Bulletin — April 2021
Offshore decommissioning: Zeroing in on trends and challenges Gordon Nardell QC and Maria Kennedy
Decommissioning of offshore assets impacting on the cost, risk and timing of English shipping company selling a has been high on the energy industry’s decommissioning. vessel for dismantling in South Asia agenda for some years. This high-tech, could owe a duty of care to workers in high-cost challenge raises a host of The United Kingdom Bangladesh even where multiple third difficult legal and policy issues. We parties were involved in the transactions last examined the legal framework in At least six key developments have affected UK-based players: – a decision with clear implications for our 2016 bulletin, End of Shelf Life. decommissioning. 1. Major to minor Since then, sustained low oil prices 3. Reduced demand and falling prices and ever-increasing policy emphasis The majors have continued to sell assets on climate change have made this an to smaller, independent players with The past year has seen a significant ever more complex area for owners an appetite for lower margins and fall in petroleum prices. In April 2020, and operators of assets, specialist higher risks. The ten largest operators West Texas Intermediate crude futures contractors, governments and on the UKCS now account for just over dropped below US$0 per barrel for the regulators globally. half of the North Sea’s output, down first time in history. Brent crude fell from around two-thirds a decade ago. below US$20 per barrel – the lowest This bulletin is the first in a series of price since the aftermath of 9/11. This publications and events from Twenty The parties have had to consider how to address decommissioning liability, dip in prices is linked with the decrease Essex focusing on developments in this in demand caused by COVID-19. Low oil area, aimed at helping players in the choosing between ‘clean break’ and shared liability options, and factoring prices are set to play “a pivotal role” in sector and their advisers navigate the boosting UKCS decommissioning spend constantly shifting legal terrain. the impact of future regulatory action into their acquisition structure. as assets cease to be economically In this bulletin, we cover: productive. Meanwhile mainstream 2. Climate change lenders’ commitments to decarbonise • The major recent trends affecting their portfolios mean constraints on decommissioning. The Paris Agreement, ratified in funding and costlier borrowing for November 2016, imparts a binding petroleum extraction. • The evolving regulatory framework obligation to limit global warming for decommissioning on the UK to below 2°C. The UK government 4. Decommissioning costs fall Continental Shelf (UKCS) as it sets has committed to achieving net zero itself the awkward objective of both greenhouse gas (GHG) emissions The cost of decommissioning is steadily maximising economic recovery of by 2050 (“Net Zero”). As a result, the declining. In 2020 the OGA announced petroleum and furthering the UK activities of fossil fuel companies have that costs fell by a further 2% on a like- government’s decarbonisation aims. come under greater scrutiny. Tightened for-like basis in 2019. Unsurprisingly, regulation of petroleum production and this has coincided with an increase • How the ‘Net Zero’ target impacts consumption has been accompanied by in projected decommissioning spend: decommissioning. rapid growth in climate change litigation in 2020, Oil & Gas UK estimated the globally. For UK-based international decommissioning spend for the next ten • Potential legal challenges arising operators, the dispute risk is amplified years at up to £15.1 billion. out of the newly updated Oil & Gas by the English courts’ willingness to Authority (OGA) Strategy. 5. Brexit accept jurisdiction over environmental What has changed? claims relating to overseas operations The UK-EU Trade and Cooperation and subsidiaries. In The Maran (UK)1, Agreement (TCA) took effect from the In recent years, the oil and gas industry the Court of Appeal found that an end of the Brexit transition period on 31 has undergone significant changes, 1 Hamida Begum (on behalf of Md. Khalil Mollah) v Maran (UK) Limited [2021] EWCA Civ 326.
