Introduction
As Nigeria currently experiences a wave of divestments by international oil companies (IOCs), an increased attention is being directed towards the decommissioning of ageing infrastructure. This has prompted the urgent need for decommissioning strategies that are efficient, environmentally responsible, and economically viable. As IOCs pull back from onshore and shallow-water fields, the responsibility for managing these assets is increasingly falling to indigenous companies, creating both challenges and opportunities.
Decommissioning is the process of concluding oil and gas operations, both onshore and offshore. It involves the safe dismantling and removal of infrastructure, plugging of wells, and restoring the surrounding environment whether land(onshore), ocean, or seabed(offshore) to its pre-operations condition.
The Petroleum Industry Act 2021 (PIA)1 defines decommissioning and abandonment together as "the approved process of cessation of operations of crude oil and natural gas wells, installations, plants and structures, including shutting down an installation's operations and production, total or partial removal of installations and structures where applicable, chemicals, radioactive and all such other materials handling, removal and disposal of debris and removed items, environmental restoration of the area after removal of installations, plants and structures."
In Nigeria, decommissioning and abandonment are becoming increasingly critical issues as the oil and gas sector matures, and several oil fields approach the end of their operational lifespan. Despite its significance, the country's decommissioning landscape has long faced unique challenges. The PIA, however, seeks to address these issues by providing a clear framework for decommissioning, which includes the cessation of operations, removal of structures, and restoration of impacted environments. This legislation represents a significant step toward ensuring that Nigeria can manage the decommissioning and abandonment of its installations effectively and in accordance with global standards.
Sustainability is central to Nigeria's decommissioning and abandonment processes, particularly in reducing environmental risks and safeguarding host communities. However, a critical aspect of these efforts lies in addressing and managing risks for both sellers and buyers involved in the transaction.
For sellers, effective derisking requires strict compliance with regulatory frameworks such as the Petroleum Industry Act (PIA), accurate evaluation of environmental and decommissioning liabilities, and the establishment of robust financial assurance mechanisms to cover anticipated costs. For buyers, the focus should be on conducting comprehensive due diligence to identify and evaluate potential liabilities associated with decommissioning. This includes assessing the adequacy of existing decommissioning plans, verifying compliance with applicable local and international regulatory frameworks, and ensuring that the financial and operational risks are well-managed.
By embedding these measures into the decommissioning process, stakeholders can achieve a balance between regulatory compliance, financial prudence, and environmental stewardship, thereby contributing to a more sustainable energy transition in line with the best global practices.
Regulatory Framework for Decommissioning and Abandonment in Nigeria
1. Petroleum Industry Act 2021
The PIA is Nigeria's primary legislation for regulating abandonment and decommissioning practices among oil and gas companies operating within the country. It seeks to meet the benchmarks established by global frameworks, which mandate that decommissioning and abandonment activities adhere to globally recognized petroleum industry standards.
Decommissioning and abandonment activities for oil and gas facilities in Nigeria are primarily governed by the foundational provisions of the PIA, which establishes key ground rules for such processes. These include obligations regarding environmental restoration, funding mechanisms for decommissioning and abandonment, and ensuring safety and sustainability. In addition, the Nigerian Upstream Petroleum Regulatory Commission ("NUPRC" or "The Commission") and the Nigerian Midstream and Downstream Petroleum Regulatory Authority ("NMDPRA" or "The Authority") have issued specific regulations pursuant to the PIA to further elaborate and operationalize the decommissioning and abandonment requirements under the PIA, ensuring structured coordination and compliance with these overarching principles. The Commission issued the Upstream Decommissioning and Abandonment Regulations for upstream operations (referred to as the "Upstream Regulations"), while the Authority introduced the Midstream and Downstream Decommissioning and Abandonment Regulations for midstream and downstream operations (referred to as the "NMDPRA Regulations").
2. Procedure for Decommissioning and Abandonment Under the Upstream Regulations
The procedures for decommissioning and abandonment in the upstream sector include:
- Approval Process: Before any decommissioning or abandonment activities commences in the upstream sector, companies must secure written approval from the Commission. In some cases, the Commission itself may notify the licensee, lessee, or permit holder when decommissioning becomes necessary, based on international petroleum industry standards.2
- Submission of a Decommissioning Program:
Operators are required to submit a Decommissioning and Abandonment
Plan to the Commission within one year for existing facilities
after the regulations' commencement. The plan must detail:
- Environmental, economic, and social considerations.
- The steps to responsibly manage the facility's end-of-life phase.
- Measures to minimize impacts on host communities and the surrounding environment.
- Plan, Review and Approval: Once submitted, the Commission has a statutory 120-day period to review the Decommissioning Plan. If in the opinion of the Commission, the plan does not meet regulatory standards, the operator has 180 days to address and resubmit.
- Public Consultations: Stakeholder engagement is integral to decommissioning in the upstream sector. Operators must conduct public consultations, ensuring that communities and other stakeholders are informed and involved in the decision-making process. It is important that these consultations are documented to maintain transparency. Feedback from these sessions often influences the final decommissioning strategy, making it more inclusive and effective.
- Establishment of a Decommissioning Fund:
Operators are obligated to establish a dedicated Decommissioning
and Abandonment Fund with an independent financial institution. The
purpose of this fund is to ensure that sufficient resources are
available exclusively for decommissioning activities in Nigeria.
