23 October, 2018
The closure and decommissioning of offshore petroleum infrastructure is a significant issue for all countries that exercise jurisdiction over such infrastructure. The challenges to plan, execute and supervise decommissioning projects, coupled with their scale and cost, are well recognised. The re-use of the facilities for other purposes is being recognised as a possible alternative to removal. So while decommissioning can be viewed as an exercise in site restoration and one to be principally guided by environmental considerations, broader economic and social factors have increased the profile of these operations and the number of interested stakeholders.
DECOMMISSIONING IN AUSTRALIA
Over the next 50 years, the anticipated cost for decommissioning operations in Australia is over US$21 billion.1 While a number of small projects have been successfully decommissioned to date, Australia’s policy, regulatory and legislative framework has yet to be tested on larger decommissioning projects. There has been no material change to Australia’s decommissioning laws since Australia’s offshore petroleum legislation was enacted in 1967. At that time the extraction of oil and gas was a much simpler exercise.
Across the globe, however, significant decommissioning projects have been carried out, providing a backdrop to technical and regulatory developments in Australia. The Department of Industry, Innovation and Science (Department) has commenced a review with the aim of ensuring that the legislative framework for decommissioning offshore petroleum infrastructure in Commonwealth waters is fit-for-purpose, continues to meet community and industry expectations, and positions Australia to respond to decommissioning challenges and opportunities now and into the future.
The review has been kicked off with the release of a comprehensive discussion paper (Decommissioning Paper).2 Ahead of its release, there has already been considerable interaction between the States and the Commonwealth agencies, various regulators and industry participants and other interested stakeholders.
The Decommissioning Paper reports on the current framework in Australia and contrasts it against the law and practice in the United Kingdom, Norway, the United States of America and Canada. It contains an extensive comparative analysis of the respective positions on selected topics of interest.
The review is structured with four stages:
- Stage 1 (5 October 2018 to 16 January 2019): this is the first stage of the review, designed to promote discussion between relevant stakeholders as to the appropriateness of the current framework and opportunities to enhance it. Comments are to be supplied to the Department during this period;
- Stage 2 (2019): once the Department has considered the comments provided during Stage 1, it will develop and release an implementation paper detailing preferred options to enhance the decommissioning framework. There will be further opportunities for consultation ahead of Stage 3;
- Stage 3 (2020): the Department will provide the outcomes of its review to the Minister for Resources, along with its recommended legislative and regulatory changes that might be required to implement the revised policy framework; and
- Stage 4 (post-2020): once the proposals have been considered by the Government, the Department will start work on the changes required to implement the agreed decommissioning framework.
The remainder of this note summarises the Decommissioning Paper and our key takeaways based on a preliminary review of the materials. The Decommissioning Paper is an extensive and wide ranging document and we intend to share an analysis that examines specific legal elements in more depth in due course.
THE DECOMMISSIONING PAPER
As noted above, the purpose of the Decommissioning Paper is to stimulate consideration of, and seek key stakeholder feedback on, select issues with the current decommissioning regime and whether improvements are feasible. It is motivated by a concern that the current model may not meet modern community expectations.
The Decommissioning Paper states six key principles that underpin the current regime:
- Australia’s offshore petroleum industry is regulated under a broad objective and performance-based scheme that permits the titleholders to discharge their obligations in a manner that suits their individual circumstances;
- decommissioning is completed in a way that reduces any environmental, safety and well integrity risks “as low as reasonably practicable” and, in the case of environmental risks, to acceptable levels;
- decommissioning is the responsibility of the titleholders;
- decommissioning should be considered early and often;
- the “base case” for any decommissioning operation is complete removal, though other options (e.g. partial removal or repurposing of property) may be undertaken if the titleholder can demonstrate that the alternative approach will yield better environmental, safety and well integrity outcomes; and
- decommissioning should occur while the title remains in force.
The options identified in the Decommissioning Paper do not necessarily represent the final position of the Australian Government but are provided to ensure all interested parties are aware of the options contemplated to date and to provide input into the Department’s current views about their perceived merits, applicability and effectiveness.
