Professor John Paterson, chair in Law at Aberdeen University, gives his analysis of the Exxon vs Apache High Court case on decommissioning costs.
It is necessary first of all to determine the purpose behind section 29 and the subsequent sections of the 1998 Act.
In essence, Parliament wants to ensure that where a company involved in oil and gas production becomes insolvent, there will always be someone available to carry out decommissioning, so that the UK taxpayer will be protected from having to bear this cost.
Broadly speaking, section 29 confers power on the Secretary of State to issue a notice which imposes a duty on the recipient to prepare (and carry out and pay for) a decommissioning programme. Over time, the list of parties upon whom such a notice may be served has been extended – all with the aim of reducing the risk to the taxpayer.
As an oil or gas field matures, it is likely that the original operator may sell its stake to another company. In those circumstances, the seller will want to have its section 29 notice withdrawn because, if it does not, it will remain liable for decommissioning notwithstanding that it no longer has an economic interest in the infrastructure.
It is open to the Secretary of State to agree to such a withdrawal under section 31(5), but it is always possible that such a request will be refused where there is doubt about the financial resources of the other parties involved (principally, the buyer and its co-venturers).
Even where a notice is withdrawn, however, it remains possible for the original holder (the seller) to be recalled without limit of time to fulfil decommissioning obligations where later notice holders (including the buyer) have been unable to do so.
This much has always been clear.
The current case involves a slightly different aspect of this issue.
Here Esso, the original operator, had its section 29 notice withdrawn upon selling its interest to Apache. The sale of the assets in question not only involved a payment from Apache to Esso, but also the entering into of a decommissioning security agreement between the two companies under which Apache would set aside funds sufficient to reassure Esso that the latter would not be called back under section 34 at some future date.
As will often happen, Apache carried out further work on the assets it had purchased, which Esso noted would increase the cost of decommissioning. It thus feared that there was a risk that the money set aside under the decommissioning security agreement would not be sufficient, meaning that it might be called back under section 34.
Esso accordingly sought additional security from Apache. Apache, however, did not agree that this was necessary and sought a declaration to this effect from the High Court. The High Court agreed with Apache.
At one level, it might be concluded that an emergent uncertainty in the treatment of decommissioning liabilities has thereby been resolved.
At another, however, a question arises as to what this means for the various parties involved: sellers, buyers and the regulator. Does the court’s decision have implications for the way that each of these parties assumed section 29 and the subsequent sections would operate in practice?
Well, we now have a clear judicial interpretation of the relevant provisions. But does this chime with the regulator’s (OPRED’s) position?
To understand this, it is necessary to look at the most recent version of the decommissioning guidance notes produced by OPRED in 2018.
The possibility that new installations or pipelines might be installed following a transfer of assets is certainly envisaged. The guidance states that, where appropriate, section 29 notices will be revised or separate section 29 notices will be issued, depending on the precise circumstances.
Interestingly, the guidance is clear that even where a section 29 notice has not been withdrawn from a seller, the latter would not be liable for decommissioning of new installations or pipelines – although they would be liable for new equipment added to an existing installation.
It might be inferred from this that where a section 29 notice has been withdrawn, the seller will certainly not be liable for the decommissioning of any new installation or pipeline.
Unfortunately, things are not that simple.
Because where a notice has been withdrawn, and any question of continuing liability arises, we are not in a situation where everyone concerned is a current notice holder and thus it is only a question of working out, on the basis of the terms of each notice, who is responsible for what.
Rather, we are in a situation where current notice holders are unable to carry out their obligations and thus section 34 is potentially in play.
The guidance in this regard is somewhat less nuanced. It states that a company called back under section 34 “may be placed under a duty to carry out that programme” (my emphasis) without making any distinction between infrastructure in place at the time of transfer and any installed later.
It could be argued, of course, that where a wholly new section 29 notice (as opposed to an amended one) is in play, there should in any case be a separate programme, which would remove the risk for the seller. But in reality, that might not be practicable.
Some comfort for sellers may nevertheless be drawn from the reassurance in the guidance that section 34 will only be used “in potential default cases where significant work under the programme is necessary” (my emphasis) and that where section 34 applied in respect of more than one company the regulator would “aim to agree a fair and reasonable distribution of the liabilities in discussion with the companies concerned”.
The key question for many, however, is whether the ruling has implications for section 34 from the perspective of OPRED.
In other words, even if the case revolved around the implications of the 1998 Act for an agreement between two oil companies, does the judgement mean that section 34 it will not operate as a catch-all longstop protection for the taxpayer?
Does it mean that, in the case of a default by current section 29 notice holders, former holders called back will be able to point to those parts of a programme for which they can be held liable, and the taxpayer will have to pay for the rest? It is certainly not a stretch to reach that conclusion.
But is that the end of the story?
Is the regulator left without options?
Not necessarily.
It is always open to OPRED to seek reassurance from section 29 notice holders about their ability to meet decommissioning liabilities.
If there is any doubt about arrangements involving former holders under section 34, OPRED might simply increase its scrutiny of the financial position of current notice holders and take such steps with regard to security that it deemed necessary to protect the taxpayer – in line with Parliament’s original intention.
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