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Decommissioning oil and gas installations: A UK perspective

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Fieldfisher's Head of Oil and Gas Paul Stockley looks at the UK legal position on decommissioning and how the industry is tackling its obligations.

 
Decommissioning has become a normal part of doing business in the UK North Sea, alongside exploration, new field development and in-field development.

According to Oil and Gas UK (OGUK), the trade association for the UK's offshore oil and gas industry, spending on decommissioning currently amounts to around £1.5 billion per annum, meaning that decommissioning in itself is big business for the UK oil and gas sector.

The principle of UK legislation in this area, as in most jurisdictions, is that all oil and gas infrastructure installed on the UKCS must be removed at the end of its life – subject to some limited derogations.

It is worth noting, however, that not all pipelines have to be removed; with approval, these relatively unobtrusive pieces of supporting sub-sea infrastructure are often left in situ, and are either trenched or covered with rock.

The primary UK act governing decommissioning is the Petroleum Act 1998 (Part IV of which deals with abandonment), as amended by the Energy Act 2008 and Energy Act 2016.

The competent UK authority delegated to deal with decommissioning is the Department for Business, Energy and Industrial Strategy (BEIS) – specifically, the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED), a specialist agency of BEIS.

The Oil and Gas Authority (OGA), an independent regulator established in 2016, also oversees decommissioning through its role of assessing decommissioning programmes on the basis of costs, future alternative use of facilities and collaboration across the industry.

Section 29 Notices

Application of the Petroleum Act is governed by Section 29 of the legislation, which gives the Secretary of State power to serve a Section 29 Notice, requiring a person to submit a decommissioning programme in respect of a specific installation.

Parties served with a Section 29 Notice are jointly and severally liable for carrying out decommissioning. Normally, separate notices are issued for installations and pipelines.

Persons who may be served with a Section 29 Notice include: operators, licensees, JOA parties, pipeline owners, installation owners (e.g. FPSO owners, but not a person with a security interest under a loan, e.g. a bank) and, crucially, any entity associated with any of the above.

BEIS' policy is to serve a Section 29 Notice at the time of field development approval or pipeline works authorisation.

If a party ceases to be a licensee – for example, on the sale of their interests – it is possible to seek the withdrawal of a Section 29 Notice. This is evaluated on a case-by-case basis, having regard to the financial strength of the remaining parties and the security in place for decommissioning.

With the increased regulatory oversight of decommissioning, however, it has become more difficult to get a Section 29 Notice withdrawn.

If a party succeeds in being released from a Section 29 Notice, Section 34 of the Petroleum Act extends the right to serve a Section 29 Notice to any person who, at any time since the issue of the first Section 29 Notice, was able to have a Section 29 Notice served on them.

This is the clawback power of BEIS to pursue previous operators, licensees and owners (and their associated entities) which ensures that such parties have contingent liability in perpetuity under UK law.

Section 38 of the Petroleum Act permits Secretary of State to require financial information from Section 29 recipients. If the Secretary of State is concerned about the financial capacity of a party to secure its liabilities, it can seek financial security for decommissioning obligations.

A statutory decommissioning programme, once approved, obliges Section 29 parties to carry out this programme on a joint and several basis.

International context

The UK's decommissioning liability is the most detailed and extensive of all major North Sea oil and gas participants.

Norway, for example, has a similar concept of contingent liability in that sellers retain secondary liability if their buyers default, but does not have such an extensive liability regime as that resulting from Section 29. The Netherlands' regime is less encompassing again, in that past owners are released from decommissioning liability.

The UK's legal position is set within the context of a number of international conventions relating to decommissioning, to which the UK government is a signatory.

