Last week, the Brazilian Supreme Court sentenced former President Fernando Collor de Mello to eight years and 10 months in prison on corruption and money laundering charges. He was accused of receiving US$6 million in bribes from a subsidiary of the state-run oil company Petrobras. Callor served as President for three years before he was impeached by the Brazilian Congress. Over in the United States, former Haitian Prime Minister Laurent Lamothe was blocked from entering the country over his alleged involvement in “significant corruption”. The US State Department has accused Lamothe of misappropriating at least US$60 million from the Haitian government’s PetroCaribe Investment and Social Welfare Fund.
In today’s article, we discuss the controversy over insurance coverage for the operations of ExxonMobil’s subsidiary Esso Exploration and Production Guyana Ltd (EEPLG) in the light of the court ruling on the matter which is now under appeal.
What the 2016 PSA says about insurance coverage
In accordance with Article 20.2 of the 2016 Production Sharing Agreement, ExxonMobil’s subsidiaries, Esso, Nexen and Hess, are required to effect at all times and during the term of the Agreement, insurance as required by applicable, laws, rules and regulations and in such amount as is customary in the international petroleum industry in accordance with good oil field practice for petroleum operations in progress. (Emphasis added.) This includes pollution caused in the course of petroleum operations for which the Contractor or the operator is responsible. However, subject to the approval of the Minister, the Contractor shall have the right to self-insure all or part of the insurance coverage. The Contractor is also to require the operator ensures that sub-contractors effect similar insurance.
Role of the Environmental Protection Agency
The Environmental Protection Agency (EPA) is the responsible agency for ensuring that there is adequate insurance coverage and parent company guarantee in the event of a major oil spill as a result of the operations of ExxonMobil’s subsidiaries. Its main functions are to: (i) manage, conserve, protect and improve the environment; (ii) prevent or control pollution; and (iii) assess the impact of economic development, and the sustainable use of natural resources. In relation to (ii), the EPA has two main divisions, namely, Environmental Management Permitting Division (EMPD); and Environmental Management Compliance Division (EMCD). There are a number of Regulations that govern the Agency’s work in these two areas.
The main responsibility of the EMPD is the screening and processing of applications for Environmental Authorization for new projects as well as for renewals, including projects that require Environmental Management Permits (EMPs) and Environmental Impact Assessments (EIAs). To complement the work of the EMPD, the EMCD works with industry associations, businesses, community organizations, ministries and other governmental organisations in developing standards and promoting good practices. This is done through four main pillars: support for compliance; monitoring compliance; enforcing the law; and encouraging higher performance.
The EMCD promotes compliance by providing practical, constructive and authoritative advice on how to comply with the law and, where non-compliance is found, how to remedy it. It also uses advice, guidance and partnerships to ensure permit and non-permit holders understand what compliance is and how to identify and manage the associated risks. Compliance advice may include referring people to applicable codes of practice, best practice management guidelines, protocols for environmental management, international standards or other relevant information.
The EMCD determines levels of compliance with current standards and laws. Its primary focus is on prevention and ensuring that incidents of non-compliance and their impact are avoided. When EMCD identifies or becomes aware of a problem or a risk, it seeks to resolve the problem or risk before it leads to an adverse impact on the environment. Monitoring compliance and investigating non-compliance is therefore a key role for EMCD.
The EMCD addresses non-compliance with the law and standards by requiring remedial action and, where appropriate, applying sanctions. It uses enforcement to address non-compliance, fix the problem and restore and ‘make good’ the harm caused by breaking the law. It may not always be possible to restore the environment to its previous state. However, the EMCD will require offenders to ‘make good’ by minimizing the extent of the damage or risks and taking all reasonable steps to remediate the impact. The first goal of enforcement is to stop non-compliance with the law and to prevent further harm. Sometimes remedying a breach is insufficient to deter lawbreakers. In such a situation, enforcement will include legal action, such as prosecution for serious breaches of the law. Punishing law breakers is an important and effective way of deterring people from breaching their environmental obligations.
