The UK oil and gas industry continues to make a substantial contribution to the country's energy security and economy. However, the UK Continental Shelf (UKCS) is a mature oil-producing basin and has been heavily impacted by the sustained period of low oil and gas prices since 2014. In January 2016, crude oil prices dropped to their lowest level in 12 years and as a result of this, decommissioning of UKCS infrastructure has been put firmly on the agenda for many operators looking to reduce their balance sheet liabilities.
According to the latest report from Oil & Gas UK it is expected that 203 fields will see some form of decommissioning activity between 2018 and 2027 on the UKCS. To put this into context, it is anticipated that 1,465 wells will be plugged and decommissioned, 74 topsides will be lifted and removed, 71 structures will be dismantled and 18,136 concrete mattresses will be removed along with 5,724 kilometres of pipeline. This is equivalent to over 850,000 tonnes of topside and structure to be removed.
With the volume of decommissioning that is required, there are opportunities for the offshore industry to step in as efforts are made to continue to drive down costs. The cost of decommissioning is decreasing with well decommissioning costs being steadily reduced over the past five years. For example, the cost of decommissioning a platform well has been reduced from £2.32 million per well to £1.70 million per well.
Total expenditure on decommissioning between 2018 and 2027 in the UKCS is expected to be in the region of £15.3 billion with an average spend of £1.5 billion per year for the next decade.
Decommissioning is an obligation and liability rather than an activity with intrinsic value to the operator. It is complex and fraught with legal and regulatory challenges, not just around establishing and approving decommissioning plans, but also in relation to funding the costs, allocating liabilities under joint operating agreements, asset transfers, litigation risks with contractors, and the need to comply with all the relevant EU, international and local environmental regulations.
There are already signs that the unit costs for decommissioning are falling, in part because the industry is building up knowledge and learning from each project, but future cost savings will come from maximising efficiencies in the decommissioning process, which means standardising contracts, vessels, rules and procedures.
The recent market downturn is also serving to reduce the costs of retiring these sites, which means some companies are expediting decommissioning to take advantage of low charter rates, while others are deferring cessation of production due to cash-flow constraints.
Over the coming decades, large investment will be required to retire North Sea oil and gas fields. If that investment is well managed, and the necessary legal framework developed, the UK has the potential to build expertise in safe and responsible decommissioning of platforms and pipelines that can be exported around the world.
II Preventing a run on decommissioning activity
In response to the decline in production from the UKCS, the UK government commissioned a review of the UK offshore oil and gas recovery and regulation led by Sir Ian Wood. The UKCS Maximising Recovery Review Final Report was published in February 2014 (Wood Review). Following the report, the government set out its proposals for implementing the Wood Review's recommendations. As part of this, the Oil & Gas Authority (OGA) replaced the Department for Energy and Climate Change (DECC) as the entity responsible for petroleum licensing and regulation of the upstream oil and gas sector, including:
- oil and gas licensing;
- oil and gas exploration and production;
- oil and gas fields and wells;
- oil and gas infrastructure; and
- carbon storage licensing.
The OGA was established as a fully independent regulator in April 2015 and a government-owned company, with the Secretary of State for Business, Energy and Industrial Strategy as the sole shareholder was set up.
The strategy for maximising economic recovery in the UK (MER UK) was implemented as part of the recommendations in the Wood Report. This required that 'all stakeholders should be obliged to maximise the expected net value of economically recoverable petroleum from relevant UK waters, not the volume expected to be produced'.
The consequences of this means that, if a relevant party decides not maximise the possible production from a particular field, it must allow others to seek to take over in order to maximise the recoverable hydrocarbons from the field by divesting the licence or asset 'to other financially and technically competent persons'. This is intended to ensure that decommissioning activity is not undertaken too early. MER UK further requires an operator who is unable to raise suitable finance to proceed with operating an installation or whose returns are unsatisfactory and cannot divest itself of the asset, to relinquish the licences after a reasonable period of time.