Of particular note are:
   
  • The Convention for the Protection of the Marine Environment of the North-East Atlantic 1992 (OSPAR Convention) – OSPAR Decision 98/3 on the Disposal of Disused Offshore Installations allows derogations from the ban on dumping, and leaving wholly or partly in place, disused offshore installations. The purpose of this is to recognise difficulties of fully removing large steel jacket footings and concrete installations. Applications for derogations are assessed on a case-by-case basis and subject to certain conditions. For example, top sides of installations always have to be completely removed, as do steel structures of less than 10,000 tonnes. For steel structures over 10,000 tonnes and concrete structures, there is a facility for potential derogation. Any installation put in place after February 1999 (the date when OSPAR Decision 98/3 came into effect) must also be completely removed.
 
  • The Waste Framework Directive – While there is currently no specific EU framework for decommissioning, Directive 2008/98/EC reflects the OSPAR principles.
Decommissioning security

Oil and gas companies will generally make provision in their accounts for decommissioning, however there is currently no legal requirement to set aside dedicated funds for this purpose.

It is also worth noting that tax relief is only available when decommissioning is carried out, so there is no tax incentive to set aside funds at an early stage.

However, the liability/contingent liability principles established by the Petroleum Act mean it is very important to set aside security for decommissioning – especially for JV parties and sellers of assets.

The Secretary of State is particularly alive to checking that liable parties are financially capable of meeting their decommissioning obligations as the primary purpose of the regime is to ensure infrastructure is removed without the taxpayer picking up the bill.

This objective led to the development of an industry template – the Decommissioning Security Agreement – in 2009 (the original model agreement has since been revised in line with industry developments).

The principal rationale for this template was to avoid accumulating multiple layers of security, for example as between JV parties and buyers/sellers of assets. The template is also designed to level the security playing field, to ensure all stakeholders provide security on a consistent basis.

As a consequence, it is common to see decommissioning security agreements in JV arrangements on a field-wide security basis, as well as on almost every transaction in some form, whether on a bilateral or field-wide basis.

Energy transition

The energy transition, where businesses and economies attempt to reduce their carbon footprint by switching to low/no-carbon forms of energy or by becoming more efficient about their energy consumption, is likely to have an impact on decommissioning.

In the UK, the shift is being driven by government's legally binding 2019 commitment to achieve 'Net Zero' greenhouse gas emissions by 2050.

In May 2020, the OGA unveiled its strategy for supporting Net Zero, partly through proposed changes to 'Supporting Obligations' relating to work undertaken around decommissioning. The OGA has consulted the industry on its proposals and next steps on the strategy are now awaited.

It is anticipated that efforts to meet the Net Zero target will enhance the possibility of re-using/re-purposing oil and gas infrastructure for uses such as carbon capture and storage (CCS), hydrogen or gas-to-wire projects – although there may be limited infrastructure suitable for these purposes.

There are also likely to be regulatory challenges around the transition of facilities and decommissioning risk, so efforts will be need to be made to ensure there is a suitable environment to attract future investors in the UK oil and gas sector.

The impact of Covid-19

The impact of the Covid-19 pandemic on UK decommissioning activity is yet to become clear.

Low oil prices could accelerate decommissioning, with the growing number of sub-economic fields and a lower service cost environment prompting the dismantling of redundant infrastructure.

Equally, the crisis may cause some decommissioning programmes to be deferred, even though many fields could cease production earlier than planned, as companies try to cut spending at a time of cash flow and credit constraints.

Either way, decisions on decommissioning may have a domino effect on the North Sea's many interconnected hubs, as decommissioning of one piece of infrastructure can have a knock on effect on other fields.

The future of decommissioning in the UK

In 2016, the OGA set a target to reduce decommissioning costs by 35% by 2022 – a goal the industry is on its way to meeting as of 2020.

This target was established in recognition of the need for decommissioning cost control and cost certainty. In the 2000s, before the industry had developed much experience in this area, decommissioning costs were regularly coming in around 80% above budget, which was clearly unsustainable for the sector.

