Knowledge Centre
Commercial Perspective
Asset trading and the impact of decommissioning liabilities
The UK continental shelf (UKCS) is a maturing province but still has up to 24 billion barrels of oil equivalent (boe) yet to be recovered. Continuing success in maximising reserves recovery rides, in part, on the back of existing physical infrastructure and attracting new investment. With a high oil price, the viability of existing fields is extended, bringing with it a wider window-of-opportunity for smaller fields to get to market using this infrastructure. In recent years, this has provided an opportunity for new players, bringing significant investment to existing asset maintenance and integrity, as well as for new developments.
Decommissioning can be actively delayed by extending the economic life of the asset. This can be achieved, for example, by using existing infrastructure for the transportation (in the case of pipelines) or processing of near-by reserves accumulations (i.e. as part of a 'tie-back' project). In addition, the economic life of a field may be extended through enhanced oil recovery (EOR) methods, or by utilisation for other projects such as carbon capture and storage (CCS).
Fig: Decommissioning deferral can help achieve the 'Better Future' for the UKCS
However, there remain barriers to this new investment, some of which involve the decommissioning regime in place within the UKCS. Indeed, the industry is concerned about certain regulatory and taxation issues which may have an impact on the decommissioning process. Perhaps the main concern is whether there is likely to be a change to the threshold stipulations for derogations approval under OSPAR 98/3. Another issue is that of fiscal uncertainty over the levels of tax relief provided for decommissioning costs, and whether this has the potential to change in the future. Such uncertainty surrounding the decommissioning process can act as a barrier to new investment on the UKCS.
An important aspect to consider concerns the legal liability for responsibility to carry out a decommissioning programme. This includes the liability to carry out field abandonment, decommissioning of installations, pipelines, drill cuttings accumulations etc, and also the future ongoing custody and maintenance of any of these which remain in the offshore environment (for example under an OSPAR 98/3 derogation ruling).
The DECC policy of maximising recovery by attracting investment from a diverse range of companies is, to some extent, offset by the Petroleum Act 1998 which defines the liability on all these companies to effectively eliminate the risk to government of any default on decommissioning obligations. It is therefore important that joint venture partners can cover their obligations and liabilities. The issue is especially relevant when one considers the large number of “small companies” currently entering the UKCS (as demonstrated by the 25th Licensing Round) and the heightened risk these companies may pose of defaulting on their future decommissioning cost liabilities.
The overall cost of decommissioning primarily falls on the current asset owners but the legislative mechanism for decommissioning obligations (Section 29 of the Petroleum Act 1998) is separate from licence requirements so that it can extend liabilities beyond the normal timescale for exploration and production licence operations. Usually the liability passes with the licence transfer, but the DECC can require some parties to retain the liability, even though they have no further commercial arrangements with the licence. To manage this ongoing decommissioning liability (which is joint and several on all Section 29 parties) existing parties often require securities from those coming in, if the deal includes taking on these liabilities.
Decommissioning Security Agreement (DSA)
To help in managing this situation, the industry created a template Decommissioning Security Agreement (DSA), which sets up an agreed ‘boilerplate’ format, with options for negotiation. The initial driver was to streamline the process for companies needing to establish such agreements (either before producing asset start-up tied to the Field Development Plans or upon transfer of the asset) and to give increased confidence to the commercial arrangements (given the importance of controlling exposures to decommissioning liabilities) i.e. efficiency and effectiveness improvements. Associated with this, in an attempt to gain some consistency in the decommissioning cost estimates concerned with individual assets, Oil & Gas UK has created a Guideline on Decommissioning Cost Estimation.
The DSA is a stand-alone agreement, but should be linked to the Joint Operating Agreement (JOA) by the common terms and obligations. It allows inclusion of all Section 29 parties (both those still as licensees and party to the JOA, and others) and, if appropriate (by use of DECC recognised options), the Secretary of State. It includes the use of a new Trust Fund concept, widely used in potential insolvency cases, to provide a secure place for any liquidated guarantees due to default, until such time as they can be used for the decommissioning purpose they were set up for. It also tries to minimise the overlaps of different securities due to different commercial arrangements and provides an option to adjust the 'safety factor' applied to calculations, to fit with the level of uncertainty in the cost estimation.
Currently the only recognised forms of security guarantee in use are bank letters-of-credit (LoCs) or parent company guarantees (PCGs). However this arrangement does not suit everyone and the industry is looking at alternatives to provide a greater range of options. However, the workability of such options is strongly dependent on taxation treatment.
Role of contractors in decommissioning
Decommissioning is a different market from installation and contractors will need to re-establish their credentials as demand builds and new technologies become available. There are also differing factors which need to be taken into account, particularly with respect to:
- project management;
- financing, risk management and contract regime;
- varying and extending activity completion times;
- cross-operator collaboration to co-ordinate/aggregate activities;
- duty-of-care responsibilities for disposals;
- residual offshore liabilities and monitoring survey requirements.
Decommissioning is clearly a complicated and work intensive task, requiring a diverse network of contractor segments to be engaged in the process. These are likely to include:
- engineering design and project management contractors;
- clean-up and facilities preparation contractors;
- drilling contractors;
- sub-sea contractors;
- heavy-lift and transport barge contractors;
- disposal and refurbishment contractors.
Whilst deferral of decommissioning expenditure and continued production due to oil price rises is to be welcomed, the variability of timing estimates creates problems in establishing an effective market place for decommissioning operations. Oil & Gas UK has made a concerted effort to bring together operators and contractors so that decommissioning plans and the associated technology requirements are communicated, and so that lessons can be learnt from the decommissioning experience of those in other oil and gas provinces. Please click here for information on these efforts.
