Offshore Oil & Gas Decommissioning - Norway

The Ministry of Energy is the responsible authority making decisions relating to the disposal of oil and gas facilities. Additionally, approval is required from the Norwegian Ocean Industry Authority prior to disposal of an oil and gas facility. 1

In connection with the Ministry of Energy’s assessment of the submitted decommissioning plan and its disposal decision, the submitted decommissioning plan is sent for consultation to other relevant authorities and affected bodies. The Norwegian Environment Agency is one such consultation body which is given the opportunity to comment on environmental matters related to the decommissioning plan.

Furthermore, approval requirements and permits may be required from other regulators pursuant to other laws and regulations beyond the petroleum legislation. In this regard, disposal of oil and gas facilities is subject to a permit under the Pollution Act, 2  for which the relevant authorities are the Ministry of Climate and Environment and the Norwegian Environment Agency. The Norwegian Environment Agency may in this regard impose measures to monitor and prevent pollution.

The main laws and regulations governing decommissioning of oil and gas facilities in Norway are the Petroleum Act 3  and the Petroleum Regulations. 4

Generally, the aim of the Norwegian decommissioning legislation is to ensure that licensees perform a thorough assessment of the disposal of oil and gas facilities at the end of production and carry out the disposal activities determined by the Ministry of Energy. Additionally, owners of such facilities, which are not licensees (asset owners), are also subject to decommissioning obligations, as applicable. Additionally, the decommissioning provisions regulate liability for damages incurred during and following the execution of decommissioning activities and the possibility for takeover by the State of fixed oil and gas facilities.

Other laws and regulations may apply to the decommissioning process of oil and gas facilities after the facility in question is removed from the respective oil and/or gas field.  When the oil and gas facilities are transported away from the oil and gas field, the facility is regarded as waste pursuant to the Pollution Act, 5  and the provisions of disposal under this Act apply.

There are also various health, safety and environment (HSE) laws and regulations in place, ensuring that the decommissioning is conducted in a safely and environmentally responsible manner.

Furthermore, Norway acts in accordance with international regulations and agreements regarding decommissioning, such as the OSPAR Convention. 6

According to the Petroleum Act, Chapter 5, the obligation to carry out decommissioning activities of oil and gas facilities vests with the licensees of the respective production licences or a specific licence to install and operate oil and gas facilities. Asset owners are also subject to decommissioning obligations, as applicable. The following decommissioning obligations apply throughout the decommissioning process:

• Decommissioning plan

The licensees shall submit a decommissioning plan to the Ministry of Energy, prior to expiry or surrender of the licence, or before the use of a facility is terminated permanently. Unless otherwise decided by the Ministry of Energy, the decommissioning plan shall be submitted, at most five years, and at least two years prior to expiry of a production licence and/ or the expected permanent termination of a facility. The decommissioning plan shall contain proposals for continued production or shutdown of production and disposal of facilities. The decommissioning plan shall include all information required by the Ministry of Energy to assess the plan and make its disposal decision, with further information requirements set out in the Petroleum Act 7 , and the Petroleum Regulations. 8

• Disposal decision

After receiving the decommissioning plan, the Ministry of Energy shall make a decision relating to disposal and shall stipulate a time limit for implementation of the decision. The Ministry shall, in making its decision, take into account technical, safety, environmental and economic aspects, as well as consequences for other users of the sea. The Ministry of Energy may impose conditions in connection with the disposal decision. 9

• Execution of the disposal decision

The obligation to carry out the disposal decision vests with the respective licensees and the asset owner. Furthermore, in the event of assignment of a participating interest in a licence, the assignor will retain secondary liability for the financial obligations towards the remaining licensees for carrying out the disposal decision, and also towards the State if the disposal decision is not carried out within the stipulated time limit. This secondary liability for decommissioning costs is further described in Section 2.1 below. 10

• Liability for decommissioning damages in the execution and post-monitoring phase