In 2019, the OGA estimated a run rate of £1.5 billion per annum of expenditure on decommissioning over the next decade. While this is a significant sum, it currently only represents around 10% of overall annual UK expenditure on oil and gas, indicating that investment in new infrastructure still far outweighs that earmarked for decommissioning.

Wood Mackenzie estimates that US$85 billion will be spent globally on decommissioning between 2019 and 2028[1], with the UK accounting for 28% of this figure, the largest share of any country in the world. The UK's disproportionately large share of this cost primarily reflects the maturity of the North Sea basin, and impact of OSPAR on decommissioning obligations.

While the UK indisputably has one of the most onerous decommissioning regimes in the world, in terms of regulating liability and securing that liability, there could be cross-learning opportunities for other jurisdictions as they develop their own regulatory regimes for decommissioning as well as business opportunities arising from the experience of actual decommissioning activity to date.

For instance, the UK could develop as a global hub and centre of excellence for decommissioning and has the benefit of first mover advantage in developing market-leading expertise. The UK government, via BEIS, has indicated that is sees potential for future export earnings from having a highly skilled decommissioning workforce.

On the flipside, there are material risks arising from the UK's regulatory burden on oil and gas companies.

The regulatory burden and requirement to deal with multiple agencies on decommissioning is a potential deterrent to some investors, while decommissioning risk has in the past been a block on M&A activity.

However, the UK government has done a lot in recent years to combat this (e.g. the introduction of Decommissioning Relief Deeds and transferable tax history) and to help stimulate M&A activity.

While it used to be the case that sellers had a 'clean break' in M&A deals (i.e., the seller could walk away without any contractual liability for decommissioning, although they retained statutory liability), today most deals involve some form of decommissioning retention by sellers.

It remains to be seen how the UK oil and gas sector evolves in response to various pressures and trends affecting the industry, and how these in turn impact decommissioning.
 
UK decommissioning facts and figures
 
  • 400+ installations
  • 25,400km of pipelines (over 40,000km including cables and umbilicals)
  • 4000+ well bores
  • 15% of infrastructure decommissioned to date
  • In 2019, the cost estimate for the UK's overall decommissioning bill was £51 billion
  • OGA set target in 2016 to reduce costs by 35% by 2022
  • Run rate of £1.5 billion per annum of expenditure on decommissioning forecast over the next decade (representing around 10% of overall annual UK expenditure on oil and gas)
  • Wood Mackenzie estimates US$85 billion will be spent globally on decommissioning over the next 10 years – the UK will account for 28% of this expenditure.
Source: OGUK/Wood Mackenzie
 
Key decommissioning issues for policymakers
 
  • Compliance with domestic laws and international conventions
  • Impact on human health and safety
  • Control of marine pollution
  • Navigational safety
  • Technical feasibility
  • Public perception – public consultations when decommissioning programmes are proposed
  • Liability should follow production benefit
  • Economic impact – cost control and insulation of state/taxpayers
  • Timing of decommissioning/potential re-use/re-purposing of infrastructure
  • Incentivising continued investment and deal activity
 
Key decommissioning issues for oil and gas companies
 
  • The OGA's Maximising Economic Recovery (MER UK) strategy since 2016 – not wanting to leave barrels in the ground
  • Alignment in time with the OGA's revised strategy around Net Zero
  • Security for decommissioning – JV parties and sellers/buyers
  • Tax relief on decommissioning spend
  • Regulatory burden – multiple agencies in the UK
  • Domino effect of interconnected infrastructure
  • Oil price and economic viability
  • Timing of decommissioning/potential re-use
  • Residual liability in perpetuity
 
This paper was authored by Paul Stockley, Head of Oil and Gas at Fieldfisher. The paper is based on a webinar hosted on 22 July 2020 by The Extractives Hub. For more information on Fieldfisher's oil and gas expertise, please contact Paul or visit the practice pages on the Fieldfisher website.
 
[1] Figure quoted in OGUK's Decommissioning Insight 2019 report (p.25)

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