Offshore Oil & Gas Decommissioning - United Kingdom

There are two key regulators:

• OPRED – the Offshore Petroleum Regulator for Environment and Decommissioning

The competent authority regulating decommissioning in the UKCS is the Secretary of State.  In practice, acts through OPRED, which is an agency department of the Department for Energy Security and Net Zero (DESNZ). 1  OPRED takes day to day responsibility for decommissioning matters.

• NSTA – the North Sea Transition Authority

The NSTA is an arms length Government owned company to which is delegated regulatory authority over most upstream oil & gas activities in the UKCS.  It has a more limited, consultative, role in relation to decommissioning activities. The recipients of a Section 29 Notice must consult the NSTA before submitting a decommissioning programme to the Secretary of State (OPRED) for approval; the NSTA also plays a role in offshore well commissioning which is managed via the WONS permitting system.

In line with its international obligations 2  the UK Government’s aim is to ensure that all offshore oil & gas infrastructure is decommissioned and removed for recycling or reuse on land, with a default assumption in favour of a clear seabed. In line with the ‘polluter pays’ principle, the cost should be borne by those that installed and have benefitted from the infrastructure and government policy is intended to protect the UK taxpayer from that cost (although see section 1.5 below regarding the availability of tax relief).

The UK has four main sources of law and regulations governing offshore oil and gas decommissioning: 3

• the Petroleum Act 1998 (the 1998 Act) - in relation to decommissioning of installations and pipelines;
• the relevant petroleum production licence (the Licence) and its incorporated model clauses (the Model Clauses) - in relation to decommissioning of wells; 
• the OGA 4  Strategy 5  - sections 9A and 9B of the Energy Act 2016 (the 2016 Act) require relevant persons, 6  the NSTA and the Secretary of State to adhere to the OGA Strategy, which includes requirements in respect of decommissioning activities; and
• a wide range of subsidiary sets of regulations - which contain requirements that are applicable to offshore decommissioning activity.

Together, these set the general legal framework for decommissioning offshore oil & gas infrastructure. On a case by case basis there may be other regulatory, consenting and permitting requirements that apply. In addition, there is guidance that should be followed, in particular:

• Decommissioning Guidance: “Oil and Gas: decommissioning of offshore installations & pipelines” 7  and the earlier guidance notes 8  that are referred to there – together comprising guidance issued by OPRED, which is part of DESNZ (the OPRED Guidance); and
• Decommissioning Strategy: A Decommissioning Strategy (the NSTA Decommissioning Strategy) 9  (published in May 2021) and Stewardship Expectation 10 (Cost-Effective Decommissioning) 10  (published in February 2024) (SE10) – guidance and best practice expectations set out by the NSTA.

• Decommissioning of Installations and Pipelines (Petroleum Act 1998)

The 1998 Act, Part IV (as amended) sets out the main requirements regarding decommissioning of installations and pipelines on the United Kingdom Continental Shelf (UKCS).  Decommissioning is only permitted where a decommissioning programme has been approved by the Secretary of State (see section 1.2 below for more details in respect of decommissioning programmes). 

Section 39 of the 1998 Act states that “The Secretary of State may make regulations relating to the abandonment of offshore installations and submarine pipelines”. Thus far, no such regulations have been put in place, but the OPRED Guidance also sets out in more detail what must be included in a decommissioning programme, and the process for obtaining the approval of the Secretary of State.

• Decommissioning of Wells (Petroleum Production Licence)

A Licence is the agreement between the licensee(s) and the Secretary of State to provide the licensee with the exclusive rights to explore for, develop and produce hydrocarbons from a Block. 11  

Each Licence incorporates a set of Model Clauses (either expressly or by reference) which are in essence a set of terms and conditions for that Licence. The applicable Model Clauses will depend upon the date on which the Licence was granted.  The most recent set of Model Clauses are contained in the Schedule to the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008 (SI 2008/225).  The Licence and the Model Clauses include provisions concerning the decommissioning of wells (but do not extend to installations or other infrastructure – see above in that regard).

