Clarity on the UK oil and gas decommissioning regime

On 17 May 2021, the Commercial Court handed down its judgment in an important case concerning the decommissioning of offshore installations under the Petroleum Act 1998 (Apache UK Investment Limited v Esso Exploration and Production UK Limited (2021) EWHC 128). The court confirmed that a former licensee will not be liable for the decommissioning of wells drilled after the licensee ceased to be the owner of the relevant oil and gas assets.

Background

In 2011, Apache UK Investment Limited (Apache) acquired some North Sea oil and gas assets from Esso Exploration and Production UK Limited (Esso) under a Sale and Purchase Agreement (SPA). The parties entered into a series of Bilateral Decommissioning Security Agreements (DSAs) as part of Esso’s sale to Apache of a subsidiary that held licences in several oil fields in the North Sea. The DSAs provided security for Apache’s obligation under the SPA to indemnify Esso for decommissioning obligations that Esso could be liable for.

It is common practice for such DSAs to provide that the operator/licensee will prepare a “proposed plan” for each year setting out details such as an estimate of the dates on which the decommissioning will commence and an estimate of the likely decommissioning costs. The proposed plan is then used to calculate the amount of security to be provided by the relevant parties.

Issues in dispute

The dispute concerned the amount of security to be provided by Apache in respect of those decommissioning obligations. The issue of Esso’s potential exposure under the Act assumed relevance because the higher that exposure, the higher the security that Apache had to provide – and the Offshore Petroleum Regulator had weighed in with a view that Esso could be liable under the Act for certain wells drilled after its sale of the fields to Apache.

The decision can be taken both as reassurance – you will not be liable for wells that you didn’t drill, but also a warning – you might be liable for wells you intended – to drill. The decision also suggests that there are further arguments as to the Act’s interpretation that will at some point come to light.

Here is a summary of the issues in dispute, the arguments raised and the court’s decision:

Issues

Arguments raised

Court’s decision

An issue of construction under the DSAs relating to the year for which Apache was required to produce a decommissioning plan (which formed the basis of the calculation of the security).

2. A point of principle concerning the interpretation of the Petroleum Act 1998 (the “Act”) – notably whether Esso could in principle be held liable to the Secretary of State under the terms of the Act for the decommissioning of wells which were drilled in fields some years after Esso had sold its interest in the fields to Apache (the “Additional Wells”).

Regarding Issue 2 Apache contended that, on a proper analysis of the Act, Esso could not be held liable for the decommissioning costs of the Additional Wells. They submitted that the Additional Wells were drilled for the first time after the ownership of the relevant assets passed to Apache under the SPA.

Esso submitted that the Additional Wells could be covered by the Section 29 notices (and security therefore required from Apache under the DSAs for their decommissioning) because the concept of an “offshore installation” in the Act could refer to an entire field.

The court found in favour of Esso on Issue 1, and in favour of Apache on Issue 2.

In respect of Issue 2:

It was common ground between the parties that Esso could only be held liable for the decommissioning of the Additional Wells if a Section 29 notice had been served in respect of them prior to the sale of Esso’s interest in the fields (the decommissioning obligations under the Act are triggered when a section 29 notice is served by the Secretary of State, requiring the recipient to submit a decommissioning programme for approval)

Esso argued that relevant section 29 notices had been served in relation to the Additional Wells in that period, because notices had been served in broad language covering all installations on the relevant fields, and these were wide enough to cover the Additional Wells.

This was rejected by the Judge. He said that in order for the section 29 notices to relate to the Additional Wells, those wells had to have been in existence, or intended to be established, at the time of the relevant notices. The judge also pointed out that the objective of the decommissioning regime is to “ensure that parties who have derived a financial benefit from an offshore installation should also be responsible for the decommissioning.”

This was not the case here on the facts. It therefore followed that the Secretary of State had no power to impose a liability on Esso for the decommissioning of the Additional Wells, and no security was therefore required to be provided by Apache in relation to them.

Comment

Liability for decommissioning costs is one of the largest potential exposures for a company carrying out exploration and production activity on the UK Continental Shelf. The decommissioning provisions in the Act are drafted widely, to protect the UK Government from being left to carry the burden of decommissioning costs. The obvious takeaway is that the decision is a reminder that a company selling interests in offshore fields can, subject to the service of section 29 notices, be liable for decommissioning costs. The perhaps not such obvious warning is that this exposure may extend to installations, not in existence, but intended to be established when the notices are served. Lastly, it repeats a point seen elsewhere and in other contexts: “guidance” from a regulator will not be determinative of interpretation issues arising under statute. That remains, rightly, the province of the Courts.

Oil and Gas Lead, Euan Palmer, joined the Disputes team in June 2020 and specialises in advising oil and gas companies on contentious and non-contentious issues. If you would like to discuss any issues discussed in this update, please do get in touch.