1. This paper covers the process the Offshore Decommissioning Unit (ODU) of DTI currently undertakes when a licence transfer takes place (which affects acreage with an approved oil and gas field associated with it). Note - this paper should be used for indicative purposes only.
2. The assumption is that all co-venturers will already have a valid section 29 notice (s.29 notice), served under the Petroleum Act 1998. Such s.29 notices set an obligation on the notice holders jointly and severally to submit and carry out a decommissioning programme for the installations/pipelines to which they refer.
3. DTI is keen to maximise the economic recovery of hydrocarbons from the UKCS and recognises the benefits that smaller companies have and will continue to bring towards achieving this goal. The DTI also recognises, however, that the decommissioning costs for offshore oil and gas installations and pipelines are substantial and aims to ensure that the taxpayer is not left to assume these costs.
4. In all instances of licence transfer affecting installations and/or pipelines any new co-venturer will be served with a s.29 notice. Separate notices are served for installations and pipelines. The notice is served on the actual co-venturer who will have a unique registered number.
5. The process of serving a new notice usually prompts the departing co-venturer (if there is one) to seek withdrawal of their s.29 notice. When deciding whether or not to withdraw this notice ODU assess the impact that such withdrawal would have on the funding of the decommissioning activity.
6. To undertake this assessment ODU consider the financial strength of the remaining s.29 holders and the estimated decommissioning costs for each field involved (a licence transfer may affect more than one field). ODU have a database of estimated decommissioning costs provided by an independent 3rd party.
7. Essentially we look to see if any of, or a combination of, the remaining s.29 holders provide the necessary assurance against default. In some cases the decommissioning may not take place for many years and forecasting the abilities of companies to meet large expenditures in the future is difficult. As a result ODU necessarily takes a cautious view particularly in cases involving large decommissioning costs. The attached spreadsheet shows scenarios indicating the likely ODU response to a number of theoretical licence transfers.
8. As noted earlier the joint and several provisions of the Petroleum Act 1998 are used in making the assessment. At its extreme this will mean that one company may be called upon to pay for the decommissioning share of all other co-venturers in the event of their default.
9. In most cases the review shows that there is at least one company remaining of satisfactory strength. In such cases ODU are content to withdraw the s.29 notice. If, however, this is not the case then ODU will not withdraw the s.29 notice. All s.29 holders are informed of this decision and are also informed that this would be reconsidered should a satisfactory Financial Security Agreement (FSA) be established. The FSA will be established by the remaining s.29 holders (it will not usually include the departing co-venturer ? but see below for cases involving 100% ownership). The Secretary of State for Trade and Industry will be a party to the agreement to ensure that no changes can be made without his express consent.
10. In cases where 100% ownership is either transferred or will result following transfer the Secretary of State is unwilling to 'police' the FSA himself due to the administrative burden involved. In such cases, even if an FSA is established, it is unlikely that the departing co- venturer's s.29 notice will be withdrawn. It falls on that party to 'police' the FSA. Because the notice remains, this is very much in their interest as any failure in the operation of the FSA (e.g. non posting of security etc) would mean that we would expect all s.29 holders to ensure submission and carrying out of a decommissioning programme. It is highly unlikely that a s.29 holder in the 'policeman' role will be required to provide security. We find it difficult to envisage a scenario in which a large, financially robust oil and gas company (in terms of UK assets) would be required to post security such as Letters of Credit.
11. ODU are aware that co-venturers may already have agreements between themselves to which the Secretary of State is not a party. These may involve forms of security that ODU currently deem to be unacceptable for use in FSAs. These agreements are entirely a matter for the parties involved and they are not a subject of this paper.
12. Our reluctance to accept PCGs is based on three concerns.
A. We have concerns about the status of PCGs. A standby letter of credit imposes a primary contractual obligation on the issuer to pay a specified sum of money on the happening of a specified event. On the other hand our understanding is that a PCG is related to the underlying contract and is not therefore a primary obligation on the part of the guarantor. There remains, therefore, the possibility that the guarantor might dispute the basis on which the obligation in the underlying contract has arisen or might rely on all rights, counter -claims and defences available to the contracting party. Ultimately the DTI should not have to litigate to obtain judgement against the parent company, with the risk of being unsuccessful in that action, perhaps on the basis of some technicality.
B. We recognise that there are companies with interests in the UKCS which are offshoots of major overseas companies but where the UK co-venturer itself does not have significant assets and is reliant upon support from the overseas parent. ODU is concerned about the difficulties and potential delays in enforcing a PCG through foreign courts. Delay could hamper our objective of ensuring that timely decommissioning occurs. This situation in turn creates a difficulty in accepting PCGs from UK parents. We are concerned that different approaches could be alleged to discriminate against recipients of s.29 notices whose parents are domiciled in other EU Member States as the Treaty of Rome prohibits discrimination on the basis of nationality.
C. In some cases the parent company may not itself have the long -term financial strength we are looking for and in cases where a subsidiary is in financial difficulty this may indicate that the parent and/or group as a whole is in financial difficulty.
Offshore Decommissioning Unit December 2002
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| Title
| Table of Contents
Appendix 1 | Appendix 2 | Appendix 3 | Appendix 4 | Appendix
5 | Appendix 6 | Appendix 7 | Appendix 8 | Appendix 9
Appendix 10 | Appendix 11 | Appendix 12 |
Appendix 13 | Appendix 14 | Appendix 15 |
Appendix 16 | Appendix
17
Index Map | Plate 1 |
Plate 2W | Plate 2E | Plate 3W | Plate 3E | Plate
4W | Plate 4E |
Plate 5 | Plate 6
Plate 7 | Plate
8W | Plate 8E | Plate 9W | Plate 9E | Plate 10W | Plate
10E | Plate 11 | Plate 12 | Legend