The respective licensees and asset owner responsible for carrying out the disposal decision are liable for damages or inconvenience caused wilfully or negligently in connection with disposal of the facility or other implementation of the disposal decision. If the disposal decision is abandonment, the respective licensees and asset owner are liable for damage or inconvenience caused wilfully or negligently in connection with the abandoned facility, unless otherwise decided by the Ministry. The State may enter into an agreement with the licensees and asset owner to take over future maintenance, responsibility and liability for abandoned facilities, subject to payment of financial compensation by the respective licensees and asset owner. 11

• Takeover of facilities by the State

The State has a right to take over the licensees’ fixed facilities when a licence expires, is surrendered or revoked, or when the use of such facilities has been permanently terminated. This may be the case if a fixed facility is needed for transportation of petroleum from other nearby fields. The Norwegian government decides with binding effect if and to what extent compensation shall be paid for the takeover. Following such takeover, the licensees will be relieved of their decommissioning obligations. 12

In the event of non-compliance with decommissioning requirements set out in or imposed pursuant to the Petroleum Act, the following penalties may apply to licensees and asset owners, depending on the severity of the non-compliance:

• Liability for financial costs

If a decision relating to disposal is not carried out within the stipulated timeline, the Ministry may take necessary measures on behalf of the licensee or asset owner, for their account. 13  The Ministry may also take necessary measures to the licensee’s account and risk if orders issued are not implemented. 14

• Daily fines

Non-compliance of orders issued may result in daily fines for each day that passes after expiry of the time limit set for implementation of the order. 15

• Revocation of licence

The Norwegian Government may revoke a licence in the event of serious or repeated violations. 16

• Criminal charges

Wilful or negligent violations may be punishable by fines or imprisonment for up to 2 years. 17

Decommissioning costs of oil and gas facilities are tax deductible in Norway for both ordinary corporate tax and special petroleum tax pursuant to the Petroleum Tax Act. 18  The current total tax rate is 78%. 

Furthermore, the state-owned company Petoro holds participating interest in approximately one third of the petroleum licences on the Norwegian Continental Shelf. Petoro is, like other licensees, obliged to cover their proportionate share of the licence decommissioning costs. As a result, a part of decommissioning costs for licences on the Norwegian Continental Shelf is thus ultimately to be borne by the State. 

• Joint and several liability

Licensees are joint and severally liable to the Norwegian State for financial obligations arising out of petroleum activities pursuant to the licence, including decommissioning costs. 19  In the event of default by a licensee in payment of its share of the decommissioning costs, the other licensees are liable to the Norwegian State for that licensee’s share.

Additionally, the standard joint operating agreement (JOA) 20  regulates the liability of the licensees between themselves. The licensees are primarily liable to each other on a pro rata basis, and secondarily joint and severally liable to each other for all obligations arising out of the joint venture’s activities. 21  Following this, the licensees are also, according to the JOA, liable to meet the defaulting licensee’s share of the decommissioning costs.

• Secondary decommissioning liability

Furthermore, the Petroleum Act, states that a licensee assigning its interest in a licence on the Norwegian Continental Shelf (asset sale), has secondary liability for decommissioning costs. 22  The secondary decommissioning liability applies in respect of the other licensees in the event of the buyer’s payment default of its share of the decommissioning cost, and in respect of the Norwegian State in the event of joint payment default by the licensees. The secondary decommissioning liability is limited to costs related to facilities existing at the time of the assignment. Further, the liability is calculated on the basis of the share of the participating interest assigned and on a post-tax basis (currently 22%). The assignor’s secondary decommissioning liability survives subsequent transfers of the licence or a participating interest in the licence, but to the effect that claims shall initially be directed to the company being the immediately previous assignor of the participating interest.

