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Mind the Gap: Decommissioning Challenges in Asia

With many upstream assets in the Asia-Pacific reaching the end of their lives, decommissioning is fast becoming a major issue. In many countries, legislative frameworks are in early stages of development, and older Production Sharing Contracts ('PSC') or concession agreements – signed when the field's end was a distant thought – often fail to cover decommissioning responsibilities.

According to a 2018 WoodMac study, decommissioning Asia-Pacific's offshore assets (nearly 2,600 platforms, and around 35,000 wells) could cost over US$ 100 billion. With the looming possibility of high costs and unclear levels of responsibility, host states, regulators, NOCs, IOCs and other players must mind the gap created when a PSC or concession agreement does not deal with decommissioning responsibilities. Often, often legislation has the same 'gap' (ie, it does not deal with decommissioning).

As discussed below, as a facility is nearing the end of its lifetime, steps can be taken to address both legislative and contractual gaps to create certainty and stability for the parties involved.

 

Why are relevant legislative provisions, or contractual provisions, necessary?

Legislative or contractual provisions deal with the parties' responsibilities for decommissioning and the attendant risk. There is often a conflict between participants throughout the lifetime of a facility, and the state who may eventually take over the facility. Common areas of conflict include responsibilities of an earlier participant for the decommissioning of facilities that are to be shut down by another company that took over the project. The cost of decommissioning is also often high and uncertain, which is even more so the case when dealing with larger, more complex structures. The cost of contribution can therefore be significant.

Environmental responsibilities and requirements are also a concern. Emphasis is placed on taking responsibility for the environmental impacts of projects and actions, including the most appropriate and environmentally considerate way to decommission a facility or installation. In the Gulf of Mexico and the North Sea, provisions are already in place prohibiting abandonment of facilities. The last operator is precluded from having to pay all of the decommissioning costs, and responsibility is split between operators and host states. Such concerns also carry reputational considerations, as participants will want to ensure that they take the correct approach to decommissioning.

Often, participants are required to build-up a sinking fund through a decommissioning security agreement. Under that type of arrangement, funds are contributed over a period of time. This aims to avoid the risk that the last operator will simply declare bankruptcy at the end of the life of the field/asset.

As discussed below, current legislative provisions in the UK cover this split in responsibility between participating companies and NOCs or governments in great detail, which has proved to be effective.

 

What if there is no legislative framework in place?

Companies considering the potential challenges and costs of decommissioning should refer to any legislation already in place. However, such legislative frameworks are at various stages of development and have been slower to progress in Asia as compared to the UK and US.

This is changing and there is still work to be done. Regional Decommissioning Guidelines published in 2012 by the ASEAN Council on Petroleum ('ASCOPE') sought to address the issues presented by decommissioning, and some jurisdictions have begun implementing specific regulations. For example, Thailand has established a basic legal framework for decommissioning through the amended Petroleum Act 1971. Brunei Darussalam implemented the Decommissioning and Restoration Guideline for Onshore and Offshore Facilities in 2009 to address issues of costs sharing in decommissioning. Similarly, in 2015, Vietnam amended its 1995 Law on Petroleum by Decree No. 95/2015/ND-CP to align the legislation with UNCLOS. It also established a fund for decommissioning liabilities. In 2017, a further decision on the Law on Petroleum (Decision No. 49/2017/QD-TTg on Decommissioning of Petroleum Installations) obliges operators to create a decommissioning plan for approval by the Vietnamese government, among other things. A Model PSC introduced by Vietnam in 2013 also specifically references decommissioning and abandonment. Malaysia also has decommissioning guidelines in the form of the Petronas Procedures and Guidelines for Upstream Activities, amended in 2013. Under these guidelines, operators must submit a decommissioning plan to Petronas during the development phase, and all proposed decommissioning activities are subject to review and approval by both Petronas and the Malaysian government.

However, some jurisdictions have taken longer to adopt specific regulations. For example, in February 2018, Indonesia issued Regulation No. 15 of 2018 concerning post-operation activities for upstream oil and gas businesses. This regulation imposes on all PSC contractors abandonment and site restoration obligations, including contributing to a fund, regardless of whether the PSC expressly requires this. This attempt at retroactive application could lead to disputes, particularly if the PSC has a stabilisation clause (discussed below) that prohibits new legislation from applying retroactively. Exposure to decommissioning obligations also increases through change in ownership. For example, Indonesia's state-owned oil and gas company, Pertamina, has entered into deals to acquire certain assets such as the Rokan Block currently operated by Chevron. This increases Pertamina's potential exposure to a wealth of decommissioning obligations.

These factors are important to consider, particularly given that around 75% of the 450 odd offshore platforms around Indonesia are more than 20 years old, and nearing the end of production.

It is therefore valuable for NOCs, and IOCs through knowledge sharing, to ensure comprehensive legislation and guidelines are in place to navigate the waters of decommissioning responsibilities. The ASCOPE guidelines provide a starting point, and aim to encourage consistency throughout the region, but countries can also look to other developed regions for examples of successful legislation.

 

Can lessons be learned from other jurisdictions?

In the UK, for example, the legislation and guidelines in place are extensive and accessible, aiming to fill any gaps in the allocation of responsibility for decommissioning. This is covered by the Petroleum Act 1998 and the Energy Acts of 2004, 2008 and 2016. The regime is administered by the Department of Business and Industrial Strategy, in consultation with the Oil and Gas Authority. The overall focus is of the regime is to explore options for re-use of facilities, and seek to decommission in the most cost-effective way.

