Introduction
Facts
Issues
Decision
Comment
On 17 May 2021, the Commercial Court clarified the proper interpretation of the Petroleum Act 1998 (the Act), dealing specifically with the extent of previous licensees' liability in future decommissioning programmes.
Now that decommissioning programmes – which once seemed a distant prospect – are being executed in the North Sea, the allocation of liability through private commercial arrangements, taken with the statutory scheme, is finally being unravelled and put into practice.
The statutory scheme under the Act was designed to protect the government from excessive decommissioning costs for offshore installations, by attributing liability to former licensees under sections 29 and 30 of the Act. The decision of the Court in Apache UK Investment Ltd v Esso Exploration and Production UK Ltd(1) limits the liability of former licensees in respect of wells drilled after ownership has transferred.
In 2011, Apache UK Investment Ltd entered into a sale and purchase agreement with Esso Exploration and Production UK Limited, by which Apache acquired several oil and gas assets in the North Sea.
Before this, the newly acquired licensee company had been served several section 29 notices under the Act, requiring submission to decommissioning programmes.
The parties entered into a six bilateral decommissioning security agreements (BDSAs), under which Apache agreed to indemnify Esso for any decommissioning obligations arising out of the transferred assets. To determine the amount of security to provide under the BDSAs, proposed plans are prepared annually by the licensee, detailing estimates of decommissioning dates and costs. In June 2020, Apache sent its proposed plan for 2021 to Esso. Esso identified that these plans did not include four subsea wells(2) (the "additional wells"), which were relevant to the BDSAs.
Two key issues arose from the BDSA's proposed plans for 2021. The first, which this article does not discuss, was the choice of the proposed decommissioning plan to apply, which required contractual interpretation of the BDSA's specific terms.
The second was contingent upon key analysis of the Act's decommissioning regime, requiring judicial interpretation of the statutory scheme.
Esso objected to Apache's proposed plan for 2021, arguing that the cost estimate should have included the additional wells that had been drilled after it had sold the assets to Apache, on the basis that it could become liable for the decommissioning costs (if the section 29 notices(3) originally served on Esso were wide enough to extend to these additional wells).
Apache contended that for the additional wells, neither Esso nor its predecessors fell within section 30(1) of the Act, as the additional wells had been drilled after Esso had divested itself of the relevant licences on the sale to Apache and so section 34 of the Act (Revision of Programs) was not engaged.(4)
In turn, Esso (which had discussed its concerns with the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED)),(5) contended that it could be liable for the decommissioning costs of the additional wells under section 34 of the Act, and, therefore, that Esso was entitled to additional security from Apache in respect of the potential costs of decommissioning the additional wells.(6)
The judge noted that the definition of "field property" in the BDSAs was wide enough to encompass the additional wells, as long as the Secretary of State has the power to require their decommissioning by Esso under the terms of the Act.
However, the judge held that Esso could not be liable for the decommissioning costs of the additional wells under the section 29 notices, because the wells had not existed, nor had they been "intended to be established" when Esso owned the assets and carried out exploration and production activities, or when the original section 29 notices were served.
Referring to the objectives of the Act's regime, the Court noted that such an interpretation aligned with the objective of ensuring that those who have "derived a financial benefit from an offshore installation should also be responsible for its decommissioning".
When interpreting the definition of "offshore installation" under sections 44(1) and 44(5) of the Act, the Court suggested a narrower approach, dismissing the argument that the phrase could refer to whole fields or sub-fields as opposed to equipment or structures within a field. The Court highlighted the Act's reference to "any floating structure or device", holding that this could not be interpreted as describing an entire field. This is important guidance for future decommissioning projects.
Now that decommissioning programmes are being put into practice, the Court's interpretation of the Act's statutory regime is a valuable insight into what to expect. The broad terms of section 29 notices are now more refined in practice, limiting the liability of former licensees in respect of new asset installations that they did not intend during their ownership.
Wells drilled by new owners will not lead to liability for previous owners in respect of decommissioning costs. This clarification will assist those involved in DSAs when drafting proposed plans, as new wells will not need to be included, nor will security be required in relation to such wells. Additionally, former licensees can take solace in the Court's interpretation, as they will not be liable for decommissioning costs for wells that they did not drill or intend to drill.
However, sellers should still be cautious, as they may still be liable for any installations that they intended to establish at the time the section 29 notices were served. The OPRED guidance suggests that a former licensee could be liable for the decommissioning of new equipment added to platforms that existed during their ownership, but the Court has not yet clarified this point. Until the Court takes a view, companies involved in DSAs should be mindful of the possibility of being liable for equipment that they did not install.
For further information on this topic please contact Alex Hookway at Wikborg Rein by telephone (+44 20 7367 0300) or email ([email protected]). The Wikborg Rein website can be accessed at www.wr.no.
Endnotes
(2) EM1, EM2, EM3 (the Nevis wells) and EM5 (the Buckland well). EM1 (S67) is in Block 9/13a and is part of the Nevis Field; EM2 (S70) is in Block 9/13a and is part of the Nevis Field; EM3 (N15) is in Block 9/13a and is part of the Nevis Field; EM5 (B7) is in Block 9/18a and is part of the Buckland Field.
(3) The Secretary of State has served several section 29 notices in respect of the Nevis and Buckland Fields. The potentially relevant section 29 Notices in respect of the Nevis Field in so far as they concern Esso were served on 29 May 2000 and 18 January 2005 with the relevant section 29 Notices on the Buckland Field served on 18 March 2004 and 25 November 2005.
(5) The OPRED, a specialist agency of the Department for Business, Energy and Industrial Strategy, is the UK authority that deals with decommissioning.