DECC publishes new Decommissioning Guidance Notes for oil and gas installations

DECC has published a new version of the BERR Decommissioning Guidance Notes of September 2006 in relation to the decommissioning of oil and gas installations and pipelines. This follows a consultation which took place in December 2008. The amendments take account of developments in industry practice (principally the development of an industry standard decommissioning security agreement) and the passing of the Energy Act 2008. The consultation period was extremely short owing to the fact that the government had brought forward the date for commencement of the decommissioning parts of the Energy Act 2008 from 6 April 2009 to 26 January 2009 as a direct response to the current economic situation.

The principal changes to the 2006 guidance notes are set out below:

• There a number of changes of terminology and references to legislation, to reflect developments since 2006. In particular the revised draft reflects the impact of the Energy Act 2008, which will be brought into force, in relation to oil and gas decommissioning, on 26 January 2009. The Energy Act 2008 introduces provisions dealing with decommissioning of gas storage and LNG unloading facilities and carbon capture and storage (“CCS”) injection facilities. It is noted that functions under Part IV of the Petroleum Act 1998 (decommissioning) in relation to CCS are exercised by the Scottish Executive.
• The new version of the guidance notes makes express reference to policies and procedures recognising the need to maximise energy production. However, it is not clear that in substance the guidelines have changed to reflect that need. There is an inherent conflict, recognised by DECC, between this aim and its responsibility to ensure that the cost of decommissioning does not fall directly on the taxpayer and the changes seem to be aimed more at the latter. Indeed, there is reference to fact that since the current decommissioning regime was originally introduced in 1987, industry has changed, with new licensees often being smaller companies with fewer assets, resulting in an increased risk of default.
• The process of issue of section 29 notices is altered to reflect new powers introduced by the Energy Act 2008. DECC can now serve notice not just on the operator but also on licensees before production has started – previously it had to wait until start-up before serving on licensees which gave rise to exposure if the development was unsuccessful. Likewise in relation to pipelines, it can now serve owners when there is an intention to establish a pipeline (which in the view of DECC is when Pipeline Works Authorisation is given and construction has commenced) and doesn’t need to wait for production to begin. It has new powers to serve notice on limited liability partnerships, and on persons who have transferred an interest in a licence without DECC’s consent, and can now serve the owners of installations (such as FPSOs) even if the operator and licensees have made adequate provision.DECC’s ability to obtain financial information has been brought forward – it can now obtain information before serving a section 29 notice, in order to decide whether to serve, and before an abandonment programme is agreed, to decide whether it is appropriate to ask for security. In this regard the guidance notes stipulate information which may be required including detailed estimates of decommissioning costs, predictions of future revenue, costs and benefits of plans for redevelopment, and up to date management accounts. DECC’s ability to obtain security is also brought forward – it may now require this at any time after a section 29 notice is served and not just after an abandonment programme is agreed.
• The new version of the guidance notes refers to the fact that under the Energy Act 2008 notice may only be served on licensees and JOA parties entitled to derive a financial or other benefit from the installation. This provision was introduced at the urging of industry to deal with the concern that in a multi-area licence, licensees in one area are potentially jointly and severally liable for decommissioning of installations in another area in which they have never been beneficial owners. However, there has been criticism of the provision put forward on the grounds that the reference to “financial or other benefit” is not sufficiently defined. [For a discussion of this criticism please click here]. Some comfort is given in the guidance notes which state that the benefit must arise from exploitation or exploration of mineral resources or storage or recovery of gas for which the installation was built or maintained. It states that this does not include persons who are only transporting production via the installation in question or who only buy oil and gas from that installation. It would also not include persons whose only benefit is derived from trading carbon dioxide emissions allowances or from the supply of goods or services to the installation. The concern of industry has been that this again leaves the industry in the position of relying on policy of government which may change.
• The guidance notes expressly address the question of whether the host installation operator would be considered “manager in default” of a tieback if the tie-back operator disappeared. Where the host operator has no authority to make strategic managerial decisions regarding the tieback field and no entitlement to benefit, DECC has taken the view that the host operator is not to be regarded as the manager of the tieback installation.
• On the related question as to when a tieback is considered a separate installation and not part of the host facility, the guidance notes comment that the mere fact that the tieback depends on the host facility is not a useful criterion since many UKCS fields are dependent in one way or another on some other infrastructure for operation and/or transport. If the tie-back exploits a different field, and has a subsea well head and manifold it will usually be separate: if it doesn’t, strong reasons will be needed to treat it as separate but whether it is on a different licence and whether there are different licence groups may be significant. Extended reach wells are treated as part of the host installation even if accessing a separate field.
• There is now express reference to total facilities contractors but, unfortunately for the companies involved, the guidance notes do not offer total comfort – the fact that the contractor is responsible for day to day operations and is duty holder for HSE legislation is not sufficient to make them a manager for purposes of section 29 but if they have a role in planning and exercise a strategic role in relation to the exploitation of the field and the running of facility then they may be. There is likely to be a significant grey area between the two ends of this spectrum.
• Protective provisions – the guidance notes summarise the provisions inserted into the Petroleum Act by the Energy Act which protect funds set aside for decommissioning against the insolvency of the provider, and enable the Secretary of State to direct a provider to publish information about those decommissioning funds so that creditors are aware of them and can make informed decisions.
• Discussions between DECC and the operator regarding preparation of a decommissioning plan for approval begin up to 3 years before expected COP in the case of larger fields. The guidance notes now make the point that in cases where a derogation may be sought from the government’s obligations under the OSPAR Treaty to ensure total removal of facilities then these discussions may need to begin as much as 5 years before COP.
