How Australia's offshore petroleum decommissioning regime is shaping joint venture arrangements and M&A transactions 7 min read
Overview
As Australia’s offshore oil and gas sector enters a period of increasing asset maturity, decommissioning is rapidly becoming one of the industry's most significant commercial, regulatory and financial challenges.
The focus is no longer limited to the technical execution of decommissioning activities; participants must also address complex issues around the allocation of decommissioning liabilities in joint ventures and M&A transactions, evolving environmental planning and approvals requirements and the tax treatment of decommissioning expenditure.
In this multi-part series, we explore each of these areas and examine the legal and regulatory frameworks that are shaping decommissioning outcomes across Australia’s offshore oil and gas sector.
About part one
In this first Insight, we provide an overview of the decommissioning regime under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA) and examine how that regime is influencing joint venture arrangements and M&A transactions in Australia's offshore oil and gas sector.
Key takeaways
- Australia’s offshore decommissioning regime under the OPGGSA imposes ongoing obligations on titleholders to decommission offshore infrastructure and remove property that is no longer required for authorised activities. Those obligations must, generally, be satisfied before a title can be surrendered.
- The OPGGSA is supported by significant enforcement powers, including civil and criminal penalties and the trailing liability regime, under which former titleholders and related entities may remain exposed to decommissioning liability after disposing of their interest in offshore petroleum assets.
- The trailing liability regime has important implications for joint ventures. Participants should consider whether their JOAs adequately address decommissioning cost allocation, governance, funding, default risk and potential residual exposure under the trailing liability regime.
- Decommissioning is now a central issue in offshore petroleum M&A transactions. Buyers and sellers should consider decommissioning exposure as part of due diligence, transaction structuring, contractual protections, security arrangements and the allocation of responsibility for existing and future regulatory obligations.
- While parties can allocate decommissioning risk contractually, a complete "clean break" is no longer possible from statutory liability. This has increased the importance of indemnities, security arrangements, funding mechanisms and enhanced disclosure in transaction documentation.
Overview of decommissioning regime under the OPGGSA
Obligations of titleholders
Australia's offshore petroleum decommissioning regime is principally governed by the OPGGSA and its associated regulations. The decommissioning regime is built around the principle that titleholders are responsible for decommissioning offshore petroleum infrastructure and restoring the marine environment in a timely, safe and environmentally responsible manner. Key features of Australia's offshore petroleum decommissioning regime include:
- a titleholder is generally required under the OPGGSA to remove from the title area all structures, equipment and other property that is not used or to be used in connection with authorised activities unless an alternative arrangement (i.e., repurposing for carbon capture and storage activities, or leaving the property in situ) has been approved by the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) - this is an ongoing obligation throughout the term of a title, and a pre-condition to surrender of a title under the OPGGSA;
- titleholders are jointly and severally liable under the OPGGSA, even where only one titleholder has operational control of activities conducted under that title; and
- the OPGGSA imposes severe criminal and civil penalties for non-compliance with statutory decommissioning obligations.
Decommissioning activities are subject to a comprehensive regulatory approval framework administered by the NOPSEMA, which oversees environmental management, health, safety and well integrity matters in Commonwealth waters. The regime requires titleholders to undertake detailed planning and obtain the necessary regulatory approvals before decommissioning works can commence, with increasing emphasis on early planning and lifecycle management of decommissioning activities. We will explore this approvals regime in further detail in Part Two of our series.
Decommissioning: an emerging focus area for policy makers, regulators and industry
As Australia's offshore petroleum assets continue to mature, decommissioning has become an increasingly important commercial, regulatory and policy issue. Participants are focusing not only on how decommissioning activities will be undertaken, but also on how associated costs, liabilities and regulatory risks should be allocated and managed throughout the asset lifecycle. Recent reforms to the OPGGSA, including the introduction of the trailing liability regime, have further increased the significance of these issues for joint venture participants and parties involved in M&A transactions.
Against that backdrop, a clear understanding of the decommissioning framework is critical not only from a regulatory perspective, but also in informing the contractual arrangements between participants.
The following sections examine some of the key considerations that arise in the context of joint venture arrangements and transactions involving offshore petroleum assets, where statutory decommissioning obligations must be considered alongside contractual allocations of risk and responsibility.
Implications for joint venture arrangements
Decommissioning is increasingly becoming a key workstream in the governance and operation of offshore petroleum joint ventures. As assets approach end of life, participants are giving greater consideration to how statutory decommissioning obligations interact with the contractual allocation of risk, responsibility and funding under existing joint venture arrangements.
This issue is particularly relevant given that many joint operating agreements (JOAs) currently governing Australian offshore petroleum assets were entered into before the introduction of the 'trailing liability' provisions of the OPGGSA in 2021. Those agreements may not adequately contemplate the potential ongoing exposure of former titleholders or contain mechanisms designed to manage the risks arising from that regime.