This secondary decommissioning liability applies only to direct transfer of licences. 23  In case of indirect transfers of licences, i.e. a transfer of shares of a company holding interests in licences on the Norwegian Continental Shelf (share sale), secondary decommissioning liability does not apply in respect of the previous shareholder directly. 24  However, the Ministry of Energy wanted to treat direct and indirect transfers of licences equally regarding secondary decommissioning liability, to ensure that other licensees and the Norwegian State are equally protected regardless of how the sale is structured. Therefore, the Ministry of Energy issued an explanatory letter in November 2016, 25  announcing that it would from then on introduce a new practice of requiring a parent company selling the shares of a licensee company on the Norwegian Continental Shelf to provide a guarantee for the licensee’s secondary decommissioning costs (Decommissioning Guarantee). 26

• Provision of security to the Norwegian State

The Ministry of Energy has, upon granting a licence and subsequently, a right to decide that a licensee shall provide security for fulfilment of the licensee’s obligations and possible liabilities in connection with its petroleum activities. 27  Typically, the Ministry of Energy requires the (ultimate) parent company of a licensee holding licences on the Norwegian Continental Shelf to provide a parent company guarantee towards the Norwegian State covering obligations arising in connection with the licensee’s petroleum activities (State Guarantee). The State Guarantee covers the licensee’s decommissioning liabilities.

Furthermore, the Ministry of Energy’s general practice is to require a parent company selling the shares of a licensee company on the Norwegian Continental Shelf to provide a Decommissioning Guarantee, covering the licensee’s secondary decommissioning costs. 28  The reasoning for the Decommissioning Guarantee is described further above in Section 2.1.

• Provision of security to the co-venturers

In the event of a licensee withdrawing from the licence, the other licensees may require the withdrawing party to provide a satisfactory guarantee for its proportionate share of the joint venture’s liability for decommissioning costs for facilities belonging to the joint venture at the time of withdrawal. 29

As described above in Section 2.1, typically the Ministry of Energy requires provision of a State Guarantee or alternatively a Decommissioning Guarantee, as applicable, which covers decommissioning liability. The State Guarantee and the Decommissioning Guarantee are to be provided by the parent company of the licensee company, and it is usually required to be provided by the ultimate parent company. These parent company guarantees are suretyship guarantees. 

There is no requirement nor general practice for a licensee to provide any financial security to the other licensees for its share of the decommissioning liability. As described above in Section 2.1, a guarantee may be required from a withdrawing licensee. Further, financial security mechanisms may be agreed between a seller and buyer in an asset or corporate sale process, as outlined in Section 2.4 below. 

As a starting principle, licences on the Norwegian Continental Shelf are generally sold in their condition (“as is”). Consequently, the buyer will take over the risk and be solely responsible for the asset’s future decommissioning obligations and liabilities.

Nonetheless and as described in Section 1.3 and 2.1 above, the seller will in any event have secondary liability for decommissioning costs. With this liability resting on the seller, the seller will typically seek to be held harmless from any such liability being imposed. This liability applies for future decommissioning of facilities that existed at the time of the transfer.

Liability and hold harmless provisions related to the seller’s secondary liability for decommissioning costs will thus be included in the sale and purchase agreement, and in addition the seller would require the buyer to provide security for this indemnity.

• The Recommended Model Agreement

In Norway a recommended model agreement for decommissioning security for removal obligations has been established, and its clauses are fairly well recognised as model clauses for the provision of decommissioning security. 30  The model agreement was prepared with broad-based participation by interested parties in the Norwegian petroleum industry, represented by Offshore Norge. 31

The model clauses as published contain preparatory notes outlining considerations for use. The recommendation includes two alternative agreements. Agreement A is contingent upon the buyer procuring a letter of credit at the time of completion of the sale and purchase agreement. The letter of credit shall cover the current value of the future estimated removal costs that the seller could be alternatively liable for. Agreement B is more comprehensive, where the buyer is given the opportunity to furnish a parent company guarantee for potential future removal costs. This presupposes, however, that the buyer's parent company has a sufficiently high credit rating. If the parent company has a lower credit rating, or if the credit rating falls below a certain limit, the buyer must procure a letter of credit.

• Decommissioning Liabilities Following a Transfer/Sale

The recommended guidelines recognise that any and all sales of production licences with future decommissioning liability will have special circumstances, and as such a potential decommissioning security agreement must be specially adapted to the situation, both regarding what is being sold and who the buyer is. The comments specifically state that “the attached model clauses must therefore not be used to the letter and uncritically, but can serve as an inspiration.”