III Regulation of decommissioning activities
The Department for Business Energy and Industrial Strategy (BEIS) is responsible for establishing the framework and implementing the policies set out in MER UK. It is responsible for petroleum licensing and regulation of the upstream oil and gas sector, including:
- decommissioning of offshore oil and gas installations and pipelines; and
- enforcing environmental legislation as it applies to upstream oil and gas activities.
The Secretary of State has overall responsibility for the activities of BEIS and its policies and is also responsible for exercising many of the powers under the Petroleum Act 1998 and related legislation. A number of these powers were transferred to the OGA by the Energy Act 2016 upon it coming into force in May 2016 and have implications for those engaged and undertaking decommissioning activities in the UKCS.
IV Health and safety and decommissioning
As part of the oil and gas lifecycle, decommissioning activities in the UKCS are underpinned by the health and safety legislative regime in the UK. The primary piece of legislation in the UK is the Health & Safety at Work Act 1974 (HSWA74). This imposes criminal liability on both companies and individuals who are in breach of the HSWA74.
Penalties include unlimited fines and imprisonment and there are additional regulations that apply to the oil and gas industry that sometimes impose strict liability and can also trigger civil liability. These include the Offshore Installations (Offshore Safety Directive) (Safety Case etc) Regulations 2015 and the Control of Major Accident Hazards Regulations (which came in to force on 1 June 2015, revoking the 1999 Regulations).
HSE's Energy Division is responsible for overseeing health and safety arising from work activity in the offshore oil and gas industry on the UKCS.
The HSWA74 imposes strict criminal liability on all employers, who are under a duty to ensure the health and safety of all those affected by the conduct of such employer's operations, so far as is reasonably practicable. This duty therefore applies to all employees, contractors and third parties (including, visitors and members of the public). Where an employer can demonstrate that they have taken all reasonably practicable steps to avoid a breach they will be afforded a complete defence to any charge or breach of the HSWA74. Individual officers, managers and directors whose neglect, consent or connivance contributed to the breach can also be prosecuted under the HSWA74 and imprisoned if convicted. Under the HSWA74 it is the duty of every employee while at work to take reasonable care for the health and safety of him or herself and of other persons who may be affected by his or her acts or omissions.
The Piper Alpha disaster in 1988 led to a number of wide ranging changes in the oil and gas regulatory regime as part of the report following Lord Cullen's public inquiry. This placed responsibility on the 'duty holders' to:
- prepare a safety case that demonstrates they have the ability and means to control major accident risks to an extent that is acceptable to the HSE;
- consult the installation's safety representatives in the preparation, revision or review of the safety case;
- operate the installation in compliance with the arrangements described in the current safety case;
- implement effective measures to prevent uncontrolled releases of flammable or explosive substances;
- maintain the integrity of the installation's structure, process plant, temporary refuge and all other equipment;
- maintain the integrity of the wells and the pipelines throughout their lifecycle (this applies to well operators and pipeline operators); and
- prepare a plan for dealing with an emergency should one occur.
The Offshore Installations (Offshore Safety Directive) (Safety Case etc.) Regulations 2015 (SCR) now require the operator or owner of every offshore installation to prepare a safety case and submit it to the regulator for acceptance. These now incorporate additional requirements of the EU Offshore Safety Directive and BEIS has issued its own guidance to the SCR.
As such, oil and gas operations in external waters in the UK's territorial sea or designated areas within the UKCS are required to submit a saftey case. Activities in internal waters (e.g., estuaries) will continue to be covered by the Offshore Installations (Safety Case) Regulations 2005 and its guidance L30.
The purpose of the SCR is to reduce the risks from major accident hazards, increase the protection of the marine environment and coastal economies against pollution, and to ensure improved response mechanisms in the event of such an incident.
V Other regulations
In addition, the following regulations are central to the offshore regulatory regime:
- Offshore Installations (Management and Administration) Regulations 1995 (as amended) (MAR).
