Trade association Oil & Gas UK (OGUK) has launched a new framework agreement to help operators clarify decommissioning liabilities for infrastructure on the UK continental shelf.
The Decommissioning Cost Provision Deed (DCPD) provides different options for joint venture partners to consider in setting up a decommissioning plan for offshore assets. DCPD would help reduce uncertainty over decommissioning responsibilities, as current provisions under UK law allow the government to call back previous licensees to pay decommissioning costs even if they have sold their interests to another party, said OGUK Operations Director Paul Dymond in London Oct. 16.
“These issues are hindering asset trading,” Dymond said, adding that this could jeopardize maximum economic recovery from the UK North Sea. In reviewing joint operating agreements that companies are using to establish liabilities, OGUK found that many were inadequate because there were no explicit provisions to cover decommissioning.
The government is committed to review on a case-by-case basis DCPDs that buyers approve, and if it is satisfied, it will release sellers from being held responsible for decommissioning liabilities under Section 29 of the Petroleum Act 1998. In a recent decommissioning consultation with industry, the government declined to change Section 29, preferring to monitor the effectiveness of DCPDs and develop a transparent way to assess whether buyers can cover their decommissioning costs.
These costs are expected to fall between £15-20 billion, with uncertainties regarding technology, product costs, and timing possibly increasing estimates. Major projects have been delayed as high oil prices have improved the economic attractiveness of continuing production.
Improved technologies will help to decrease costs, but Dymond warned that technology companies are reluctant to invest because market signals are poor. “It would be good to see floating devices to work alongside lifting vessels as new technologies,” Dymond said. “We have set up a working group...to better plan for the future to help develop technologies and capabilities,” Dyson said.
Dymond told OGJ the success of DCPDs will be rated by the number of operators using them. However, OGUK will not use targets, because it is a trade association and cannot compel companies to implement them. Out of the 400-500 fields on the UKCS, fewer than 100 have securities in place to cover decommissioning plans.
Dymond told reporters the association was also talking to government about changing the tax treatment of decommissioning costs. Presently companies acquire letters of credit from banks to show they are capable of handling the liabilities. “This form of financial security is problematic,” Dymond said, pointing out that small companies find it difficult to secure the letters, especially if they have only the one asset.
“Oil and Gas UK are suggesting a sinking fund that companies could put funds into, but this would need to have a tax relief put up against it to make it work,” he said. OGUK also is anxious to have the threat of inheritance tax removed from trust funds set up for decommissioning.
