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31 March 202210 minute read

‘Boomerang’ decommissioning liabilities for the oil & gas industry in Australia

In recent years, as offshore fields located to the north¬west and south-east of the country have reached mid-to-late life, the focus of the Australian government has turned to managing declining production and preparing to decommission offshore facilities, wells and pipelines.

The Australian government, its regulators and industry have a big job on their hands. A credible estimate cited by government has put the total cost of decommissioning offshore infrastructure at approximately AUD60 billion over the next 30 years (cost estimate based on the regulatory base case for decommissioning, which is full removal of infrastructure and restoration of the seabed).

Infrastructure to be decommissioned includes 57 platforms with a total weight of 755,000 tonnes, equivalent to the steel in 14 Sydney Harbour bridges. There are also 11 floating facilities, 6700 kilometres of pipelines, 1500 kilometres of umbilicals and more than 500 subsea structures. There are also approximately 1000 wells to be plugged and abandoned.

The NOGA administration

Recent events provide a case study of what can go wrong in decommissioning.

Government and industry have recently come under intense scrutiny in relation to the voluntary administration in 2019, and subsequent liquidation in early 2020, of the Northern Oil and Gas Australia (NOGA) group of companies, which in 2016 acquired the Northern Endeavour FPSO and Laminaria-Corallina fields in the Timor Sea to the north of the country.

The administration and liquidation of NOGA has meant that the Australian government has assumed liability for the decommissioning of the Northern Endeavour and Laminaria-Corallina fields. Recently, it has been proposed that this liability be passed-through to industry by way of an unprecedented ‘special levy’ (more on this below).

Regulations reviewed

Partly as a result of the NOGA administration and liquidation, in 2020 the Australian government fast-tracked a review of the decommissioning provisions in Australia’s key offshore oil & gas law, the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (the Act).

The government’s review found that, in general, the Act is sufficient to regulate a maturing industry with a number of current provisions for decommissioning, such as:

  • arrangements for property and equipment, plugging and abandonment of wells and remediation activities prior to title surrender, contained in section 270 of the Act;
  • financial assurance, to meet costs, expenses and liabilities relating to petroleum activities (e.g. remediation of damage to seabed or sub soil) contained in section 571 of the Act;
  • maintenance and removal of property, contained in section 572 of the Act;
  • directions relating to the restoration of the environment, from NOPSEMA to current or former title holders contained in part 6.4 of the Act; and
  • a regulatory process for the plugging and abandonment of wells, contained in part 5 of the Offshore Petroleum and Greenhouse Gas Storage (Resource Management and Administration) Regulations 2011.

However, the government’s review also identified a number of areas for improvement. As a result, in December 2020, the government announced changes to the Act, which it stated were aimed at strengthening and clarifying the regulatory framework in relation to decommissioning.

The changes to the Act, which were recently passed, receiving royal assent in September 2021, include:

  • Changes in company control: expanding the types of transactions requiring government assessment and approval to include changes in ownership or control of a titleholder entity, such as through a corporate merger, acquisition or takeover (previously, only direct asset/title transfers required government assessment and approval).
  • Trailing liability: expanding the circumstances where a previous titleholder can be ‘called back’ to remediate the title areas or conduct other activities where the current titleholder is unable to do so, and also introducing the concept of a ‘related person’ (i.e. a person who can be called back where they are a related body corporate, or a determination is made that the person was capable of benefiting, or has significantly benefited, financially from the operations, has been in a position to influence compliance and/or acts or has acted jointly with the titleholder).
  • Suitability: including revised decision-making criteria within the Act to assess competency and suitability of entities applying to operate under the regime. These assessments at key decision points include financial capacity, technical capability, history of compliance and corporate governance arrangements.

The majority of the changes to the Act took effect from 2 March 2022. Trailing liability will apply retrospectively to permits, leases, licenses or authorities that were cancelled or otherwise ceased to be held on or after 1 January 2021.

Key provisions in the Act are supported by subsidiary legislation, guidelines and policy that in some cases are yet to be released. The Australian government recently released guidelines that provide further information about how NOPSEMA and the Minister will utilise the expanded trailing liability provisions. Areas where more detail is awaited include in relation to decommissioning planning, taxation treatment of decommissioning liability and possible models of financial assurance.

Ramifications for industry

The changes to the Act have been accompanied by a distinct ramp-up in oversight and enforcement by the government in relation to decommissioning, with real ramifications for industry.

The announcement of increased scrutiny on asset buyers and the potential for trailing liabilities for past asset owners (together with, in one instance, a strongly worded letter from an Australian government Minister) discouraged two IOCs from proceeding with planned USDmulti-billion asset sales in late 2020 and early 2021.

