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Energy Law Exchange

July 6, 2017

King & Spalding’s Upstream Oil & Gas Decommissioning Workshop: Decommissioning Liabilities in Asia-Pacific

King & Spalding hosted an Upstream Oil & Gas Decommissioning Workshop on 22 May at the Fullerton Hotel, Singapore. This event followed our successful decommissioning workshop held in Houston in February this year.

During the workshop, we analysed an increasingly onerous and impending part of oil and gas operations in Asia Pacific: the decommissioning and abandonment of oil and gas assets in upstream operations. With industry experts predicting a US$100 billion decommissioning bill for Asia-Pacific, decommissioning in Asia Pacific will remain a pressing concern for E&P companies for decades to come.

Attracting over thirty attendees representing the full spectrum of the upstream sector and guest speakers from Wood Mackenzie, Environmental Resources Management (“ERM”), Moyes & Company and Total, the workshop examined different aspects of the decommissioning industry in Asia-Pacific, including:

  • transactional issues when negotiating commercial oil & gas agreements;
  • contentious and dispute related issues including planning for and (in some cases) avoiding dispute proceedings;
  • the environmental impact of decommissioning, including discussion of the U.S. rigs to reefs projects; and
  • mitigation strategies available to E&P companies, with a particular focus on bilateral trade agreements and stabilisation clauses.

We have outlined below some of the highlights from the workshop.

Wood Mackenzie: Upcoming Decommissioning and Concession expiry in Asia

Andrew Harwood, Research Director at Wood Mackenzie, provided a comprehensive summary of the looming decommissioning liabilities facing Asia-Pacific in the coming decade.

Mr. Harwood noted that 900 fields are expected to cease production in the next decade with 45% of those fields located offshore. This amounts to over 800 offshore platforms and more than 1.3 million tonnes of steel that needs to be removed. Of those offshore fields expected to cease production, 65% are operated by National Oil Companies and Supermajors.

Mr. Harwood emphasised that one of the biggest problems facing decommissioning in Asia-Pacific is the lack of clear decommissioning regulations in most countries – with Indonesia, China and Malaysia facing the greatest pressure to clarify existing regulations on decommissioning.

ERM: The Common Environmental Issues facing Upstream Operators in Asia

Piers Tonge, Asia Pacific Regional Clients and Market Leader at ERM, outlined the environmental issues facing upstream operators in Asia. Piers outlined the various decommissioning options available to E&P companies, focusing on the decommissioning of offshore jackets and the benefits of rigs to reefs programmes, with the key theme being – fish are friends.

Mr. Tonge also referred to the Decommissioning Guidelines prepared by The Association of Southeast Asian Nations’ Council on Petroleum (“ASCOPE”) decommissioning group, which represents nine Asia-Pacific countries, and which seeks to establish a coordinated and sustained effort to address regional decommissioning problems.

King & Spalding: Managing Decommissioning Risk and PSC Expiry in Upstream Assets Acquisition and Divestment Transactions

Merrick White, a partner in King & Spalding’s Global Transactions group, moderated a panel discussion involving  Ian Cross of Moyes & Company, Gwen Brooker of Total and Richard Nelson of King & Spalding.  The panel discussion focused on two M&A case studies with different government petroleum contracts: a concession regime and a production sharing contract (“PSC”).

The panellists noted the recent moves by a number of host governments (notably Indonesia and Thailand) to tighten existing regulations and introduce clearer, and in some cases more stringent, obligations on the holders of government petroleum contracts. This  has led to the allocation of decommissioning liabilities becoming an increasingly significant factor in upstream oil and gas M&A.

Sellers often seek ensure a “clean break” by attempting to transfer all risk (future and historic) associated with decommissioning and abandonment costs to buyers though the sale and purchase agreement warranty and indemnity regime. Buyers, however, naturally are reluctant to assume such open-ended liability. The panel noted that in some jurisdictions such as the UK North Sea, the parties in recent M&A deals have agreed on a mechanism whereby the exiting seller agrees to retain liability for a pre-determined amount of decommissioning related costs. The seller will also be involved in the scoping and carrying out of decommissioning works. In such cases, this has been a critical factor to the successful conclusion of the deal, as the relatively small size and balance sheet of the incoming (buyer) entities would otherwise have precluded them from assuming risks of that magnitude.

Thorough due diligence of the target asset and a clear understanding of the applicable laws and regulations is critical for a buyer in an upstream M&A transaction. Those laws and regulations frequently change and may in some cases be at odds with the position under contract (i.e., PSC or concession agreement). Also, robust sell-side due diligence and a thorough understanding of the likely extent of decommissioning works on all relevant field facilities is important so as to be able to approach buyers with a clear position and to justify limiting or “ring-fencing” decommissioning and abandonment liabilities.

Further information on this topic will follow in subsequent Energy Newsletters.

King & Spalding: Environmental Considerations in Decommissioning

Wade Coriell, a partner in King & Spalding’s International Arbitration group, moderated the third panel discussion involving Steve Laister of ERM, Piers Tonge ofERM and Carol Wood of  King & Spalding.  This panel discussed environmental considerations for operators in Asia-Pacific.

Ms. Wood provided an in-depth analysis and industry update on the rigs to reef programme in the U.S. Gulf of Mexico and considered prospects for similar programmes in Asia-Pacific.

The success of the rigs-to-reef policy in the Gulf of Mexico was driven by a clear policy that relied on three elements: (i) an obligation to decommission offshore installations within a short time period; (ii) the value seen by recreational fisheries in offshore steel structures; and (iii) U.S. federal and state legislation, which facilitated the programme. In contrast, in Asia-Pacific clear rules on institutional responsibilities for decommissioning, disposal at sea and deployment of artificial reefs are generally lacking.

King & Spalding: Disputes Surrounding Decommissioning – Environmental, BIT’s, Changes in Law and Stabilisation

Simon Dunbar, a partner in King & Spalding’s International Arbitration group, moderated the final panel discussion involving Elizabeth Silbert  and Elodie Dulac, both of King & Spalding.  This panel, outlined the various mitigation strategies and dispute resolution considerations an E&P company operating in Asia-Pacific should consider.

The panellists noted that decommissioning is ripe for disputes due to the evolving laws, multiple players and older generation government petroleum contracts. With respect to PSCs, the language is key. Many early PCSs awarded in Asia-Pacific do not contain provisions explaining the parties’ decommissioning responsibilities. Even so, there has been a recent trend in Asia-Pacific of host governments introducing new laws and regulations requiring contractors to contribute to decommissioning costs, with some host governments seeking to apply such laws and regulations retroactively. The panellists noted such requirements could implicate bilateral or multilateral investment treaties and the host-government contract’s stabilisation provisions, which address changes in law following the execution of a contract.

Ms. Dulac outlined the key elements of a stabilisation clause in host-government contracts and the consequences thereof. Stabilisation clauses offer protection from the application of financial consequences of new laws and regulations introduced by host governments. It is important to note that the stabilisation clause does not prevent the change in law by the host government, but rather seeks to address the effect of such change on the parties’ relationship. Ms. Dulac noted that stabilisations take many forms, but the two main types of stabilisation clause seek to: (i) freeze the applicable law at the date the contract is signed; or (ii) provide a mechanism to manage the impact of any new legislation on the contract.

Further information on this topic will follow in subsequent Energy Newsletters.