Update on Status of Offshore Oil and Gas Decommissioning Enquiry
The Department of Industry, Innovation and Science (DIIS) is currently reviewing the policy, regulatory and legislative framework for decommissioning infrastructure in Commonwealth offshore waters under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA).
There has been a heightened focus on decommissioning activity in recent times as decommissioning activity in the petroleum sector is expected to increase in coming years, with certain late-life offshore projects approaching cessation of production in Australia. The DIIS released a discussion paper in October 2018 entitled 'Decommissioning Offshore Petroleum Infrastructure in Commonwealth Waters' (Discussion Paper) for industry comment.
The DIIS is currently developing an options paper detailing preferred proposed options to enhance the decommissioning framework, which is expected to be released in mid-2020 for industry comment. Following this:
- the DIIS will provide the outcomes of the review and options for the proposed revised decommissioning policy framework to the Minister for Resources in late 2020. This will outline key legislative and regulatory changes that might be required; and
- once the proposals have been considered by the Government, the DIIS will start work on the changes required to implement the agreed decommissioning framework post 2020.
In the Discussion Paper, the DIIS identified a number of elements of the current decommissioning framework that have the potential to be improved and has outlined potential improvements, which include:
- (Decommissioning obligations) Clarifying the scope of decommissioning obligations, including:
- expressly requiring titleholders to either remove property or make alternative arrangements that are satisfactory to NOPSEMA. This could be introduced in parallel with an express obligation for titleholders to plug and abandon wells and remediate the title area. The effect of including these express provisions is they apply to all decommissioning projects, not just those where the titleholder has applied for consent to surrender their title; and
- introducing a timeframe or more precise regulatory trigger for when titleholders must remove property or make alternative arrangements. Such an amendment is designed to encourage/oblige the removal of disused property periodically throughout the life of a title, separate to decommissioning obligations undertaken once operations have ceased entirely.
These amendments could be made by way of amending current provisions in the OPGGSA or inserting a standalone requirement to decommission.
- (Legal Responsibility) Clarifying who is responsible for ensuring decommissioning is carried out. Options to address this include:
- introducing alternative liability arrangements where the OPGGSA is amended to provide that ongoing responsibility for decommissioning does not end at the point at which a title is transferred. Under this regime, all former titleholders could remain responsible for decommissioning in respect of infrastructure that has been installed prior to the transfer of title. This would apply irrespective of how many times the title has changed hands and such former titleholders may be required by the Government to pay necessary costs; or
- expressly providing that each member of the titleholder group could be held to account for ensuring that decommissioning obligations are discharged, including responsibility for meeting the total costs of decommissioning, without government intervention.
- (Financial Responsibility) Ensuring titleholders have sufficient financial capacity to meet their decommissioning requirements and that appropriate financial responsibility mechanisms are in place. Options to address this include:
- amending the OPGGSA to provide that NOPTA can conduct an assessment of a titleholder’s technical and financial capacity to comply with their obligations at any time (and not only at the time a title is transferred);
- implementing an express statutory requirement to provide financial security for decommissioning (this would be in addition to the existing obligation to provide financial assurance);
- only requiring financial security for decommissioning on a discretionary basis;
- establishing a dedicated decommissioning fund whether on an individual title basis or on a pooled basis; or
- bolstering current financial assurance requirements to extend specifically to decommissioning costs.
- (Information available to the Government) Ensuring the Government has advance and up-to-date information on a titleholder's plans for decommissioning which could be achieved by requiring titleholders to include information about decommissioning activities in environment plans or to submit a stand-alone decommissioning plan. Any stand-alone decommissioning plan would likely be submitted at the same time as the initial field development plan and will be required to be periodically updated over the life of the field. Titleholders may also be required to submit a 'close-out' report after decommissioning infrastructure.
- (Post-Title Compliance and Enforcement) Making policy improvements to strengthen the tools available to ensure remedial work can be undertaken if required. Options to address this include:
- amending the OPGGSA to ensure that a former titleholder operating under a remedial direction is subject to all the duties and responsibilities as if it were operating under its previous title (including in respect of financial assurance);
- amending the regulations to enable a former titleholder to submit a risk management plan prior to commencing an activity;
- establishing a new decommissioning title that would be issued to former titleholders to carry out decommissioning or ongoing post-decommissioning monitoring activities; or
- broadening NOPSEMA's and the Minister's power to issue remedial directions to all former titleholders, including to former titleholders that have transferred their interests in the title. This amendment would allow the Government to pursue, if necessary, all former titleholders throughout the chain of ownership and not just the immediate former titleholder.
Industry has indicated that a clear decommissioning framework implemented by way of legislative amendments to the OPGGSA, rather than through the issuance of guidance notes and policy would be welcomed to ensure that titleholders have a clear understanding of their legislative obligations. The implementation of the new decommissioning framework will be relevant for oil and gas companies as follows:
- In the context of M&A transactions, given the high likelihood that former titleholders' liability for decommissioning post-transfer of title will be clarified and NOPTA will likely more closely scrutinise the financial capability of incoming titleholders (whether by way of an asset or share transaction) to meet decommissioning costs:
- sellers will need to carefully consider the financial strength of buyers to meet future decommissioning costs. This is important because there is potential for a seller, as a former titleholder, to be held liable for decommissioning costs if a buyer cannot meet such obligations;
- both buyers and sellers will need to consider whether additional security needs to be provided by a buyer to ensure a buyer can meet decommissioning costs;
- parties may wish to structure the approval of transfers of title and/or changes in operational control as conditions precedent to avoid an unwind of the transaction; and
- parties will need to consider building in additional time in obtaining any joint venture consents or waiver of pre-emptive rights as continuing joint venture participants may require further oversight of arrangements that are ultimately agreed between the seller and the buyer.
