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Article   |   Julie Copland   |   25.03.2021

Decommissioning: who's liable?...

Following the recent round of acquisition of some North Sea assets, the question of who bears the liability for the cost of decommissioning has come into the spot light.

These latest acquisition deals have included some detail on decommissioning cost liability which has long been an issue critical in the sale/purchase transaction. One of the earlier large scale deals such as the sale of some of Shells UK assets outlined the residual decommissioning liabilities which would remain with the original owner even after the sale. A press release issued by EnQuest for its 25% acquisition of BP's Magnus oil field stated that BP had retained the decommissioning liability in respect of the existing wells and infrastructure for the Transaction Assets. However EnQuest will pay BP additional deferred consideration, so will still have a stake in the decommissioning costs.

Assessing the cost of decommissioning is a challenge as these estimates are heavily influenced by the status of the market, supply chain capacity, future technologies, possible changes in regulation and other inflationary pressures. This is illustrated by reports showing projections for decommissioning costs in the North Sea having increased over the last few years.

The issue of who is liable is not in dispute. These responsibilities are clearly set out in the legislation. However there has been a significant debate surrounding who may contribute to paying these costs. Alterations in UK taxation rules have in effect (or in fact) provided for a public subsidy of some of the North Sea decommissioning costs.

Under the Petroleum Act UK asset owners, operators and their partners carry the cost burden. Currently the UK government offers tax relief for some decommissioning costs. This is an issue with the potential to arouse some controversy. Some may argue that having enjoyed the economic benefits of the oil production, the cost for decommissioning and restoring the marine environment should be covered in full by the operators.

There is a risk that some companies may not be able to fully fund the decommissioning programs for which they are responsible and so some regimes are mandating the setting aside of decommissioning funds. The Bureau of Ocean Energy Management (BOEM) updated its financial assurance and risk management requirements to ensure that the U.S. government and U.S. taxpayers should never have to pay for decommissioning or removal of offshore facilities. BOEM's Notice to Lessees and Operators (NTL) forces companies to post supplemental surety bonds. In the UK, the Decommissioning Securities Agreement requires operators to clearly allocate the funds necessary to decommission their assets.

However, liability does not end when the physical decommissioning project is complete. Future risk liability in the short and long term post decommissioning must also be considered. What course of action will be required should a subsea pipeline or an abandoned well leak?

In the UK, guidance on the regulations clearly states that an asset owner is liable in perpetuity for any residue associated with their decommissioned assets. This raises some complex and interesting questions. What happens if the operator ceases to exist by the time an environmental or safety issue occurs? Just how recoverable these costs will be is a relative unknown with few past examples. Is there an opportunity for an insurance policy or facility which would stand as an insurer of last resort? Is the idea of 'in perpetuity' calculable in a risk context? This is not an easy risk to assess for any provider of insurance.

What is true, is that a significant effort must be made across the industry to ensure that maximum efficiencies are realised, decommissioning costs are kept to a minimum and the processes are put in place to cover any long-term potential risk. This is an obligation for an industry that has benefited from years of oil production.

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