Trailing liability for asset decommissioning in Australia - Oil, Gas & Electricity

Australia's total asset decommissioning liability is estimated to exceed $60 billion between 2020 and 2050. This issue is particularly acute with many fossil fuel assets facing early retirement as a result of the clean energy transition. Consequently, decommissioning stranded or end-of-life assets is becoming an increasingly significant consideration for businesses across a wide range of industries.

Australia's piecemeal legislative framework for dealing with decommissioning is, in many respects, confusing and inconsistent. Presently, the framework consists of an industry-specific array of federal and state-based legislation and regulations. For example, the Offshore Electricity Infrastructure Act 2021 (Cth) regulates decommissioning of offshore wind farms and associated electricity transmission infrastructure, while the Water Act 1989 (Vic) regulates decommissioning of public and private dams.

Until recently, this legislative framework rarely extended decommissioning liability beyond the asset's current titleholder. For example, the Petroleum (Onshore) Act 1991 (NSW) holds the current titleholder of onshore petroleum assets in NSW responsible for decommissioning but does not provide any safeguards against the titleholder's insolvency or inability to decommission the asset.

The dangers of such a regulatory framework are obvious and were highlighted by the collapse of the Northern Oil and Gas Australia Pty Ltd (NOGA) corporate group in February 2020. One of the NOGA companies, Timor Sea Oil & Gas Australia Pty Ltd (TSOGA) held a petroleum title in the Timor Sea and owned and operated the Northern Endeavour floating production, storage and offtake (FPSO) facility.

TSOGA had acquired the FPSO from Woodside Energy Ltd (Woodside) after Woodside had decided that the asset and the field had reached the end of their commercial operating period.

NOGA intended to extend the life of the FPSO, however, a number of technical and commercial issues arose (including concerns with corrosion and operational safety issues) resulting in the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) issuing a Prohibition Notice on 10 July 2019 and, ultimately, a General Direction requiring the FPSO to cease production on 18 July 2020.

As a consequence, the group entered into voluntary administration in September 2019. When it subsequently entered into liquidation on 7 February 2020, it was left unable to decommission the FPSO and the field. The $250 million decommissioning liability eventually fell upon the Commonwealth Government, which will recover the costs of decommissioning through a temporary levy on offshore petroleum production (under the Offshore Petroleum (Laminaria and Corallina Decommissioning Cost Recovery Levy) Act 2022 (Cth)).

In response to the NOGA liquidation, on 2 September 2021 the Federal Parliament passed the Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Act 2021 (Cth) (the Act), which came into force on 2 March 2022. The Act introduces a trailing liability mechanism for decommissioning offshore oil, gas and carbon capture and storage assets.

The Act only applies where the current titleholder is unable to meet its decommissioning obligations or where previously completed decommissioning work is defective. Trailing liability is intended to be a last resort; the primary obligation to decommission the asset still falls upon the current titleholder.

The Act permits NOPSEMA to issue remedial directions extending liability to former titleholders, their related bodies corporate and any other person who, on or after 1 January 2021:

has or could have significantly benefited from the operation of the asset;
has been in a position to influence the extent of another person's compliance with the Act; or
has acted jointly with a titleholder in operating the relevant asset.

The scope of NOPSEMA's power is broad enough to potentially capture a wide range of non-titleholder parties, including joint venture partners, secured financiers and royalty holders. This provides a stark contrast to the broader national decommissioning liability framework, which does not impose decommissioning liability on any parties beyond the current titleholder.

Similar trailing liability legislation already exists in international jurisdictions including Norway, the United Kingdom and the United States (see pages 71 – 84 of the enclosed link).

Whilst the NOGA collapse may have prompted the introduction of the Act, there is no conceptual reason why trailing liability should be limited to offshore oil, gas and carbon capture and storage assets.

Certainly, the potential cost exposure for these assets is considerable and the immediate environmental risks from a catastrophic failure makes their safe decommissioning a priority. However, the fundamental issue of an insolvent or incapable titleholder ultimately passing a 'clean-up bill' back to the taxpayers is something which one may expect to have broader application than just under the Act.

Consequently, having regard to the very significant pipeline of decommissioning activities noted above, we may well see the introduction of state or federal trailing liability legislation which extends decommissioning liability to a far wider class of assets. For example, the Victorian Government has already announced an intention to introduce trailing liability for decommissioning coal mines under the Mineral Resources (Sustainable Development) Act 1990 (Vic).

As such, it will become increasingly important for parties to consider their potential decommissioning liability exposure and structure transactions accordingly. This may include a consideration of a variety of risk mitigation measures such as security arrangements, indemnities in favour of prior asset holders and cross guarantees. Such exposure may also have an effect on the commercial value of assets which are close to the end of their life, which will also become an increasingly important consideration for parties dealing with these assets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.