reduce the financial incentive for greater precautions, there have been no major offshore accidents in Europe for a number of years and the EU offshore industry operates under increasingly stringent regulations. Whatever the pros and cons of the different liability regimes in Focal States, the Brussels I and Rome II regulations help safeguard the interests of claimants for accidents that originate in jurisdictions with less stringent civil liability rules than in the claimants' jurisdiction. They help ensure that both the benefits and the consequences of Member State choices on liability fairly accrue to these Member States alone, which may reduce the impact of the current lack of a level playing field.

3Financial Security Instruments and their Availability The 2010 Deepwater Horizon disaster showed that worst offshore accidents can cost so much that only the very largest companies would be able to cover their costs. This raises questions about whether financial security instruments exist to handle this risk. This chapter presents an overview of the financial security instruments available for offshore accidents, as well as a look at how public authorities could improve the provision and utility of such instruments. For the purposes of this document, the analysis shall include all forms of risk pooling, including industry mutual schemes. While such schemes may not be traditional financial instruments per se, they provide the same kinds of risk management services offered by many financial products. From the operator's point of view, the primary function of a financial security instrument is to redistribute risk so that the costs of more infrequently occurring major accidents are spread into smaller, more manageable payments and business can continue uninterrupted. From the point of view of victims, financial security instruments help ensure that compensation is available. Whilst financial security instruments may also reduce risk somewhat – for example, by reallocating it to less risk-averse entities, or by introducing an additional layer of mutual monitoring – they cannot completely insulate companies from the risks they take. Viewed in this light, a major objective of this chapter is to address whether an 'adequate' market exists for the financial security instruments that oil and gas companies need to manage their operating risks. One relevant point here is the competitiveness of this market, so that products are available at prices close to the cost of the risk being insured. Another is the diversity of available products, as companies in the oil and gas sector have a broad range of needs that vary according to their size and activities. And finally, the market should have the capacity to spread the risk of the largest, most infrequent accidents in the sector. The presence of such a market is key to ensuring that damage is remediated and an industry with many economic benefits remains healthy. However, there are limitations to the conclusions that can be drawn from the analysis presented in this Chapter. Chapter 1 has shown that liability for certain losses simply does not exist in much of the EEA. It would make little sense for an oil and gas company to have financial security for a liability that does not exist in the jurisdiction in which it is operating. Likewise, it would make little sense for providers of financial security instruments to develop products to cover such a liability. 3.1The financial security instruments available on the market Companies in the oil and gas sector have a broad range of financial security needs that vary according to their size and activities. This section provides a broad overview of the options available to them for managing their exposure to liabilities from offshore accidents. First-party financial security instruments: Third-party financial security instruments: A distinction must be made between first- and third-party instruments and mechanisms, the differences in which are described in Text Box 3 . Most businesses use a combination of traditional instruments and self-insurance (purchasing primary and excess liability insurance in the international marine insurance market). In addition, there are many interactions between these instruments, which have the benefit of spreading the risk among various players, thereby increasing the available capacity. Indeed, because liabilities from offshore oil and gas operations may run into billions of euros, there may be no single insurer willing to cover the entire risk exposure.

