Proposed Changes To Australia's Offshore Oil And Gas Decommissioning Framework.

Legal News & Analysis - Asia Pacific - Australia - Energy & Project Finance

22 January 2021

 

What you need to know
 

  • The Commonwealth Department of Industry, Science, Energy and Resources has released the Enhancing Australia's Decommissioning Framework for Offshore Oil and Gas Activities consultation paper which proposes a number of changes to Australia's decommissioning framework for offshore oil and gas assets.
     

  • The changes proposed by the Consultation Paper include:
     

    • legislative amendments to expand "trailing liability", so the Government can "call back" a former titleholder to remediate an offshore petroleum asset when the current titleholder is unable to do so;
       

    • requiring a titleholder to demonstrate financial and technical capability when a petroleum titleholder changes ownership through a merger, acquisition or takeover; 
       

    • requiring financial assurance for decommissioning activities;
       

    • mandatory review periods for Field Development Plans; and
       

    • policy changes to increase accountability, including the Minister issuing remedial notices proactively and earlier in a project's life, to ensure decommissioning obligations are met.
       

What you need to do
 

  • If your organisation has offshore oil and gas assets or is looking to acquire them, understand the proposed changes and consider making a submission in response to the consultation paper by 22 January 2021.
     

  • If you are currently selling offshore oil and gas assets in Australia, consider the effect of the proposed trailing liability provisions (which will be backdated to 14 December 2020) in your due diligence of prospective buyers.
     

  • Reach out to an Ashurst contact below if you would like advice or assistance regarding the consultation paper or making a submission.

 

On 14 December 2020, the Commonwealth Department of Industry, Science, Energy and Resources (Department) released the Enhancing Australia's Decommissioning Framework for Offshore Oil and Gas Activities consultation paper (the Consultation Paper). The Consultation Paper proposes a number of changes to Australia's offshore oil and gas decommissioning framework and is open for online submissions until 22 January 2021. 
 

The Consultation Paper proposes improvements in the following areas:
 

  • financial oversight;
     

  • planning and management;
     

  • accountability; and 
     

  • trailing liability.
     

Consultation Paper's recommendations influenced by events surrounding Northern Endeavour
 

The Consultation Paper follows a review by the Department of the legislative, regulatory and policy requirements for offshore oil and gas decommissioning which began in 2018 (Decommissioning Framework Review).

The content and recommendations of the Consultation Paper are heavily influenced by the events surrounding the Northern Endeavour, a floating production storage and offloading facility in the LamCor oil fields in the Timor Sea.

The Northern Endeavour was originally operated by Woodside until it was purchased in 2015 by Northern Oil and Gas Australia (NOGA).  The Northern Endeavour continued to be operated by a NOGA subsidiary which also became the relevant titleholder of the LamCor oil fields.

NOGA went into administration in September 2019 followed by liquidation in February 2020. Production ceased and the Government took control of the Northern Endeavour until a longer-term solution could be reached.  The Government was forced to assume responsibility for the safety of the Northern Endeavour and the surrounding environment and meet the costs of decommissioning. 

 

The August 2020 Independent review into the circumstances leading to the administration and liquidation of Northern Oil and Gas Australia (NOGA) (the Walker Review) analysed how the situation with the Northern Endeavour arose and how to minimise the future risk of a similar incident.  

Some of the findings and recommendations of the Walker Review included:
 

  • the NOGA group of companies were significantly undercapitalised and had insufficient funds to meet their liabilities;
     

  • current decommissioning regulatory controls do not anticipate titleholder liquidation: a serious concern as the offshore industry continues to mature and late in life assets are acquired by smaller titleholder companies;
     

  • the Decommissioning Framework Review should consider the concept of trailing liability, where a titleholder can be liable for decommissioning even after a sale; and
     

  • the Decommissioning Framework Review should explore legislative changes or clarifications to require financial surety for decommissioning liabilities.
     

The Walker Review findings influenced a number of the proposed changes suggested in the Consultation Paper.
 

Proposals to introduce trailing liability
 

Possibly the biggest change being considered in the Consultation Paper, and the one most clearly proposed in response to the Walker Review, is the introduction of "trailing liability", which would give the Government broader powers to "call back" previous titleholders if a current titleholder is unable to fulfil its obligations.  

Currently, a previous titleholder can only be called back to remediate when the relevant petroleum title ceases through termination, expiration, revocation, cancellation or surrender.  In other words, a previous titleholder cannot be called back when it sells or transfers the title to another entity.  

The proposed changes would allow the previous titleholder to be called back after it has sold the interest to another entity, although this is intended to be a "last resort" when all options for the current titleholder to meet its obligations have failed.  This trailing liability will also apply to a "related person" of the previous titleholder, such as a parent company.

The Consultation Paper justifies this proposal as a means of ensuring risks and liabilities ultimately remain the responsibility of those who have derived the greatest benefit from a project during its life.

