UK: Amendment To Energy Bill 2008 - Proposals For Oil And Gas Decommissioning

Last Updated: 30 June 2008
Article by Judith Aldersey-Williams

The government has made an amendment to the Energy Bill 2008 limiting the application of Sections 29 and 34 of the Petroleum Act 1998 ("the Act") in certain instances. The intention is to allow parties to the licence whose beneficial interest is confined to one area to escape liability for decommissioning in another area. However, there are concerns that the amendment may not be totally effective.

Background

Currently under the Act, (as proposed to be amended by the draft Bill) the Secretary of State may by a written Section 29 notice require the submission of a costed decommissioning programme for each offshore installation and submarine pipeline from a range of persons, identified under Section 30 of the Act, including, in effect, licensees, operators, owners of installations/pipelines, those bodies corporate associated with them, and those persons who have transferred their licence rights, but have not obtained a necessary consent required under the licence in relation to the transfer. If a Section 29 notice has been served on a person and withdrawn or, even though it was never served, it could have been served on a person, then such person may be drawn back into the liability net for decommissioning costs by virtue of Section 34 of the Act.

Divided Licences

The amendment attempts to deal with the issue of potential liability of 'Area A' owners for the decommissioning of an installation in 'Area B', which is governed by the same petroleum production licence as Area A, but in which the 'Area A' owners hold no beneficial interest. This may happen as a result of assignment or sole risk development. In such a situation the two groups of owners are all still party to the same production licence under which the rights are held joint and severally and so are indivisible, but each group agrees, usually in a trust deed, not to exercise those rights in the other area.

Under the terms of the Act, various categories of person can be made liable for decommissioning an installation - among them are persons who "have the right to exploit or explore mineral resources in any area" where such exploitation is carried on from the installation in the exercise of this right. The owners of Area A have the right to exploit or explore mineral resources in the whole licence area by virtue of the licence even if they have by contract agreed with the owners of Area B that they will not exercise that right in Area B. The right, shared with the Area A owners, is exercised from the installation in Area B and therefore it is arguable that Area A owners are liable for the decommissioning of an installation in Area B despite having no beneficial interest in it and never taking any production from it.

An alternative basis on which a person can be made liable for decommissioning an installation is if they are party to a joint operating agreement relating to rights by virtue of which a party falls within the category just described. Therefore, even if it can be argued that Area A owners do not have the right to exploit or explore mineral resources in Area B, they may still be caught if they are parties to the same JOA as the owners of Area B. In some cases of sole risk development or assignment of areas of a licence, the JOA is not split and the same JOA applies to both areas.

The policy of BERR in such a situation is not to serve Section 29 notices on the Area A owners in relation to an installation in Area B. However, as with any policy, there is always a concern that this may change and the industry has been lobbying for this policy to be made statutory.

BERR has already made a change to its licensing processes under which a licence can be split and two new licences issued to the owners of Area A and Area B. However, this may not be straightforward or desirable in all cases and does not completely resolve the issue of the status of licensees under the original licence.

Further Amendment Under The Energy Bill 2008

The following further amendments to the Bill were made by the Government and were passed in the House of Commons:

  • a person on whom a Section 29 notice could normally be served because it either:

    1. has the right to explore, exploit and convey minerals in an area which right is exercised by means of the installation (i.e. a licensee); or

    2. although neither a licensee nor an operator of the installation it is nevertheless a party to any joint operating (or similar) agreement;
      may not be served a Section 29 notice if that person is not entitled to derive, and never has been entitled to derive any financial or other benefit from the installation, and is not, and never has been, a person meeting the other criteria of Section 29;

  • a Section 29 notice may also not be served on a body corporate which would ordinarily be liable to be served a Section 29 notice due to its association with a person exempt from being served a Section 29 Notice by virtue of the previous provision; and

  • a proposal under Section 34 of the Act to make a person liable to carry out a decommissioning programme may not be made if the Secretary of State would be prevented from serving a Section 29 notice pursuant to the previous provision if the programme had not already been approved.

This amendment is a step in the right direction to address the concerns of companies doing business in the UKCS who have never benefited from production via a specific offshore installation but who may potentially be liable for a share of the decommissioning liability for that installation by virtue of being a co-licensee holding an interest in a different area.

However, the amendment has not put the minds of the industry entirely at rest on this issue. The wording "is not entitled to derive, and never has been entitled to derive any financial or other benefit from the installation" is capable of a number of interpretations. While the primary benefit arising from an installation is the ability to produce hydrocarbons from that installation, there are other situations in which benefits may be said to arise. For instance, if the owners of Area A do not have any beneficial interest in the installation in Area B, but the production from Area A is transported to the installation on Area B for processing and onward transportation to a main export route, are the owners of Area A thereby deriving a benefit from the Area B installation?

The Government has attempted to explain its intentions by means of a statement from the Minister, a copy which has been placed in the libraries of both Houses. However, it is not clear if this will be sufficient to allay the fears of the industry.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 23/06/2008.

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