• DECC seems intent on simplifying the overall decommissioning process, stressing that programmes should be as short as possible consistent with providing the requested information in a manner proportionate to the installations concerned. The guidance notes propose that consultation on the initial draft programme with government and other stakeholders should take place simultaneously, and remove one or two iterations of the draft programme from the process. They also shorten the overall timetable for consideration of the draft programme once formally submitted from 12 weeks to 10 in most cases though derogation cases may take longer.
• There is emphasis at several points in the text on the need to take into account the climate change impact of options under consideration in terms of energy balance and emissions.
• There is new detail on pipeline decommissioning and subsequent monitoring. The guidance notes make clear that the decommissioning plan will need to include evidence of the contents of the line and an outline of the cleaning operations that will be undertaken. The advantage of commencing cleaning operations early in the decommissioning process is also emphasised. DECC has also concluded that a risk based monitoring scheme based on pipeline stability and potential impact remains appropriate. DECC will be closely involved with the operator during the monitoring phase.
• The guidance on drill cuttings has also been updated to reflect the OSPAR Recommendation which was effective from 30 June 2006 to introduce a two stage management regime. The guidance also acknowledges that industry has provided DECC with a report assessing UK cuttings piles in line with this recommendation and states that an implementation report is hoped to be submitted by DECC to OSPAR before March 2009.
• The guidance notes make reference to artificial habitats and state that although it is unnecessary to justify the removal of structures that have been colonised by protected or rare species, it is still a requirement to conduct surveys to establish whether such species or habitats are present and to what extent.
• Significant amendments have been made to Annex F regarding decommissioning liabilities and risk to the taxpayer. In particular, the guidance notes provide new information on how DECC determines whether to withdraw a section 29 notice from a company selling their interest in an asset. A new assessment procedure is outlined which will be used to calculate the risk associated with the group of section 29 notice holders. The process will also be used to review the risk of all section 29 groups every six to twelve months. These measures involve consideration of updated company accounts together with wider changes in a company’s and its group’s portfolio of assets. The guidance notes indicate that even if a section 29 notice is not withdrawn at the time of sale it may be withdrawn later based on this assessment. The process involves calculating the costs of decommissioning the project and comparing a company’s share of the costs (and indeed its and its corporate group’s total liability for UKCS decommissioning) against its (and its corporate group’s) net worth. Companies and their corporate groups will then be classified depending on the probability that they will be able to afford the potential decommissioning costs. This process is not made public. Where decommissioning liabilities exceed 50% of the relevant net worth figure, the OFT considers that there may be difficulties and above 70% this becomes likely. In these cases more detailed financial analysis will be undertaken and mitigation measures may be considered such as requiring security from the person concerned or serving section 29 notices on other potentially liable persons such as affiliates, although this is unlikely to be considered necessary if a satisfactory field decommissioning security agreement is in place. Once a risk classification has been assigned to each section 29 notice holder in a group and to an incoming party, the position of the joint venture group is then analysed as a whole – considerably more detail is given on how this is assessed than was previously the case but the rules are not hard and fast. Effectively, if a group is considered high risk then the section 29 notice of an existing party will not be withdrawn. On a medium risk group withdrawal is probable if costs are under £25 million and on a low risk group withdrawal is probable if costs are under £100 million but even these rules are subject to other factors, such as whether a decommissioning security agreement in agreed form exists, whether the licence is now held by a sole licensee or whether other licensees are known to be trying to sell their interest.
• The guidance notes are supportive of the industry initiative to develop a template decommissioning security agreement. Where the industry template is not used, any alternative will need to meet the same minimum requirements. Annex G sets out information regarding the participation of DECC in these agreements. It is stressed that the existence of such an agreement may enable DECC to conclude that it does not need to use its statutory powers to demand security directly from section 29 holders, but that it retains the right to do so and when it exercises these powers the security will be held directly by DECC and not under a decommissioning security agreement involving a trust deed. Annex G also recognises that alternative forms of security from the traditional letters of credit may be acceptable provided they are irrevocable, on demand and from “a UK body of substance”. It retains its traditional antipathy to PCGs as a form of security but does comment that from its perspective, a company of substantial financial standing may be able to demonstrate the ability to meet all of its potential liabilities without providing a financial security at all. This raises the option for certain field groups of including PCGs as an option for companies with a particular net worth (on an individual rather than a corporate group basis), on the basis that although they are not acceptable to DECC, DECC may agree to dispense with the requirement for any other form of security from those entities.In the present circumstances, there is concern regarding the requirement for letters of credit to be from a AA/Aa2 rated bank – the guidance notes comment that DECC will consider proposals which do not fully meet the criteria taking account of other factors such as the level of risk and decommissioning costs and the presence of other parties to the agreement.Previously, DECC has indicated that it requires security for 100% of decommissioning costs. The guidance notes now reflect the relatively widespread formula of costs multiplied by a contingency fee less anticipated revenues. “The contingency fee will vary depending on the complexities of the facilities to be decommissioned but in most circumstances will add 50% to the total cost estimate.” As previously, DECC remains sceptical as to the salvage value of equipment. There is confirmation of the position put forward in the industry template that generally DECC will require audits of costs and revenues to be carried out only every three years but that these may be required annually depending on project timescales.

Due to the short consultation period prior to publishing the third version of the guidelines, DECC has agreed to take into account any further points made by companies, to produce a fourth version, if this is warranted. Companies must send their comments to DECC by the end of March 2009.