The size of the secondary decommissioning liability, on a transfer of licence(s), is based on the net cost after-tax of the removal. Because the amount is limited to the cost (after tax), it is also stated separately in the Norwegian Petroleum Tax Act, 32  that the payment of such (net) amount is not tax deductible for the seller (and not taxable for the buyer).

Regarding a sale of all the shares in a company however, the seller of the shares exiting the Norwegian Continental Shelf, would not be entitled to a tax deduction for such secondary liability for removal costs. This is because the seller (parent of the target company) is not subject to tax under the Petroleum Tax Act and the tax treatment of such secondary liability for a seller of shares is not limited by the Petroleum Act to the after-tax amount. 33  The amount will be considered fully taxable at the hands of the benefitting Norwegian licence holder. Therefore, the seller’s guarantee will need to be for 100% of the removal costs. Similarly, if the buyer was to present a guarantee from a third-party bank, this would need to be for 100% of the removal costs.

In corporate sales processes initiated in recent years, we have seen examples of sellers retaining their Norwegian corporate entity, in order to reduce potential secondary decommissioning liability with the sales processes converted into a full asset sale.

• Decommissioning Costs and Securities

Decommissioning costs are significant and as the basin is aging, decommissioning costs are approaching as producing oil and gas fields get closer to cessation. The sellers would like to be held harmless and have sound security for their potential secondary decommissioning liability. However, this type of security will not necessarily be available nor possible to obtain for all sellers, and even if it is, it may be considered too expensive to obtain and offer. Moreover, tax considerations explained above also affect the potential cost of such liability and security. Hence, in order for the parties to close the gap, the parties are forced to explore alternative solutions to deal with decommissioning liability.

In summary, dealing with decommissioning liability is in essence dependent on what the seller and the buyer are willing and able to accept. Considering the significance of the amounts involved, dealing with decommissioning liability is becoming an increasingly important part of the negotiation when dealing with transactions in Norway.

• Trend of retention of certain decommissioning liability in transactions

A particularly hot topic in Norway in relation to decommissioning liability is how to regulate and structure decommissioning liability in transactions in the event of sale of interest in licences on the Norwegian Continental Shelf.  As noted in Section 2.4 above, a previous trend was that the sellers retained a clean exit and obtained full indemnification and security from the buyer for any future potential secondary decommissioning liabilities. However, there is now a shifting trend where the sellers are more inclined to retain certain decommissioning liabilities, in order to find commercial solutions which are viable and acceptable to both parties.

• Indication of use of right to takeover of facilities in upstream pipeline network

Another hot topic in Norway is that the Ministry of Energy in 2023 signalled its intent to make use of the right of takeover of facilities for key part of the upstream pipeline network at the end of their licence period. 34  This is relevant in the context of decommissioning, as the licensees will be relieved of their decommissioning obligations following takeover by the State.

The reason behind this is that the State considers itself to be the most suitable owner of this infrastructure in order to facilitate the overall objective of the Norwegian petroleum policy, including low tariffs for the users. The notification was made on the basis that large parts of the infrastructure in the Gassled partnership have licence periods that expire in 2028.

At the request of licensees, the State has instead offered to purchase the gas infrastructure before the licence period expires. The Ministry of Energy has entered into purchase agreements of interests in key parts of the gas infrastructure with the majority of the licensees. 

The decommissioning plan to be submitted by the licensees shall contain proposals for continued production or shutdown of production and disposal of facilities. 35  Such disposal may inter alia constitute further use in the petroleum activities, other uses, complete or part removal or abandonment. For each of the relevant disposal alternatives, technical, safety and environmental factors shall be described, as well as measures to reduce emissions related to the disposal. 36  Re-use of oil and gas facilities is therefore something that the licensees are required to consider in in their preparation of the decommissioning plan. 

Furthermore, the impact assessment included in the decommissioning plan, which describes the consequences of the relevant disposal alternatives, is sent on public consultation. Following this, relevant stakeholders may provide input regarding the disposal alternatives. This contributes to ensuring that relevant issues related to disposal of the respective facilities are well clarified prior to the Ministry of Energy making a decision on disposal.