Legal Briefing

Oil and gas decommissioning

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Projects, energy and natural resources | 01 May 2012

According to the Department of Energy and Climate Change (DECC) statistics, within the United Kingdom Continental Shelf (UKCS) there are approximately 500 oil and gas installations, 10,000 kilometres of pipeline and over 10,000 wells. As an increasing number of these installations become redundant due to the depletion of oil field reserves, challenging issues are raised in terms of how decommissioning can most successfully be achieved, taking into account the environmental impact, available technology, waste management, high costs and multiple participants.

Oil & Gas UK’s Decommissioning Report (2011) estimates that £30.4bn will need to be spent within the next 30-40 years to meet UKCS decommissioning liabilities, with £3.3bn being incurred between 2012 and 2016 as 51 installations are due to be retired. Beyond 2016, UKCS decommissioning activity is estimated to increase to £1bn per annum. Consequently, recent UK decommissioning legislation has focused on ensuring that all relevant companies with a beneficial interest (whether current or historic) in UKCS installations are accountable for the full cost of decommissioning, rather than the UK taxpayer.

This article focuses on the legislative framework that underpins offshore decommissioning activity in the UKCS, the protective measures that the government has introduced to minimise risk to the taxpayer and, finally, whether any useful comparisons can be drawn with the nuclear industry, which is also grappling with many of the decommissioning issues currently facing the oil and gas sector.

FUNDAMENTALS OF THE REGULATORY REGIME

The current UK regulatory regime applicable to decommissioning of UKCS oil and gas installations stems from international legislation. This legislation has evolved significantly since the Geneva Convention on the Continental Shelf (1958) sought to formalise a uniform decommissioning standard based on entire removal of all abandoned or disused structures.

Current international standards are incorporated in the OSPAR Convention and Decision 98/3, which came into force on 9 February 1999 and prohibits the ‘dumping, and leaving wholly or partly in place of disused offshore installations within the maritime area’. Unlike the Geneva Convention, this prohibition is subject to certain express derogations (as discussed below), but is widely regarded as a significant marker of best practice notwithstanding the fact that it only strictly applies to coastal states bordering the north east Atlantic.

Petroleum Act 1998: Part IV

The UK government has embodied (and expanded upon) Decision 98/3 via the enactment of the Petroleum Act 1998 (Part IV), as supported by the Decommissioning Guidance Notes published by DECC.

Allocation of Part IV decommissioning liabilities (and subsequent enforcement) is triggered by the secretary of state for energy and climate change (SoS) serving a notice under s29 requiring recipients to submit a costed decommissioning programme in respect of identified installation(s). Each decommissioning programme is subject to SoS approval, which may be conditional, later withdrawn or subject to a future requirement for the programme to be amended or updated.

A s29 notice can be issued on a wide range of persons including i) the licensee(s); ii) the company responsible for managing the installation (eg the operator); iii) the installation owner(s); iv) the parties to the Joint Operating Agreement (JOA, which governs the practical, day-to-day management of an oil field and its associated installations) (or similar); and/or v) a company which is associated with any of the foregoing (eg a parent company or other affiliates) (Part IV, s30(2)).

Part IV does not fetter the SoS with regard to which category of person it opts to hold responsible in the first instance. However, DECC has stated that a s29 notice will initially be served on all parties falling within categories i) to iv). Service on category v) parties is therefore typically reserved for those instances where:

‘It is judged that satisfactory arrangements, including financial, have not or will not be made to ensure a satisfactory decommissioning programme is carried out.’

An important caveat on the operation of s29 applies to the SoS’s ability to retrospectively apply liability to parties holding a historic interest in the installation. In principle, a s29 notice cannot be served on a party that disposed of its interest prior to service of the first s29 notice for the relevant installation. However, following the date of first service, the SoS can issue further s29 notices (at any time) on any party whom it could have served a notice on after this trigger date (regardless of whether their interest at the date of service is current or historic). Consequently, a party bearing an interest that continued or arose after the trigger date may never escape statutory responsibility for decommissioning.

In order to maximise reliance on this retrospective arrangement and minimise financial risk to the taxpayer, the SoS typically elects to serve a s29 notice following approval of a field development plan (ie concurrent with construction of the installation), thus triggering the s29 liability chain at the earliest opportunity. Note, however, that the time between s29 service and the date on which the SoS requires actual submission of the decommissioning plan may be considerable.