KEY TAKEAWAYS
Base case of complete removal: there are three main options for decommissioning property: complete removal, partial removal, and repurposing or reuse.
The default decommissioning requirement under the current framework is the complete removal of all infrastructure and the plugging and abandoning of all wells. However departures from the base case can be accepted where an alternative approach achieves equal or better environmental, safety and/or integrity outcomes. It appears that, at this stage, the Department does not seek to change this. While the Decommissioning Paper recognises that base case other options (such as “rigs-to-reef” programs similar to those undertaken in the United States of America) may be suitable, the Decommissioning Paper concludes that “further research is needed” before the Australian legal framework is altered to support an artificial reefing programme. Any scope for change to the base case may also be more successful if considered at a granular level (e.g. pipelines vs wells).
Liability of current titleholders: at the moment, the primary responsibility for decommissioning rests on the current titleholder(s). However, the extent of this liability is not clear and the Decommissioning Paper states that there is a “strong policy case” that titleholders should bear all liability associated with the infrastructure, including civil liability after operations have ceased. As such, the Decommissioning Paper proposes the following:
- amend the regime to clarify that civil liability rests with the titleholder in perpetuity, even after decommissioning and block relinquishment;
- grant titleholders a release from civil liability (e.g. where the Joint Authority consents to a surrender of a title), provided that additional steps are included to ensure that the infrastructure has been decommissioned appropriately (e.g. more stringent inspection and reporting requirements, additional post-decommissioning monitoring requirements or creating an industry decommissioning fund or other financial security (see below)); or
- include new arrangements where the Government takes ownership of infrastructure, and accepts the associated ongoing liabilities, under approved programs such as the “rigs-to-reef” programs in the United States of America (though as noted above, it seems more research is required before this option will be favoured).
Liability of former titleholders: the Department’s view appears to be that all former titleholders remain liable for decommissioning under the current regulatory framework.3 The Decommissioning Paper suggests that this should either be clarified, or the regime should be amended to clarify, that even if a titleholder transfers their interest in a title they remain liable for infrastructure that has been installed before the transfer takes place.
This is similar in the United Kingdom approach to former titleholder liability, though this approach has been criticised for its dampening effects on attracting new investment due to the inability to secure a clean exit.
Ongoing assessment of financial capacity: the Decommissioning Paper identifies a concern that changing circumstances could result in a titleholder not having the financial and technical capability to complete the decommissioning operations (e.g. on a change of control or due to other intervening events) and that the current point in time where this assessment (i.e. on transfer of a title) is made is insufficient.
The Department propose that the regime be amended to enable the National Offshore Petroleum Titles Administrator (NOPTA) to conduct ongoing assessment of a titleholder’s financial and technical capability, with there being powers to enforce where titleholders loss have the requisite capability. We have noticed in recent times elevated levels of scrutiny of the material submitted to explain the financial capability of new titleholders when an application is made to approve a transfer of a title.
Decommissioning security: while the Department considers that “the lack of appropriate financial security arrangement carries the risk that, where a titleholder fails to decommission appropriately, government will be obliged to carry out the necessary work.” The Decommissioning Paper notes that this is inappropriate given security requirements are “common” in comparable jurisdictions. Accordingly the Department has proposed the following as possible security for decommissioning costs:
- an express statutory requirement for all titleholders to provide financial security;
- a discretionary power for the regulator to require the provision of financial security by titleholders on a case-by-case basis;
- the establishment of dedicated decommissioning fund, similar to the Mining Rehabilitation Fund;4 or
- to expand the existing “financial assurance” requirements so that they cover ordinary costs associated with decommissioning and not just “extraordinary” costs (e.g. costs relating to an oil spill occurring during those operations).
We note a number of these measures have been applied elsewhere in Australia, with varying degrees of success. Inevitably industry will take a close interest in these matters as it will not wish to have assurance arrangements that sterilise cash or bring significant establishment or recurrent cost. There is also a real possibility that these requirements could be disproportionately onerous for small operators and could force them out of the sector.