Most major oil and gas companies rely on first-party instruments, such as self-insurance or a captive, because their balance sheets and asset bases are generally larger than those of the insurance companies from which they would obtain coverage. Self-insurance (in contrast to a captive, see below) is usually created by setting up a 'reserve fund' for unanticipated events (including accidental damage). This can be described as a relatively large savings account into which the self-insuring company deposits an amount of capital to serve as a financial base to call upon if an adverse event occurs. Self-insurance is usually chosen over traditional insurance if it allows the company to insure itself more cheaply that obtaining cover on the commercial insurance market, where insurers charge for the service they provide. If a company is sufficiently large, it may establish, and thus obtain insurance from, a captive insurance company. Captives are an alternative to traditional commercial insurance, set up with the sole function of financing risk for their parent company, its operating affiliates and sometimes its partners. Specialist teams of brokers, sometimes from the major brokerage firms, may run a captive for a company. Captives may purchase reinsurance to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. Most multinational oil companies have set up a captive (e.g. Total, Shell, ConocoPhillips). The level of insurance which can be provided by a captive is driven by the level of the captive’s capital/assets and any reinsurance arrangements. Joint captives also exist to cover more than one company. They are generally established to cover risks for which it is difficult to obtain cover on the commercial insurance market. Jupiter, BP’s captive, holds assets in excess of $5 billion. It can provide insurance coverage of up to $1.5 billion on a per risk basis. The reported advantages of first-party financial security options, such as self-insurance and captive are: The general financial insulation from market cycle swings in the insurance business; The reduction of overall transactional costs of insurance; Greater flexibilities for coverage; Tax advantages (depending on the country); and Internationalisation of the knowledge associated with brokering insurance. In addition, regulation in a specific country may require operators to take out insurance coverage, making captives the only option for companies able and willing to self-insure. One final kind of first-party instrument available to larger companies, or companies with a large parent company or affiliate, are financial tests and corporate guarantees. Authorities use these to gauge the financial strength of operators and licensees to ensure that public funds will not be required to remedy the environmental damage or other harm they cause. The financial test may include the following criteria: a minimum level of the regulated company’s net working capital or net worth; a minimum ratio of its current assets to its current liabilities; a minimum ratio of net income or tangible net worth to the estimated costs of complying with required works; a minimum rating for the company’s bonds by a recognised rating company; or the location of a substantial proportion of the company’s assets in the relevant jurisdiction. In all cases, it is likely that authorities will require data provided by the company relating to the above to be supported by a report from an independent auditor. A corporate guarantee enables a company with a large parent or other affiliated company to provide the above evidence regarding its parent or affiliate on its behalf. Companies that satisfy the financial test or corporate guarantee can do so at low cost because they do not have to purchase a financial security mechanism from a third party. The competent authority, however, must regularly monitor the company’s financial position to ensure its continued financial viability. Smaller cap companies, less able to handle offshore operating risks independently, are more likely to rely on third-party financial security instruments, such as insurance. In an insurance contract, the insurer accepts a fixed payment, or premium, from the insured and in return undertakes to make payments if certain events occur. Insurers may take on this risk because they are better able to spread it and are therefore less risk-averse and/or because they charge for their service (i.e. they pay out less in claims than the aggregated premiums they receive). A wide range of commercial insurance policies is available to companies carrying out offshore exploration and production, including: Offshore physical damage, which provides first-party cover to an insured in respect of its offshore facilities, equipment, pipelines and offshore loading; Hull, machinery, which provides cover to Mobile Offshore Drilling Units; Operator’s Extra Expense (OEE) or Energy Exploration and Development (EED), which is described below;