Part IV acts to infer joint and several liability on all recipients of a s29 notice, regardless of the size and contemporaneous nature of their interest in the installation. A party that has disposed of its interest cannot be held liable for any new installations in the surrounding field since disposal, but will be liable for any upgrades or new equipment added to installation(s) to which the s29 notice relates.

Other protective measures

In addition to early triggering of the s29 liability chain, Part IV provides the SoS with a number of other measures to minimise the financial risk of decommissioning to the UK taxpayer. Such measures include:

  1. Provision of financial security. Section 38(2) permits the SoS to require a s29 recipient(s) to provide adequate financial information to enable determination of their capability to meet their decommissioning liabilities. If the SoS determines that a party is financially incapable, they may (in consultation with the Treasury) invoke s38(4) to require that party to take appropriate mitigating actions including, if required, the provision of suitable financial security (which excludes any form of parent company guarantee); and
  2. Ring-fencing of decommissioning funds. Once a decommissioning programme has been approved, s38A acts to require any security provided for decommissioning liabilities to be effectively ring-fenced. In practice, this means that the ring-fenced security can only be applied towards discharge of decommissioning liabilities and is protected against the general body of creditors in the event of insolvency of the security provider. S38A applies irrespective of whether the security was provided before or after programme approval.
Escaping liability: is it possible?

Within the last decade, there has been a significant shift in ownership of oil and gas assets within the UKCS as smaller companies enter the market to ‘sweat’ those fields nearing depletion. Increased consideration has therefore been given to the extent to which an exiting party should retain decommissioning liabilities while ensuring that new entrants are not deterred by the government’s ability to call for the provision of decommissioning security. Such security requirements could have a crippling effect on a party’s balance sheet, thus severely restricting their ability to seek third-party funding.

From a statutory perspective, once a decommissioning obligation has been fixed via issue of a s29 notice, it will remain ‘live’ until such time as the SoS issues a notice of withdrawal pursuant to s31(5) (Part IV). A company that disposes of its interest may apply to the SoS for a s29 withdrawal – this is granted at the SoS’s discretion and any final decision will be based on an assessment of the financial risk of all remaining s29 participants.

Notwithstanding any s29 withdrawal, s34 (Part IV) entitles the SoS to require a previous s29 recipient (or a party that could have been served with a s29 notice) to implement an approved decommissioning programme in certain circumstances. DECC has clearly indicated that this power will only be invoked as a last resort, being where any existing security arrangements and the financial strength of current s29 holders is insufficient to meet outstanding decommissioning liabilities.

As a result of the power that Part IV imparts on the SoS, UKCS participants now recognise that their statutory decommissioning liability could potentially be significantly in excess of the value of their remaining participating interest (if any). Participants therefore typically seek to contractually allocate liability in a manner that more closely aligns with the ownership history. Any such contractual allocation was previously addressed, albeit in varying degrees of detail, in the JOA. However, current practice tends to favour entry into a separate decommissioning cost provisions deed (DCPD) (previously referred to as a decommissioning security agreement).

Following industry-wide consultation, a template DCPD was published in 2007 (available on Oil and Gas UK’s website, www.oilandgasuk.co.uk) as a means of harmonising the approach adopted by the ever-increasing number of UKCS participants (noting that amendments will be needed according to the specific circumstances). The DCPD applies to an entire field (as opposed to separate installations) and governs the terms for (amongst other matters) the:

  1. allocation of decommissioning costs;
  2. provision of adequate security for a party’s decommissioning liabilities and the manner in which this security is held on trust; and
  3. preparation, approval and submission of a decommissioning programme to the SoS.

Timings for the provision of security under the DCPD are strictly linked to the extent of remaining, exploitable field reserves. Consequently, the requirement to provide security will be triggered when production levels begin to decline, thus ensuring that the decommissioning fund is fully financed when production finally ceases.

The DCPD identifies three different tiers of decommissioning participant based on the form and scope of their interest. Fundamentally, however, it ensures that any party who can be held statutorily responsible for decommissioning can rely on the DCPD’s financial provisions and security arrangements irrespective of whether they are a security provider. This structure provides contractual comfort in the event that a party is required by the SoS to fund a level of decommissioning liability that is over and above their proportionate share.

In addition to the potentially wide scope of statutory liability and its impact on current security arrangements, UKCS decommissioning participants also need to give due regard to a wide range of practical considerations and other legislative requirements. It is not possible for us to address every consideration in this article, however, we seek to summarise below those which are likely to be of wider relevance.

