Decommissioning Update: Conference on the future of UKCS Exploration & Production

On 10 and 11 February, Aberdeen played host to a conference on the Future of UKCS Exploration & Production. Experts from across the industry discussed “what happens next”, tackling not only the legal, commercial and technical framework for extending field life and decommissioning, but also tabling interesting ideas on the alternative uses to which current North Sea oil and gas infrastructure could be put in the future (wind farms and water transportation to name but a few).

The main focus of the conference was on decommissioning, with panel discussions on the regulatory framework and presentations exploring the latest decommissioning technologies. As the North oil and gas industry matures, decommissioning is becoming a more urgent issue with a predicted 80-100 installations being ready for decommissioning between 2005 and 2009. Even across the various North Sea sectors, decommissioning policies vary: in Norway, the government underwrites part of the costs of decommissioning in relation to tax contributions. This isn’t currently the policy in the UK, although there is always room for change in the future.

However, the legal framework is becoming clearer and the oil companies are investing a great deal of time, effort and money in putting in place their decommissioning programmes. So, briefly, what will be required of the oil companies when the time comes to decommission their installations and pipelines?

Liability for decommissioning rests with those who have been served a “Section 29 notice” under the Petroleum Act 1998 (the “Act”). Recipients of a Section 29 notice will be held jointly and severally liable for performance of the Decommissioning Programme. This means that each licensee in effect has liability for the total cost of the decommissioning (although between themselves they use the JOA to split this cost). In cases where part of the structure remains in place, liability will remain with those who were the owners at the time of carrying out the Decommissioning Programme. Where ownership of a field transfers prior to decommissioning, the seller will usually seek to be removed from the relevant Section 29 Notice. However, removal from a notice is at the discretion of the Secretary of State and may not always be granted, particularly where the new and remaining owners may not be able to meet the entire costs of decommissioning an asset. Moreover, under section 34 of the Act, parties who have had their notice withdrawn may have it re-imposed if the Secretary of State feels at any time that the primary parties have inadequate funding. In short, withdrawal of a Section 29 Notice is a comfort, but by no means a unilateral release.

The OSPAR Decision (98/3) came into force in the UK on 9 February 1999 and works on the initial presumption that installations will be removed completely. Derogations, or exceptions, are available on a case-by-case basis, but these will generally apply only to ‘footings’, steel jackets weighing more than 10,000 tonnes and concrete installations. In short, where it is technically extremely difficult to carry out complete removal.

The OSPAR decision does not apply to pipelines, which are, instead, regulated under the Act. Decisions regarding the removal of pipelines are taken on a case-by-case basis taking account of all significant and adverse effects on the marine environment. Generally speaking, it should be possible to leave in place pipelines which are adequately entrenched or buried (or likely to become so): removal is more probable in the case of pipelines with a diameter less than 12 inches or where they are not entrenched or buried.

The OSPAR committee met in 2003, and agreed to delay a decision on whether to keep or remove the derogations until 2008. In the meantime they have agreed a timetable for assessing various environmental issues.

There are two key commercial drivers in assessing risk of liability for decommissioning. These are tax and security for decommissioning costs. At present companies can set off certain decommissioning costs against PRT already paid: the industry hopes that these rights will remain in the future. With each licensee effectively having the legal liability for one hundred per cent of the cost of decommissioning and that liability remaining for ever, security for there costs is crucial.

Nowhere are these issues more apparent than in the trading of assets, especially producing assets. Both buyers and sellers, and other licensees in the joint venture all have a keen interest to ensure that they know who is going to pick up the tab for decommissioning in the future.

For further information please contact Bob Palmer at [email protected]