A trio of oil industry experts have written a “manifesto” to help de-cloud the offshore decommissioning landscape.
The three part series touches on a range of themes, including the validity of legislation around asset removal, decommissioning liabilities and the lack of a UK port strategy.
Decide Wisely director Jim Christie, DundeeCom chief executive Callum Falconer, and Jee chief executive Trevor Jee have collaborated on the project.
Read the second article:
From Here to Eternity?
Regulatory Requirements and Long-Term Liability Management
Liability in Perpetuity
“Liability in Perpetuity” is a term we hear quite often, but what exactly does it mean? In which piece of legislation is this term of liability established? What scope or responsibility does this liability apply to?
Given the fact that perpetuity is, by definition, for eternity, this is longer than any person, entity or country will continue to exist. Some legal definitions state perpetuity as either for eternity or “for a very long time”, normally referring to existing beyond periods set by law. As such, liability in perpetuity, even if defined and documented, is difficult, or impossible to achieve.
But where is it documented?
The term “perpetuity” does not appear in the Petroleum Act 1998, with or without the word “liability”.
Section 29 of the Act indicates that the Secretary of State may issue a notice to a person or persons requiring submission of an abandonment programme, setting out the measures proposed to be taken in connection with the abandonment of an offshore installation or submarine pipeline. This programme should contain a cost estimate, timing and very interestingly, provision as to how any installation or pipeline left in position or not wholly removed will be maintained. This would suggest the Petroleum Act anticipates that in some circumstances, an installation may be left in position or not wholly removed.
Section 29 is concerned with the abandonment of an offshore installation or submarine pipeline. There is no reference to wells.
Section 32 of the Act states that the Secretary of State may either approve or reject a programme submitted under Section 29.
Section 34 of the Act defines that any party who has held a particular status, such as a party to a joint venture, at any point since the date of the first Section 29 notice, may remain liable for the performance of decommissioning an installation, jointly or severally.
The term “remedial action”, as it relates to decommissioning, appears in Section 37 of the Petroleum Act 1998. This remedial action relates to those circumstances where an approved programme is not carried out, or a condition to which approval is subject is not complied with.
DECC Guidance Notes – 2011
The DECC Guidance Notes, 2011 (Guidance) state, within the introduction, that “the guidance notes provide a framework and are not intended to be prescriptive”. They go on to say “We recognise that circumstances will vary from case to case and that differing approaches may be required”
The Guidance specifically addresses “Residual Liability” in Section 16.1, in the following manner:
“The persons who own an installation or pipeline at the time of its decommissioning will remain the owners of any residues. Any residual liability remains with the owners in perpetuity.” The exact nature of this liability is not defined.
The Guidance also, within Section 16.2, provides further information on “remedial action”. It states that any remains of installations may require maintenance or remedial action in the longer term and that remedial action may be considered as a result of significant advances in technology; in this case, a comparative assessment would need to be carried out to determine that benefits of such action.
What liability exists in perpetuity?
It is suggested that the purpose and extent of liability, whether or not it remains in perpetuity, is unclear. Is the liability for carrying out what is required within an approved decommissioning programme and meeting any conditions to which approval is subject? Or is the liability for carrying any further work that the regulator may deem necessary or desirable, even after satisfactory performance of all requirements within an approved decommissioning programme?
The first definition would appear to be fair and reasonable; the second less so. The second definition places an uncertain and open ended obligation upon the installation owners to carry out whatever the regulator deems fit, even with the stated protection of a comparative assessment.
If the placing of liability on perpetuity upon the owners is intended to cover when things go wrong in the future, after satisfactory completion of a decommissioning programme, this would seem like a poor solution to the problem. The introduction of Section 34 into the topic of liability in perpetuity means that any Section 29 notice holder could be held liability, jointly and severally for the entire decommissioning cost and or correction of problems at any time in the future. There must be a better answer.
What is the better answer?
In simple terms a better, and more cost effective, solution would be to prepare a national or industry approach to remedying the problem, rather than finding someone to blame and hold liable. The existence of liability in perpetuity, real or otherwise, can constrain the transfer of assets from one operator to another more suitable to extend the asset life and maintain production and tax revenues. The threat of perpetuity can also, arguably, prevent standardisation of solutions, and encourage over-engineering.
If we can move the discussion from the existence or otherwise of liability in perpetuity, which is an option for solving a real or perceived problem, to a better definition of the problem, and an assessment of multiple options, we will uncover a better solution; this is the key to robust decision quality.
Likely options that warrant some further investigation would include some form of owner’s club to provision for remedial action, or an insurance solution. A multi-step allocation of responsibility may also be worth investigation to clearly define responsibilities and durations.
It is wise advice to “not select your solution until you fully understand your problem”.
An example – Clear Sea Bed – A Problem or a Solution?
The key regulator for the approval of Decommissioning Programmes, BEIS has a starting presumption that the end-state solution to decommissioning is a clear sea bed, and that this answer is required to satisfy the requirements of OSPAR Decision 98/3.
This would appear to be a solution looking for a problem.
The presumption of a clear sea bed as being the preferred solution is reinforced by the availability of an accelerated decommissioning programme approval process, if an operator proposes this approach.
But what if the best answer is something other than a clear sea bed? We may have simplified the process to get approval for a complex sub-optimal solution.
Rather than having a prescriptive solution as the starting point, why don’t we insist on a robust and transparent process to determine the best answer? Not everyone will agree initially on what they feel the best solution is, but if we can agree on what constitutes a fair, robust and verified process, and we involve a wide cross section of stakeholders in the process, the potential to arrive at the optimal solution is greatly improved.
Just this month the West Australian authorities have issued their approach to assessing decommissioning alternatives, including leaving facilities in situ. Perhaps it is time for the UK to catch up, before it can lead.
It is unlikely that a single solution will satisfy all installations and projects, in terms of the outcome. Repeated application of an appropriate process will, however, enable us to achieve what we all strive for; Do The Right Thing.
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