Since then, the Australian government has also:

· issued directions to an IOC to decommission two fields off Western Australia and the Northern Territory, in particular requiring plugging and abandonment of six wells and removal of all subsea equipment including pipelines, umbilicals, mooring systems and manifolds at one field before the end of 2021; · ordered complete decommissioning by a major Australian oil & gas player of an oil field off Western Australia, comprising plugging and abandonment of 18 wells by mid-2024, removal of all other equipment by the end of 2024, and restoration of the seabed environment by the end of 2025; and · imposed deadlines for decommissioning in respect of an IOC’s 10 platform and approximately 200 well portfolio in the Gibbsland Basin off Victoria in southern Australia.

A special 48 cents per barrel levy, to run indefinitely, is also proposed to be imposed across all Australian offshore petroleum producers, effective retrospectively to 1 July 2021, to fund the government’s costs with respect to the decommissioning of the former NOGA assets, which it is speculated could be up to AUD1 billion.

Risks and liabilities grow

Even if a special levy was to ‘pass through’ its liabilities in relation to the former NOGA assets, the decommissioning of offshore oil & gas assets remains a significant fiscal issue for the Australian government. Tax deductibility of decommissioning costs may mean that a significant portion of upcoming decommissioning costs ultimately fall to the government (and thereby the Australian taxpayer).

If this occurs, the oil & gas industry should brace for decommissioning liabilities to become more of an issue in the community, and for some backlash – which in turn will spur on government to take even more stringent oversight and enforcement action in relation to decommissioning.

In such a context, it would not be surprising to see the trailing liability provisions recently introduced by government ‘boomeranging’ decommissioning liabilities back to industry, and being used by the government to pursue parent companies, joint venture partners and former asset owners in relation to decommissioning liabilities, where those liabilities cannot be met by the existing asset owner. In the worst cases, trailing liability may even be applied again across every operator in a basin or jurisdiction (as with the special levy proposed to be introduced in relation to the former NOGA assets).

In these circumstances, Australian oil & gas operators need to shift from solely focusing on improving their own decommissioning practices, at the technical level to also closely scrutinising the decommissioning capabilities of their joint venture partners and those who acquire assets from them (whether by asset transfer or at the corporate level) – and those who have acquired assets from them in the past. The financial and technical capabilities of these persons will from now on require substantial and ongoing due diligence. Asset and share sale transaction documentation will also need to be structured so as to appropriately manage ongoing decommissioning liabilities.

How to ensure future investment

There are opportunities for government and industry in decommissioning.

The chief opportunity for government is to ensure future investment in the industry – which will continue to be essential in the Asia-Pacific region for many years to come – by providing clear and detailed decommissioning regulations, that align the interests of all stakeholders.

One way that government and industry can become more aligned is to agree on better structures around decommissioning funding and security, also known as financial assurance. Often in the past, financial assurance in respect of decommissioning has been supported by large IOC balance sheets and captive insurance arrangements. However, governments are increasingly looking to bonds and other sureties, as well as innovative decommissioning fund models (already popular in production sharing contract jurisdictions). In Australia, there are some collective decommissioning fund models already in use in respect of onshore mining in Western Australia, and onshore petroleum and mining in Queensland, which might be considered for use in offshore petroleum. There is also the potential for innovative new financing solutions to provide financial assurance for decommissioning. The development of new models and solutions for financial assurance can be supported by clear and detailed regulations.

A major opportunity for industry also exists to demonstrate genuine alternatives to the regulatory base case for decommissioning, which is full removal of infrastructure. Alternatives to full removal can save enormously on cost, and when done properly can lead to genuinely positive environmental outcomes – for example, infrastructure left in-situ can continue supporting biodiversity (see the ‘rigs to reefs’ initiatives, for example in the Gulf of Mexico – a scenario which is well-suited for use in offshore Australia, if environmental criteria are met). Infrastructure left in-situ might also be re-purposed for use in carbon storage and other net-zero projects – earlier this year, a major Australian oil & gas player and an IOC announced that they are collaborating on opportunities in this space in the Timor Sea.

Finally, there are also opportunities for the private sector in creating new types of industry business model, such as the “supply chain-led delivery model” used in the North Sea region. There and elsewhere globally, this model sees large operators relinquishing late life assets in a planned manner to smaller, focussed operators who can lower costs, eke out the final barrels of production and then bring closure to the asset using specialist decommissioning skill sets. This ‘right assets right hands’ approach requires an active regulator to ensure that the ‘right assets’ do indeed get into the ‘right hands’, but if that can be achieved, genuine benefits arise for governments and industry alike.