P&I CLUBS CAN FUND INDEMNITY ON ABANDONED PLATFORMS

Deborah Pretty, Martin Davies Sedgwick Energy Ltd. London The North Sea oil industry is coming under increasing pressure to decide the future of abandoned offshore oil and gas platforms. The British government stated it will not accept reversion of title for abandoned oil fields in the U.K. sector of the North Sea, leaving the burden of responsibility on operating companies. There are two approaches to platform abandonment: dismantling and removal of the entire platform, and partial removal

Aug. 30, 1993

4 min read

Deborah Pretty, Martin Davies
Sedgwick Energy Ltd.
London

The North Sea oil industry is coming under increasing pressure to decide the future of abandoned offshore oil and gas platforms.

The British government stated it will not accept reversion of title for abandoned oil fields in the U.K. sector of the North Sea, leaving the burden of responsibility on operating companies.

There are two approaches to platform abandonment: dismantling and removal of the entire platform, and partial removal subject to inspection and maintenance consistent with International Maritime Organization regulations.

Partial removal involves toppling platforms or cutting them down to a low level to leave only stumps exposed.

The remains would then join the existing 20,000 recorded wrecks in the seas around the U.K. as recognized maritime hazards.

The cost of platform removal is potentially enormous, although complete removal would reduce operators' residual liabilities to a minimum.

Leaving a wreck would reduce substantially field partners' capital costs for removal.

It would also expose the partners to potential third party liability claims for snagged fishing nets and damage to deep draft vessels and submarines, for example.

Despite extensive analysis, the likelihood or potential magnitude of third party liability claims remains unclear. The potential for pollution claims has also been debated.

In contrast, it is maintained by some that residual liability would not exist if a site were to be abandoned to the government's standards and was correctly charted and buoyed.

Under these conditions it is crucial to monitor legislation, safety standards required in navigation, particularly for civil and military submarines, and fishing and environmental concerns.

OBLIGATIONS

Under the terms of their original grants, the surviving operators of abandoned sites retain title with all the attached obligations in perpetuity. In the North Sea it is usual for platforms to be owned by the partners of joint ventures, who share these obligations jointly and severally.

Two years ago the U.K. Offshore Operators Association (Ukooa), London, submitted a proposal to government suggesting that title should revert to the state after sites had been abandoned to a satisfactory standard. In return, Ukooa offered to establish a fund which could be used to pay for any claims from third parties arising from abandoned wells. This fund was expected to be substantial.

The government rejected the industry's proposals. Platform owners were thus left with perpetual and unquantifiable liabilities. They were also left in the knowledge that if a joint venture partner ever went out of business the surviving partners would have to pick up that company's share of any claim. There was a clear need for some form of insurance which would cover potential claims indefinitely and furthermore protect owners against coventurer default.

P&I CLUB

Earlier this year, at the invitation of Ukooa, Sedgwick Energy Ltd. in partnership with mutual insurance manager Charles Taylor & Co. and solicitor Clifford Chance proposed a solution to this problem.

This takes the form of a protection and indemnity (P&I) club, a traditional mutual funding vehicle for marine insurance.

Under the terms of the Sedgwick proposal, individual owners would pay a single premium to the club whenever a platform was abandoned. This premium would be sufficient to generate the annual cost of any reinsurance protection required. It would also have the advantage of locking members' funds into the club at the time of the abandonment.

Any subsequent liquidation of a coventurer, therefore, would not deplete the funds of the club.

Members would have the comfort of knowing that their premiums, paid with uncertainty as to whether any real risk attached, remained within a vehicle owned by themselves. Above all, it would be an industry solution.

An alternative to such an industry solution is for platform owners to include these risks within their existing insurance programs. There is a fear, however, that such cover would become very expensive if a number of losses occurred.

Moreover, insurance against partner default is unlikely to be available in any significant volume.

The challenges of setting a rate for a risk where supposition and informed guesswork take the place of loss history, and where cover is perpetual, cannot be overstated.

The sponsors of the proposed club believe that pricing is possible when based on long-term reinsurance costs and the club members' own levels of prudence. They feel that, with the support of the industry, it will be possible to create an effective funding mechanism.

The vehicle, while not relieving owners of their legal responsibilities, would provide economic protection against these relatively unexplored and unquantifiable risks.