IMPLEMENTATION OF A DECOMMISSIONING PROGRAMME

Full or partial removal: potential derogations from Decision 98/3

Decision 98/3 does provide certain derogations from the fundamental principle that decommissioning should result in full removal of the installation. Such derogations apply to concrete structures (which may be left wholly or partly in place or disposed of at sea) and the footing of large steel jackets weighing more than 10,000 tonnes (which may be left in situ). Note, a derogation is not automatically available and is subject to a detailed assessment and consultation procedure to decide if there are significant reasons to allow the installation (or part thereof) to remain in situ. Furthermore, no derogation is available to steel installations constructed after 9 February 1999 (being the date that Decision 98/3 came into force, thus placing parties on notice of the adopted position).

Other legislative considerations
The environment

While Part IV acts to fix the scope of any decommissioning programme, careful consideration also needs to be given to a suite of other legislation that will impact the programme’s implementation, including the handling of any resulting waste. Such legislation includes:

  1. The Marine and Coastal Access Act 2009 and The Marine (Scotland) Act 2010. This legislation replaces a significant proportion of Part II of the Food and Environment Protection Act, and introduces an enhanced system of marine management that seeks to protect and encourage development of the UK marine ecosystem. As part of this, non-exempt activities within UK coastal waters will require a marine licence and this extends to decommissioning and abandonment operations. The licensor will typically be DECC, however, there are certain circumstances in which licensing may fall within the governance of a devolved authority.
  2. The Offshore Chemical Regulations 2002. These regulations implement OSPAR Decision 2000/2 and require the operator of an installation to apply to DECC for a licence in the event that decommissioning activities will result in the use or discharge of chemicals.
  3. The Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation Convention) Regulations 1998. These regulations require the operator of an offshore installation to submit to DECC an Oil Pollution Emergency Plan (OPEP), which outlines the measures that will be taken in the event of a hydrocarbon spill. With respect to decommissioning, a separate OPEP may be submitted or, alternatively, it may be wrapped up into the wider field OPEP.
  4. The Offshore Petroleum Activities (Conservation of Habitats) Regulations 2001. These regulations require an appropriate assessment and, in some cases, mitigating actions to be undertaken in the event that DECC (in consultation with various independent agencies) determines that the decommissioning programme poses a risk of significant harm to those habitats and species covered by the regulations.
  5. The Convention on International Trade in Endangered Species (CITIES) 1973. This is of relevance if an installation harbours significant numbers of either a cold water coral (lophelia pertusa) or a reef-forming worm (sabellaria spinulosa). In such circumstances, the corresponding Environmental Impact Assessment (EIA) should assess the potential impact of the decommissioning activities on such species and, furthermore, CITIES may require certain mitigating actions to be undertaken before the decommissioned installation can be returned to shore; and
  6. The Offshore Petroleum Activities (Oil Pollution Prevention and Control Regulations) 2005. These regulations prohibit a party from discharging oil from an offshore installation into the sea without a permit. DECC will require the decommissioning programme to address how any oil recovered during decommissioning will be dealt with and, where necessary, for a permit to be secured for any discharge or reinjection of oil.
Environmental Impact Assessment

Although not a statutory requirement, DECC’s Decommissioning Guidance Notes clearly indicate that an EIA should be included in all decommissioning programmes. This EIA will need to address the impact of the proposed decommissioning activities on the environment and, if any installation is being left in situ pursuant to an OSPAR derogation, it should address any long-term environmental impact of the resident structure and undertake a comparative assessment of any alternative disposal options.

Furthermore, if a recent environmental survey has not been undertaken around the relevant installation, it may be necessary to commission a baseline survey prior to implementation of a decommissioning programme. Further surveys will need to be undertaken after completion of decommissioning to enable remaining debris and contaminant levels to be assessed. DECC typically seeks to impose specific requirements regarding the scope, form and reporting of such surveys, therefore early contact should be made with DECC to ensure any such requirements are taken into account from the outset.

Treatment and handling of waste

Each decommissioning programme must provide a detailed assessment, identification, quantification and strategy for the recovery and/or disposal of any waste generated (or likely to be generated) by the decommissioning activities (including all parts of the relevant installation). Such waste may include metals, oils, glass, plastic, hydrocarbon sludge, production chemicals, drilling chemicals, asbestos, polychlorinated biphenyls, radioactive materials and algae. Consequently, a comprehensive strategy will need to be designed to ensure efficient removal, sorting and separating of all waste while enabling any recycling opportunities to be maximised and all health, safety and environmental risks to be minimised.

