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What Lies Ahead for our Clients on Offshore Decommissioning?

4 mins  30.10.2018 Paul Shillington

The 2018 AMPLA Annual Conference in Perth included a session on End of Life for Offshore Oil & Gas Facilities that provided an overview of the still developing legal and policy framework in end-of-life offshore abandonment and decommissioning.

Paul Shillington, a Partner in our Perth office, reflects on some of the key issues for our clients that arise from this still evolving area of regulation.

The oil & gas industry is facing a tsunami of offshore abandonment and decommissioning that will need to be executed over the next 10 to 20 years, at a substantial cost to oil & gas industry players, and if not handled correctly, to the taxpayers of the countries that have sovereignty over these offshore fields. By the same token, this represents a great opportunity for oil & gas contractors to obtain a steady stream of offshore construction work, following the tough years of the market since the oil price crisis of 2014.

However, the legislative and regulatory regime for offshore decommissioning in Australia is now dated, and is widely considered to lack suitable detail. Consequently, there are a number of review processes and regulatory reforms underway in Australia that are likely to result in legislation being amended and new regulations being enacted to better guide and control decommissioning obligations and liabilities. This includes the Commonwealth Department of Industry, Innovation and Science's recently released Discussion Paper and associated framework review, the Western Australian Department of Mines, Industry Regulation and Safety's new decommissioning guidelines and public forum sessions, and various industry supported papers and reviews such as the Western Australian Marine Science Institution's draft report, "Decommissioning offshore infrastructure: a review of stakeholder views and science priorities".

Other legally sophisticated oil & gas jurisdictions, particularly the UK and Norway, are well advanced in imposing detailed (and potentially quite onerous) new regimes to manage the myriad technical and financial risks of decommissioning.

Although the session presenters indicated that it is unlikely that there will be a revised and detailed regime in Australia until 2020, we suggest that our clients closely monitor the developing legal and policy framework around decommissioning in Australia, and make sure that their voices are heard through the different consultation processes that are currently underway in Australia. Close monitoring will also ensure that oil & gas players (both operators and contractors) will be ready for the new regime that is likely to be effected.

To assist in this process, we have highlighted some key points below for our clients to keep in mind.

  • High in the regulators' minds are the risks associated with the transfer of late-life assets to smaller and less well-funded entities, who may not have the expertise or balance sheet to manage a complicated offshore decommissioning work scope. Our client's M&A and asset planning teams may need to be ready to adjust their views on suitable future transferees.
  • Regulators may well seek the legislative power to impose strict financial security obligations on tenement holders at a suitable time in the life of field. Clients may wish to start some long-term budgeting around this, and to consider how it will dovetail with existing JOA obligations in this regard.
  • Given the magnitude of operational and financial liabilities associated with some offshore decommissioning projects, legislators in other jurisdictions have been willing to enact laws that ensure that past owners of offshore permits remain liable (potentially on a joint and several basis) for decommissioning activities ("alternative liability" regimes). Such alternative liability regimes tend to lead to a proliferation of bespoke liability allocation agreements being put in place between field participants, to manage the commercial allocation of this residual legal risk. Clients may want to start planning for the creation of such agreements if a similar regime looks likely to be effected in Australia.
  • Clients will need to recognise that alternative liability regimes could potentially bring an end to "clean exits" from major oil & gas projects.
  • If heavy financial obligations are imposed on later-life fields, should there be some form of tax relief to ensure that the investment environment for later-life fields is not decimated (with the result that reservoirs are not exploited to their fullest extent)?
  • Should clients start to consider a form of reverse securitisation of their abandonment and decommissioning liabilities i.e. paying off these liabilities in advance, by contractual transfer to contractors that are better equipped to price and manage the risks of decommissioning?

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