• The OGA Strategy

Paragraphs 15 to 17 of the OGA Strategy contain specific Supporting Obligations which apply in relation to planning and implementing decommissioning activities.  This includes consideration of viable options for reuse or repurposing, maximising cost efficiency and the development and encouragement of the use of technology to do so.

• Regulations & other applicable legislative requirements

Beyond the primary sources referred to above, a wide range of legislation applies to the actual performance of decommissioning activities, for example, requirements in respect of health and safety and various environmental laws and regulations, many of which are not specific to decommissioning activities but also apply to other aspects of offshore oil & gas activities

• Decommissioning of Pipelines and Installations

The 1998 Act sets out the requirements for obtaining approval for and carrying out a decommissioning programme, including the party or parties responsible for doing so.  In summary:

• Section 29 of the 1998 Act allows the Secretary of State to serve a notice (known as a Section 29 Notice) requiring a decommissioning programme to be provided.
• Section 30 sets out who may be served with a Section 29 Notice. This includes: (i) those with management of the installation or its main structure or designated by the Secretary of State as the owner of the pipeline; (ii) the licensee(s) of the relevant area (and any party who had such a right and transferred it without NSTA consent); (iii) a party to a joint operating agreement (JOA) or similar agreement relating to license rights in the relevant area; (iv) a party with any interest in the installation or pipeline otherwise than as security for a loan; (v) an associated company of any of the above.
• Section 34 provides for revisions to decommissioning programmes, and for the potential liability of former owners.
• Section 36 creates a duty on those served with a Section 29 Notice to carry out (and pay for) an approved decommissioning programme. 

A Section 29 Notice is typically served when authorisation for the construction of new infrastructure or pipelines is given and then updated if there is further development at the site.  It is possible for a Section 29 Notice to be withdrawn if a recipient ceases to be a licensee/owner (at the discretion of the Secretary of State) but this is rarely done in practice. 

Each party that is served with a Section 29 Notice is jointly and severally liable for decommissioning of the installation or pipeline to which the Section 29 Notice relates, whether or not they are still a licensee or an owner at the time at which decommissioning is carried out. Section 34 provides a route for the Secretary of State to make former owners liable for decommissioning, even where that former owner did not receive a Section 29 Notice previously.  That has resulted in complex decommissioning security arrangements between companies to ensure that funds are available to pay for decommissioning at the required time. See our comments at Section 2 below.

As noted in the OPRED Guidance, informal interim decommissioning and/or monitoring arrangements may be agreed by the Secretary of State in respect of pipelines or infrastructure (or parts of them) which are taken out of use, for the period until the field’s end of life when the full decommissioning programme will be required and implemented. 

• Decommissioning of Wells

The Model Clauses require that the written consent of the NSTA is obtained before a well is decommissioned. In practice, NSTA consent is likely to contain certain conditions.

• Duty to consider re-purposing and reuse

The OGA Strategy requires consideration of re-purposing and/or reusing oil and gas infrastructure prior to decommissioning, in support of the UK’s net zero goals.  The NSTA Decommissioning Strategy, 12  sets out how it approaches matters relating to decommissioning, including considering potential other uses, such as reuse of infrastructure or conserving for the future, alongside methods to reduce costs, and SE10 sets out further expectations as to the approach to be adopted by relevant parties.

• Post-Decommissioning Liabilities 

The OPRED Guidance states that once a decommissioning programme is completed, the operator is required to put in place arrangements for monitoring, maintenance and management of the decommissioned area and any remnants of installations or pipelines. 13  The period and extent of these requirements are to be agreed between the operator and OPRED in consultation with other government departments 14  and noted in the decommissioning programme itself.

The legal position on liability for anything remaining in place after completion of the approved decommissioning programme is unclear – see further comments in section 3.

