Test 2

[John]

Decommissioning of offshore oil and gas installations and pipelines


The decommissioning of offshore oil and gas installations and pipelines on the United Kingdom
Continental Shelf (UKCS) is regulated by the Department for Business Energy and Industrial
Strategy (BEIS) Offshore Decommissioning Unit through the Petroleum Act 1998, as amended
by the Energy Act 2008 and the Energy Act 2016.
The UK's international obligations on decommissioning are governed principally by the 1992
Convention for the Protection of the Marine Environment of the North East Atlantic (OSPAR
Convention).
The Oil & Gas Authority (OGA) works with BEIS and is specifically required by the Energy Act to
assess decommissioning programmes to ensure they meet the MER UK principal objectives on
the basis of cost-savings, future alternative use and collaboration.
Section 29 notice. Decommissioning obligations arise when the Secretary of State serves a
section 29 notice under the Petroleum Act 1998 to the operator of the field and each of the
licensees, requiring them to submit a decommissioning programme. In the first instance this
would include parties to joint operating agreements for installations, and owners for pipelines.
The notice will either specify the date by which a decommissioning programme for each
installation or pipeline is to be submitted or, as is more usual, provide for it to be submitted on or
before such date as the Secretary of State may direct.
Decommissioning programme. A decommissioning programme sets out the measures to
decommission disused installations and/or pipelines, and will describe in detail the methods
required to undertake the work (including where it is proposed that an installation or pipeline is to
remain in position, provision for maintenance). In some cases this process can cover a wide
range of activities such as radioactive material handling, removal of debris from the seabed and
environmental monitoring of the area after removal of the installation.
Once the decommissioning programme is approved, following the OGA's review of the details
including the cost estimates, the section 29 notice-holders are legally obliged to carry it out on a
joint and several liability basis. If a programme is not carried out or its conditions are not
complied with, the Secretary of State may, by written notice, require remedial action to be taken.
Failure to comply with any such notice is an offence and the Secretary of State can carry out the
remedial action and recover the costs from the person to whom the notice was given.
As the objective of the regime is to shield the UK taxpayers from decommissioning costs, the
OGA may also serve a section 29 notice on a wider group of parties, not just the current
licensees, including any person having an ownership interest in the installation or pipeline, and a
parent or associated companies of a licensee. It is expected that the OGA will send a section 29
notice to this wider class of parties if it finds the decommissioning arrangements proposed by the
operator and licensees to be unsatisfactory. Importantly, section 34 of the Petroleum Act extends
the right to issue a section 29 notice to anyone who, at any time since the issue of the first
section 29 notice for the installation, was liable to have a section 29 notice served on them (that
is, former licensees). The Secretary of State cannot send a section 29 notice to a person if that
person has never been entitled to derive any benefit (financial or other) from an installation and
they are a licensee or party to a joint operating agreement (or similar agreement) but have never
been in one of the other categories of persons to whom a section 29 notice can be served.
The section 29 notice holders remain liable for decommissioning obligations unless the section
29 notice is withdrawn and the obligation to carry out the approved decommissioning programme
is joint and several. When an asset changes hands, the Secretary of State may release a former
licensee from its section 29 obligations. In most cases, the section 29 notice is withdrawn once
the OGA is satisfied that adequate financial security arrangements are in place in relation to the
decommissioning liabilities. Such security arrangements are usually in the form of a
Decommissioning Security Deed to which the Secretary of State may be a party, which ensure
that the new incoming licensees can discharge the decommissioning liabilities. However, even if
a former licensee is discharged from its section 29 obligations, in some circumstances the
Secretary of State may use its claw-back power under section 34 to impose liability on that party.
The Secretary of State has the right to require anyone on whom a section 29 notice could have
been served to carry out a decommissioning programme at any time after the first section 29
notice was served (including if that person had not previously received a section 29 notice or the
section 29 notice has subsequently been withdrawn). Therefore, any company which has been a
licensee at any time since development of a field is potentially liable for the decommissioning of
that field until decommissioning is complete. Under the Guidance Notes published by BEIS
(formerly DECC), such a situation is as a measure of last resort.
Submitting a decommissioning programme. The Secretary of State usually requests the
submission of a decommissioning programme towards the end of the life of the field and
facilities. However, for smaller fields the Secretary of State may require a programme at the time
of approval of the final field development plan. The Secretary of State can approve or reject a
decommissioning programme submitted and (if approved) can approve it with or without
modifications, and either subject to conditions or unconditionally. The Secretary of State must
consult the OGA before making such a decision, but the BEIS makes the final decision to
approve the plan. If the Secretary of State is not satisfied that a person will be capable of
carrying out their decommissioning obligations then, after consulting the Treasury, it may require
them to provide security, such as a letter of credit, in order to reduce the risk to the UK taxpayer
(who could otherwise bear this liability). The OGA also obliges companies to provide adequate
financial information (including management accounts and revenue predictions) to enable the
Secretary of State to assess whether decommissioning security ought to be provided at an
earlier stage. Any funds set aside in a secure manner to meet decommissioning obligations
(such as a trust or other arrangement that was established on or after 1 December 2007) will not
be accessible to creditors under insolvency legislation.
Tax relief. As decommissioning is an inherent cost of doing business on the UKCS, obtaining tax
relief for decommissioning costs is critical in determining whether to invest and a crucial factor in
enabling participants to meet the overall cost of decommissioning. Tax relief for such costs is
given at the point they are incurred and the decommissioning carried out.
Relief is given against RFCT and Supplementary Charge as well as PRT (see Question 10).
Typically, the relief will produce losses that can be carried back and set against earlier profits.
Security. Licence holders are required to post security for the cost of decommissioning, in
accordance with the terms of a decommissioning security agreement. This is usually through
letters of credit and facility agreements with third party financiers but such security has
historically been calculated and posted on a gross (pre-tax) basis, taking no account of the tax
relief the participant might obtain. This was largely due to the lack of certainty as to when and
what tax relief would be available. In September 2013 the government introduced
Decommissioning Relief Deeds, legal agreements between the government and oil and gas
investors aiming to give the latter certainty as to the tax relief available for decommissioning
expenditure in certain circumstances (such as in the event of a default by a licensee). The fixed
applicable rate of tax relief that companies will be entitled to in connection with decommissioning
activities at the time when security agreements are entered into allows companies to calculate
the amount of security required (having taken into account the amount of tax relief they will be
entitled to). The rationale is that this will reduce the amount of security required (before security
was given without taking account of tax relief, therefore increasing the amount) which will free up
funds for asset transactions and investments, and discourage early decommissioning