Are you still responsible for decommissioning?

Historically, little attention was paid to the issue of decommissioning. This is clear from the fact that the original terminology was that of ‘abandonment’ and the contractual provisions between the parties focused on ensuring that the operator recovered as much money as possible from the disposition of assets which was then to be distributed among the joint venture partners. Today, bearing in mind the environmental and international obligations of countries, the responsibility for and the costs associated with decommissioning have come sharply into focus.

The development of decommissioning provisions in Trinidad and Tobago reflects this sharpening of awareness. In 1969 under the Petroleum Act of Trinidad and Tobago (the ‘Petroleum Act’) the focus was on delivering to the Minister of Energy and Energy Affairs (the ‘Minister’) all assets used in production at the end of the licence ‘… in good order, repair and condition and fit for further utilization (fair wear and tear excepted)…’. There was also a requirement to restore the area to its natural condition so far as possible. There were however no mechanisms to ensure that this requirement was achieved. The current model form of production sharing contract issued by the Ministry of Energy and Energy Affairs (the ‘MOEEA’) now provides for contractors to: (i) submit an abandonment programme for approval by the MOEEA; (ii) carry out that programme to the Minister’s satisfaction with respect to all installations and pipelines save those which are to be transferred to the Minister; and (iii) most importantly, requires contractors to establish an escrow account into which funds are paid to secure their decommissioning obligations.

If an assignee does not carry out the decommissioning obligations, the MOEEA can require the original parties to do so.

With greater clarity on decommissioning obligations, companies seeking to assign all or part of their interest in a production sharing contract/licence and those seeking to acquire such interests need to carefully analyze and provide for the decommissioning obligations for which they are responsible. The assignor will be seeking to be relieved of all obligations however production sharing contracts/licences usually provide that:

‘No assignment shall in any way absolve the assignor from the obligations undertaken by it under the Contract except to the extent such obligations are in fact performed by the assignee.’

The effect of this provision is that if the assignee does not carry out the decommissioning obligations the MOEEA can require the original parties to the production sharing contract/licence to carry out the decommissioning obligations. This principle is also contained in the Trinidad Petroleum Regulations. Many an assignor of its interest will be surprised to discover that they may still be liable for the future decommissioning of facilities. In hindsight, parties may be concerned as to how much due diligence was carried out on the assignee, especially where the assignor was transferring all of its interest. Is the assignee financially and technically capable of carrying out the decommissioning obligations and how certain is the assignor that the assignee will do so in twenty years’ time?

Licencees operating in the UK Continental Shelf (‘UKCS’) have faced similar issues due to the provisions of the Petroleum Act of 1998 (the ‘UK Petroleum Act’). Essentially, the UK Petroleum Act requires the submission and approval of a decommissioning programme. The Secretary of State may then issue a notice (a Section 29 Notice) on the operator of the facility and those with an interest in the licence to carry out the decommissioning programme and that obligation is joint and several; meaning that if any party with a duty to carry out the programme is unable to do so, the other parties interested in the field carry that defaulting party’s burden.

Significantly, section 34 of the UK Petroleum Act gives the Secretary of State the right to require an additional class of persons to be responsible for the costs of decommissioning including a company that had previously assigned its interest. The UK Petroleum Act therefore created a situation similar to that which exists in Trinidad and which licencees in the UKCS found unacceptable as they may be made liable for decommissioning costs years after they had transferred their interest in an area. This resulted in assignors seeking security from assignees and the remaining joint venture parties also seeking security from the assignee. This double security requirement hindered the transfer of assets especially to those entities seeking to monetize stranded reserves and the view was that this would ultimately limit the country’s ability to recover the maximum of its oil and gas reserves.

There are aspects of a DSA which can be incorporated into transactions to address the future decommissioning obligations of parties.

To address these issues, parties in the UKCS entered into decommissioning security agreements (‘DSAs’) which have become a standard part of transactions. While a UKCS DSA cannot be utilized in Trinidad and Tobago in its entirety due to a number of legislative differences between the jurisdictions, there are aspects of a DSA which can be incorporated into transactions to address the future decommissioning obligations of the parties including:

• the incorporation of provisions to govern the liability for decommissioning among the current parties of the joint operating agreement;
• allowing the assignor to remain a party to the security arrangements with no ongoing obligation to provide security but solely in order to access the security in the event the assignor is ever called upon to carry out any decommissioning obligations; and
• a procedure to allow an assignee to become party to the security arrangements and to govern the handling of security already provided by the assignor and to be provided by the assignee.

Any company that has ever had a production sharing contract or licence awarded to it or that has ever assigned or received an interest in a production sharing contract or licence should review its documentation to determine what are its primary and potential residual decommissioning obligations. Additionally, parties that have recently or are in the process of assigning such an interest should carefully consider what their decommissioning obligations would be after the assignment and whether there is adequate security in place to protect all parties.