- Offshore Installations (Prevention of Fire and Explosion and Emergency Response) Regulations 1995 (PFEER).
- Offshore Installations (Design and Construction) Regulations 1996 (DCR).
However, there are many other relevant regulations, such as:
- Management of Health and Safety at Work Regulations 1999 (MHSWR).
- Control of Major Accident Hazards Regulations 1999 (COMAH).
- Provision and Use of Work Equipment Regulations 1999 (PUWER).
The DCR is relevant to decommissioning activities. The DCR is divided into two parts:
- The first section deals with integrity, workplace environment and other miscellaneous matters. This places an obligation on the duty holder to ensure that an installation possesses such integrity as is reasonably practicable at all time. The duty holder must ensure that installations are designed and built so that, so far as is reasonably practicable:
- it can withstand the forces acting on it as may be reasonably foreseeable;
- its layout and configuration, including the plant and machinery fitted, do not prejudice its integrity;
- fabrication, transportation, construction, commissioning, operation, modification, maintenance and repair of the installation can take place without prejudicing the installations integrity;
- it can be decommissioned and dismantled safely; and
- in the event of damage to the installation, it will retain sufficient integrity to enable action to be taken to safeguard the health and safety of the personnel on it or operating nearby.
- The second section requires the duty holder to ensure that suitable arrangements are in place for maintaining the integrity of the installation, including suitable arrangements for:
- periodic assessment of its integrity; and
- the carrying out of remedial work in the event of damage or deterioration that may prejudice its integrity.
These obligations continue to apply throughout the decommissioning of an installation and need to be considered when undertaking decommissioning activities.
VI The Petroleum Act 1998 and decommissioning
The decommissioning of offshore oil and gas installations and pipelines on the UKCS is overseen by BEIS' Offshore Decommissioning Unit (ODU) and is underpinned by the legislation set out in the Petroleum Act 1998 (PA98), as amended by the Energy Act 2008 (EA08) and the Energy Act 2016 (EA16).
The 1992 Convention for the Protection of the Marine Environment of the North East Atlantic (OSPAR Convention) sets out the UK's international obligations on decommissioning.
The OGA works with BEIS and the ODU to ensure that decommissioning programmes submitted for approval in accordance with the PA98 also meet the principles set out in MER UK for cost-savings, future alternative use and collaboration.
Decommissioning obligations on an operator arise when the Secretary of State serves a 'Section 29 notice' issued in accordance with Section 29 of the PA98. This requires the operator of the field and each one of the licensees to submit a decommissioning programme. In the first instance this would include parties to joint operating agreements for installations, and owners for pipelines. It is usual for the party who has physical control over the installation to take the lead but all the parties remain jointly and severally liable for the costs of decommissioning the installation.
The Section 29 notice will either specify the date by which a decommissioning programme for the installation or pipeline is to be submitted or, as is more usual, provide for it to be submitted on or before such date as the Secretary of State may direct. This usually occurs on or before the cessation of production (COP).
The decommissioning programme sets out the measures to decommission disused installations and pipelines and will describe in detail the methodology to be engaged for the removal of the asset. Where it is proposed that an installation or pipeline (or part thereof) is to remain in position it must also state what provisions will be put in place for monitoring and maintenance of the remaining structure.
After the decommissioning programme has been approved, the section 29 notice-holders are legally obliged to carry out the work. The Secretary of State has powers to require remedial action to be taken if a programme is not carried out or its conditions are not complied with and failure to comply with any such notice is an offence under the PA98. In extremis, the Secretary of State can carry out the remedial action and recover the costs from the person to whom the notice was given.
The government has been keen to ensure that UK taxpayers do not foot the bill for an operator's decommissioning costs and so latter legislative changes implemented by the EA08 and EA16 have broadened the parties upon whom a Section 29 notice can be served. This currently includes not just the current licensees but any person who has or who has had an interest (financial or otherwise) in the installation or pipeline. This includes any parent or associated companies of a licensee.