Under section 29 of the Petroleum Act, once notice has been served for decommissioning of a particular facility or installation, all participants are jointly and severally liable for the decommissioning costs. The legislation focuses on two principles. First, the precautionary principle that decommissioning should always aim to achieve a clear seabed, and second, that those who have benefitted from exploitation or production of hydrocarbons bear the responsibility for decommissioning. This can be shared back along the chain of users, owners and licence holders.

The legislation aims to ensure that parties are prepared in advance, and cost efficiency is maximised. If all parties are aware of their responsibilities and potential liabilities, decommissioning can take place in the most cost-effective way. The guidelines and legislation in place in the UK encourage collaboration between operators and regulators, and provide certainty in a potentially uncertain area.

Similar frameworks are in place in other countries. The Dutch government recently introduced a platform aiming to encourage the re-use and collaboration in decommissioning of oil and gas infrastructure. This joint initiative from the Dutch oil and gas industry and Energie Beheer Nederland (a natural gas company owned by the Dutch government) is called 'NexStep'. It provides a forum for operators and regulators with the common goal of optimising decommissioning. Overall, valuable lessons can be learned from other countries with more developed decommissioning regulations and guidelines.

 

How can effective legislation be developed in practice?

Given the scope for potential decommissioning disputes, the sooner a regime is in place for dealing with such responsibilities, the better. Clear, accessible regulations and legislative frameworks benefit all parties involved, including potential new investors.

The success of such frameworks can be seen in countries with extensive guidelines and legislation, such as the UK. Regulations encourage collaboration and clarity on costs, responsibility, safety and environmental considerations. Asian countries looking to further develop regulations can look to these examples, and benefit in terms of efficiency of decommissioning itself. This will also minimize the risk of disputes.

The success of such frameworks can be seen in countries with extensive guidelines and legislation, such as the UK. Regulations encourage collaboration and clarity on costs, responsibility, safety and environmental considerations. Asian countries looking to further develop regulations can look to these examples, and benefit in terms of efficiency of decommissioning itself. This will also minimize the risk of disputes.

There are, however, a number of key considerations.

First, any new legislative regime must align with existing PSCs. Language is key in relation to PSCs, particularly when it comes to potential disputes. Many early Asian PSCs do not deal with the parties' decommissioning responsibilities. Others deal with it only generally. Whatever the case, new legislation should be consistent with PSCs that are already in place.

Second is the timing of new provisions. Legislation that has retroactive effect can be problematic. Such legislation could lead to claims under bilateral or multilateral investment treaties. It could also potentially contravene stabilisation clauses or grandfathering provisions, which both address changes in law after the contract was signed and which are frequently included in PSC regimes.

Stabilisation clauses offer protection for private companies when entering into long-term agreements with states or state-owned entities. They insulate the investing party from consequences of new laws and regulations introduced by host governments. The clause does not prevent the host government from changing the law, but seeks to address the effect of any change on the parties' relationship. Stabilisation clauses take many forms. However, the two main types seek to freeze the applicable law at the date the contract is signed, or provide a mechanism to manage the impact of any new legislation on the contract.

Although many stabilisation provisions included in PSCs are open to interpretation as to exactly what is protected.

The same applies to grandfathering provisions, under which an old rule continues to apply to some existing situations, while a new rule applies to future cases. Violation of stabilisation or grandfathering provisions could give rise to fair and equitable treatment claims under bilateral investment treaties ('BITs'). BITs often require that a host state provide fair and equitable treatment to investments. This could be a potential ground for dispute if a state subsequently imposes laws and regulations with retroactive effect.

An example of where this went wrong is in Thailand. A dispute arose between Chevron and Thailand in 2016, when Thailand retroactively enforced a new energy ministry regulation requiring gas field operators to pay the costs to decommission all installed assets, even if they no longer operate those assets. Chevron is due to hand over operation of the Erawan gas field to Thailand's state-owned oil firm PTT in April 2022 when its concessions expire. However, the new law would require Chevron to pay the future costs of decommissioning the assets it has installed, including those it transfers over to the PTT entity. Thailand's energy ministry had requested Chevron to pay a security deposit for the full decommissioning cost of all of the company's assets in the Erawan gas field. Chevron's position was that, under its initial contracts from 1971, it is only liable for infrastructure that is no longer usable. Although the parties suspended the arbitration in late 2019 for settlement discussions, the proceedings for this US$ 2 billion claim restarted in October 2020.

 

If there is no applicable framework governing the decommissioning issue, contractual provisions or amendments are the next step

If no legislation deals with decommissioning, it needs to be dealt with contractually sooner rather than later. As mentioned above, many PSCs are silent on the issue of decommissioning, creating a gap.

So, an amendment should be drafted as soon as possible. An amendment can deal with issues of cost sharing (between previous NEXT px Group Positions for Next Stage of Growth with New Investors participants, current and future participants, and the host state), and collecting funds.

Considerations to bear in mind are obligations the company may already have under existing supply, maintenance or operating contracts on decommissioning or abandonment. Further, it is useful to consider the best model to suit the business, particularly as there are a wide range of potential risks arising from strict legislative requirements associated with decommissioning and abandonment works. Finally, it is worth considering the most suitable dispute resolution mechanism for decommissioning disputes.

Overall, it is important for all participants – operators, NOCs, host states etc – to be aware of the potential gaps that exist in relation to decommissioning both contractually and legally. Clear guidelines on such responsibilities, in terms of both obligations and costs, will ensure cost efficiency is maximised, and will work towards minimising the risk of disputes. Using practices from other jurisdictions can be valuable, and emphasises the importance of cooperation between host states and operators. Decommissioning is only going to become a more significant and pressing issue in the years to come, and preparation is key.

 

This article was published on the Platform magazine, 28 April 2021.

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