The advice you would give your new-entrant IOC client on their contractual and financial liabilities on decommissioning before farming into a producing field in the UK North Sea?

New entrant IOC client is not only affected by the decommissioning rules and policies but also by the market outlook. Having an objective view of the market (past, present, and future) is important because of the financial obligation associated with membership and contractual obligations. Decommissioning has cost implication and the decommissioning expenses will be spread over the years such that the late entrants will have to pay more.

Decommissioning has both upsides and downsides, but it is realistic to understand that decommissioning comes at a time when many installation are increasingly becoming redundant, the oil reserves are depleted, environmental impacts, technological requirement and high operational cost in additional to the increasing number of participants. It will be difficult for the companies to realize adequate capital needed to meet the full cost of decommissioning[1].

Minimizing the financial risk also contributes to an increase in financial liability. For example, the SoS served the s29 notices to the new entrant following approval of the development plan, and construction of installation and this leads to further contractual obligation that includes s29 financial liability and the time allowed for actual submission of the plan and the date of s29 services also differ.[2]

The new entrant should also understand that Part IV infers that all the recipients of the s29 notice have a joint and several liability such that all s29 recipients will have equal responsibility towards discharging their liability irrespective of their interest in the decommissioning or the size of their interest

Finally, all security provided by the company for decommissioning liabilities are also ringfenced, may not be used to discharge debt obligation, and cannot be refunded in the event of insolvency. Therefore, any security provided by a new entrant can only be used to discharge the decommissioning liabilities and nothing more.[3] As a new entrant, it is important to note that there are security requirements that are likely to affect the company’s balance sheet as the security are ringfenced and cannot be used to seek external funding[4]

Conclusion

While new entrants are likely to pay more and not be protected by the government because the decommissioning costs are allocated by the DCPD, It is also the duty of the DCPD to provide adequate security for the company’s decommissioning liabilities. Therefore, any security held in trust by the DCPD can only be discussed with the DCPD. This also means that contractual obligation and liabilities are directly handled by the DCPD and any liabilities of obligation outside the DCPD do not tie the decommissioning committee.

Finally, it is important to note that financial provision are only provided by the DCPD, therefore, all new entrant who by virtue of their statutory responsibility in decommissioning must work with the DCPD and as security providers, all their security arrangement must be done in liaison with the DCPD

[1] Oil and Gas UK (OGUK), 2011 Decommissioning In sight Report, January 2012 – see OGUK website.

[2] Department of Energy and Climate Change (DECC) – Decommissioning at http://og.decc.gov.uk/en/olgs/cms/explorationpro/decommissionin/decommissionin.aspx

[3] L. Moller, “The cost of Decommissioning: Government and the industry Attempts at Addressing Decommissioning Liabilities” (2007) Vol 5- issue 4, Oil, Gas and Energy Law Intelligence.

[4] J. Aldersey-Williams, “Decommissioning Security” (2007) Vol 5- issue 4, Oil, Gas and Energy Law Intelligence.

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