Against that backdrop, participants should consider whether existing joint venture arrangements appropriately address decommissioning throughout the project lifecycle. Key issues include:
- the allocation of decommissioning costs and liabilities between participants;
- the operator's role and authority in planning and implementing decommissioning activities;
- governance and approval requirements for significant decommissioning decisions;
- funding and security arrangements, including whether any decommissioning fund, trust or other security mechanisms are appropriate;
- the treatment of participant defaults and funding shortfalls;
- the treatment of transfers of participating interests and the allocation of decommissioning liabilities between incoming and outgoing participants; and
- the extent to which joint venture arrangements address the consequences of the trailing liability regime.
Participants should also consider whether existing governance arrangements remain fit for purpose as assets approach the end of field life. This may include reviewing whether operators have sufficient obligations (and rights) to undertake decommissioning planning, prepare cost estimates and coordinate decommissioning activities, as well as whether dedicated committees or other governance structures would assist in managing the process.
Decommissioning considerations can assume particular importance in connection with transfers of participating interests, including where parties are seeking to allocate historical and future decommissioning liabilities, agree appropriate indemnity and security arrangements, and manage any continuing exposure of outgoing participants under the statutory regime. As Australia's offshore decommissioning task accelerates, participants are increasingly reviewing their JOAs and related project documents to ensure that their contractual arrangements appropriately address, and can respond to, the evolving regulatory landscape.
Implications for M&A transactions
Decommissioning considerations are increasingly influencing M&A transactions in Australia's offshore oil and gas sector, shaping due diligence, consideration structure, risk allocation and the structuring of transactions.
Unlike many other liabilities associated with an asset, statutory decommissioning obligations may continue to affect parties long after a transaction has completed (and beyond contractual warranty claim periods). As a result, buyers and sellers are increasingly focused on understanding not only the scale of potential decommissioning exposure, but also the extent to which that exposure can be allocated contractually.
Three areas warrant particular attention.
Decommissioning liabilities are becoming an increasingly important area of transaction due diligence. The nature and extent of those liabilities will depend on a range of factors, including the maturity of the relevant asset, remaining field life, expected decommissioning scope, existing infrastructure and the potential for continued use, repurposing of the asset and third-party access arrangements.
In addition, sellers may place greater emphasis on understanding the financial strength, operational capability and reputation of prospective buyers. This reflects the fact that regulatory approval processes, including title transfer approvals, increasingly involve more detailed consideration of a buyer's capacity to meet ongoing obligations associated with a title, including future decommissioning obligations.
Sellers should also consider undertaking enhanced sell-side diligence to identify potential issues related to decommissioning liabilities early, facilitate disclosure and minimise transaction execution risk.
The trailing liability regime under the OPGGSA means that a seller can no longer assume that divesting their interest in offshore petroleum assets will eliminate their potential exposure to future decommissioning liabilities.
Accordingly, while parties may seek a commercial allocation of decommissioning risks through transaction documents, it is no longer possible to achieve a complete statutory 'clean break' from potential decommissioning liabilities. This has increased the importance of contractual protections, including indemnities, security arrangements, decommissioning funding mechanisms and other structures designed to manage residual exposure to decommissioning liabilities following completion. The inclusion of these enhanced contractual protections can also impact on consideration structures, potentially reducing upfront consideration in favour of greater contractual protections from statutory liability (including decommissioning security arrangements).
A buyer may also inherit an asset that is subject to an existing regulatory framework, including environment plans, approvals and other obligations that may have implications for future decommissioning activities. Accordingly, decommissioning considerations should form part of the broader regulatory due diligence undertaken in connection with a transaction.
Buyers should carefully assess existing environment plans, safety case obligations, obligations under approvals, regulatory commitments and assumptions underpinning the operation of an asset, including any matters that may influence future decommissioning activities or cost. For sellers, these considerations may require enhanced disclosure regarding the regulatory status of assets and regulatory obligations that may affect future activities, including decommissioning activities.
Looking ahead
As Australia's offshore petroleum sector enters a period of increasing decommissioning activity, participants can expect continued policy, regulatory and commercial focus on the allocation and management of decommissioning liabilities. In that environment, decommissioning considerations are likely to become an increasingly prominent feature of joint venture negotiations, asset acquisitions and divestments and broader portfolio management decisions across the sector.
Participants should ensure they have a clear understanding of how decommissioning obligations and liabilities are addressed in both joint venture arrangements and M&A transactions, including the allocation of responsibility and cost between parties, the treatment of contingent and future liabilities, and the potential for residual exposure to persist notwithstanding asset divestments, title surrender or the completion of decommissioning activities.
Next steps
If you would like to discuss the issues raised in this Insight, or other aspects of Australia's offshore petroleum decommissioning regime further, please contact us below.