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11 December, 2018
The Exploration and Production (E&P) basins usually mature in about 20-30 years. What is left after the prolonged E&P phase are the abandoned installations and wells (onland), sub-sea infrastructure, platforms, and wells (offshore). Once the hydrocarbon resources are exhausted or it becomes unviable to extract them further, the E&P project moves to an abandonment phase, and the project is decommissioned. Decommissioning ensures that the E&P installations and infrastructure are removed subsequent to their abandonment and the site is restored in an environmentally sustainable way.
The Need for Decommissioning
Offshore drilling results in pollution and severely impacts the fragile marine ecosystem. In India, a number of oil & gas blocks were awarded to National Oil Companies and private companies on a nomination basis under the pre-New Exploration Licensing Policy (NELP) era. Many of these blocks have gone through the development and production phases, and are now at the stage of abandonment. Such fields need to be carefully decommissioned to minimise environmental impact and restore the sub-sea flora and fauna.
Globally, the trend post-production phase is for the licensee or operator (as the case may be) to pass the decommissioning work to small players . On one hand, this generates employment as well as revenue; on the other hand, it distributes the decommissioning costs, thereby de-risking the major players. However, owing to the high costs, requirement of skilled manpower, stringent regulations, risk factors, health & safety concerns, low profit and lack of incentives, not much progress has happened in India in the field of offloading decommissioning risks to smaller players. The contractual regime also does not facilitate such a model.
Indian Perspective
During different E&P regimes in India, the Government has maintained a scheme for restoration of E&P sites undergoing abandonment. Since E&P projects have a huge impact on the environment and the economy of a country, decommissioning activities are governed by different Acts and Rules framed thereunder.
The Petroleum and Natural Gas (Safety in Offshore Operations) Rules 2008 (2008 Rules), under the Oilfields (Regulation and Development) Act, 1948, impose obligations on the licensee, lessor or the operator for ensuring fulfilment of requirements regarding health, safety and environment. Specifically, these rules require the licensee, lessor or the operator to submit a Decommissioning Plan with all the prescribed details to the concerned authority.
The Oil Industry Safety Directorate (OISD), which is a technical directorate established under the administrative control of the Ministry of Petroleum and Natural Gas (MoPNG), was set up under the 2008 Rules. Amongst its other responsibilities, it formulates and coordinates the implementation of self-regulatory measures aimed at enhancing safety in the oil & gas industry in India, and it verifies the decommissioning of offshore structures & abandoning of wells as per international safe practices and OISD standards.[1]
During the NELP regime, the Government framed the Site Restoration Fund Scheme, 1999. The Scheme mandates the assessee (who may be any entity engaged in prospecting for, or extraction or production of, petroleum or natural gas, or both, in India pursuant to entering into a contract with the Government) to form a Site Restoration Fund to be used for the removal of all equipment and installations from an E&P site, after expiry/termination of the contract.
Recently, in conjunction with the Open Acreage Licensing Policy Bid Round – I, under the Hydrocarbon Exploration and Licensing Policy (HELP), the MoPNG notified the Site Restoration and Abandonment Guidelines, 2018, for Petroleum Operations, which provide a collective understanding of obligations under different rules and regulations, along with detailed provisions to be followed upon decommissioning of a site towards its restoration.
Apart from the regulations and guidelines, the Production Sharing Contract (PSC) under the erstwhile NELP and the Revenue Sharing Contract (RSC) under HELP have imposed the obligation for restoring the block awarded to the Licensee or the Lessor on expiry, termination of the contract or relinquishment of any contract area or decommissioning of the installation.
Problems in Operationalising the Decommissioning Plans
While the need for ensuring proper decommissioning of the E&P installations and infrastructure is understood by everyone, the responsibility for the same is not proactively assumed by any entity. Apart from the issue of appropriation of risks / costs of decommissioning between the parties in a consortium, other major issues that can affect the operationalisation of decommissioning plans are insolvency of the operator / member of the consortium, and small players in the E&P sector, which are prone to become unwieldy.
