UK regulator still needs to clarify how it will use veto powers

There will be a period of "acute uncertainty" as the industry awaits the repercussions of the Oil and Gas Authority’s new powers to block decommissioning plans, according to Greg Gordon, senior lecturer at Aberdeen University Centre for Energy Law.

New rules in the UK give the regulator powers to block decommissioning (Image credit: Wikimedia Commons / Adrian Pingstone)

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Gordon told DecomWorld the big change in ethos would prove “destabilizing” until it was fully understood. Previously, operators had to seek permission for certain things but basically “paddled their own canoes”, he said. Under the Maximising Economic Recovery (MER) policy, they can no longer abandon infrastructure as it suits them. 

The relevant sections state that owners of infrastructure must ensure they “explore all viable options for their continued use”, and the OGA “may identify particular pieces of infrastructure the decommissioning of which would prejudice the maximizing of the recovery of economically recoverable petroleum in a region”.

OGA Chief Executive Andy Samuel has said the regulator will publish a decommissioning plan by the end of June. According to Gordon, the regulator will have more leverage in discussions but must strike a balance between self-assertion and collaboration.

“The MER obligation changes everything,” Gordon said. “Without it, the regulator has no traction in negotiations and companies can just pull out of UKCS [UK Continental Shelf] and rip out their infrastructure at will. Now they can tell them to mothball a project for three years while they see if a carbon-capture project is coming on stream, or a new field.”

Heavy-handed imposition of the policy could discourage investors, Gordon argued. If the regulator were “chaotic and inconsistent” in its decisions, investors would look to more familiar markets, such as Norway. The way to avoid clashes, Gordon said, is to wield the powers in an orderly and well-planned fashion. This would involve identifying key pieces of infrastructure and entering into discussions.

“Instead of crashing about issuing notices of refusal, they will try to negotiate as much as possible. But operators will know the OGA is now holding a big stick,” he said.

Pulling the trigger

The regulator must be prepared to use its powers in the event of a fundamental disagreement, Gordon said. “It may be the first card in the game. But at some stage they will have to get serious and pull the trigger. Otherwise companies will feel they can call the OGA’s bluff. What’s the point of an arms-length regulator if it rolls over all the time?”

Rebecca Allison, Engineering Manager at Lloyd’s Register, told DecomWorld the MER powers were essential, particularly to prevent the domino effects on Tier 2 and Tier 3 operators if big operators pulled out suddenly.

Meanwhile, if the OGA wants cash-strapped smaller operators to hang onto infrastructure, they will have to provide support. Some 40% of North Sea assets are unprofitable, Allison noted, and said a decision by the OGA to block plans for cessation of production may cause some operators to struggle.

Allison argued that because these businesses have shareholders, the OGA needs to take a collaborative approach. She said it could ease burdens on late-life assets from over-restrictive health and safety or maintenance regimes, and that the Health and Safety Executive could offer support too.

If the prevention of a decommissioning project proved costly and was shown to produce no benefit, the OGA could face legal challenges, Gordon said. The challenge could be successful if the operator showed it was being forced to keep infrastructure in place, “but the OGA hadn’t a clue what the potential benefits might be” and could not show if it would be economically viable.

Such clashes are unlikely in the immediate future, according to Allison. Most operators still lack the skill sets to embark on decommissioning projects and the majority are waiting for someone else to show the way. The industry is watching Shell’s decommissioning of the Brent oilfield with a close eye. But if the oil price returns to around $80, Allison believes more operators will opt for decommissioning.

Who retains the liabilities?

A further complicating factor in negotiations will be the difficulty of passing on decommissioning liabilities when offloading late-life assets. If the OGA blocks a decommissioning plan and the company cannot sell on the liability, they could be left nursing a loss-making asset.

Most supermajors retain liability, but further down the chain, the likes of EnQuest and Maersk would be reluctant to do so, Allison said. She gave the example of a firm that was unable to pass on a liability for one field so they abandoned it. “That’s just one asset. But if the OGA disallows multiple decommissioning procedures and the companies say they can’t sell them on, where do we go from there?”

The industry is also poorly equipped to exploit late-life assets, she said. There have been mass redundancies over the past year, including 65,000 job losses in Aberdeen alone. The skills shortage is likely to result in maintenance backlogs which could have a negative impact on the mergers and acquisitions market.

Another concern is that if the asset is left idle for a prolonged period of time it could become a health and safety hazard. Gordon pointed out that in the harsh North Sea environment, infrastructure degrades quickly and can contravene environmental legislation.

“If they stop full decommissioning, they might get hydrocarbons off, fill up the pipes with seawater and get it scrubbed up so it’s as inert as possible. But it can’t stay like that forever,” he said.

The OGA could face legal challenges if there is an accident relating to a significant piece of infrastructure that has been left in place for three or four years longer than the operator wanted.

Gordon said, “If someone is injured and the infrastructure is not being actively used, or maintained, there could be a defence of lawful authority. The operator could say ‘you can’t charge us as you told us to leave it there’.”

By David W. Smith