Land rigs and miscellaneous property, which includes contractor’s equipment, scientific and sampling instruments, diving equipment and remotely operated vehicles; Business interruption / loss of production income; Public / general liability policies, which cover third party risks with (in many jurisdictions) qualified or absolute exclusions for specified environmental liabilities; Environmental insurance policies, which provide cover for bodily injury, property damage and clean-up costs from a pollution incident; and Employers’ liability policies (and, where appropriate, workers’ compensation policies), which provide cover for accidents and diseases suffered by employees resulting from their employment. An OEE or EED policy provides coverage for the risks arising from a blowout. It covers: a) control of well; b) redrilling/extra expenses; and c) seepage and pollution, clean-up and contamination. The standard OEE or EED policy does not provide cover for pure economic loss. If this is needed to comply with the OPA or OPOL, it must be purchased through additional OPA or OPOL endorsements. Oil companies typically purchase cover under an OEE or EED policy of between $100 million and $300 million for offshore wells. Liability insurance in the offshore oil and gas industry reportedly tends to be a very customised product. Commercial liability insurance will generally switch from a platform construction policy to an operating policy once construction is complete (and other contractual parameters are met). The insurance policy that applies to most claims for compensation for offshore pollution is the Offshore Energy Package Policy, which includes a range of covers on top of OEE / EED. Oil companies that carry out offshore exploration and development drilling typically also purchase a series of other policies not necessarily related to a specific platform, including corporate liability policies, to cover all their activities. Together, these make up a layered insurance programme. Insurance in the offshore oil and gas industry is generally provided by the subscription market due, in particular, to the size of the risk insured. As indicated above, a single (re)insurer does not underwrite a policy. Instead, a broker will broker the policy to many subscribers who each underwrite a specified portion of the risk. Liability between the underwriters to a subscription policy is not joint and several; each underwriter is liable only for its proportion of the risk, as specified in the schedule to the policy. Lloyd’s is the leading subscription market for (re)insurance to the offshore sector. Clients of the products sold at Lloyds have global operations, even though some national companies may operate only in one country. Lloyd’s sets general terms and conditions. It is dependent on reinsurance and only provides policies on an annual basis. The subscription market therefore provides access to insurance or reinsurance for customers and insurers. It allows for better diversification for both customers and (re)insurers, spreading risks over a larger population. However, (re)insurance pools – agreements under which each (re)insurer assumes a specified portion of risk – offer another way to achieve these same objectives. Both the subscription market and (re)insurance pools ease access for clients, but whereas the subscription market is seen as better able to satisfy bespoke needs of clients, (re)insurance pools tend to be set up for new high value risks where the market might be unable to provide a solution. Here, expert underwriting skills are required and only a limited number of underwriters may have the requisite expertise. Munich Re and Swiss Re are the largest reinsurance companies (“first tier”), but there are many other insurance or reinsurance companies (“second tier”), such as Hannover Re. These reinsurance companies are engaged in insurance as well, to a certain extent. In most reinsurance companies, the reinsurance cover operates under a one-year contract (as is also the case for insurance). Renegotiating contracts every year is a common practice in the insurance and reinsurance industry, and clients can almost always find a reinsurer for its risk, up to a certain limit and for a certain price. Although the capacity of reinsurers can be significant, very high limits of indemnity can be difficult to provide. For instance, Hannover Re has a financial cap of $150 million per occurrence, both for insurance and reinsurance. However, this still have fallen far short of the liabilities seen at Deepwater Horizon, which ran into tens of billions of dollars. As such, following the incident, Munich Re developed an innovative product to cover such losses for Gulf of Mexico operators: the Sudden Oil Spill coverage (SOSCover). This facility – a joint venture between Aon Benfield, Guy Carpenter, Munich Re and Willis Re – would be able to generate substantial capacity for offshore-related risks, boasting limits of $10-20 billion for companies in offshore oil activities. It is the only initiative offering this level of coverage for offshore operations, and therefore merits some description here. As indicated in a study done for the European Commission, SOSCover could work under three different models: 1.a consortium of insurers and reinsurers, each providing uniform prices and conditions and fixed capacity; 2.traditional insurance or reinsurance on a subscription basis, with flexible pricing, conditions and limits; and 3.a pool for oil drilling companies with contributions reflecting market share. It is a hybrid of many of the financial security instruments described in this section. Unlike traditional insurance coverage, SOSCover is a balance sheet protection product. Also unusual in the insurance world, it relies on parametric triggers and coverage may be seen as pay-as-you-go. It involves a scenario-based approach, which Munich Re claims makes risk more quantifiable. Munich Re further indicates that the product strictly follows liability rules and therefore is very close to a liability cover. Table 3 below summarises the main features of the product.

