Decommissioning Regulation, Funding and Securitisation

Decommissioning of offshore installations and pipelines is regulated by the Petroleum Act 1998, with the current owners being jointly and severally liable. Whilst companies make full and proper provision for the costs in their accounts, currently there are no dedicated decommissioning funds, nor are these encouraged by the fiscal regime. The legislation allows BERR to require licensees to provide financial security to BERR, typically for 150% of the decommissioning costs, via a Letter of Credit. Recent amendments, in the current Energy Bill, will allow BERR to assess companies financially and require that this security be provided from the beginning of the development of a field.

Liability for decommissioning costs is not, however, restricted to the current owners of the asset. Under the 1998 Act, previous parties may also be held liable in the event that the current owners are unable to meet their obligations. This is achieved through Section 29 of the Act which places these decommissioning obligations on licensees and holders of an interest in an asset, as identified in Section 30, except where the Secretary of State has chosen to release them from the liability. Thus when a company sells its interest in a field, it may still retain a liability for decommissioning even when the purchaser has accepted the responsibility, unless the seller has been given a release by BERR. Even where a former licensee has been released from its obligations, it (and any other party potentially liable under Section 30 not already holding a Section 29 notice) can still be called back to decommission the asset under Section 34. This will ensure that a major oil company still retains a liability for decommissioning, regardless of whether it retains any commercial interest in the field.

These provisions may be considered by BERR to be the most appropriate route to shield the government from any financial exposure for decommissioning. However, many consider this to be an unduly wide and ambiguous regulatory framework which is more costly than required and is depressing the sale and transfer of assets between investors, thereby restricting the number of new entrants. Ultimately, it will reduce the recovery of the UK’s oil and gas reserves.