PAPER 2 FOR PILOT WORKING GROUP ON DTI INVOLVEMENT IN FSAs

DTI PROCEDURES FOR CONSIDERING SECTION 29 WITHDRAWAL.

1. This paper explains the process that the Offshore Decommissioning Unit (ODU) of DTI undertakes when assessing whether to withdraw a Section 29 (S.29) notice (issued under the Petroleum Act 1998) following a licence transfer. It builds on the details contained in the first 'Paper For Pilot Working Group On FSAs'

2. When considering a request for withdrawal of a S.29 notice the key task for ODU is to determine whether the financial strength of the remaining S.29 notice holders is adequate to cover the potential costs of decommissioning.

3. We receive notification of proposed licence transfers from OG Licensing Section. We check if transfer affects approved fields, which have installations and/or pipelines associated with them (the majority only affect undeveloped acreage). We check if the transfer would result in a licensee leaving the development /operating group and whether this affects the financial capacity of the group to cover the potential costs of decommissioning.

4. If it does, we look at the S.29 holders that would be left, including any new licensees. This may also include ex -licensees who have sold their interest but ODU has decided not to withdraw their S.29 unless a satisfactory financial security agreement (FSA) has been established and no such FSA has been set -up. If a company with large UK assets remains amongst the S.29 notice holders, ODU is likely to agree to withdraw the S.29 notice from the departing company. "Large" means an oil company, on a sound financial footing, with considerable UK assets, probably in both upstream and downstream sectors, and well in excess of their potential UKCS decommissioning liabilities.

5. If there is no "large" S.29 notice holder, we examine the remaining group on a field basis, i.e.: -

• Check if the group is being materially weakened by the change, if it is a swap between two companies with similar financial strengths, we may take the view that there is no significant dilution of the group's financial ability to cover decommissioning liabilities.
• Consider if there is a combination of significant companies (again in terms of UK assets), which is likely to be financially sound.
• Assess the level of estimated decommissioning costs affected by the transfer (recognising the difficulties in arriving at accurate estimates). If it is a small subsea field we will have less concern, unless the group will only comprise 'start -up' type companies.
• Consider the uncertainties around the decommissioning. Is it a large steel jacket with a large cuttings accumulation for both of which removal methods are unclear and costs may well escalate or is it a small, simple platform for which the cost estimate is more reliable?
• Consider the timing of the decommissioning. Costings for a decommissioning schedule many years ahead will be more uncertain than for a near term programme.

6. We also consider the remaining companies individually, i.e. · Assess the total decommissioning liabilities of the S.29 holder, taking account of all the UKCS fields in which they are involved. Although we concentrate on the aggregate of the company's shares of decommissioning costs for fields in which it holds an interest, we also look at any risks of additional exposure due to the joint and several provisions of the Petroleum Act 1998. Ultimately the company may be responsible for 100% of the costs. · Consider the timing of the decommissioning obligations in their portfolio. A spread across several years would look better than a high peak period.

General Points

7. Forecasting the ability of companies to meet significant expenditures at a date often many years ahead is a very difficult exercise. Recent failures of energy companies have demonstrated the potential uncertainties around any examination of company viability. Oil and gas companies are very dependant upon a commodity price, which fluctuates for reasons outside their control. Reservoir predictions sometimes prove optimistic and indeed in some cases may not be realised at all.

8. We believe that the combination of uncertainties necessitates a cautious approach on behalf of the taxpayer. Therefore, in any cases where the above processes have left doubts or concerns we ask the DTI internal accountants for their advice on the financial strength of each remaining notice holder. Because of the joint and several liability provisions of the Petroleum Act 1998, we ask them to assess each company's ability to meet both their share and also 100% of the costs.

9. ODU consider the advice, which typically concentrates on the level of net assets of the remaining companies and their dependence on loans from parents or group undertakings, together with the results of its own considerations. We pay particular attention to gearing and to the level of net assets (or net worth). If at least one remaining licensee has acceptable gearing and their net assets offer a significant level of cover against the decommissioning liability, the assessment is likely to lead to the conclusion that we can withdraw the S.29 notice from the departing licensee.

Offshore Decommissioning Unit 7 February 2002

Back | 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