Decommissioning: who's liable?

21 February 2017

Following the recent acquisition of some of Shell's 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. This has long been an issue which is critical in the sale/purchase transaction. The decommissioning cost associated with the assets Shell sold to Chrysaor is estimated at $3.9bn, however, Shell has retained a fixed liability of $1bn for decommissioning these assets.

A press release issued by EnQuest for its 25% acquisition of BP's Magnus oil field states BP has 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 it is an estimate which is heavily influenced by the status of the market, supply chain capacity, future technologies, possible changes in regulation and many more inflationary pressures. This is illustrated by recent reports showing projections for decommissioning costs in the North Sea having increased significantly.

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 the 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 1998, 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 never have to pay for decommissioning or removal of offshore production 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 North Sea, 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 still 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?

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.

Steve Gilbert, VP Operations

Steve has over 25 years Oil & Gas experience with major international operators and contractors including more than 10 years in Senior Management positions. He has extensive exposure and knowledge of both UK and International projects having managing engineering, operational and commercial teams along with involvement in high-level acquisitions.

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