Relinquishing an oil and gas licence may not be without its costs
As low commodity prices continue, the risk increases that exploration and production companies without access to funding will struggle to meet their obligations to plug and abandon any suspended wells one month before a licence or acreage is relinquished, as required under the Petroleum Act 1998 (the "Act"). We should expect to see the Secretary of State start to exercise its rights under the Act to take 'pre-emptive action' against those licensees whom it perceives as being at risk of defaulting on its abandonment obligations.
Failure to plug and abandon a well will be considered a breach and a non-observance of the terms and conditions of the licence, which can result in revocation of the Licence.
Interestingly, the Secretary of State has the power to require a person, who has drilled a well, to provide financial information or copies of documents. Upon reviewing the requested information, if the Secretary of State is not satisfied that the person will be capable of plugging and abandoning the well, it can issue a notice specifying that the person carry out certain actions. While the Act does not specify types of actions that may be required, we believe that it would be most likely that further security would need to be provided to cover the estimated costs of plugging and abandoning the well.
It is an offence if you fail to comply with the Secretary of State's notice; unless it can be proved that due diligence was exercised to avoid that failure. A person can be liable to a fine on summary conviction or imprisonment and/or a fine on conviction on indictment. If the failure to comply with the notice was committed with the consent or neglect of a director, manager or officer of that company, that person may also be guilty.
The Secretary of State has broad powers to request a Licensee's financial information in relation to the obligation to plug and abandon wells. With companies struggling to make ends meet due to the plunging oil price, we expect that the Secretary of State will begin to use this power increasingly. Companies should be aware that further actions may be required as a result of disclosure of their or joint venture partners' financial position and failure to carry out such actions is an offence.