The Model RSC under HELP does acknowledge the need for site restoration, which includes decommissioning,[2] and further provides that the activity of site restoration shall be done as per applicable rules / standards / notifications / guidelines.[3] However, it does not address how the risks / costs of decommissioning should be allocated between the parties in a consortium.
Decommissioning in Case of a Consortium
Further, take the example of a consortium wherein a lead operator proposes a work programme and budget every contract year. The operating committee comprising of representatives of the consortium agrees upon and adopts such budget. Subsequent to the same, the operator issues cash calls to the parties from time to time which the parties are required to pay in proportion to their participative interest.
Here, it is suggested that, similar to the proposal of work programme and the corresponding budget, the operating committee, in case of a consortium, and the contractor, as in case of a single contracting entity, lay down a roadmap for the decommissioning that would come into effect at the time of abandonment of the installation, along with the respective financial and performance obligations of the parties. The operating committee should allocate the responsibilities of the members of the consortium, in proportion to their participative interest, where applicable, or in a proportion as agreed by the members of the consortium.
Insolvency and Bankruptcy Code Issues
Further, the existing PSCs, along with the upcoming RSCs, also need to be examined in light of the Insolvency and Bankruptcy Code, 2016, which has come up as a watershed moment for recovery of bad debts and resolution of stressed companies. A resolution plan and the priority waterfall[4] of an E&P company should also incorporate any decommissioning plan, including an escrow account, ensuring proper restoration of the site even if the company goes into liquidation.
International Perspective
The international community has been sympathetic to the concerns regarding imbalances in marine ecology.
The United Nations has framed the Convention on Continental Shelf, 1958,[5] and the Convention on the Law of the Seas, 1982,[6] which provide for decommissioning of such installations.
In addition to the United Nations, the International Maritime Organization Guidelines and Standards for the Removal of Offshore Installations and Structures on the Continental Shelf and in the Exclusive Economic Zone, 1989, place the obligation on the coastal State having jurisdiction over the installation to ensure that it is removed in conformity with these guidelines and standards once it is no longer serving the primary purpose.
A solution may also lie in the template of the United Kingdom (UK) E&P industry wherein an independent entity acts as a security trustee, holding security on trust for the purposes of decommissioning. The UK has in the past used various instruments to create decommissioning security i.e. Contribution to Trusts in cash; Parent Company Guarantee (this may be useful in the case of smaller players with high net worth individuals who provide personal guarantees); Standby Letters of Credits; Performance Bonds; or introducing/ creating an insurance instrument to meet the decommissioning costs.
Conclusion
With many allocated blocks nearing the end of their production phase, India needs to be ready with the regulations, technology and the organisational framework to take up decommissioning of offshore assets.
It is also an opportune time for companies interested in diversifying to provide decommissioning services to equip themselves with the requisite technology and expertise needed to undertake such projects. This also opens a window of opportunity for technology driven companies in the E&P sector to invest in this segment in India.
For further information, please contact:
Jatinder Cheema, Partner, Cyril Amarchand Mangaldas
jay.cheema@cyrilshroff.com
[1] About Us, Oil Industry Safety Directorate, <https://www.oisd.gov.in/>
[2] See Article 4, Relinquishment, Model RSC, OALP Bid Round – I, < http://online.dghindia.org/oalp/Content/pdf/MRSC_booklet_02.pdf >
[3] See Article 14, Protection of the Environment, Model RSC, OALP Bid Round – I, < http://online.dghindia.org/oalp/Content/pdf/MRSC_booklet_02.pdf >
[4] Section 53, Insolvency and Bankruptcy Code, 2016
[5] Article 5.5 of the Convention states that any installation made for exploration and exploitation of the continental shelf, which are abandoned or disused must entirely be removed.
[6] Article 60 of the Convention provides that due notice must be given of any artificial installation on the continental shelf and exclusive economic zones and such installations must be removed upon completion of the project.