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December 2020. This is likely to have Singapore and US maritime (or New executive agency of the Department for multiple effects on decommissioning, York) law. Historically, English and Business, Energy & Industrial Strategy. including for employers in the industry Singapore law have followed each who will have to grapple with the UK’s other closely. However, the common Since 2015, Part 1A of PA 1998 has immigration regime. Key EU legislation, law of penalties is the latest area incorporated the UK government’s such as the Waste Framework Directive in which divergence has emerged, objective of Maximising Economic 2008/98/EU and the Waste Shipments with the Singapore Court of Appeal Recovery (MER). This was originally Regulation 1013/2006, no longer declining to follow the UK Supreme implemented through the OGA’s applies directly, but as ‘retained EU Court’s Cavendish Square decision statutory MER UK Strategy, binding law’ pursuant to the EU (Withdrawal) when examining liquidated damages on all “relevant persons” including Act 2018. The UK may in future amend and forfeiture clauses in oil & gas holders of offshore petroleum licences, such laws, but Article 7.2(2) of the TCA contracts.2 Choice of law has real and owners and operators of offshore provides that it shall not “weaken or consequences for businesses engaged installations. The OGA’s December 2016 reduce, in a manner affecting trade in decommissioning. Framework Document expressed its or investment between the Parties, its preference for “[e]ncouraging, catalysing, environmental levels of protection or its Climate change, Net Zero and the facilitating and supporting collaboration climate level of protection below the regulatory framework across industry to act in a way that levels that are in place at the end of the In End of Shelf Life, we outlined the main will maximise the recovery of offshore transition period.” Nevertheless, the international instruments governing oil and gas”, but also emphasised its industry will be keeping a close eye on decommissioning operations and power to take “appropriate action if future legislative change. their implementation in the legislation industry acts in a way that is contrary or inconsistent with MER UK”. 6. Constraints on the offshore regulating the UKCS. The regime under workforce the UK Petroleum Act 1998 (PA 1998) MER considerations tend to prolong is shaped at a global level by the UN the life of assets beyond the point at Brexit and COVID-19 have combined to Convention on the Law of the Sea 1982, which commercial considerations would reduce the UKCS workforce. Offshore the IMO’s 1989 Guidelines, the 1972 lead to the end of their production. personnel on board (POB) fell from just London Convention on Marine Pollution However, this is increasingly in tension over 11,000 in early March 2020 to and its 2006 Protocol. The 1992 OSPAR with UK climate change policy. The UK just over 7,000 in mid-April. Numbers Convention and OSPAR Decision 98/3 Climate Change Act 2008 established partially recovered to c. 9,000 POB in enshrine the “clean seabed” principle for a long-term target for reduced carbon August, but the focus has largely been removal of marine assets in the North emissions, overseen by an advisory on operational continuity and safety- East Atlantic. PA 1998 implements Climate Change Committee (CCC). The critical maintenance. the principle by requiring operators government’s Net Zero target followed and others to submit and agree a Asia advice from the CCC. In its 2020 decommissioning and abandonment progress report, the CCC recommended programme, and ensure that the In Asia regulatory change driven the introduction of “policies to approved programme is carried out. The largely by environmental concerns significantly reduce the emissions process is triggered by a notice under has continued apace, notably with the intensity of fossil fuel production”. This section 29 of PA 1998, which may be ASEAN Council on Petroleum (ASCOPE) stopped short of directly recommending served on a range of parties with a issuing decommissioning guidelines acceleration of the wind-down of current or former interest in licensed for oil & gas facilities. Industry sources UKCS petroleum recovery. However, assets. estimate that some 800 offshore other recommendations (e.g. those on platforms in the Asia Pacific region will Petroleum licensing functions under PA decarbonising the power system and enter decommissioning by 2027, at a 1998 rest with the OGA, an arm’s length displacing fossil fuel use in transport predicted cost of some US$100 billion. regulator. Meanwhile decommissioning and buildings) make plain that the functions rest with the Offshore CCC envisaged a government-driven While English law remains a popular Petroleum Regulator for Environment programme of irreversible reduction in choice to govern Asia Pacific and Decommissioning (OPRED), an demand for fossil fuels, including those decommissioning contracts, it faces stiff derived from UKCS production. competition from other systems. The 2 Denka Advantech Private Limited v Seraya dispute resolution clause of BIMCO’s Energy Pte Ltd [2020] SGCA 119, declining to The government’s 2020 Energy White DISMANTLECON form of contract follow Cavendish Square Holding BV v Talal El Paper attempts to resolve that tension. envisages a choice between English, Makdessi [2015] UKSC 67. Its “Net Zero Basin” section insists on