The 1998 Act sets out various consequences for non-compliance with decommissioning requirements:

• Section 40 provides that a person guilty of an offence is liable to a fine not exceeding the statutory maximum on a summary conviction; or to imprisonment for up to two years, or to a fine, or both (on conviction on indictment).
• In relation to failure to properly abandon wells, Section 45A replicates Section 40 and provides that a person who fails to comply with a notice is liable to a fine not exceeding the statutory maximum on a summary conviction; or to imprisonment for up to two years, or to a fine, or both (on conviction on indictment).
• Where a company has committed an offence and there is proof that this has been committed with the consent or connivance, or the neglect of, any director, manager, secretary or other similar officer of the company or any individual who was appearing to act in any such capacity, that individual (alongside the company) will be liable for that offence.

If a well is decommissioned without that consent, this constitutes a breach of the Licence and a failure to comply with a petroleum-related requirement for the purposes of Part 2, Chapter 5 of the Energy Act 2016. The NSTA has the power to issue sanctions notices (which may take the form of financial penalties, enforcement notices, operator removal notices and/or licence revocation) in respect of a breach of a Licence or a failure to comply with a petroleum-related requirement (and has issued financial penalties for such a failure).

Reputational consequences must also be considered. Asset owners, and particularly asset operators, who do not comply with decommissioning laws and/or regulations can suffer significant reputational damage, including through negative press coverage and closer regulatory scrutiny in respect of other activities.

Companies required to meet the cost of decommissioning in relation to the offshore oil & gas industry in the UKCS receive tax relief through the tax code at the point when decommissioning expenditure is incurred i.e. when decommissioning activities are executed.

Since decommissioning activities typically take place through periods of loss for oil and gas companies (i.e. after production has finished) when they may have no profits to set the tax relief against, there are various provisions that permit reliefs to be carried back against previous profits.  This is a complex area and the precise reliefs that may be available depend on a number of factors, including the UK tax history of each company, so only a brief overview is provided here:

• For fields liable to pay a petroleum revenue tax (PRT), losses can generally be carried back for an unlimited period of time.
• For additional corporation tax (which is in the form of ring fence corporation tax (RFCT) and supplementary charge (SC), losses can generally be carried back to 2002 and are first set off against the latest profits.

In order to provide certainty to the industry as regards the availability of this tax relief, to permit arrangements for provision of decommissioning security to be made on a post-tax basis in order to free up capital for investment, and to limit scope for future government changes to this aspect of the tax system, the Finance Act 2013 (2013 Act), Part 2 established the Decommissioning Relief Deed (DRD).  Broadly, this is a bilateral contract entered into between the UK Treasury and a qualifying company, which is a company which has carried out relevant upstream oil & gas activities and will incur relevant decommissioning costs.  The DRD provides for the Treasury to make a payment to the company (subject to certain requirements) in two circumstances: (i) if the company is not able to obtain tax relief on its decommissioning costs equivalent to those reliefs available in 2013, or (ii) if it has additional decommissioning costs imposed on it, for example as a result of a failure by a co-venturer to meet its share of those costs.  Once entered into, a DRD may be relied upon by any company within the signatory’s associated group of companies if it has itself carried out upstream oil & gas activities falling within the scope of the DRD and incurs decommissioning costs. 

The liability of Section 29 Notice holders is joint and several. As such, they are all liable together to carry out their decommissioning responsibilities, and each party is also individually responsible for the entirety of the decommissioning liability.  This has led to most joint ventures putting in place Decommissioning Security Agreements (DSA) between them to ensure funds are available to meet the cost of decommissioning and can be accessed by any party that is the holder of a Section 29 Notice relating to that infrastructure, if called upon to carry out the decommissioning programme.

Further, the industry standard template joint operating agreement (JOA) in the UK (which is the Offshore Energies UK (OEUK) version rather than Association of International Energy Negotiators (AIEN) model) allocates liability to each of the parties to meet their share of all costs in relation to the relevant Licence activities, including decommissioning costs. This is calculated by reference to the participating interests of each party (i.e. the percentage interest of ownership that they hold in the specific asset). If an invoice in relation to decommissioning costs is not paid, the operator may serve notice on the security trustee under the DSA for the net amount held as security for the defaulting party to be paid to the operator.

