OEUK Decommissioning Security Agreements – Approval/Objection of Proposed Plan

As discussed in our previous Law Now (see our OEUK Decommissioning Security Agreements – the Proposed Plan Law Now here), Offshore Energies UK (OEUK) has published two template Decommissioning Security Agreements (DSAs); one for use in relation to PRT (Petroleum Revenue Tax) paying fields (the “PRT DSA”) and another for all other circumstances (the “non-PRT DSA”) – other than in relation to their treatment of PRT, these are in identical terms, and are collectively referred to in this article as the OEUK DSA for ease of reference. These template DSAs provide a standardised approach to the provision of security for future decommissioning costs that is widely used in the UKCS, and informs similar arrangements that may be adopted in some cases in other jurisdictions.

As explained in our OEUK Decommissioning Security Agreements – the Proposed Plan Law Now, the starting point for the calculation of the security to be provided in respect of a particular year (the “Relevant Year”) is the obligation in Clause 4 of the OEUK DSA for the Operator to prepare a plan (the “Proposed Plan”) – the timeline that is suggested by the DSA template requires this to be provided by 30 June in the year prior to the Relevant Year.

Approval of the Proposed Plan

Once the Proposed Plan has been prepared by the Operator, the parties required to approve the Proposed Plan have an initial 60-day period to do so or to raise any objections. The OEUK DSA template provides optionality as to whether the Proposed Plan requires to be approved only by the Licensees, or by all Parties to the DSA.  In the latter case, the approval right includes previous licensees (referred to in the DSA template at “Second Tier Participants”). Alternatively, the template provides an option where the Second Tier Participants are permitted to provide written representations in response to the Proposed Plan, and to refer those to expert, but where their express approval is not required).

If no objections are received within the 60-day period, the Proposed Plan is deemed to be approved and becomes the Decommissioning Plan for the Relevant Year. Under the suggested dates in the OEUK DSA, the Proposed Plan is to be submitted by 30 June in the year prior to the Relevant Year, meaning if objections are not received by 29 August in that year, the Proposed Plan becomes the Decommissioning Plan for the Relevant Year.  The Operator will then, in due course (the OEUK DSA suggests by 1 October prior to the Relevant Year), prepare a Provision Invoice setting out the amount of security that each of the Licensees (i.e. the current holders of the relevant licence) will have to provide – in terms of the OEUK DSA, the suggested deadline is for this security to be provided by 1 November in the year prior to the Relevant Year, although this is commonly amended to provide for payment by 1 December in the year prior to the Relevant Year.

Objections to the Proposed Plan

If an approving party has any objections to make to the Proposed Plan, it must give a written statement of its objections to the Operator within the 60-day period. Clause 4.3 of the OEUK DSA provides that where objections have been made, all Parties are to meet promptly to discuss those objections and attempt to reach an amicable resolution. In the event that an amicable resolution is not reached within 90 days of the date of submission of the Proposed Plan, the party objecting to the Proposed Plan is entitled to refer the matter to an expert for determination.

Clause 4.3 of the OEUK DSA provides that the expert shall be required to confirm that those elements of the estimates of Net Cost or Net Value (or, in the case of the PRT DSA, PRT Relief, if applicable) which have been the subject of objections have been made in accordance with the OEUK DSA. Where the expert does not consider that those estimates are in accordance with the OEUK DSA the expert is to determine the estimates which should have been so made. The Operator shall then incorporate the expert’s determinations into the Proposed Plan. The Proposed Plan, as adjusted if applicable, shall then be deemed to be approved and shall become the Decommissioning Plan for the Relevant Year.

Where the DSA requires a Party to give notice, it is important to remember that notices should be served in accordance with the notice provisions within the DSA. In the OEUK DSA, the notice provisions are contained in Clause 13 and provides that notices are to be made in writing to the addresses provided in Clause 13 and either (i) delivered personally or (ii) sent by pre-paid registered post, recorded delivery or other fast postal service which provides proof of delivery, or by fax. It is worth noting that the template DSA does not provide for service of notices by email. We will consider notice provisions in more detail in a later Law Now in this series.

Referral to the Expert

Clause 11 of the OEUK DSA sets out the process to be followed in the event a referral to an expert is required.

The first step is for the referring party to serve notice on the other Licensees/Parties requiring the matter to be referred to expert.

Next, the expert is to be selected. The OEUK DSA sets out two options:

1. The expert shall be selected by the unanimous vote of the Licensees and any Licensee can nominate an individual for consideration; or
2. Each Licensee shall nominate three experts who are ready, willing and able to act. The Licensees will then score the experts according to preference (1 being the lowest preference and 3 being the highest preference) and the expert with the highest score is selected. If there is a tie, lots are to be drawn amongst the tied experts.

Where the relevant Parties have not agreed the identity of the expert to be appointed, the OEUK DSA includes provision for requesting that an agreed organisation appoint an individual to act as expert. In the past, Parties would often agree to apply to the Energy Institute to appoint an expert in such circumstances but we understand that the Energy Institute no longer provides this service – it will be necessary for the parties entering into a DSA to elect a suitable appointing body for their agreement.

Following acceptance by the expert of the appointment, the timetable for a decision under the OEUK DSA is as follows:

Under the OEUK DSA, the final decision of the Expert is binding on all the Parties except in the case of fraud or manifest error.

Unless a more detailed process is provided for in the DSA, typically once the Expert is appointed they will set out a proposal as to how the matter is to be conducted including a timetable. This might involve meetings with the Expert and might include Parties providing the Expert with written or oral submissions.

Pros & Cons of Expert Determination

There are a number of factors to be considered when considering whether to provide for disputes to be determined by an expert rather than proceeding with litigation or other alternative dispute resolution method.  For example:

Pros:

• In appointing an expert, the Parties can select their preferred individual to resolve their dispute, who they consider has particular skills and expertise to deal with the dispute.
• The dispute and determination remain confidential, unlike in court proceedings which will usually be a matter for public record.
• Expert determination tends to be less expensive than proceeding through the courts or arbitration.
• Typically expert determination results in a binding resolution of the dispute in a much quicker time than proceeding with litigation or arbitration. Following the OEUK DSA timeline, the Parties can expect to reach a resolution within around 3 months (40 Business Days for preliminary decision with a further 30 days for the final decision).

Cons:

• The ability to appeal or challenge an expert decision is very limited due to the binding nature of the expert’s determination. Under the OEUK DSA, the expert decision is binding except in cases of fraud or manifest error. However, such an appeal may be difficult where the expert has not provided any reasoning for his determination.
• If it is necessary to enforce an expert’s decision, generally speaking, further court action or arbitration proceedings will be required.
• The expert’s determination will likely only apply to the Proposed Plan for a particular Relevant Year – it will not have binding effect for future years. 

Next steps

Future Law-Now articles in this series will consider key aspects of the OEUK DSA arrangements in more detail, such as notice requirements and forms of security. We will also consider broader potential implications of these arrangements, such as events of default, interaction with the relevant field operating agreements with respect to default and payment of decommissioning costs, as well as looking more widely at how other jurisdictions are addressing the question of how the costs of decommissioning are met.