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Australia's new decommissioning regime: following the UK's lead

12 May 2021 Alexander Macgregor

Introduction
The Australian government accepted it would have to decommission the Northern Endeavour FPSO in December 2020. The operator, Northern Oil and Gas Australia, had gone into liquidation. Previous operator, Woodside Petroleum, looked out of reach.

The Australian government is now trying to ensure it does not happen again. It is a concern of many governments. In mature provinces, declining fields are sold to smaller players; this is welcome, as it prolongs field life, but the risk increases that decommissioning responsibilities will not be met.

Different approaches
In many countries, there is a duty on the contractor to pay into a decommissioning fund during the years of production. The fund is available to meet the decommissioning costs. It is not popular with investors, as it ties up significant amounts of capital for long periods. Other countries have constructed different solutions to the problem, including

  • Requiring rightholders to plan for decommissioning early.
  • Stringent processes for approving assignees of upstream rights.
  • Requiring guarantee or security for decommissioning expenses.
  • Allowing the government to go after former licence holders (trailing liability).

The UK approach
The UK government serves Section 29 Notices on oil companies when development plans are approved. These notices require the licence-holder to provide a decommissioning plan. If the government is concerned about the financial strength of a company, it may require financial security.

Assignments of interests require government consent, which may take into account the proposed assignee's financial ability to meet the expected decommissioning costs.

The government may also require the assignor and assignee to enter into a Financial Security Agreement.

The UK has trailing liability; previous licence holders may be required to contribute to decommissioning costs if the final licence-holder defaults.

New Australian reforms
Australia is taking a leaf out of the UK's book. Australia has published a draft bill proposing amendments to the Offshore Petroleum and Greenhouse Gas Storage Act 2006.

The most notable changes are:

  • More assignments of petroleum rights will become subject to government approval. The consent of the government will be required for indirect assignments, when a company becomes the owner of a 20% (not 50%) interest in a licence-holder.
  • The government will have to assess the proposed assignee's future financial strength to complete its decommissioning obligations
  • The government will be able to go after other companies, including previous petroleum licence-holders for decommissioning costs, if the last licence-holder cannot complete the work.

In addition, the government will be able to look to companies related to previous titleholders and companies which have benefitted financially to a significant degree from a project.

The consultation period for the amending bill recently ended. The bill will now proceed to Parliament for debate.

Conclusion
More countries will need to revisit their decommissioning legal regimes to make sure they are robust enough for the new era, in which the pace of abandonments will be quickening.

Governments will be looking at the legal regimes of other countries for inspiration on how to avoid being left to decommission facilities themselves.

The penalty for failing to make sure these regimes are fit for purpose is a large bill for the taxpayers, and some awkward questions about how such a thing was allowed to happen.

The Australian government looks like it has learned from recent experience and from other countries, like the UK, how to make its decommissioning regime fit for the 2020s.

For more E&P Terms and Above-Ground Risk insights, visit ihsmarkit.com/PEPS

Posted 12 May 2021 by Alexander Macgregor, Senior Legal Analyst, Petroleum Economics and Policy Solutions, E&P Terms and Above-Ground Risk, IHS Markit


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