Decommissioning planning and approvals: outside of the relatively recent Offshore Petroleum Proposal process, the current legislative framework does not easily facilitate early planning for and approval of decommissioning. The Department identifies two key approval pathways to address this issue, being the inclusion of decommissioning information in Environment Plans or a standalone decommissioning plan. Both options will bring forward consideration of project specific decommissioning outcomes and embed these considerations in the upfront planning for exploration and development activities. We expect there will be advantages for industry as well as Government, particularly in obtaining early certainty around regulatory requirements, and the ability to cost and provision accordingly.
Decommissioning timing: the Department notes that if property is not either removed or adequately maintained then it will likely deteriorate over time, potentially making removal operations more costly and increasing safety, integrity and environmental risks. As such, it considers there to be a need for a timeframe or more precise regulatory trigger to compel removal (e.g. if certain equipment has not been used for a certain period).
We anticipate titleholders will assert that they should be left to make these decisions as they are best placed to determine whether certain property has potential later or other uses (e.g. third party access to pipeline infrastructure at the end of field life in order to make new projects viable) and the timing of doing and paying for these works.
Decommissioning costs: consistent with the current legislative framework, the Decommissioning Paper makes only passing references to the costs of decommissioning operations. The key principle is that the owners of these facilities should be obliged to pay whatever the cost of the decommissioning operation happens to be.
The element of cost and how it may feature in the ALARP assessment is not as well developed as we had expected it to be. For example fully removing a pipeline is a vastly different operation to leaving it in place with very different budgets. We note that a material portion of the cost will be ultimately met by the taxpayer (as the combination of income tax deductions and Petroleum Resources Rent Tax credits mean that up to 58 cents of every dollar paid towards a decommissioning operation will be “paid” for by the taxpayer). In the United Kingdom the impacts of these programs on net petroleum receipts to the Exchequer have been profound.5
NEXT STEPS
As noted above, Stage 1 continues until January 2019 and interested parties are invited to submit comments to the Department by 16 January 2019.6 Additionally, in late October and early November 2018, the Department is holding a series of discussion forums to seek verbal feedback on the Decommissioning Paper – further information and signup details for these sessions can be found here.
Concurrently, the Department is progressing review and reform of regulation in the offshore petroleum environment and safety space. Draft amendments to the environment regulations to implement transparency driven reforms were released for public comment in October. Broadly, the transparency outcomes are twofold: public comment on Environment Plans for exploratory seismic and drilling activities, and publishing of Environment Plans in full. Further information of these amendments and upcoming consultation forums can be found here.
Review of the safety regulations is at an earlier stage, with the Department facilitating workshops to discuss health and safety issues and the regulatory regime with stakeholders. Further information on these workshops and the status of the review can be found here.
If you have any questions about the implications of the proposals in the Decommissioning Paper or the environment and safety reforms on your business, please contact the persons referred to below.
For further information, please contact:
Stuart Barrymore, Partner, Herbert Smith Freehills
stuart.barrymore@hsf.com
ENDNOTES
- Wood Mackenzie (2018). Decommissioning Asia Pacific on a budget, 25 January 2018.
- Decommissioning Offshore Petroleum Infrastructure in Commonwealth Waters – available here.
- While there are issues of fine distinction here and the OPGGSA does contain a regime that allows directions to be given to “former titleholders” it is our view that it is not open to the relevant regulator to select any former titleholder and direct it to decommission. We prefer the position that power to direct applies to situations where the title is no longer current and, in those circumstances, directions can be given to the “last” titleholder.
- See further details at: http://www.dmp.wa.gov.au/Environment/What-is-the-MRF-19522.aspx
- Ward, A., Thomas, N., and Parker, G. (2017). UK faces £24bn bill for shutting North Sea fields. Financial Times. Accessed 9 October 2019.
- See pages 7 and 8 of the Discussion Paper for lodgement details.