Once ashore, each decommissioning waste stream is required to be managed, transported, treated and disposed of according to legislation, the applicability of which will depend on the physio-chemical identity and nature (radioactive, hazardous, inert etc) of the waste and its subsequent classification. Such legislation includes:

  1. The Transfrontier Shipment of Waste Regulations 2007 and the Basel and Bamako Conventions. These control exports/imports across international boundaries and are of relevance if a party is intending to move certain waste from the UKCS to another member state or non-member state. Waste from commercial operations of oil platforms may be exempt from the regulations, but waste arising from the decommissioning of installations is not. Consequently, written authorisation of the competent authorities is required prior to any transboundary movement of decommissioning waste.
  2. s34(1) Environmental Protection Act 1990. This effectively makes every ‘person’ within the decommissioning activity chain responsible for deciding whether or not a substance or object is ‘waste’ and imparts a duty of care on such persons to take all such measures as are reasonable in the circumstances to ensure waste is managed and treated appropriately. Such waste management and treatment includes ensuring adequate transportation by a licensed waste carrier and treatment and/or disposal at an appropriately permitted facility. The permitting regime for waste management/handling in England and Wales differs from that in Scotland, with the former adopting ‘environmental permits’ under the Environmental Permitting (England and Wales) Regulations 2010 and the latter still applying the dual system of waste management licences and pollution, prevention and control (PPC) permits under the Waste Management Licensing (Scotland) Regulations 2011 and the Pollution Prevention and Control (Scotland) Regulations 2000 respectively. Irrespective of which regime applies, it is important to ensure that each contractor that is receiving decommissioning waste is licensed to do so.
  3. Radioactive Substances Act 1993 and the Transfrontier Shipment of Radioactive Waste and Spent Fuel Regulations 2008. This legislation imparts additional requirements for the handling and disposal of radioactive waste.
  4. Carriage of Dangerous Goods and Use of Transportable Pressure Equipment Regulations 2009. These are highly prescriptive regulations governing the carriage of dangerous goods by road, which should be considered if the decommissioning waste strategy proposes any onward transportation of waste or recycled material.

LESSONS FROM THE NUCLEAR INDUSTRY?

For any organisation undertaking an offshore decommissioning project, ensuring that the associated legal, financial, environmental, safety and reputational risks are all managed appropriately will be a huge undertaking, requiring painstaking planning and preparation. The contracting structures used to procure the necessary equipment, skills and experience will also vary and the supply chain will therefore need to be innovative and flexible to meet the differing demands and requirements of those ultimately responsible for decommissioning offshore installations.

The approach taken by parties to overcome these challenges will inevitably vary according to the risk appetite, experience and internal resources of the participants concerned. Furthermore, many responsible parties are yet to go through the decommissioning process for the first time, while experienced parties may have to deal with a revised regulatory backdrop as the government responds to the increased level of UKCS decommissioning activity.

The UK nuclear decommissioning sector is arguably more established and has significant experience in the development, costing, documentation and implementation of decommissioning programmes. Consequently, they have addressed and successfully overcome many of the issues relating to practical techniques, waste transportation, allocation of risk and reward across the decommissioning supply chain, the contractual matrix, cost uncertainty, charging structures etc that UKCS participants are currently facing. Recent industry discussions have considered whether a uniform approach to these issues can be identified and incorporated into a standard form UKCS decommissioning agreement (and ancillary documents). Irrespective of whether this approach is adopted, it seems clear that the nuclear industry’s experience could be usefully applied in the development of workable solutions.

By James Phillips, senior associate, and Rosie Lord, associate, Burges Salmon LLP.

E-mail: james.phillips@burges-salmon.com; rosie.lord@burges-salmon.com.

Decommissioning tax relief certainty

The recent budget, which outlined the government’s intention to guarantee the level of tax relief for decommissioning costs, was a very welcome relief for many operators. With the government’s contractual solution to guaranteeing this relief unlikely to be available until summer 2013 at the earliest, the industry will be keen to monitor any potential impact of Scottish independence with the debate as to which government should bear the cost of decommissioning in the event of independence being far from resolved.