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sharp cuts in emissions arising directly obligations to be approached. These an asset cannot continue in economic from the petroleum production process include: petroleum use, OPRED may reject a (“Scope 1” emissions, in the language of decommissioning programme where the 3 the GHG Protocol Corporate Standard ), • Creating a culture of GHG emissions whole or part of the structure may viably such as those from flaring and venting. reduction on the UKCS. support clean energy development. The It also commits the government to • Ensuring that GHG emissions OGA may also use its licensing powers “challenging the sector” to reduce reduction is considered throughout to ensure cooperation between asset indirect and embedded emissions from industry lifecycle activities. owners and others, including parties consumption of extracted fuel (“Scope seeking to invest in alternative uses (§21 2” and “Scope 3” emissions). The Paper • Collaboration between all of the OGA Strategy). discusses incentivising the switch to relevant parties (including the clean energy, including bringing the renewables sector) to support Postponement of decommissioning UKCS regulators’ “roles, powers and and progress potential energy will sometimes, but not always, be priorities” into line with government integration developments, such as welcome news to asset owners. UKCS decarbonisation policy, though electrification, carbon capture and M&A transactions and other contracts “without imposing significant additional storage and hydrogen. will typically be priced on assumptions regulatory burdens”. about the useful life of an asset and How does Net Zero impact the timeframe within which the costly This provides the setting for the new decommissioning? process of decommissioning is expected strategy. Following consultation, the to take place. Insistence by OGA or updated and re-named “OGA Strategy” Despite the Strategy’s change of OPRED on prolonging the life of an was laid before Parliament in December name, the MER objective remains in asset with a view to reuse may result in 2020 and introduced on 11 February place. This is no “keep it in the ground” parties discovering they have overpaid 2021. Its centrepiece is a revised Central strategy. What has altered is the way into a security arrangement, or finding Obligation (emphasis shows new text): assets are managed in the context of themselves compelled to negotiate recovery of oil and gas. The updated elaborate cost apportionments with “Relevant persons must, in the OGA Strategy is unlikely in itself to incoming investors. Unravelling or exercise of their relevant functions accelerate the pace at which assets altering already complex contractual activities, take the steps necessary to: come forward for decommissioning, arrangements to accommodate beyond the consequences of falling a. secure that the maximum value of these changes may prove legally and demand (and perhaps prices) flowing economically recoverable petroleum financially problematic. from the government’s overall policy of is recovered from the strata beneath reducing fossil fuel dependence in the Legal challenges relevant UK waters; and, in doing so, downstream economy. Rather, elements Several NGO respondents to the b. take appropriate steps to assist of the OGA Strategy may slow the pace 2020 consultation regarded the MER the Secretary of State in meeting of decommissioning. objective as simply incompatible with the net zero target, including by The Central Obligation is supplemented the Paris Agreement. Others proposed reducing as far as reasonable in by a number of detailed provisions that the OGA Strategy should at least the circumstances greenhouse on re-use of assets not only for CCS give the Net Zero target precedence gas emissions from sources such projects but also, “where appropriate”, over MER. So far, courts in the UK have as flaring and venting and power for “projects relating to hydrogen been reluctant to assess the legality of generation, and supporting carbon supply”. §§15 to 17 of the OGA Strategy, regulatory policies and decisions against capture and storage projects.”4 headed “Decommissioning”, require even those climate obligations the UK On 15 March 2021, the OGA published relevant persons to demonstrate, government accepts as binding: see the 5 its new “Stewardship Expectation before planning decommissioning of Heathrow and Drax cases. In R (Finch) 6 11 – Net Zero”, aimed at assisting infrastructure, that “all viable options” v Surrey County Council, the High the industry in understanding how it for its continued use, “including for Court specifically rejected an attempt to expects implementation of Net Zero reuse or re-purposing for [CCS]” have been “suitably explored”. Note the 5 R (Friends of the Earth and others) v Heathrow Airport Ltd [2020] UKSC 52, reversing the Court 3 https://ghgprotocol.org/sites/default/files/ word “including”: potential re-use is not of Appeal [2020] EWCA Civ 214; R (ClientEarth) v standards/ghg-protocol-revised.pdf confined to CCS but could also include SSBEIS, Drax Power Ltd Interested Party [2020] 4 https://www.ogauthority.co.uk/news- hydrogen and other clean energy uses EWHC 1303 (Admin). publications/publications/2020/the-oga-strategy/ such as offshore wind. So, even where 6 [2020] EWHC 3566 (Admin).
