Robin Clarkson and Rona Jamieson of legal firm Burness Paull LLP discuss the challenges and complexities of decommissioning – and the need to take advice at the earliest possible stage to avoid potentially significant pitfalls.
Q: Where are we in terms of North Sea oil and gas decommissioning?
Robin Clarkson (RC): It will be a while before the decommissioning industry reaches maturity. The sheer scale of potential contracts is huge – 5500 wells, 400 facilities and 10,000km of pipeline to decommission over 35 years at a cost estimated at £50 billion. It is the first global oil and gas decommissioning on this scale, so for many aspects there isn’t any significant experience or precedents to draw on. With the oil price remaining very low, things will move more quickly than people previously expected. Within the next 5-10 years, there is likely to be a huge increase in activity.
Q: Is there a standard template for decommissioning?
Rona Jamieson (RJ): All operators must have a decommissioning plan as part of their licence. However, while mobile installations are relatively easy to decommission, fixed installations are a very different prospect. There are many designs and all present different challenges and complexities. Some installations built in an age where environmental considerations were not at the forefront might be very difficult to decommission – especially those in remote locations, where it hasn’t been possible to assess the state of the installation below the water’s surface.
Q: Are operators and contractors ready?
RJ: Operators are looking much more seriously at decommissioning plans and how to do it – but need to recognise the complexities of the process mean costs might be higher than they bargained for.
Contractors are seeing the opportunities. While the decline in the oil and gas industry presents huge challenges, the decommissioning phase is a massive economic opportunity and there is a chance to make a virtue out of the skills we have in the existing contracting industry – in North-east Scotland and the wider UK. The capacity is there.
There is a desire to be very efficient and a need to be sophisticated in tackling risk assessment. Licencees must come up with plans and methods to allow decommissioning to be done in a financially sustainable way while adequately controlling increased and potentially unknown risks. Given the interdependency on existing infrastructure, it will require co-operation and collaboration. I do not see the industry cutting corners.
Q: Is it clear in all cases who is responsible for decommissioning?
RC: The Petroleum Act 1998 makes clear that companies currently on a petroleum licence – or who have been on a licence historically – have a financial responsibility for decommissioning. Indeed the net is actually cast wider. Those who have sold an interest in a licence (and there has been a lot of North Sea acquisition and disposal activity over the years) still have contingent obligations with regard to decommissioning, although in practice contractual and financial arrangements are likely to be in place to protect former incumbents.
Q: Where do you see major tensions arising during decommissioning?
RJ: I think there will be tension between the contracting regime and statutory regime. All parties need to look how best to spread risk through contracts and insurance, but the statutory regime imposes duties regardless of what the contract says about risk. Some contractors have already found to their cost that statutory obligations are more onerous than those under their contract and might have no ability to seek additional compensation. This area will need to be skillfully navigated within the constraints of the statutory regime.
RC: Contracts must make very clear who is responsible for what and lay down a clear work scope and a clear pricing structure – and understand the potential risks and allocate them accordingly, in line with the informed, sensible expectations of the parties.
Q: How is the UK Government approaching decommissioning?
RC: There is a big focus to ensure that certain infrastructure used (or potentially used) by more than one field is not decommissioned too early, stranding discoveries that could be commercial in the event of an oil price rise. The Oil and Gas Authority (OGA) is likely to take a big strategic interest in this area. In the case of shared infrastructure, one operator might want to decommission, but that could impact on another operator who wants the pipeline to stay open or regards the infrastructure as crucial to possible further development. This could run contrary to the OGA’s strategic priorities and the oil and gas industry is concerned about how the OGA might use its powers and sanctions where it believes operators are not maximising long-term recovery.
Q: Three big areas around decommissioning are health and safety, environmental issues and reputation management. How will these areas play out?
RJ: Health and safety is all about getting advice at an early stage – maybe earlier than clients appreciate. They know it’s likely to be a high-risk period. Historically more accidents occur during shutdown periods than operations and early advice on how to manage the contractual position should lead to fewer problems further down the line.
On the environmental side, it is important to understand the changing EU regulations which will mean contractors will take on greater environmental obligations. Care must be taken regarding environmental impacts and this plays into the reputation management area. There is potential for environmental activism, especially if decommissioning plans do not meet with the approval of green groups. For example, if a project is given approval to leave part of an installation on the sea bed, that might lead to challenges – even if it is clearly the best solution on safety grounds.
Offering expert guidance requires a good understanding of both the operator and contractor sides. We have 40 years’ offshore experience, plus decommissioning experience in other industries including nuclear at Dounreay and elsewhere – and lawyers who have worked in-house in the oil and gas industry, who bring commercial as well as legal expertise and an understanding of in-house imperatives and priorities. Our decommissioning working group is developing existing links in this developing area and we are speaking to operators and contractors to gather information by drawing on their experiences. It’s important to have those conversations and get key issues on the table.
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