The OGA has served Section 29 notices on additional stakeholders where it has considered the decommissioning arrangements proposed by the operator and licensees to be unsatisfactory. The Secretary of State's power to do this is set out in Section 34 of the PA98. It follows that the Secretary of State cannot send a Section 29 notice to a person if that person has never been entitled to derive any benefit (financial or otherwise) from an installation and they are a licensee or party to a joint operating agreement (or similar agreement) but have never been in one of the other categories of persons to whom a Section 29 notice can be served.
A Section 29 notice holder will remain liable for the decommissioning of an installation or pipeline unless the Section 29 notice is withdrawn. As discussed above, the obligation to carry out the approved decommissioning programme is joint and several.
Where an asset changes hands as a result of a decision by the licensee to sell the asset as a going concern or as a result of MER UK, the Secretary of State may release a former licensee from its Section 29 obligations.
This is usually done in circumstances where the OGA is satisfied that there is adequate financial security to cover the decommissioning liabilities. Security in the form of a decommissioning security deed (to which the Secretary of State may be a party and can draw down on), letter of credit or facility agreement with a third-party financier will usually ensure that the new licensee can discharge their decommissioning liability. It is worth noting, however, that even if a former licensee is discharged from its Section 29 obligations either by agreement with the OGA or otherwise under contract, the Secretary of State can re-impose liability on a party under Section 34 of the PA98. Therefore, any company that has been a licensee at any time since development of a field is potentially liable for the decommissioning of that field until decommissioning is complete.
Since decommissioning is an inherent cost and a liability for an operator as a result of operating on the UKCS, there is tax relief for decommissioning costs. Tax relief for such costs is given at the point they are incurred and the decommissioning carried out.
In response to pressure from the industry, in September 2013 the government introduced decommissioning relief deeds, which are agreements entered into between the government and oil and gas investors providing tax relief for investors for decommissioning expenditure in certain circumstances.
BEIS' Offshore Environmental Inspectorate enforces offshore oil and gas environmental regulations and, through the OGA, can bring prosecutions against offshore permit holders, licensees and operators. The OGA can also issue notices and sanction an offending party using:
- Enforcement notices: these inform the party who is in breach of the requirements what time the OGA will allow for compliance with the prescribed conditions.
- Financial penalty notices: these require the party in breach to comply with the relevant requirement within a given time frame and to pay the financial penalty to the OGA.
- Revocation notices: these revoke the petroleum licence of the party in breach following a failure to comply with a specified petroleum-related requirement imposed on a licensee.
- Operator removal notices: these require the licence holder to remove the operator from its position following a failure to comply or a breach.
The HSE also has wide-ranging enforcement powers under the HSWA74 and other regulations. An HSE inspector may enter any workplace, including docks and offshore installations, to inspect health and safety conditions and to investigate accidents to personnel working in a port or while loading or unloading a ship. They can similarly investigate accidents occurring to a ship's crew.
Enforcement may include:
- serving notices on duty holders;
- withdrawing approvals;
- varying licences, conditions or exemptions;
- issuing simple cautions;
- prosecution; and
- providing information or advice, in person or in writing.
The Maritime and Coastguard Agency (MCA) is responsible for enforcing all merchant shipping regulations in respect of occupational health and safety, the safety of vessels, safe navigation and operation (including manning levels and crew competency).
Sometimes the jurisdiction of the HSE, MCA and the Marine Accident Investigation Branch overlaps and they will agreewho takes the lead for a given activity depending on whether the activity is within the internal waters or territorial sea of Great Britain or the UKCS. This excludes responsibility for health and safety enforcement activities offshore.