Scope of coverage Insured Lessees and operators of federal oil and gas leases (joint venture), represented by operator, 100% scaling Insured activity All highly exposed wells on US sea territory to be insured (Gulf of Mexico, California, Alaska) Wild Cat Exploration Appraisal Development Production Work-over Perils insured Coverage limited to oil spills / releases of wells (no coverage provided for vessels and pipelines). Excluded events Terrorism (potential inclusion of sub-limit of 10-20% for additional premium), war. All kinds of Nat-Cat events (windstorm, meteorite impact, earthquake, seaquake, etc.) and consequential events (subsea landslide, mudslide, flood wave, tsunami etc.) Gradual pollution and leakage Computer attacks Loss of GPS signal Cornerstones of coverage Losses covered Liability arising out of oil spills of insured activity (defined drilling) : Clean-up and removal costs Natural resource damage 3rd Party Property damage Bodily injury Loss of profits and earning capacity of related industries Revenues and Public Services Waiver of subrogation against the joint venture’s contractors Defence costs Defence costs are covered and part of the limit No duty to defend Limit $10bn+ capacity, provided by an insurance consortium. Limit is in place per well and per any event, but only once per year per well and with a double aggregate per insured. Capacity requests Capacity providers need to commit their capacity for a period of 24 months (but with an annual right to cancel and a cancellation period of 15 months). Renewal subject to annual review of risk adequate terms and conditions. Retention Attachment point of $1.5 billion Cover will be pure excess cover, no follow form / no drop down etc. Trigger and indemnification period Trigger: Occurrence Date of loss: Date of event Reporting: As soon as likely to involve the coverage Sunset clause: New claims after 36 months are cut off Risks attaching Claims payment process First part of the limit is $1.5 billion and will be paid into an escrow fund after the entire retention of $1.5 billion is funded by the insured (“Benefit Program”) Pay-out of the limit’s other tranches (“Liability Program”) after A) parametric trigger (defined no of claimants) and B) exhaustion of the limit’s previous tranche Co-insurance Minimum of 10% co-insurance (of $10 billion), depending on the limit required Possible role of the oil companies’ Captives both of retention and co-insurance Claims Service A fully integrated claims facility with a clear claims management strategy is available (on a fee basis) as part of the product In spite of its creativity, the SOSCover proposal has not met widespread interest. The product has not been shelved, although Munich Re has spoken of a current lack of demand from oil companies. Munich Re indicated that it could develop a similar product for Europe within 3-6 months. The reinsurer estimates that a minimum cover of $5 billion would be necessary to cover European operations. Associations of similarly situated oil and gas companies that insure one another, offer another means for companies in the offshore sector to spread risk. Members pay an initial premium followed by annual premiums. These mutual insurance associations may, in some cases, make a call on members for additional premiums if losses exceed the total funding held by the mutual. Mutualisation enhances insurance availability, expands the terms under which insurance is offered, diversifies risk and reduces the overall cost of insurance as policyholders of the company are also their owners/shareholders. Criteria on the acceptance of members of mutual pools tends to be stringent because all businesses in the pool underwrite the risks of other members according to their proportionate capacity in the pool. Thus, companies that do not meet the requisite standards of members of the pool are almost certain to be refused entry due to their higher potential for incurring losses payable by the pool. This adds a layer of industry mutual monitoring that complements the regulatory scrutiny of companies' financial capacity at licensing. Perhaps the best known example of a mutual is Protection and Indemnity Clubs ('P&I Clubs') for marine shipping risks. Thirteen P&I Clubs with worldwide activities have formed the International Group of P&I Clubs, whose main objective is to coordinate the operation and regulation of the Clubs’ Pooling Agreement. The Pooling Agreement provides a mechanism for sharing all claims in excess of US$ 9 million up to, currently, approximately US$ 7.5 billion. However, mutuals also exist in the offshore sector, notably Oil Insurance Ltd. (OIL), which was formed in 1972, and the Oil Casualty Insurance Ltd. (OCIL), founded in 1986. Both OIL and OCIL have experienced considerable growth in the last few decades. OIL’s total assets have grown from $160,000 in 1972 to over $7bn in 2013. From 2002 to 2012, OCIL registered an increase in its number of worldwide shareholders from 75 to 113, of which 12 are currently situated in Europe. Financial security for offshore liabilities may also come in the form of various guarantees. Trust funds administered by a trustee on behalf of a government authority may ensure that capital is readily available to compensate victims and remediate any accident damage caused by an operator or licensee. Letters of credit from a financial institution may serve the same purpose, provided the operator or licensee it is issued on behalf of can provide the requisite collateral, as do bank guarantees to cover liabilities in the event the operator or licensee fails to do so in