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treat embedded emissions in extracted • “Irrationality” has a high threshold. Key takeaways petroleum as part of the emissions In an area involving competing attributable to the extraction operation expert views about highly technical • The legal framework for itself. There will be great interest in the issues, the court will be especially decommissioning activity forthcoming appeal. reluctant to second-guess the is fast-moving. On a global decision-maker’s assessment level, environment and climate On the industry side, several unless there is a demonstrable change concerns have grown in respondents objected to the lack of absence of evidence or an obvious significance as drivers of regulatory definition in key concepts appearing in flaw in the reasoning process (for policy, and are increasingly the draft. It is entirely possible that an example, if OPRED has failed to understood as sources of litigation aggrieved owner or operator whose recognise and examine a possible risk. UKCS operators face additional decommissioning or divestment plans alternative use proposed by an changes arising from Brexit. are upset could challenge an individual asset owner).7 decision by OGA or OPRED. For • As far as the UKCS is concerned, example, there may be arguments as to • “Illegality” includes misinterpreting the MER duty (in what is now whether particular assets are capable applicable policy documents, since the OGA Strategy) has been of viable re-use for alternative energy- their meaning is a question of law tempered by a Net Zero objective. related purposes, fuelling disputes for the court.8 However, the kind Although focused on management about the content of a decommissioning of open-textured language that of assets rather than diminution programme (especially timing and characterises the OGA Strategy in production, this is likely to be costing). The use of regulatory powers (“appropriate steps”, “as far as accompanied by progressive to force an asset owner into unplanned reasonable”, “fair market value”) reduction in demand over the collaboration with a stakeholder from tends to blur the distinction coming period. another sector may also be a source of between questions of ascertaining • The OGA Strategy directly affects controversy. meaning and exercising regulatory decisions about which assets come judgement. The forum for resolving such forward for decommissioning, and disagreements is ultimately the OPRED’s application of the policy to when, because of its provisions statutory review procedure under individual decommissioning decisions on re-use of assets to facilitate section 42 of PA 1998. However, that has yet to be tested in the courts. transition from fossil fuels. Asset procedure has a number of important However, despite the high bar to a owners and operators may find constraints. An application to the court successful section 42 challenge, the themselves obliged to collaborate must be initiated very quickly (within value of the economic interests involved, with stakeholders who have a 42 days of the decision). This restricts coupled with the inexorable trend in contrasting agenda for future opportunities to resolve the matter bringing climate change-related issues management of the asset. through negotiation before launching before the courts, means that the effect • Any challenge to individual OPRED proceedings. More importantly, the of Net Zero is likely to be litigated before decisions must be brought on the process is not an appeal on the merits too long. but a challenge to the lawfulness of limited grounds available under OPRED’s decision, with the onus on the section 42 of PA 1998. Despite the 7 R (Lasham Gliding Society Ltd) v Civil Aviation heavy burden of establishing a aggrieved party to establish a basis Authority [2019] EWHC 2118 (Admin), esp. ground for review, future challenges for challenge corresponding to the Thornton J at [43]. traditional grounds of judicial review: 8 R (Manchester Ship Canal Co) v Environment are expected given the high value irrationality, illegality or procedural Agency [2013] JPL 1406, CA. economic interests at stake and the impropriety. As to the first two: growing trend of bringing climate change issues before the courts.
This article does not constitute, and should not be relied upon as, legal advice. The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of other members of Twenty Essex.
twentyesssex.com Bulletin — April 2021
Gordon Nardell QC Maria Kennedy
Gordon specialises in international Maria has a broad practice, with litigation and arbitration. He has a experience in arbitration, energy, civil particular focus on claims by and fraud, insolvency, shipping, insurance, against state bodies, especially in general commercial disputes and public the areas of energy, infrastructure law. and utilities. He has acted in disputes Before coming to the Bar, Maria involving UKCS petroleum assets, and was a qualified solicitor-advocate. advised on decommissioning liabilities She spent five years working at a and energy transition issues. top international law firm, where Gordon is also known for his work she specialised in commercial in other sectors including transport, litigation, arbitration and regulatory public/ private partnerships and investigations. financial services. Read her online bio › Read his online bio ›
Over the coming months we will be producing a series of publications and events on the energy transition agenda, including further updates on decommissioning.
We will be picking up some of the themes and developments mentioned in this bulletin as well as a range of other contract issues, regulatory and funding developments, and risk management challenges.
The editorial and writing teams for the series include:
Michael Ashcroft QC, Rachel Foxton, Timothy Hill QC, Maria Kennedy, Matthew McGhee, Wendy Miles QC, Gordon Nardell QC, Fiona Petersen, Alexander Thompson and Fiona Whiteside.
If you have any questions about the issues covered in this bulletin, or would like to get in touch with the authors, please contact:
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