- In the context of oil and gas projects, companies will need to ensure that any new regulatory requirements are complied with, for example (and depending on what is ultimately legislated as part of the reforms):
- clearly reflecting that decommissioning is an ongoing process that needs to be considered from the outset of a project and throughout the life of a project including requiring the operator to either update current environment plans to cover decommissioning activities or prepare a stand-alone decommissioning plan;
- considering whether additional requirements should be included for joint venture participants to provide security specifically in respect of decommissioning costs; and
- considering arrangements that will survive a transfer of title if former titleholders are held liable for decommissioning costs, including whether it is appropriate to allow for such former titleholders to be reimbursed for costs they incur in relation to decommissioning.
Companies participating in the oil and gas sector should be considering whether to amend existing joint operating agreements and include provisions in new joint operating agreements to reflect any new legislative requirements, either by way of generic provisions to comply with the relevant legal requirements once known or specific provisions once the new legislative requirements have been introduced and are understood.
On 7 April 2020, NOPSEMA released a draft policy 'Section 572 Maintenance and removal of property' (Draft Policy). The purpose of the Draft Policy is to assist in clarifying how NOPSEMA intends to advise, promote, monitor and enforce compliance of the obligations under section 572 of the OPGGSA in relation to the maintenance and removal of equipment and property brought onto a title area.
The Draft Policy has been issued in response to the former Federal Minister for Resources and Northern Australian's Statement of Expectations given to NOPSEMA in October 2019, which set out a clear expectation that NOPSEMA would give heightened focus to oversight of titleholders' compliance with section 572.
The Draft Policy is helpful insofar as it clarifies and formalises NOPSEMA's position on section 572, but is broadly consistent with NOPSEMA's policy position as communicated to industry on a transaction/project basis and the DIIS' Offshore Petroleum Decommissioning Guideline released on 17 January 2018.
There is a strong focus in the Draft Policy on considering section 572 obligations as 'life-of-project' obligations rather than simply applying at the point of cessation of operations. The key features of the Draft Policy are:
- (Maintenance of property) NOPSEMA will apply the following principles, amongst others, to monitor compliance with the obligation to maintain property in good condition and repair:
- property must be fit for purpose to perform its intended function during operations, including removal; and
- property is monitored, maintained and where necessary repaired so that it can be removed in a safe and environmentally responsible manner. This includes a requirement to hold an inventory of all property in the title area at all times, including records of the condition of all property.
- (Base case is full removal of property) NOPSEMA will apply the following principles, amongst others, to monitor compliance with the obligation to remove property:
- the base case is full removal of property from the title area;
- all property is designed, installed and operated with the intention of being removed; and
- removal is planned to take place throughout the operations, including with justified timeframes for removal and full removal which must be completed while the title is still in force.
- (Alternative arrangements)
- NOPSEMA will only accept partial removal if:
- titleholders can demonstrate in an environment plan (EP) that arrangements other than full removal are acceptable and that the EP otherwise meets the criteria for acceptance;
- the alternative is expected to have equal or better environmental outcomes when compared with full removal and will result in environmental impacts and risks that are reduced to a level that is as low as reasonably practicable;
- NOPSEMA expects titleholders to address arrangements for long term monitoring and management and will not accept a notification ending the operation of the EP until the monitoring has been completed; and
- NOPSEMA confirms that its acceptance of an Offshore Project Proposal does not constitute approval for proposed alternative arrangements and that this must be done through the EP process.
- NOPSEMA will only accept partial removal if:
- (Permissioning documents) NOPSEMA expects that the section 572 requirements will be addressed in the permissioning documents, including the EP, safety case and well operations management plan. Relevantly, NOPSEMA has stated that the cessation of production is a new state of operations that requires an accepted EP to be in place.
- (Current titleholder) NOPSEMA confirms that where a title has been sold or transferred but has not been revoked, cancelled, terminated or expired, the duty to remove property will apply to the current titleholder, whether the property is operational or not.
- (Engagement of contractors) NOPSEMA states that if titleholders engage contractors to operate facilities, titleholders remain ultimately responsible.
- (Title transactions) NOPSEMA reiterates that it will provide title related compliance advice to NOPTA, including where there are outstanding section 572 obligations.
- (Enforcement) NOPSEMA reiterates that it may direct a titleholder or former titleholder to remove property or make alternative arrangements satisfactory to NOPSEMA and that it may seek to prosecute titleholders and have either civil or criminal penalties applied.
NOPSEMA is seeking feedback on the Draft Policy to inform its refinement prior to final publication. A copy of the Draft Policy can be found at this link. We will provide a further update once the Draft Policy has been finalised.