Tidying and simplifying the rules on decommissioning oil and gas facilities in the UK North Sea is one of the pressing issues facing John Hutton, the new minister to lead the Department for Business, Enterprise, and Regulatory Reform (DBERR), formerly known as the Department for Trade & Industry.
Oil companies have complained that in its present state the Petroleum Act 1998 is unfair and complex because it requires every company that has had an interest in an offshore installation to draw up a decommissioning plan, even if it sells the interest or the entire asset. Although some companies have received exemptions from decommissioning liabilities because of special circumstances, Section 34 of the act allows the government to reinstate the requirements.
Companies served with a notice become jointly and severally liable to submit a decommissioning program for ministerial approval and to ensure that the program is implemented. This, of course, raises additional financial obligations as well as health, safety, and environmental responsibilities. As the UK tax regime has changed several times in the past 5 years, fiscal uncertainty has complicated decommissioning as companies are unsure about the level of tax relief available to offset decommissioning costs.
Decommissioning delayed
For now, decommissioning is being delayed by the strength of oil and gas prices, which has encouraged exploration and allowed the development of small fields tied back to existing production platforms. Ultimately, however, decommissioning liabilities undermine the government’s objective of maximizing recovery from the UK continental shelf (UKCS).
According to the latest UKCS economic activity report by Oil & Gas UK, about 470 installations, 10,000 km of pipelines, 15 onshore terminals, and 5,000 wells await decommissioning. Costs estimates range from £15 billion to £20 billion.
The group estimates that elevated oil and gas prices over the past 4 years have delayed decommissioning by 2 years and suggests that decommissioning costs can be reduced “through greater coordination with the supply chain and a more systematic approach across the industry.”
But questions about decommissioning are slowing asset deals as buyers and sellers are unsure about the limits of their responsibilities.
“Uncertainty over the future fiscal treatment of decommissioning costs is forcing companies to over-provide, making asset trading more costly,” an Oil & Gas UK spokeswoman told OGJ. “The drop in the level of asset trading means potential investment by new owners who see value in extracting more costly oil and gas reserves is not being made and overall recovery will be lower.”
The UK government has launched a consultation with industry on ways to improve the statutory decommissioning regime and to minimize the risk of liabilities falling on the public purse. The consultation closes on Sept. 13, 2007.
Discussions of regulatory and fiscal change are under way in PILOT (the government-industry forum chaired by the secretary of state) and between the industry and several government agencies. Talks on the fiscal element are expected to conclude in the autumn.
What are the possible solutions?
Oil companies want regulatory reform so they can drop any decommissioning liabilities once they leave a license under a DBERR-approved decommissioning cost-provision deed affording robust financial security for all parties. After 2 years of intense discussions within PILOT, Oil & Gas UK plans to launch a deed in August illustrating how financial security must be provided for all parties involved in a transaction.
The industry also needs assurance about the availability of decommissioning tax relief and after-tax treatment of permit securitization. According to Oil & Gas UK, this will increase the funds available for asset trading.
Consultation responses
It will be interesting to hear the responses of the industry to the decommissioning challenge that Hutton must steer through its next phase. As a mature province, the UKCS is facing major international competition from other places for investment, innovation, and development.
Whatever emerges from the consultation, it is imperative that public education is at the forefront to ensure thorough understanding of the issues at hand. The oil and gas industry has often been misunderstood and perceived as selfish, greedy, and careless about the environment.
No company wants to repeat the controversy Royal Dutch Shell PLC endured in 1995-98 over the Brent spar loading buoy. The company initially planned to clean and scuttle the unit in the deep Atlantic but under heavy protest eventually dismantled it and used the metal for quay construction (OGJ, Jan. 15, 2001, p. 15).
