Historically, little attention has been paid to the issue of decommissioning. This is clear from the fact that the original terminology was that of “abandonment” and the contractual provisions between the parties focused on ensuring that the operator recovered as much money as possible from the disposition of assets.
Today, bearing in mind the environmental and international obligations of countries, the responsibility for and the costs associated with decommissioning have come sharply into focus.
The development of decommissioning provisions in Trinidad and Tobago reflects this sharpening of awareness. In 1969, under the Petroleum Act, the focus was on delivering to the Minister of Energy all assets used in production at the end of the licence “… in good order, repair and condition and fit for further utilisation….” There was also a requirement to restore the area to its natural condition as much as possible.
There were, however, no mechanisms to ensure that this requirement was achieved. The current model form of production-sharing contracts now provides for contractors to: (i) submit an abandonment programme for approval by the Ministry; (ii) carry out that programme to the Minister’s satisfaction; and (iii) most importantly, establish an escrow account into which funds are paid to secure their decommissioning obligations.
With greater clarity on decommissioning obligations, companies seeking to assign all or part of their interest in a production-sharing contract/licence and those seeking to acquire such interests need to carefully analyse and provide for the decommissioning obligations for which they are responsible. The assignor will seek to be relieved of all obligations; however, production-sharing contracts/licences usually provide that:
“No assignment shall in any way absolve the assignor from the obligations undertaken by it under the Contract except to the extent such obligations are in fact performed by the assignee.”
The effect of this provision is that if the assignee does not carry out the decommissioning obligations, the Ministry can require the original parties to the production-sharing contract/licence to carry out the decommissioning obligations. This principle is also contained in the Trinidad Petroleum Regulations.
Many an assignor in this regard will be surprised to discover that they may still be liable for the future decommissioning of facilities. In hindsight, parties may be concerned as to how much due diligence was carried out by the assignee. Is the assignee financially and technically capable of carrying out the decommissioning obligations? How certain is the assignor that the assignee will do so in 20 years’ time?
Licencees operating on the UK Continental Shelf have faced similar issues due to the provisions of the UK Petroleum Act. Essentially, that Act gives the Secretary of State the right to require a number of people to be responsible for the costs of decommissioning, including a company that had previously assigned its interest. The UK Petroleum Act therefore created a situation similar to that which exists in Trinidad and which licencees in the UK found unacceptable, as they may be held liable for decommissioning costs years after they had transferred their interest in an area.
This resulted in assignors seeking security from the assignees, as well as the remaining joint-venture parties also seeking security from the assignees. This double security requirement hindered the transfer of assets, especially to those entities seeking to monetise stranded reserves; the prevailing view was that this would ultimately limit the country’s ability to maximise recovery of its oil and gas reserves.
To address these issues, parties in the UK entered into decommissioning security agreements (“DSAs”), which have become a standard part of transactions. While a DSA cannot be utilised in Trinidad and Tobago in its entirety due to a number of legislative differences between the jurisdictions, there are aspects of a DSA which can be incorporated into transactions to address the future decommissioning obligations of the parties, including:
the incorporation of provisions to govern the liability for decommissioning among the current parties of the joint operating agreement;
a provision allowing the assignor to remain a party to the security arrangements with no ongoing obligation to provide security, but allowing the assignor to access the security in the event the assignor is ever called upon to carry out any decommissioning obligations; and
a procedure to allow an assignee to become party to the security arrangements and to govern the handling of security already provided by the assignor.
Any company that has ever assigned or received an interest in a production-sharing contract or licence should review its documentation to determine its primary and potential residual decommissioning obligations. Additionally, parties that are in the process of assigning such an interest should carefully consider what their decommissioning obligations would be after the assignment and whether there is adequate security in place to protect all parties.