the first instance. Many stakeholders have highlighted that the traditional insurance market may not have the capacity to cover the greatest offshore risks fully. The alternative risk transfer (ART) mechanisms briefly described in the remainder of this section provide access to other sources of capacity and thus offer a further means for offshore companies to hedge operating risk. Essentially, ART mechanisms turn an insurance policy or reinsurance contract into a financial security that is then transferred to investors in the capital markets. This helps to expand the set of possible insurable risks and provide coverage that may not be available from traditional sources. Additionally, because the resources of the capital markets are many times greater than those of insurers, ART solutions can also greatly increase capacity. Reinsurance sidecars are special purpose vehicles sponsored by reinsurers to provide additional capacity; they access capital markets directly through private debt and equity investment. A ceding reinsurer forms the sidecar and capital raised by the sidecar is held in a collateral trust for the benefit of that reinsurer. The ceding reinsurer then enters into a reinsurance contract with the sidecar, paying premiums to it for the reinsurance underwritten. The sidecar is usually owned by a holding company, which raises capital for the sidecar by issuing equity and/or debt. Private equity, hedge funds, insurers and reinsurers provide the capital for the typical sidecar. In fact, the growth of the sidecar market has been significantly driven by hedge funds seeking attractive non-traditional sources of investment yield. Catastrophe (cat) bonds provide insurance companies with a closely related risk management option that leverages capital markets for insurance purposes. Funds raised from investors are used to establish a special purpose entity (SPE) or a special purpose reinsurer (SPR), which acts as the administrator of the security issuance. The SPE/SPR then issues a reinsurance policy to the insurer or corporation ceding the risk, which pays a premium to the SPE/SPR. Through an investment bank, investors receive bonds from the SPE/SPR with an agreed-on interest payment drawn from this premium. In the event of an accident, proceeds are released from the SPR/SPE to help the insurer pay claims; the release of funds is usually proportional to the size of the accident and the investors are not fully repaid. If no contingent event occurs, the principal is returned to the investors upon the expiration of the bonds. Like cat bonds, contingent capital leverages financial markets to protect an insuring company against perils while offering a profit to counterparties in these markets. Unlike cat bonds, however, contingent capital: a) is financed directly by the insuring company without an intermediary; b) spreads risk over time rather than transferring it; and c) finances a loss after the event has occurred. Similarly to a put option, a contingent capital agreement allows an insurer to issue capital (e.g. common stock, hybrid capital, or debt) to a financial counterparty at a predetermined strike price following the occurrence of a defined catastrophic event (for instance if the insurer’s stock price falls below the strike price following a windstorm of specified strength). In exchange for a fee, the insurer is thus assured of a cash infusion at its time of greatest need. Considered useful in financing low-frequency/high-severity exposures. the benefits of contingent capital include a low up-front option fee, balance sheet protection when it is most needed and access to financing with neither a corresponding increase in leverage nor a dilution of shareholders’ equity. We therefore see that there is broad variety of financial security products available to hedge oil and gas companies’ operating risk. Whilst not all the products discussed may be in widespread use by oil and gas sector clients at this time, the marketplace notionally offers the depth and innovation to cater to all offshore operators under current legal liability obligations. It also allows oil and gas companies to spread their risk to a diversity of market actors, from insurers and reinsurers, to financial market actors such as private equity groups and hedge funds, as well as to other oil and gas companies. 3.2The financial security instruments accepted by authorities An important distinction needs to be made between (i) financial security instruments and/or mechanisms that may be available to licensees in EEA waters for third-party damage from offshore oil and gas activities and (ii) those that are acceptable and accepted by competent authorities in the 20 Focal States for compensation for such damage. Table 4 below summarizes the latter. It is based on the findings of a study done for the European Commission to address the subject. Annex IV of this document provides a more detailed description of these findings. Target State Legislative financial security requirement Bulgaria Not specified but permit or concession agreement may require insurance Croatia Insurance Cyprus Insurance Denmark Insurance France Not specified Germany Insurance Greece Insurance Iceland Insurance, performance bond or other type of financial security acceptable to the competent authority Ireland Insurance, with competent authority having discretion not to require financial security, or to require another type of financial security Italy Not specified Latvia Not specified but licences may require financial security Lithuania Not specified but production sharing agreement may requi