Energy Bill 2008 – Proposals for oil and gas decommissioning

The primary focus of comment on the new Energy Bill has unsurprisingly been on the proposals for nuclear power. However, the Bill also proposes certain changes to the current offshore decommissioning regime contained in the Petroleum Act 1998 (the “Act”), in particular the closing of certain “loopholes” in terms of the persons who can be made liable and the timing of liability, as put forward in a BERR consultation paper in June 2007.

Summary of the Current Regime

• Essentially, the Secretary of State (under Part IV of the Petroleum Act 1998) may by written notice (a “Section 29 Notice”) require the submission of a costed decommissioning programme for each offshore installation and submarine pipeline. Those persons given Section 29 Notices are jointly liable to submit a programme. A wide range of persons may be served with Section 29 Notices, including operators, licensees and owners.
• If the Secretary of State approves a decommissioning programme, it is the joint and several duty of the persons who submitted it to ensure it is carried out.
• In the event of failure to submit a programme or carry it out, the Secretary of State may carry it out and recover the cost from those given Section 29 Notices or under section 34 of the Act may require a wide range of other persons (including ex-owners and their affiliates) to carry it out.

Proposed changes

The changes in the Bill are designed to ensure that liability for decommissioning oil and gas assets falls on the appropriate persons and does not fall on the taxpayer, even if the current owners of the field are insolvent. The changes are in two main areas:

• Changes are proposed to ensure that insolvency laws do not threaten funds placed in trust by the licensees to provide for the costs of decommissioning – in other words to prevent an insolvency practitioner claiming that funds expressly ring-fenced for decommissioning should instead form part of the insolvent licensee’s estate and be shared amongst all its creditors.
• It widens the range of persons who may be made subject to a duty under section 29 of the Act to submit a decommissioning programme and extends the powers of the Secretary of State to obtain relevant information on such a person’s financial affairs and to require security.

Ousting of insolvency rules

The Bill proposes to amend the Petroleum Act to provide new protection for funds set aside for the purposes of a decommissioning programme. If security for the performance of obligations under an approved decommissioning programme has been provided by a person by way of trust or other arrangements, neither the Insolvency Act 1986, the Insolvency (Northern Ireland) Order 1989, nor any other enactment or rule of law will be able to prevent or restrict the security being applied in accordance with the trust or other arrangement, or prevent or restrict their enforcement for the purposes of being so applied. No such protection exists for oil and gas decommissioning funds at present although a similar provision applies in the coal industry. While the application of this provision will need to be considered in depth, on its face this proposal represents a substantial strengthening of the position of the beneficiaries of such security arrangements. The risk of security proving to be unenforceable in an insolvency situation is one reason which has in the past been given by BERR for needing the added protection of section 34 of the Petroleum Act (enabling them to place liability on ex-owners and affiliates if the licensees are insolvent). It will be interesting to see whether this provision prompts any change in their stance.

A related proposal will empower the Secretary of State to direct a security provider to publish information about protected assets. Any failure to provide specified information may result in an application (by the Secretary of State or a creditor) to the court. The court may order the security provider to take such steps as the court directs for securing that the Secretary of State’s direction is complied with.

Tightening up of existing regime

The Bill makes a number of proposals to tighten up the existing decommissioning regime:

• earlier provision of decommissioning security – the current regime allows the Secretary of State to require security for the costs of decommissioning only after a decommissioning programme has been approved. However, this typically happens very late in the life of a field while one of the most critical stages is start-up. If a field does not come in successfully, this may result in default on decommissioning obligations as was the case recently with the Ardmore Field. The proposed revisions to sections 38 of the Act, would allow the Secretary of State to require security prior to approval of the decommissioning programme;
• Section 31(1) of the Act has been amended so that owners of installations can be made liable for decommissioning even if the operator and licensees are able to provide adequate security. This is intended, for instance, to enable the owner of an FPSO to be made liable for decommissioning in addition to the operator and licensees.
• earlier provision of financial information - the current regime allows the Secretary of State to serve a notice requiring financial information only once a Section 29 Notice has been served – this will be amended so that information can be obtained prior to service of such a notice;
• widening range of persons who may be made liable for decommissioning - the two main changes are expressly including Limited Liability Partnerships and including those who have transferred their right to exploit or explore mineral resources or to store/recover gas from or by means of or on the installation, but have not obtained a necessary consent required under the licence in relation to the transfer (this is a new proposal, not included in the BERR consultation);
• allowing liability to be imposed at an earlier stage - the Energy Bill also proposes that those persons with an interest in the installation may become liable for decommissioning if it is established that they intend to carry on activities from the installation whereas under the current regime, the interested persons only become liable if they are actually carrying on the activities – this gives rise to an exposure during the critical development phase;
• The definition of "submarine pipeline" in section 45 will be extended to include a pipeline which is intended to be established. this enables notices under section 29 to be served for submarine pipelines prior to installation, mirroring the existing requirements for offshore installation.
• abandoned wells - a new section 45A will extend decommissioning liability to abandoned wells.
• A new offence is proposed of disclosing information obtained by virtue of 38(1) or (2) (financial information requested from the Secretary of State).

Missing?

BERR’s consultation document put forward the following proposal which has not made it into the Bill:

• The current regime does not enable the Secretary of State to serve Section 29 Notices on the licensees or JOA parties for a pipeline unless they also own an interest in the line. (Normally, licensees/JOA parties would own an interest in the pipeline, but this is not always the case. There is a provision for designating such persons as owners of a pipeline but this is impractical to do where there may be dozens of pipelines in a field.) The consultation paper proposed to change this.

The Energy Bill may be found by clicking here.

For further information on decommissioning security and the proposed changes please contact us.