If the JOA and DSA regime works as intended, there should be no financial impact on other stakeholders, including the state in the event that one of a number of co-venturers defaults on its liability for decommissioning costs, provided that the security amount in place under the DSA is sufficient to meet the actual cost of the decommissioning expenditure; if it is not, as a result of the DRD, the State may end up meeting some of those costs.  If there is only one licensee, then in the event of a default, the State may look to any other holders of Section 29 Notices in respect of the relevant area (i.e. prior licensees) to carry out (and pay for) the decommissioning programme.

There is no legal obligation to provide security to the state or other co-venturers. As between co-venturers, security is typically provided pursuant to a DSA entered into by the relevant parties as a private contract, which requires those parties to place security in respect of anticipated decommissioning costs in trust for the benefit of the current co-venturers, the Secretary of State and other parties who are or may become liable for decommissioning pursuant to sections 29 or 34 of the 1998 Act (typically referred to as “second tier participants“ and “third tier participants“ respectively). The industry standard JOA includes an obligation to enter into a DSA prior to the submission of a development plan and entry into a DSA can be a condition of development plan approval.

Under the 1998 Act, the Secretary of State has statutory powers to request financial information from Section 29 notice holders and to require them to “comply with any requirements” considered necessary to ensure that decommissioning obligations will be met. In principle, this could extend to requiring the provision of financial security. However, the exercise of this power is rare and the authors are not aware of any instances of it being formally invoked. In practice, the UK Government relies on co-venturers establishing security arrangements between themselves through DSAs, supported by the Section 29/34 liability regime as an appropriate fallback. The Secretary of State also routinely seeks a DSA where an asset is owned by a single licensee.

The industry standard DSA typically used in the UK (published by OEUK) is drafted on the basis that licensees will provide security in the form of cash placed in trust, but permits other forms of security such as parent company guarantees or letters of credit if certain credit rating thresholds are met.

In practice, it is common for licensees to provide security by one or more of the following mechanisms allowed under the DSA: a letter of credit from a single issuing bank; a letter of credit from a consortium of banks; a parent company or affiliate guarantee; an on-demand payment bond from a bank, another corporate entity or from a parent or affiliate.  If a bond or guarantee is provided by a person or entity which is not established in the UK, a counsel’s opinion is required from a respected law firm in the appropriate jurisdiction including as to enforceability, capacity and power.

The OEUK industry standard DSA provides that security is to be held by an independent trustee.  This is usually The Law Debenture Trust Corporation plc although it is possible for an alternative trustee to be appointed. The trustee is not a party to the DSA but instead enters into a separate trust deed with each licensee and with the operator. The operator is authorised to issue various notices as provided for under the DSA in order to determine the amount of security to be provided and to release the security funds if required (a substitute operator will carry out that role as regards the operator’s own provision of security in its capacity as a licensee).

• Asset sale

The buyer typically indemnifies the seller for all decommissioning liabilities, whether incurred pre-, on- or post-effective date. This market position incentivises the buyer to carry out robust due diligence on the condition of the asset and what preparatory work has been carried out in relation to decommissioning, particularly if the asset being sold is nearing the end of its useful life. Some more bespoke arrangements, such as relating to future use of the asset or its component parts, have been entered into for asset sales where the relevant asset has already ceased production and the purpose of the sale is to allow the buyer to decommission the asset.  

• Corporate sale

The decommissioning liability of the target company is unaffected by a change in ownership or control. However, any DSA security provided by the selling group will need to be replaced by the buying group. This will typically be done by way of a condition precedent to completion of the transaction (i.e. the transaction is unable to complete until this is satisfied) and careful management of the completion process to ensure that the asset(s) to which the relevant DSAs relate are never in a position of being ‘undersecured’.

There is an established trend of sellers retaining decommissioning liability. Further details on this are included in section 3 below concerning hot topics.

