With a significant number and concentration of older oil and gas facilities, decommissioning is becoming a hot topic in the Middle East. In the second of our four-part blog, our expert outlines the regulatory challenges.
Read the first part of this series, setting out the technical challenges facing operators.
The allocation of decommissioning liabilities is an area of tension between governments and oil companies in the Middle East with both eager to limit their costs. Decommissioning funds may contain significant sums of money and both oil companies and governments are loathed to tie up capital. In future, Middle Eastern governments may consider the merit of allowing such funds to be used for authorised investments with an appropriate risk profile. There may also be instances where decommissioning is underfunded, and oil companies will doubtless make the case that the governments should share the risk.
Local laws and regulations
Many of the jurisdictions in the Middle East do not have legislation that directly addresses decommissioning of oil and gas infrastructure and therefore the extent of the companies’ liabilities is unclear. While contractors must follow environmental laws and regulations, these are general in nature and do not contain any specific standards applicable to decommissioning of infrastructure, whether onshore or offshore. Accordingly, the only guidance will be provided by applicable international standards. Similarly, while contractors must follow international laws on offshore decommissioning to which the country in which they operate is a party, we are not aware of any international laws that apply to decommissioning of onshore infrastructure. The operators’ responsibilities can therefore be open-ended.
Regional and international laws
In addition to local legislation, in respect of offshore facilities, companies must be mindful of various international obligations relating to decommissioning of offshore facilities. These include the 1958 Geneva Convention on the Continental Shelf, the 1982 United Nations Convention on the Law of the Sea, the 1992 Convention for the Protection of the Marine Environment of the North East Atlantic (OSPAR Convention) and the Energy Charter Treaty.
Many jurisdictions in the Middle East are based on civil law and often include implied terms in contracts such as a duty on the parties to a contract to act in good faith. It’s difficult to assess in general whether such implied terms can be used to impose decommissioning liabilities where there are no specific contractual or legislative provisions. The contractor would argue that, where companies have specific decommissioning obligations, it is common for them to have the ability to cost-recover some or all such costs or to have the ability to offset such costs against tax liabilities. Where the companies are not specifically compensated, the fact that they ought to have known of such obligations in advance would have given them the opportunity to factor it into their original investment decision. Therefore, imposing decommissioning liabilities on such basis would be unfair.
Decommissioning liabilities in the Middle East are, to the extent addressed at all, typically dealt with by including detailed provisions in the original Host Government Granting Instrument (HGGI) and there is very little legislation dealing specifically with decommissioning liabilities. Accordingly, the contractors’ liabilities for decommissioning under older HGGIs are unclear and are usually dealt with on a case-by-case basis. In addition, except for applicable international treaties and regulations dealing with abandonment of wells, there is no often local law guidance with respect to the contractor’s specific obligations when decommissioning infrastructure.