EPA’s approval of environmental permit for Exxon’s Lisa 1 operations
The EPA issued its first Environmental Permit to EEPLG on 1 June 2017. The Permit was modified on 12 May 2021, renewed on 31 May 2022 and subsequently further modified on 27 October 2022. Clause 14 of the latest permit deals with financial assurance and liability for pollution damage. These include:
Liability for all costs associated with clean up, restoration and compensation for any damage caused by any discharge of any contaminant, including the cost of investigations by the EPA;
Insurance to cover well control and/or clean up as well as third party liability; and
Undertaking by the parent company/affiliate relating to indemnification of all liabilities under the Permit;
The forms of financial assurance is to be guided by an estimate of ‘reasonably credible costs, expenses and liabilities’ that may arise from any breaches of the Permit. However, the estimate is not expected to cover unidentifiable or inestimable costs associated with compensation for loss or on-going damage to other third parties which may be subject to civil proceedings. Additionally, valid and effective environmental liability insurance is to be in place, covering, among others, (i) environmental damage caused during the operations of EEPLG for which it is jointly and severally held responsible; and (ii) the cost of removal of wreckage and clean-up operations. Further, the EPA may require such further amounts, types and coverage of insurance as is customary in the international petroleum industry or as required by applicable law. Any breach of the Permit will result in its immediate cancellation. (Emphasis added.)
By Clause 14.10, EEPLG is required to provide to the Agency parent company and/or affiliated company with legally binding agreements in which the parent company and/or affiliated company (including co-venturers) undertake to provide adequate financial resources to pay or satisfy their respective environmental obligations. Finally, EEPLG, its servants and/or agents shall be liable for any material or serious environmental harm caused by their pollution of the environment, as provided for under the EPA Act.
Seeking judicial intervention
EEPLG provided insurance coverage for US$600 million which was accepted by the EPA. However, the two civil society activists – President of Transparency Institute of Guyana Inc., Frederick Collins, and another concerned citizen – felt that the extent of the insurance coverage was not enough in the event of a major oil spill or other environmental damage caused by the operations of EEPLG.
Accordingly, they sought the intervention of the court to force the EPA enforce the liability clause in the permits it had issued to EEPLG. These two activists, through their attorneys, argued that:
The agency, through its human minds, including its officers has failed or omitted to carry out or to show that it has carried out its legal duties and/or obligations thereby amounting to misfeasance in public office by them and by failing or omitting to act, has acted unreasonably, irregularly or improperly and or has abused its power.
Court ruling
The trial judge found that EEPGL was engaged in a “disingenuous attempt” calculated to deceive when it sought to dilute its liabilities and settled obligations stipulated and expressed in clear unambiguous terms at Condition 14 of the Environmental Permit (Renewed) while at the same time optimising production. He then ruled that the EPA must order EEPLG to provide an unlimited parent company guarantee “to indemnify and keep indemnified the Government of Guyana and the Agency against all such environmental obligations together with environmental liability insurance from an insurance company with standing and repute that equates to Grade A Plus” According to the Judge, the failure to comply with the Order by 10 June 2023 will result in the Permit being suspended.
The Judge commented that the EPA has abdicated the exclusive statutory responsibilities entrusted to it by Parliament under the EPA Act 1996 and the Environmental Protection Regulations 2000 to ensure due compliance by EEPLG. He further stated that the Agency was ‘putting this nation and its people in grave potential danger of calamitous disaster’ and that it has found itself in a quagmire of its own making.
Government’s reaction
Immediately after the court ruling, and without allowing the EPA to first respond, the Attorney General announced that the Government would appeal the ruling. He was supported by the Vice President. However, the EPA is a separate legal entity created by an Act of Parliament with a board of directors to oversee the operations of the entity. In the circumstances, the Government’s reaction appears inappropriate. That apart, the widely held view is the Government , in the haste of having as much oil revenue as possible in the shortest period of time, has abdicated its responsibility to the citizens of Guyana and to the country as a whole, for not seeking to hold ExxonMobil to account in the event of a major oil spill or other environmental damage that can have devastating effect not only on Guyana but also the Caribbean and perhaps further afield. This is most unfortunate.
Filing of appeal
The EPA has appealed the court ruling and requested a stay of the court ruling. However, Justice Rishi Persaud, who is one of the judges presiding over the matter, declined the request as it is expected the matter would be concluded on or before 10 June 2023. Meanwhile, the EPA has indicated that it has complied with the court Order by issuing an Enforcement Notice to EEPLG to provide the required parent company guarantee in the event of an oil spill or other damage to the environment.