Key requirements include:
- Notification of the fund's establishment within three months of the commencement of operations.
- Annual submission of account statements to the Commission.
- Post-Completion Report: After completing
decommissioning and abandonment, operators must submit an
End-of-Operations Report to the Commission within six months. This
report includes:
- A detailed account of the activities carried out.
- Compliance with safety and environmental standards. Any residual obligations or plans for long-term monitoring of the site.
- Non-compliance and Penalties: The regulations
impose strict penalties to enforce compliance:
- Failure to submit a decommissioning plan within the stipulated timeframe attracts a fine of $500,000. Unauthorized decommissioning activities incur fines ranging from $500,000 to $1 million.
2.2. Procedure for Midstream and Downstream Decommissioning and Abandonment
Decommissioning and Abandonment in the upstream sector share many similarities with midstream and downstream decommissioning. However, there are some key differences, particularly in terms of timelines and penalties. Under the NMDPRA Regulations, operators are required to submit a Decommissioning and Abandonment Plan to the Authority, prioritizing environmental, social, and economic sustainability. For existing facilities, the Plan must be submitted within 120 days of the Regulations' commencement; for new ones, it must accompany the license application.3
At least 24 months before decommissioning, operators must prepare a detailed Decommissioning Plan, including environmental impact assessments, cost estimates, and postdecommissioning monitoring, following public consultations. Operators must establish a Decommissioning and Abandonment Fund in an escrow account within 120 days for new licenses or one year for existing ones, with contributions reviewed every five years. The Authority reviews the Plan within 120 days and may enforce additional measures if safety or environmental concerns arise. Non-compliance may result in fines, third-party interventions, or license revocation.
Other Regulatory Frameworks Governing Decommissioning and Abandonment in the Oil and Gas Sector.
In addition to the PIA, the following frameworks regulate decommissioning and abandonment in Nigeria's oil and gas sector:
- Environmental Impact Assessment (EIA) Act (1992): Mandates environmental assessments for projects with potential environmental harm, including decommissioning activities as required under Section 236(6)(e) of the PIA.
- National Oil Spill Detection and Response Agency (NOSDRA) Act (2006): Establishes guidelines for managing oil spill-related waste to protect the environment and human health.
- Other Regulations and Conventions: Include the Harmful Waste Act (1988), Petroleum (Drilling and Protection) Regulations, and various international standards promoting global best practices in environmental and operational safety.4
Strategic Approaches for Indigenous Companies to Manage Decommissioning and Abandonment Risks During Divestments and Acquisitions
Decommissioning liabilities are a critical consideration during the transfer of ownership in the oil and gas sector. These liabilities encompass the financial, environmental, and operational responsibilities associated with safely shutting down and restoring facilities at the end of their productive life. Properly addressing these obligations ensures regulatory compliance, avoids disputes, and protects the environment. Below is a breakdown of how decommissioning responsibilities should be managed in the context of divestments and acquisitions:
- Due Diligence: Before any transaction, it is
essential to conduct thorough due diligence. This involves a
detailed review of the asset's environmental, technical, and
financial records to uncover existing or anticipated
decommissioning liabilities. Key considerations include:
- The current state of the asset and its infrastructure.
- Any prior decommissioning obligations that may not have been met.
- The estimated costs and risks associated with future decommissioning activities.
- Clear Allocation of Responsibilities: A sale
or purchase agreement should explicitly define which party is
responsible for decommissioning liabilities:
- Historical Liabilities: Typically, the seller retains responsibility for decommissioning obligations incurred up to the point of sale.
- Future Liabilities: The purchaser assumes responsibility for decommissioning activities that arise after the transaction is completed.
- Financial Security: To guarantee that decommissioning obligations are met, it is advisable that indigenous companies secure financial instruments such as decommissioning bonds, escrow accounts, or insurance policies. These mechanisms ensure that sufficient funds are available when decommissioning activities are required, providing assurance to regulators and stakeholders.
- Regulatory Oversight under the Petroleum Industry Act (PIA):
Section 232(13) of the PIA provides a crucial safeguard for
decommissioning compliance. It empowers the regulator to hold
previous owners accountable for decommissioning obligations, even
after they have divested their interests. Key implications include:
- If a licensee or lessee transfers ownership, the successor entity inherits the decommissioning responsibilities associated with the asset.
- However, the regulator retains the authority to recall the previous licensee or lessee to fulfill any unmet obligations if necessary.
Footnotes
1 Section 318 of Petroleum Industry Act 2021 (PIA)
2 Sec 232 of the PIA
3 PART IV of the Midstream and Downstream Regulations
4 Key examples include the United Nations Convention on the Law of the Sea (UNCLOS), which sets out the legal framework for removing offshore structures to prevent marine pollution, and the International Maritime Organization (IMO) Guidelines, which provide best practices for decommissioning offshore installations. Additionally, the London Convention regulates the disposal of decommissioned infrastructure to prevent marine pollution, while the Convention on the Continental Shelf addresses the safe removal of offshore installations from the continental shelf. These international instruments form the foundation for the administration and operation of decommissioning activities, ensuring that they meet established environmental and safety standards.
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