A comment on the recent government consultation process and the launching of the industry Decommissioning Cost Provision Deed (DCPD).
With the decline of North Sea production and the impending decommissioning phase, the current emphasis is to ensure maximum recovery of the estimated remaining reserves of 16-25 Bboe. It is vital to both government and industry to encourage a high level of exploration and production and the associated corporate activity in the North Sea.
Recent government consultation introduced further changes to the existing legal requirements for decommissioning, while the industry has launched a mechanism to deal with the costs of decommissioning and also developed guidelines and standards to assist their members facing decommissioning projects in the UK Continental Shelf (UKCS).
Decommissioning 450 offshore installations, along with associated subsea wells and about 10,000 km of pipelines, has been delayed whilst companies fully exploit the UKCS. However it is accepted that once the phase starts in earnest, the cost of decommissioning will be between £15-20 billion up to 2030. New and existing industry players have realised the significant investment potential and have accordingly developed a supply chain of contractors and service providers.
The challenge for all is to find a practical arrangement to balance the need for future investment with appropriate safeguards to cover the huge decommissioning liabilities. It is in everyone’s interest to ensure that decommissioning obligations and liabilities are defined clearly and funded properly. The main question is: who should be responsible - government, industry or the taxpaying public?
The government’s role is to ensure a balance between decommissioning liabilities and the protection of taxpayers. Accordingly, the government's view is that industry should bear the costs of removal of their infrastructure at the end of its useful life and not shift the burden to the taxpayer.
Section 29 of the Petroleum Act 1998 allows the Department of Business and Regulatory Reform (BERR) (the regulatory authority on decommissioning of energy installations in the UKCS) to serve a notice on various parties for the submission of a decommissioning programme. The parties are jointly and severally liable to carry out the programme and, if they fail to do so, BERR can carry out the decommissioning work and charge them. Section 29 notices are usually issued to the licensees on development approval requiring the submission of the programme at a date to be notified later (usually three years before COP). BERR can also claw back into liability anyone on whom a section 29 notice could have been served at any time after the first notice was served including previous licence holders.
BERR has launched a consultation on the changes to the offshore decommissioning regimes for oil and gas installations under the Petroleum Act 1998 and for renewable energy installations under the Energy Act 2004. The objective is to strengthen the government’s ability to require, and the operators’ ability to safeguard, appropriate financial security for decommissioning costs. According to BERR, the aim is to minimise the risk that companies default on their obligations – leaving the government to meet the costs – whilst continuing to encourage the necessary investment in the sector.
The consultation closed on 13 September 2007 and BERR is currently reviewing the comments.
The view from industry is that the issue of decommissioning liabilities (including the enormous costs) should not be seen as a barrier to the entrance of new and smaller companies to the UKCS. Oil and Gas UK (OGUK) has stated that the long-term future of the North Sea depends upon recovering the remaining UK oil and gas reserves and therefore any uncertainty concerning the fiscal and regulatory regime for decommissioning would delay the necessary asset transfers and subsequent investment opportunities.
Over the last three years, industry has been developing a standard decommissioning securities arrangement to improve the negotiations between the joint venture partners and government. The purpose is to reduce the cost of providing securities, remove duplication and ensure that provisions are appropriate and tied to cost guidelines. This arrangement, the Decommissioning Cost Provision Deed (DCPD), is now regarded as the industry standard agreement for use by joint venture partners in UK offshore oil and gas assets. It is widely regarded as an important step towards the management of joint obligations on decommissioning liabilities consistent with the goal of maximising recovery of UKCS oil and gas reserves.
The DCPD is to be used as a template form of agreement between the member companies for providing for the costs of decommissioning. The deed is entered into on a voluntary basis and is used in conjunction with the Joint Operating Agreement (JOA). It could also be used as part of the security arrangement during the buying or selling of an interest in any asset. It is designed as a standard that applies to a field rather than single interests but could be adapted for that use.
The document also contains templates for a Trust Deed in respect of the payment of the decommissioning costs (for use between licensee, operator and trustee); Deed of Adherence (to be executed as a deed by each new second tier participant); and a form of a letter of credit for estimating decommissioning costs (for banks and agents).
The DCPD is still under development and it is therefore up to the members to shape it to fit in with individual circumstances. OGUK is convinced that its robust legal structure and flexible application will encourage adoption across the industry. It should be an important contribution in establishing appropriate decommissioning provisions and help boost asset trading on the UKCS.
Government and industry have been working closely together in improving the regulatory regime concerning the issue of decommissioning to create a robust financial security agreement for all. They must continue to do so to limit the uncertainties surrounding the impending decommissioning 'boom'.
Leon Moller is a solicitor specialising in energy with UK law firm Shepherd and Wedderburn