• Retained decommissioning liabilities in M&A transactions

It has become increasingly common in M&A transactions involving UKCS offshore oil and gas assets for the seller to retain certain decommissioning liabilities relating to the assets that are the subject of the sale.

The potential liability of former asset owners under section 34 of the 1998 Act 15  and the availability of tax relief on decommissioning expenditure are key drivers in this trend – a full clean break from decommissioning liabilities is not possible and it may in fact be more beneficial from a tax perspective for the seller rather than the buyer to incur certain decommissioning expenditure.

The seller retaining decommissioning liability can be structured in a number of ways, including one or more of: (i) a pre-agreed re-transfer of the assets at the point of decommissioning; (ii) the seller agreeing to be liable for part or all of what will become the buyer’s liability for decommissioning expenditure; (iii) the seller providing credit support to third parties; (iv) negative consideration; and (v) a sinking fund built up from asset revenues.

The contractual arrangements required to put these approaches in place is complex and requires agreement on various key aspects including: (i) exactly what “decommissioning liabilities” are being retained – for example, whether environmental liabilities associated with decommissioning are also retained; (ii) whether the amount of retained liability is fixed, capped or uncapped; (iii) whether equipment or infrastructure installed post-completion of the transaction is included within the retained liability; and (iv) what level of control or oversight does the seller require in respect of matters that may impact decommissioning obligations.

• Post-decommissioning liability

OPRED Guidelines on Decommissioning states that “residual liability” for any infrastructure left in situ “remains with the owners in perpetuity”. It is widely recognised that, once decommissioning activities have been completed, there is a continuing need to conduct certain activities to ensure that any infrastructure left in situ, including plugged and abandoned wells, do not present an intolerable level of risk of future degradation, seepage or leakage.

However, the legal basis and extent of any such liability is unclear, because the 1998 Act contains no express provisions dealing with liability after a decommissioning programme has been performed. For that reason, there is significant uncertainty (and therefore concern in the offshore oil & gas industry) as to exactly what liability infrastructure owners will have post-decommissioning.

• Offshore decommissioning charging scheme - Energy Act 2023, Section 299

As at the time of writing, 16  the costs to DESNZ of regulating decommissioning in the UK are met through central budgets, supported by the charging of fees at two fixed points: (i) the submission of a decommissioning programme and (ii) a request to revise an approved decommissioning programme. The fee to be paid at approval of a decommissioning programme ranges between £100,000 for a small scale (i.e. less than 10,000 tonnes in weight) offshore installation or a submarine pipeline, to £250,000 for a decommissioning programme that covers multiple large scale (i.e. each weighing more than 10,000 tonnes) offshore installations. 17

However, through section 38C of the 1998 Act (as amended by section 299 of the Energy Act 2023), the Secretary of State now has the power to establish an offshore decommissioning charging scheme, explained on the basis that it aligns with the “polluter pays” principle of environmental law i.e. that those responsible for causing pollution should bear the costs associated with its prevention, control and remediation.

The Secretary of State has not yet exercised this power and, according to the Energy Bill Policy Statement published ahead of the enactment of the Energy Act 2023 18 , the new charging scheme will be subject to consultation and be accompanied by guidance.

In the UK there are two key areas in which the decommissioning of oil and gas infrastructure interacts with low carbon energy projects. These are (i) the obligation in the OGA Strategy to consider re-use of oil and gas infrastructure, and (ii) the related issue of change of use relief.

• Re-Use of Oil and Gas Infrastructure

The Central Obligation of the OGA Strategy, which is binding on owners of oil and gas infrastructure (among others), obliges those persons to carry out their regulated activities in such a way as to assist the Government in achieving its net zero target, including by supporting carbon capture and storage (CCS) projects.

The Central Obligation is supplemented by Supporting Obligations. Specifically in relation to decommissioning, there is a Supporting Obligation 19  to “ensure, and be able to demonstrate, that all viable options for [relevant] infrastructure’s continued use including for reuse or re-purposing for carbon capture and storage projects have been suitably explored”. This obligation applies during the period “before commencing the planning of decommissioning of any infrastructure”. 