The Consultation Paper proposes to implement these changes by amendments to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (the OPGGS Act).  Any changes made will only apply to incumbent or future titleholders who hold or acquire title on or after 14 December 2020.

Such a wide trailing liability would have a considerable impact on proposed sales or acquisitions of offshore oil and gas assets, as a seller will want to conduct thorough due diligence on any prospective buyer.
 

Proposals to improve financial oversight of decommissioning activities
 

To improve financial oversight of decommissioning activities, the Consultation Paper proposes to:
 

  • expand the types of transaction requiring government assessment and approval;
     

  • increase the requirements for a petroleum titleholder to continuously demonstrate technical and financial capacity; and
     

  • require a titleholder to provide financial assurance to demonstrate it can meet its decommissioning liabilities.
     

The OPGGS Act does not currently require any Government assessment when the ownership or control of a titleholder entity changes.  The OPGGS Act only requires the National Offshore Petroleum Titles Administrator (NOPTA) to assess the technical and financial capability of a titleholder when either the registered titleholder changes or the interests of the titleholder change.  

The Consultation Paper's proposals would require NOPTA assessment and approval of any change in ownership of a petroleum titleholder, such as through merger, acquisition or takeover.  There would also be further requirements for a titleholder to demonstrate financial and technical capacity at key stages of a project, such as during licence renewal.  This  proposal would require amendments to the OPGGS Act, associated regulations and guidance material.

Proposed changes to financial assurance arrangements will expand the National Offshore Petroleum Safety and Environmental Management Authority's (NOPSEMA's) powers to require sufficient financial assurance be provided to demonstrate that all obligations and liabilities can be met as a project matures.  

Section 571 of the OPGGS Act already gives NOPSEMA broad powers to require financial assurance to cover "petroleum operations", but NOPSEMA is currently guided by an Explanatory Memorandum for an amendment to the OPGGS Act which focused on financial assurance for accidents and escape of petroleum during operation.  As the existing provisions in the OPGGS Act are sufficiently broad, the Consultation Paper proposes implementing these changes through policy and guidance materials.
 

Proposals to improve planning and management of decommissioning activities
 

The Consultation Paper proposes to improve planning and management of decommissioning activities by modernising the requirements around Field Development Plans to reflect the maturing industry.

Currently, Field Development Plans are created and approved based on the information available at the time of application for a petroleum licence.  Unlike Environment Plans and Safety Cases, which have mandatory NOPSEMA review periods, a Field Development Plan does not have any mandatory review and often undergoes minimal change over a project's life.

The proposed introduction of a mandatory review period for Field Development Plans is designed to encourage a petroleum titleholder to engage with the relevant Ministers and NOPTA to consider and develop decommissioning plans throughout the life of a project.  This recognises that knowledge and technology develop over time.  The Consultation Paper notes that this is common in other jurisdictions that are managing mature industries.

This proposal would likely be implemented as part of the current review of the Offshore Petroleum and Greenhouse Gas Storage (Resource Management and Administration) Regulations 2011 (Cth).
 

Proposals to improve accountability of decommissioning activities 
 

The Consultation Paper proposes to change the policy for remedial direction notices, so that the Minister issues remedial notices proactively and earlier in a project's life to ensure decommissioning obligations are met.

Part 6.4 of the OPGGS Act already allows remedial directions to be issued to current titleholders, and former titleholders in limited circumstances.  The proposed policy change would encourage the Minister to issue remedial directions early to "complement" the duties of the titleholder during decommissioning.  The policy change would also encourage the Minister to regularly review and amend remedial directions as required.  

Remedial notices would also be used to enhance the monitoring requirements during decommissioning.  The example given by the Consultation Paper is that a remedial direction could be used to require monitoring following the plugging of a well to ensure there is no leakage into the marine environment.

The Consultation Paper also considers improving transparency and public engagement during the decommissioning process by introducing a public comment period for submitted decommissioning environment plans and public reporting of petroleum activities.
 

Proposals reflect policy changes throughout the region as many major producing fields approach end of life
 

Regionally, decommissioning legal regimes have been undergoing significant change as many major producing fields approach end of life or their concession periods expire. 

Governments and regulators have been considering various alternatives to balance the interests of the environment and investors, with the former being given primacy. 

Whilst there is much similarity in the changes being proposed or implemented across Australasia and South East Asia, the ultimate outcome is sometimes influenced by the petroleum regime in the applicable country (i.e., whether a licencing or production sharing regime applies). The proposals in the Consultation Paper reflect Australia's particular legislative and policy circumstances, while also responding to the impact of the events surrounding the Northern Endeavour.  
 

Next Steps
 

The Consultation Paper is open for submissions until 22 January 2021.  Submissions need to be submitted via an online survey on the Department's website.

If your organisation has offshore petroleum assets which may require decommissioning in the near future, you may want to consider making a submission in response to the Consultation Paper.  Any changes which occur as a result of the Consultation Paper are proposed to be backdated to 14 December 2020.

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For further information, please contact:

 

Jane Hall, Ashurst 
[email protected]