This article was written by Partner Adrian Elliot and Senior Associate Paul McQuillan in the Energy Group at law firm Pinsent Masons and appeared in The Offshore Engineer
.
The lifetime of many assets may have been extended by factors including the price of oil, new technology, and trading in mature assets but the experiences and lessons from projects which have been carried out is now starting to filter through. In fact one of the Department of Trade and Industry's (DTI) key objectives in relation to the decommissioning of North Sea oil and gas installations is to ensure decisions on proposed decommissioning solutions are based on full information and take proper account of experiences and lessons learned. The result is that both operators and the DTI are re-examining their approaches to the decision making process in the context of the applicable regulatory requirements.
The Process
The regulatory process is triggered by licensees being fixed with the obligation to develop and ultimately implement an approved decommissioning programme. The trigger is a letter from the DTI advising all parties to the joint operating agreement that the Secretary of State is minded to issue a notice under Section 29 of the Petroleum Act 1998. The Government is of course concerned to ensure that licensees are able to meet the cost of decommissioning, and that any trading in assets does not result in new owners, being unable to meet the associated cost.
With this in mind, the Act provides that once a notice is served, the licensees become jointly and severally liable for developing and implementing the decommissioning programme and the associated cost. In addition, the transfer of licenses is carefully managed so that release from the Section 29 obligation is given only when the cost of decommissioning is financially secured.
The steps for preparing the decommissioning programme are:
- the operator submits a draft programme setting out the decommissioning methodologies, the time and cost
- if the draft programme meets the requirements set out in the DTI's guidance notes it will be circulated to various consultees including DEFRA, the Scottish Environmental Protection Agency and the Scottish Executive (if appropriate), the HSE and its own technical experts.
- consultees will provide feedback to the operator, who will then provide a further draft
- a further round of consultation takes place to ensure the consultees’ concerns have been met
- a revised draft programme is then sent out to public consultation
- the operator revamps the programme taking due account of the consultation process to arrive at what, with a following wind, will be the final programme
Experience Filtering Through
It has become clear that the consultation phase is proving cumbersome and there is an element of duplication of effort. The DTI is currently considering whether the consultation process can be streamlined into a single stage.
A further area of potential change stems from the DTI’s tendency, when considering proposed decommissioning solutions, to take account of criteria/aspects other than those published in its Guidelines. These might include any history of interaction between fishing gear and pipelines, and information on previous well abandonment. This adds to the complexity and uncertainty of outcome. The DTI is currently consulting with the industry to formulate a more complete and useable matrix of criteria against which it will consider decommissioning solutions. This would aid transparency and ultimately make the process more efficient.
Access to parts of offshore installations can be difficult, sometimes impossible and the behaviour of 25 year old structures and materials can be difficult to predict. Proposed decommissioning methodologies and specific activities planned may prove impossible to implement in practice. For example, a single lift of a sub-sea template may prove impossible without blasting off excess grout. In such circumstances the operator would be required to apply to modify the approved decommissioning programme. This would involve consulting interested parties and the associated uncertainties of outcome. Such changes can also throw up associated difficulties in the disposal of waste, in particular where a need for trans-frontier shipment arises (especially low specific activity material).
Experience suggests that the solution here is to include contingency activities in the initial programme which will in effect become approved activities giving the operator greater flexibility to deal with programme changes. A final area where experience is driving a rethink relates to financial security. Although the government seeks to encourage free trade in mature assets it must balance this with the need to avoid exposing the taxpayer to the cost of default of an operator in meeting decommissioning obligations.
Historically, when the DTI has been asked to consent to the transfer of licenses on the sale of an asset, so long as the remaining licensees were financially strong enough to meet the anticipated cost of decommissioning, it has recommended the withdrawal of the Section 29 liability on the outgoing company.
In other cases withdrawal of the Section 29 notice has been refused unless the remaining parties and the new entrant enter into a financial security agreement relating to the decommissioning costs. The cost of such security (whether the security is in the form of a bank letter of credit, insurance or a trust fund) will be high given the joint and several nature of the liability. The extent of the security will of course be dependant on the planned cost of the decommissioning works. It has been suggested that there is a tendency for the DTI to take a robust approach to the anticipated cost here, which has had the effect of increasing the security required.
The upshot is that the security requirement and its timing (i.e. when a transfer of assets is proposed) may well prove prohibitive for smaller companies and stifle the benefit to the industry of trading in such assets.
The DTI has indicated that it is reviewing the operation of financial security arrangements. Experience and feedback from complete projects is working through, which hopefully will make for a clearer regulatory framework with certainty of outcome and ultimately to a more practical and workable decommissioning process. Once these regulatory matters have been resolved, the interesting challenge of procuring the decommissioning works will begin in earnest. The key to the success of this stage is the allocation of risks as between those involved, some of which are unique to the decommissioning process. It is this process which will drive the choice of procurement solution, but then this is a challenge and a separate subject in its own right.
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