In relation to carbon capture and storage projects, another Supporting Obligation 20  requires that “where there is, or is a reasonable prospect of, any [carbon capture and storage] project being developed”, relevant persons must “have due regard to carbon capture and storage projects when complying with their obligations under [the OGA] Strategy including:

• collaborating with those persons planning and carrying out carbon capture and storage projects;
• negotiating access to infrastructure for carbon capture and storage projects in a timely fashion and in good faith; and
• permitting access to the relevant infrastructure to be used for the carbon capture and storage projects on fair, reasonable and non-discriminatory terms”.
• Other relevant Supporting Obligations relevant to re-use are to:
• “ensure that relevant infrastructure is maintained in such a condition and operated in such a manner … that it will … achieve optimum potential for the re-use or re-purpose of that infrastructure taking account of the Secretary of State meeting the net zero target [of the UK achieving net zero emissions by 2050]”; 21
• “ensure that technologies, including new, emerging and existing technologies, are deployed, to their optimum effect, and where appropriate encourage the development of such technologies for the purpose of … where appropriate enabling carbon capture and storage projects to be planned for and developed … and … where appropriate enabling projects relating to hydrogen supply to be planned for and developed”. 22

The NSTA Decommissioning Strategy, whilst not itself legally binding, provides guidance on how to implement the OGA Strategy. It provides further information as to the NSTA’s expectations of owners of oil and gas infrastructure, including in relation to re-using and re-purposing oil and gas infrastructure that would otherwise be decommissioned.

In addition, SE10, which is not legally binding but contains guidelines and recommendations designed to encourage best practice within the oil and gas industry, states that “the NSTA expects that operators are able to demonstrate a robust approach to cost-effective decommissioning and achieve optimum potential for the reuse or repurposing of infrastructure taking into account the duty of the oil and gas industry to assist the Secretary of State in meeting the net zero target”. 23

While the OGA Strategy and the NSTA Decommissioning Strategy refer only to CCS and hydrogen in the context of reuse and purposing of oil and gas assets, SE 10 envisages a wider range of potential options, including renewable energies and further oil and gas extraction.

• Change of Use Relief

The Energy Act 2008 introduced a regime of change of use relief, enabling certain offshore installations or pipelines to be designated as eligible CCS installations which, when approved and subject to the occurrence of the relevant trigger event, would effectively release existing Section 29 Notice holders from their obligations to submit a decommissioning programme in respect of the relevant installation or pipeline. 

Key features of change of use relief, as amended by the Energy Act 2023, are as follows:

• the owners of oil and gas infrastructure may make an application to the Secretary of State for an installation or pipeline to be designated as an eligible CCS installation or eligible carbon storage network pipeline.
• the Secretary of State must consult with the NSTA before (i) deciding to designate an installation or pipeline and (ii) issuing an “approval notice” confirming receipt of the Fund Payment (see below).
• an eligible installation and/or pipeline qualifies for change of use relief if the Secretary of State has given a CCS-related abandonment programme notice  in relation to carbon storage installations and/or pipelines.

The trigger for change of use relief being effective will be confirmation by the Secretary of State that payment of the Fund Payment - a specific sum of money approved by the Secretary of State into a decommissioning fund - has been made. The Government’s consultation on these arrangements 24  suggests that the Fund Payment will be an amount agreed with OPRED reflective of the existing decommissioning liability associated with that asset. It is not clear whether this will include an element of contingency.

It is proposed that the Fund Payment would be made by the owners of the relevant oil and gas infrastructure, with the intent that such payment effectively discharges their decommissioning liability with respect to the relevant asset. It is currently unclear whether the Fund Payment itself will be eligible for tax relief, which will be a key consideration, particularly given certain expenditure incurred in decommissioning offshore oil fields has an effective tax relief of 100%.