VIII Fines and penalties
The OGA has powers to issue fines of up to £1 million (Section 45(1) of the EA16). It may also order the removal of the operator of a licence and ultimately revoke a licence for one or all of the licence holders in the event of non-compliance with applicable requirements. For example, ConocoPhillips (UK) Limited was fined £3 million (plus over £150,000 in costs) in February 2016 for its failure to carry out an adequate risk assessment for an offshore installation, and Transco plc was fined £15 million in 2005 for its failure to prevent an explosion from a leaking gas main.
An operator or contractor undertaking decommissioning activities in the UKCS needs to ensure that they work within the various regulations set out above. Failure to do so may result in a fine and prosecution.
IX Managing risk in contracts
One of the most important areas that needs to be given thought is the contractual allocation of risk between the parties. As with any contract, particularly those that are intended for use in the offshore environment, clarity of responsibility is important, both from a financial and operational perspective.
Given the increasing frequency and complexity of the decommissioning operations that are being carried out, there has been an attempt by the industry to provide guidance and standardisation in relation to the contracts that govern such operations. With this said, this is very much a new area and the documentary framework is accordingly in its relative infancy. Many of the projects that have been undertaken have been on bespoke terms put forward by the operator. Depending on the commercial bargaining power of the parties, it may be that a contractor is able to push back on some of the fundamental terms as they will invariably be drafted in favour of the operator. As with any contract, the parties should both seek legal advice in relation to the specific terms to understand the extent and entirety of their exposure.
At present there are two contracts that have been developed with the technical challenges of decommissioning in mind. The first is BIMCO's DISMANTLECON contract (due to be published later this year), and the second is the LOGIC Decommissioning Contract.
The BIMCO drafting subcommittee, made up of expert legal, insurance and technical practitioners in the area, has developed the DISMATLECON contract to grapple with the significant challenges and peculiarities associated with a decommissioning project.
The two-part form adopted for the DISMANTLCON is reminiscent of the other documents in the BIMCO pro forma suite. The foundations of the contract are based on the WRECKSTAGE 2010 contract with amendments reflecting the specific nature of the project. The agreement does not contemplate that the contractor will deal with the disposal of the asset as the contract ends at the time of delivery. It is anticipated that an amended version of BIMCO's RECYCLECON will be modified for use with onshore disposal to allow users the option of extending the services by contract to deal with full disposal of the property.
It should be noted, however, that throughout the contract, title remains with the operator and is not transferred to the contractor. This reflects the obligation on the operator under the PA98.
The LOGIC contract was drafted by Oil & Gas UK's Decommissioning Working Group. This is made up of operators, contractors and professional advisers. The form is based on the LOGIC Maine Construction Form and, like other contracts in the LOGIC suite, it is structured with specific conditions in Section II of the contract. The intended scope of the contract is for the dismantling, removal and transport of the asset to shore. The contract can be used for any element of offshore infrastructure, whether topside or subsea.
As with the BIMCO contract, title in the property remains with the operator.
There is an obligation under both contracts for the parties to maintain appropriate insurance. Given the specialist nature of the operations, thought should be given to the inter-relationship between the different insurance policies that a contractor may have in place for the proposed services. Typically, a contractor's P&I policy is unlikely to provide adequate cover for decommissioning operations and so the contractor should be looking to obtain an extension to their existing cover or procur specialist insurance.
Some operators may consider taking out a decommissioning all risks (DAR) policy for the duration of the project. In such circumstances, a contractor should also consider what additional cover might be needed over and above the operator's DAR insurance arrangements.
Decommissioning in the North Sea presents a significant opportunity for the offshore marine contracting community at a time when the oil and gas industry has been hit particularly hard by a number of factors. It is also an interesting and developing area of law that will be subject to significant scrutiny and change in the coming years since the nature of the work will inevitably generate a significant number of legal problems. In order to mitigate the possibility for potential disputes, careful drafting and allocation of risks in the contract together with insurance can undoubtedly make a difference and help to avoid complications for the parties involved further down the road.
1 Tom Walters is a partner at HFW.